HaloSource - Interim Results

RELATED QUOTES

SymbolPriceChange
POOL57.66-0.63
HALO.L6.30+0.05



For immediate release

3 August 2012

HaloSource (LSE: HALO.L - news) , Inc.

("HaloSource" or the "Company")

Interim results for the six months ended 30 June 2012

Seattle, U.S.A. - HaloSource, Inc. (HALO.LN) the clean water and antimicrobial technology company traded on London's AIM, today announces its unaudited interim results for the six months ended 30 June 2012.

Financial Highlights

· Group revenue up 7% to $5.8 million (2011 H1 $5.4 million):

- Water Clarification (Recreational and Environmental) revenue up 8% to $4.9 million (H1 2011 $4.6 million). The Company's HaloKlear™ products were a primary driver with growth in excess of 200% over H1 2011 in the rapidly expanding environmental water business

- Water Purification revenue (Drinking Water) revenue up 37% to $0.7 million (H1 2011 $0.5 million)

- Antimicrobial Coatings revenue down 53% to $0.2 million (H1 2011 $0.3 million)

· New customer wins driving solid growth in revenues during second half of period. Revenues for the full year are expected to be in line with current market expectations

· Cash burn reduced by 50% to $5.4 million for H1 2012. Cash and cash equivalents, short-term investments and restricted cash of $8.0 million at June 30, 2012

Operational Highlights

· 2012 first-half results show solid improvement in core business segments, including Water Purification and Water Clarification

· Supply agreement signed with Perfect Water Purification Manufacturing Co. Ltd to supply HaloPure® cartridges for use in pressurized water purification devices sold by Perfect throughout over 6,000 outlets in China.

· Joint development and exclusive supply agreements entered into with Servicios de Ingeniería Geosintética, S.A. ("SIGSA") for deployment of HaloKlear™ Dual Polymer System water treatment technology for projects in Latin America and Spain. To maintain exclusivity, SIGSA is required to purchase a minimum of $0.5 million of products in the initial contract year

§ Supply agreement with PT. Basuki Water, Indonesia for sales of the Company's HaloKlear™ products throughout the Indonesian market with expected first year sales of $0.5 million

Subsequent Events Since the Close of June

· Signed a global agreement with multi-national consumer products company for supply of HaloPure® cartridges and filters for gravity water systems. We received our first purchase order for 10,000 units under this contract in July 2012

· Executed an exclusive supply agreement with RST Environmental Solutions Limited ("RST") for sales of the Company's HaloKlear™ products in New Zealand for construction and dairy industries

· Ongoing negotiations for supply of HaloPure® cartridges and filters to major international consumer products company with targeted launch of gravity-fed water purifier in China in Q4 2012

Martin Coles, President and Chief Executive of HaloSource, said:

"Since joining as chief executive officer in October 2011, we have made major positive changes in Sales, Marketing, Business Development and other operating functions around the world. This has significantly increased the capacity of local commercial leadership while shortening decision making time and improving our ability to act on local opportunities. HaloSource has focused on organizing the business to have commercial leadership in the geographies it operates in, further increasing its knowledge of local customer needs.

"The Company has been focused on building deeper, more meaningful partnerships and to this end our partner pipeline continues to grow to include some of the world's largest consumer durables companies. We continue to focus our technology innovation efforts on new products that will differentiate us in the marketplace and drive continued revenue growth in all segments of our business."

Enquiries

HaloSource

www.halosource.com

Martin Coles, Chief Executive Officer

+1 425 974 1975

James Thompson, Chief Financial Officer

+1 425 974 1993



Buchanan


Charles Ryland/ Clare Akhurst

+44 207 466 5000



Liberum Capital (NOMAD)


Simon Atkinson/Richard Bootle

+44 203 100 2222

Notes to Editors

About HaloSource

HaloSource is a global clean water technology company headquartered in Seattle, Washington U.S.A. and is focused on the provision of cleaner, clearer and safer water using its proprietary technologies across four platforms:

· HaloKlear™ products employ natural bio-polymers to provide water clarification on an industrial scale with dramatic reductions in ecological impact

· HaloPure® media became the first drinking water technology in 30 years to be registered by the United States Environmental Protection Agency ("USEPA"). In 2010, HaloPure® media was approved by China's Ministry of Health (Euronext: IXSHL.NX - news) ("MOH") and widely recognized as the world's most stringent performance requirements for water purification, a key differentiator for our multi-national partners

· SeaKlear® Pool (NasdaqGS: POOL - news) and Spa treatment products bring both natural bio-polymers and antimicrobial applications for treating recreational water

· HaloShield® products consist of antimicrobial coatings solutions that employ unique technology that binds chlorine-based bleach to textiles such as sheets, lab coats and towels for use as a non-toxic biocide.

HaloKlear, HaloPure, SeaKlear and HaloShield are either trademarks or registered trademarks of HaloSource, Inc. All other trademarks, brand names or product names belong to their respective holders.

Financial Overview

The Company delivered revenue growth of 7% in H1 2012 with revenues of $5.8 million compared with $5.4 million in H1 2011. Revenue growth in H1 2012 was driven largely by improvements in its two main growth segments related to HaloPure® (drinking water) and HaloKlear™ (Environmental Water clean-up) products. Revenue from HaloPure® products and devices was up 37% from H1 2011, with substantial growth coming in the second half of the period from the Company's supply agreement with Perfect in China. Revenues from HaloKlear™ products were $768,000, up 202% from H1 2011, driven predominantly by new contracts executed with SIGSA for product deployment in Latin America and Spain. HaloKlear™ product revenues represented 13% of the Company's total H1 2012 revenues as compared with less than 5% in H1 2011.

Revenue from recreational water products sold in the Water Clarification segment were relatively flat compared to H1 2011, despite an early start to the 2012 pool season and continued record temperatures across much of the United States. The Company is focused on strengthening key partnerships within this segment as well as focusing on innovation of new and existing products to drive future growth and increase its market share within this industry.

Gross margins were 34%, down from 38% for the same period last year, largely due to the prior year expansion of HaloSource's facilities in India and China during the latter part of 2011, increasing capacity and related overhead costs for HaloPure® media. As volumes continue to increase, we expect our gross margins to improve.

Operating expenses for H1 2012 totaled $8.6 million, down 10% from the prior year. The Company continues to focus on controlling costs and prioritizing spending on those areas that support its strategic initiatives, including opportunities that provide near term revenue growth. The consolidated net loss, under U.S. generally accepted accounting principles ("U.S. GAAP"), was $6.6 million for the H1 period, down from a net loss of $7.1 million for the same period in 2011.

The Company ended the period with $8.0 million of cash and cash equivalents ($2.5m), short-term investments ($3.3m) and restricted cash ($2.2m). The Company has reduced its cash burn (net decrease in cash, cash equivalents, and short-term investments) by 50% from $10.7 million during H1 2011 to $5.4 million during H1 2012. Cash usage during the first half was partially subsidized by utilization of funds available under the Company's fully secured working capital line of credit with Axis Bank in India totaling approximately $1.2 million. This line is used to support our relationships with Bajaj and Eureka Forbes as well as several pending relationships. Availability of funds under this facility allowed the Company to be more flexible with its cash and fund development and other initiatives in other geographies. As of June 30, 2012, this line of credit has been substantially utilized and is payable upon demand from Axis Bank. The Board will continue to seek ways to build flexibility into the balance sheet as we grow our business.

Business Review

Water Purification - HaloPure®

Water Purification (Drinking Water) revenues increased by 37% over H1 2011, resulting largely from the newly signed partnership with Perfect in China. The Company considers the Perfect relationship as key in terms of its entry into the consumer device market in China. This partnership ties directly into the Company's strategy of developing relationships with leading companies that can successfully deploy water purification devices powered by its HaloPure® media.

Under the terms of the partnership agreement with Perfect, the Company will supply HaloPure® cartridges for use in pressurized water purification devices sold by Perfect throughout over 6,000 outlets in China. The Company understands that Perfect may wish to expand its customer distribution across further jurisdictions in the future.

The Company continues to focus on strengthening existing relationships with Eureka Forbes and Bajaj in India while exploring new partnerships in underdeveloped channels. During the first half, the Company reinforced its relationship with Eureka Forbes and as a result, has increased shipments of HaloPure® media versus a year ago.

The Company remains focused and committed to developing and maintaining partnerships in India and China and driving consumer awareness of the efficacy of the disinfecting power and benefits of water purification devices powered by HaloPure® media. Evidence of this is the Company's recently signed global agreement with a multi-national consumer products company for supply of HaloPure® cartridges and filters for gravity water system in India. The Company is currently negotiating pricing and volumes ready for the commercial launch of that multi-national company's product, expected in Q3 2012. The Company believes that the opportunity exists to extend its product range to the company across other geographies.

In addition to this arrangement are the Company's ongoing negotiationsfor the supply of HaloPure® cartridges and filters to a major international consumer-products company, with a targeted launch of a gravity-fed water purifier in China in Q4 2012.

Water Clarification - SeaKlear® and HaloKlear

The Water Clarification business saw continued growth over H1 2011 driven by rapidly increasing revenue in environmental water solutions using the Company's HaloKlear™ products. Revenues related to HaloKlear™ products and services increased 202%, $768K in H1 2012, compared to H1 2011 and comprised 13% of total revenues in H1 2012 as compared to 5% for H1 2011. The Company continues to develop innovative products and partnerships through its HaloKlear™ product offering and sees significant opportunity for growth in a variety of industries, including municipal water treatment, oil and gas, construction and mining. Each of these industries produces significant amounts of water requiring remediation before recycling or returning it to the environment. As exhibited by recent agreements we've signed with SIGSA, Basuki and RST, the Company is continually in discussions with potential customers for supply of the HaloKlear™ products.

Revenues in the U.S. pool and spa industry, sold primarily under the SeaKlear® brand, have been relatively flat despite an early start to the pool season due to generally warmer seasonal conditions across much of the U.S. The Company believes this is attributable primarily to high inventory levels which remained with the Company's key distributors coming off a relatively weak pool and spa season in the prior year. Inventory levels maintained by our distributors do not pose a credit risk to HaloSource, nor do we sell products on a consignment basis or with right of return provisions.

Anti-microbial Coatings - HaloShield®

Revenues from HaloShield® anti-microbial coatings were $0.2 million in H1 2012, 53% lower than the prior year as a result of a timing issue associated with packaging changes in its existing business. Despite these circumstances, the Company remains encouraged about the opportunity for sustainable growth through innovation-led expansion of its product offering created in collaboration with existing partners.

People

Under the direction of Martin Coles, the Company has strengthened its leadership and commercial abilities through several key changes in sales, marketing, business development and operations. The Company remains focused on organizing the business to optimize efficiencies, reduce decision making time in adapting to consumer demands and technology innovation and ensuring the right people are employed to enhance the commercial activities of the business in its geographies. Employee headcount at the beginning of the year was 138 worldwide. The Company has reduced headcount in 2012 to 118. The reduction from 2011 is in part related to the Company's focus on controlling costs.

The Company expects headcount to grow slightly during the balance of the year as key positions are filled in the U.S. and abroad.

Outlook

The Company continues to drive growth through expansion of strategic partnerships and maintaining focus on its stated strategic initiatives. The revenue growth in our primary operating segments in H1 2012 is encouraging and we believe acceleration of our product and technology innovation will create opportunities for sustained growth.

We are encouraged by our progress in 2012 to date, as well as the prospects for H2 2012 and beyond as we gain traction across all aspects of our business. The current commercial agreements executed with Perfect and SIGSA as well as contracts currently being negotiated are evidence of the potential that already exists in the Company's markets. The Company continues to make significant progress towards improving its capacity to execute and we are building commercial strengths and leadership in all geographies.



HaloSource, Inc. Unaudited Interim Financial Statements and Notes Thereto

HaloSource, Inc. and Subsidiaries

Unaudited Interim Condensed Consolidated Statements of Operations






Six months ended

Six months ended

Year ended

(US$000's)

June 30, 2012

June 30, 2011

December 31, 2011





Revenue - net

$ 5,781

$ 5,418

$ 12,032





Cost of goods sold

3,813

3,340

7,839





Gross profit

1,968

2,078

4,193





Operating expenses




Research and development

1,292

1,545

2,999

Selling, general, and administrative

7,310

8,012

15,738





Total operating expenses

8,602

9,557

18,737





Operating loss

(6,634)

(7,479)

(14,544)





Other income (expense)




Interest income

32

151

225

Interest expense

(37)

(3)

(8)

Other income (loss), net

(14)

203

232

Foreign exchange gain (loss)

97

(7)

(557)





Total other income (expense), net

78

344

(108)





Net loss before income taxes

(6,556)

(7,135)

(14,652)

Income taxes

-

-

(44)

Net loss

$ (6,556)

$ (7,135)

$ (14,696)





Basic and diluted net loss per share

$ (0.09)

$ (0.10)

$ (0.20)





Shares used to compute basic and diluted loss per share

75,592

74,240

74,302

See accompanying notes to unaudited interim condensed consolidated financial statements.



HaloSource, Inc. and Subsidiaries

Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss






Six months ended

Six months ended

Year ended

(US$000's)

June 30, 2012

June 30, 2011

December 31, 2011





Net loss

$ (6,556)

$ (7,135)

$ (14,696)





Other comprehensive income (loss)




Unrealized gain (loss) on available-for-sale investments

37

48

(4)

Reclassification adjustment of net realized loss on




available-for-sale investments included in net loss

(16)

(15)

(23)

Foreign currency translation adjustments

69

13

31

Other comprehensive income

90

46

4





Comprehensive loss

$ (6,466)

$ (7,089)

$ (14,692)

See accompanying notes to unaudited interim condensed consolidated financial statements.



HaloSource, Inc. and Subsidiaries

Unaudited Interim Condensed Consolidated Balance Sheets


June 30,

June 30,

December 31,

(US$000's)

2012

2011

2011

ASSETS








Current assets




Cash and cash equivalents

$ 2,533

$ 3,070

$ 1,265

Restricted cash

2,160

3,685

1,842

Short term investments

3,333

13,770

10,298

Accounts receivable, less allowance for doubtful




accounts of $18, $5, and $19, respectively

2,236

2,189

2,554

Inventories - net

3,925

3,827

4,152

Prepaid expenses and other current assets

1,145

1,053

1,096





Total current assets

15,332

27,594

21,207





Property and equipment, net

3,934

2,254

2,567

Goodwill

2,180

2,180

2,180

Other intangible assets, net

1,031

1,154

1,093

Deposits

261

260

251





Total Assets

$ 22,738

$ 33,442

$ 27,298





LIABILITIES AND STOCKHOLDERS' EQUITY








Current liabilities




Accounts payable

$ 1,490

$ 1,264

$ 1,739

Accrued expenses

320

297

647

Salaries and benefits payable

623

681

1,030

Current portion of debt and capital lease obligations

81

110

94

Short-term debt under line of credit

1,160

-

-

Deferred revenue - current portion

-

-

12





Total current liabilities

3,674

2,352

3,522





Long-term portion of debt and capital lease obligations

74

62

21

Deferred rent

1,123

189

36

Deferred tax liability

37

-

37




Total liabilities

4,908

2,603

3,616





Stockholders' equity




Common stock, no par value

105,399

104,362

104,785

Accumulated other comprehensive income (loss)

81

10

(9)

Accumulated deficit

(87,650)

(73,533)

(81,094)




Total stockholders' equity

17,830

30,839

23,682









Total liabilities and stockholders' equity

$ 22,738

$ 33,442

$ 27,298

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 (Loss)

Deficit

Equity







Balance, January 1, 2011

74,136

$ 104,072

$ (36)

$ (66,398)

$ 37,638







Exercise of common stock options

120

35

-

-

35

Exercise of common stock warrants

19

11

-

-

11

Issuance of shares upon vesting of restricted stock

26

-

-

-

-

Share-based compensation

-

252

-

-

252

Public offering costs

-

(8)

-

-

(8)

Other comprehensive income

-

-

46

-

46

Net loss

-

-

-

(7,135)

(7,135)







Balance, June 30, 2011

74,301

$ 104,362

$ 10

$ (73,533)

$ 30,839







Balance, January 1, 2012

74,451

$ 104,785

$ (9)

$ (81,094)

$ 23,682







Exercise of common stock options

1,533

245

-

-

245

Issuance of shares upon vesting of restricted stock

27

-

-

-

-

Share-based compensation

-

369

-

-

369

Other comprehensive income

-

-

90

-

90

Net loss

-

-

-

(6,556)

(6,556)







Balance, June 30, 2012

76,011

$ 105,399

$ 81

$ (87,650)

$ 17,830

See accompanying notes to unaudited interim condensed consolidated financial statements.



HaloSource, Inc. and Subsidiaries

Unaudited Interim Condensed Consolidated Statements of Cash Flows


Six months ended

Six months ended

Year ended December 31,

(US$000's)

June 30, 2012

June 30, 2011

2011





Operating activities




Net loss

$ (6,556)

$ (7,135)

$ (14,696)

Adjustments to reconcile net loss to net cash used in operating activities:




Depreciation and amortization

493

281

734

Allowance for inventory, sales returns, and bad debts

112

(12)

151

Share-based compensation

369

252

655

Realized loss on sale of short-term investments

16

15

23

Loss on disposal of property, equipment and other assets

-

-

6

Deferred income taxes

-

-

37

Changes in operating assets and liabilities:




Accounts receivable

312

(402)

(821)

Inventories

64

(1,220)

(1,868)

Prepaid expenses and other assets

(70)

16

(121)

Accounts payable

(459)

(853)

(340)

Accrued expenses

(237)

(654)

(398)

Salaries and benefits payable

(275)

246

578

Deferred revenue

(12)

(163)

(151)

Deferred rent

110

15

(21)





Net cash used in operating activities

(6,133)

(9,614)

(16,232)





Cash flows from investing activities




Purchase of property and equipment

(552)

(1,119)

(1,979)

Purchase of short-term investments

(30)

(9,148)

(10,220)

Sale of short-term investments

7,000

10,500

15,000

Increase in restricted cash

(317)

(3,685)

(1,842)





Net cash provided by (used in) investing activities

6,101

(3,452)

959





Cash flows from financing activities




Net proceeds under revolving line of credit

1,240

-

-

Proceeds (repayments) of debt and capital lease obligations

(36)

(35)

(92)

Proceeds from exercise of stock options and warrants

91

45

66

Expenses from IPO

-

(8)

(8)





Net cash provided by (used in) financing activities

1,295

2

(34)





Effect of exchange rate changes on cash

5

(7)

431





Net increase (decrease) in cash and cash equivalents

1,268

(13,071)

(14,876)





Cash and cash equivalents, beginning of period

1,265

16,141

16,141





Cash and cash equivalents, end of period

$ 2,533

$ 3,070

$ 1,265

Supplemental disclosures of noncash investing and financing activities:




Increase in property and equipment from tenant improvement allowance

$ 913

$ -

$ -

Increase in accrued property and equipment purchases

$ 254

$ 53

$ 42

Reduction in salaries and benefits payable from exercise of stock options

$ (154)

$ -

$ -

See accompanying notes to unaudited interim condensed consolidated financial statements.



Notes to Unaudited Interim Condensed Consolidated Financial Statements

1. General Information

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

2. Basis of Preparation

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

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

The condensed consolidated interim financial information for the six month periods ended June 30, 2011 and 2012 has been prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP") which is appropriate given the Company is incorporated in the State of Washington in the United States. References to U.S. GAAP issued by the Financial Accounting Standards Board ("FASB") in the Company's notes to its condensed consolidated interim financial statements are to the FASB Accounting Standards Codification, sometimes referred to as the "Codification" or "ASC". The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended December 31, 2011, which have also been prepared in accordance with U.S. GAAP and were made available on March 30, 2012.

Liquidity

The Company has generally incurred net losses and negative operating cash flows through December 31, 2011 and in the first half of 2012 and the Company had an accumulated deficit of approximately $87.6 million as of June 30, 2012. For the six months ended June 30, 2012, the Company had a net loss of $6.6 million and cash used in operations of $6.1 million. As of June 30, 2012, the Company has $2.5 million of unrestricted cash and cash equivalents, $3.3 million of unrestricted short term investments, and $2.2 million of restricted cash. The Company has implemented certain cost savings measures and implemented other plans that are expected to reduce the full year net loss and cash used by operations for 2012 as compared to 2011. 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. If the current funding is not sufficient to cover planned spending levels, the Company does have the ability to continue to reduce spending, or seek outside financing.

The accompanying unaudited condensed consolidated interim 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 accompanying interim financial statements 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.

Use of estimates

The preparation of condensed consolidated interim financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates include the allowance for doubtful accounts, sales returns allowances, inventory obsolescence, share-based compensation, 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, 2011, except as described below.

Forward Exchange Contracts

In May 2012, the Company began entering into forward exchange contracts with Wells Fargo NA in order to reduce foreign currency risk exposure associated with certain intercompany debt balances which are denominated in the Indian Rupee. As part of this arrangement, Wells Fargo NA required cash collateral in the amount of $317,000 as security for potential forward exchange contract settlement exposure with the Company. The Company maintains the restricted cash holdings in money market funds, or other short duration investment options. See further discussion of the forward exchange contracts in Note 14 below.

Recent Accounting Pronouncements Affecting the Company

In May 2011, FASB issued Accounting Standards Update ("ASU") 2011-04, or ASU 2011-04, Fair Value Measurement (Topic 820), of the Accounting Standards Codification ("ASC") or the "Codification"). The amendments in this update were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 expands and enhances current disclosures about fair value measurements and clarifies the FASB's intent about the application of existing fair value measurement requirements in certain circumstances. The Company adopted ASU 2011-04 beginning January 1, 2012. Adoption of this ASU did not have a material impact on its condensed consolidated interim financial statements or the notes thereto.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220), amending the Comprehensive Income topic of the Codification. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity, among other things. ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the Statement of Shareholders' Equity. There has been no change related to the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Additionally, no changes were made to the calculation and presentation of earnings per share. In December 2011, the FASB issued ASU 2011-12, which deferred the effective date of guidance pertaining to the reporting of reclassification adjustments out of accumulated other comprehensive income in ASU 2011-05. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05. The Company adopted ASU 2011-05 effective January 1, 2012. Adoption of this ASU did not have a material impact on its condensed consolidated interim financial statements or the notes thereto.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment, which allows an entity to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that a potential exposure exists, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The Company will adopt the provision of this ASU during its annual impairment review as of December 31, 2012, or sooner should events and circumstances indicate an impairment of the Company's goodwill may exist. The adoption of this standard as of January 1, 2012 had no impact on the condensed consolidated interim financial statements or notes thereto as the Company has not yet performed a goodwill impairment test during 2012.

4. Litigation and other contingencies

On December 2, 2011, the Company was named as a defendant in a lawsuit, captioned Molycorp Minerals, LLC v. HaloSource, Inc., in the United States District Court for the District of Colorado. The complaint alleges that the Company breached certain provisions contained in non-disclosure agreements entered into in both 2009 and 2010, made fraudulent representations in the 2010 non-disclosure agreement, and misappropriated confidential information of the plaintiff. The plaintiff seeks injunctions enjoining the Company from the alleged breaches of contract and control over certain patent applications, damages in an unspecified amount, and a declaration of ownership by the plaintiff in certain patent applications filed by the Company. In April 2012, the Company filed a counterclaim in connection with the lawsuit alleging Molycorp Minerals, LLC breached certain provisions of and made fraudulent representations contained in the 2010 non-disclosure agreement. The Company seeks injunctions enjoining Molycorp Minerals, LLC from the alleged breaches of contract and control over a certain patent application, damages in an unspecified amount, and a declaration of ownership by the Company in a certain patent application filed by Molycorp Minerals, LLC. The Company believes the lawsuit against it is without merit and intends to defend against it vigorously.

Other than the matter noted above, as of June 30, 2012 and through the date this report was available to be issued, the Company was not involved in any other material pending litigation, claims or assessments.

5. Restricted Cash

Restricted cash primarily represents cash collateral used to secure working capital borrowing needs related to operations of the Company's foreign subsidiaries. In April 2011, the Company established a working capital line of credit arrangement through Axis Bank in India. In consideration for establishing this working capital line of credit with Axis Bank, the Company entered a Sanction of Credit Facilities Agreement with Axis Bank to secure all borrowings under this line of credit. As such, the Company established a standby letter of credit with Wells Fargo Bank NA in which the Company has provided cash collateral to secure all borrowings by its foreign subsidiary under the new working capital line of credit. The line of credit with Axis Bank allows for borrowings up to 70,000,000 Indian Rupees ("Rs."), or approximately $1,250,000 as of June 30, 2012. As of June 30, 2012, borrowings under this line of credit totaled Rs. 65,000,000, or approximately $1,160,000.

As of June 30, 2012, the Company had $2,160,000 in restricted cash, of which $1,843,000 represents the minimum amount of secured borrowings under the Sanction of Credit Facilities Agreement with Axis Bank. The Company maintains the restricted cash holdings in money market funds, or other short duration investment options, as allowed under the Security Agreement. See further discussion of the Axis Bank line of credit in Note 13 below.

The remaining balance of restricted cash of $317,000 represents required cash collateral held by Wells Fargo NA for potential forward exchange contract settlement exposure as discussed above in Note 3 and also in Note 14 below.

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.

The Company's operating segments are Water Clarification, Water Purification, and Antimicrobial Coatings. Information on reportable segments and a reconciliation to interim condensed consolidated net loss for the six-month periods ended June 30, 2011 and 2012 and the year ended December 31, 2011 are presented below. Also presented below are total assets by operating segment as of June 30, 2011 and 2012 and December 31, 2011. The Company does not report to management its capital expenditures or assign intangible assets by business unit.

Six months ended June 30, 2012




(US $000's)


Water

Clarification


Water Purification


Antimicrobial Coatings


Unallocated


Consolidated

Revenue


$ 4,916


$ 707


$ 158


$--


$ 5,781

Gross profit (loss)


2,171


(304)


101


--


1,968

Operating expenses








(8,602)


(8,602)

Interest expense, net








(5)


(5)

Other income, net








83


83

Net loss










$ (6,556)

Total Assets


$ 4,182


$ 5,041


$ 55


$ 13,460


$ 22,738

Six months ended June 30, 2011




(US $000's)


Water

Clarification


Water Purification


Antimicrobial Coatings


Unallocated


Consolidated

Revenue


$ 4,570


$ 515


$ 333


$--


$ 5,418

Gross profit (loss)


2,073


(235)


240


--


2,078

Operating expenses








(9,557)


(9,557)

Interest income, net








148


148

Other income, net








196


196

Net loss










$ (7,135)

Total Assets


$ 4,714


$ 5,886


$ 120


$ 22,722


$ 33,442

Year ended December 31, 2011




(US $000's)


Water

Clarification


Water Purification


Antimicrobial Coatings


Unallocated


Consolidated

Revenue


$ 10,000


$ 1,357


$ 675


$--


$ 12,032

Gross profit (loss)


4,410


(704)


487


--


4,193

Operating expenses








$ (18,737)


(18,737)

Interest income, net








217


217

Other expenses, net








(325)


(325)

Income taxes








(44)


(44)

Net loss










$ (14,696)

Assets


$ 4,903


$ 6,233


$ 139


$ 16,023


$ 27,298

7. Income taxes

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

During the six month periods ended June 30, 2011 and 2012, the Company recorded no taxable profits. However for the year ended December 31, 2011, the Company recorded $44,000 of income tax expense related to amortization of certain components of goodwill which have a different basis for income tax purposes as well as income taxes related to states in which the company operates.

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

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

Uncertain tax positions

The Company files income tax returns in the US federal jurisdiction, and various state and foreign jurisdictions. As of June 30, 2012, the Company had no unrecognized tax benefits. Due to the Company's operating loss carry forwards, the U.S. federal statute of limitations remains open for 1997 and onward.

8. 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, restricted stock grants and warrants. The Company had a net loss for all periods presented herein; therefore, none of the options, restricted stock grants 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 7,297,000, 6,124,000, and 6,754,000 of common stock were excluded from the calculations of diluted loss per share for the six months ended June 30, 2011 and 2012 and the year ended December 31, 2011, respectively.

9. Inventories

Inventories at June 30, 2012 and 2011 and December 31, 2011, consist of the following:

(US $000's)


June 30, 2012


June 30, 2011


December 31, 2011








Raw materials


$ 2,529


$ 2,348


$ 2,433

Finished goods


1,396


1,479


1,719








Inventories, net


$ 3,925


$ 3,827


$ 4,152

During the six month periods ended June 30, 2011 and 2012 and the year ended December 31, 2011, the Company recorded cost of goods sold of $12,000, $65,000, and $342,000, respectively, to reduce certain inventory items from their recorded cost to their estimated net realizable value. The inventory reported in the condensed consolidated interim balance sheets as of June, 30, 2011 and 2012 and December 31, 2011, is net of write-downs of inventory carrying values due to obsolescence of $340,000, $486,000 and $498,000, respectively.

10.

Property and equipment

Property and equipment as of June 30, 2012 and 2011 and December 31, 2011 consist of the following:

(US $000's)


June 30, 2012


June 30, 2011


December 31, 2011

Manufacturing equipment


$ 3,092


$ 2,501


$ 2,880

Furniture and fixtures


220


132


142

Office equipment


645


466


470

Leasehold improvements


1,977


379


798

Construction in process


65


412


86



5,999


3,890


4,376








Less accumulated depreciation and amortization


(2,065)


(1,636)


(1,809)








Property and equipment, net


$ 3,934


$ 2,254


$ 2,567

11.

Related party transactions

During the six months ended June 30, 2011 and 2012 and during the year ended December 31, 2011, the Company was provided legal services, which are included in selling, general, and administrative expenses in the accompanying interim condensed consolidated statements of operations, of $264,000, $36,000 and $475,000, respectively, from a firm whose partner is a stockholder of the Company and its former Secretary of the Board of Directors. The Company owed this firm $93,000, $11,000 and $41,000 at June 30, 2011 and 2012 and December 31, 2011, respectively. These amounts are included in accounts payable in the accompanying interim condensed consolidated balance sheets.

Additionally, during the six months ended June 30, 2011 and 2012 and during the year ended December 31, 2011, the Company purchased services, which are included in and selling, general, and administrative expenses in the accompanying interim condensed consolidated statements of operations, of $69,000, $0 and $77,000, respectively, from other stockholders or companies owned by stockholders. The Company had no open accounts payable to these stockholders or companies at June 30, 2011 and 2012 or at December 31, 2011. During the six months ended June 30, 2011 and 2012 and during the year ended December 31, 2011, the Company also paid royalties for certain patent rights of $225,000, $225,000 and $452,000, respectively, to a university which held stock in the Company. Royalty payments are allocated between cost of goods sold, where there are identifiable product and sublicense revenues, and research and development expenses in the accompanying interim condensed consolidated statements of operations. The Company had no outstanding accounts payable to the university at June 30, 2011 and 2012 or at December 31, 2011.

12.

Business and credit concentration

For the six month periods ended June 30, 2011 and 2012, one of the Company's Water Clarification customers individually accounted for 17% and 12% of the Company's revenue, respectively, and the same customer accounted for 26% of the Company's revenue for the year ended December 31, 2011. Accounts receivable from this customer represented 41% and 16% of the total accounts receivable at June 30, 2011 and 2012, respectively, and represented 29% of the total accounts receivable at December 31, 2011.

The Company sources a significant portion of finished products related to its Water Clarification business from one supplier in the United States. Although the Company could obtain these items from other sources, including its own resources, this supplier's inability or unwillingness to supply Water Clarification products in a timely manner or on terms that are unacceptable to the Company could adversely impact the Company's ability to meet customer demands for these products. For the six months ended June 30, 2011 and 2012 and the year ended December 31, 2011, the Company made total payments to this supplier of $1,762,000, $895,000, and $2,478,000, respectively.

Essentially all of the Company's revenue from its Water Purification segment is generated in emerging market countries, including India and China. During 2011 and 2012, the majority of Water Purification revenue was derived from two customers in India and one customer in China. In addition, essentially all raw materials and manufacturing facilities used in the Water Purification segment are sourced from or located in the same emerging market countries. These markets represent varying political and regulatory environments that can potentially affect Water Purification operations. Net long-lived assets located in India amounted to $767,000 and $852,000 at June 30, 2011 and 2012, respectively, and $870,000 at December 31, 2011. Net long-lived assets located in China amounted to $472,000 and $703,000 at June 30, 2011 and 2012, respectively, and $745,000 at December 31, 2011. The remaining net assets are located in the United States.

13.

Foreign line of credit

In May 2011, Halosource Technologies Pvt. Ltd. ("Halosource Technologies"), a wholly-owned subsidiary of Halosource, Inc. which is located in Bangalore, India, entered into a Sanction of Credit Facilities Agreement with Axis Bank for a credit facility for up to an amount of Rs. 70,000,000, or approximately at $1,250,000 at June 30, 2012. This line of credit is available for borrowings to support working capital needs of Halosource Technologies. Any borrowings under the line of credit will bear interest at a base-rate, plus 1.85% or approximately 11% annually. As of June 30, 2012, borrowings under this line of credit totaled Rs. 65,000,000, or approximately $1,160,000. The line of credit agreement had an original maturity date of May 2012 and the Company is in the process of renegotiating the term of the agreement. As of June 30, 2012, the Company is in compliance with all terms and conditions of this line of credit and the line of credit is payable upon demand.

As a condition to borrowing under this line of credit, the Company is required to maintain a standby letter of credit through Wells Fargo Bank NA in an amount equivalent to 110% of the line of credit, or Rs. 77,000,000, approximately $1,375,000 at June 30, 2012; further, Wells Fargo Bank NA requires a restricted cash balance of 105.3% of the standby letter of credit. The Company has in turn restricted cash of $1,843,000 under the standby letter of credit to serve as collateral for the outstanding borrowings under the foreign line of credit.

14.

Forward Exchange Contracts

The Company is exposed to foreign currency exchange-rate fluctuations in the normal course of its business, which the Company manages from time to time through the use of forward foreign exchange contracts. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on certain assets or liabilities denominated in a currency other than the functional currency of the Company or its subsidiaries. Currently, these forward foreign exchange contracts do not qualify for hedge accounting. The Company uses forward foreign exchange contracts to mitigate risk and does not intend to engage in speculative transactions. The forward foreign exchange contracts are entered into by the Company and its subsidiaries primarily to hedge intercompany payables denominated primarily in Indian Rupee. These contracts do not contain any credit-risk-related contingent features. Further, the Company seeks to manage the counterparty risk associated with these forward foreign exchange contracts by limiting transactions to counterparties with which the Company has an established banking relationship. In addition, the contracts are limited to a time period of less than one year, generally three months or less.

During the six months ended June 30, 2012, these forward foreign exchange contracts resulted in realized gains of $166,000. There were no similar gains or losses during the six months ended June 30, 2011 or the full year ended December 31, 2011. The realized gains and losses were partially offset by realized and unrealized gains and losses on foreign denominated accounts receivable and foreign intercompany payables during the same periods. Realized gains and losses related to forward foreign exchange contracts are recorded in foreign exchange gain (loss) on the interim condensed consolidated statements of operations and the assets and liabilities for these contracts are recorded in prepaid and other assets and accrued liabilities on the interim condensed consolidated balance sheets. As of June 30, 2012, the Company had one forward foreign exchange contract outstanding with a maturity date of August 2, 2012 and a notional amount of $2,939,000. The fair value of the outstanding forward foreign exchange contract was ($17,000) at June 30, 2012. The Company had no similar contracts outstanding during any periods in the prior year.

15.

Stock options and share-based compensation

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

The Company typically recognizes share-based compensation costs for an award on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. For the six month periods ended June 30, 2011 and 2012 and the year ended December 31, 2011, the Company recorded stock based compensation expense of $252,000, $369,000 and $655,000, respectively. No income tax benefit was recognized in the interim condensed consolidated statements of operations for share-based compensation arrangements.

16.

Subsequent Events

The Company has evaluated subsequent events through the date on which the interim financial statements were available to be issued. No transactions or events have occurred that would require further disclosure.

17. Statement of Directors Responsibilities

The Directors confirm to the best of their knowledge that the unaudited condensed consolidated financial statements have been prepared in accordance with ASC 270, Interim Financial Reporting.

ENDIR VLLFBLVFEBBB