Monday, October 18, 2010

London's AIM - HaloSource Raises $80 Million in a London AIM IPO - $50 Million for the Company and $30 Million for Selling Shareholders - First U.S. Company IPO on London's AIM since July 2008

With 2009 revenue of $11.8m, and an expectation that this will grow by 40% - 50% to the $16.5m - $17.7m range during 2010, the Company’s opening valuation on London's AIM approximated $160m and the shares rose 20% after the first day of trading.  The Company lost $9.6m from continuing operations during 2009.

CEO John Kaestle is quoted as saying, “We believe that the listing on the London Stock Exchange's AIM, an ideal fit for a rapidly expanding international technology company, gives us the international visibility and funding opportunities to deliver attractive returns to our London AIM shareholders.”

CFO James Thompson is quoted as saying, “HaloSource raised its last three private rounds of financing in or through London so it made sense to list on the London Stock Exchange's AIM.  London has a history as the financial center of the universe for water-related technology and projects.  The pool of London AIM investors there who are interested in clean water is much bigger than it is in the U.S.  While the company has investors in the U.S. who understand what it is doing, clean water isn’t necessarily the flavor of the moment that will get a company on CNBC.  We got a very warm reception on the London Stock Exchange's AIM.  You have folks who have actually been to India and China as opposed to those who have just seen it on TV, or maybe read about it in The Economist, like you sometimes see here in the U.S.”

Overview of IPO Listing on London's AIM
Seattle-based HaloSource's London AIM IPO raised $80 million ($50m for the Company and $30m for Selling Shareholders) in October 2010 on the London Stock Exchange’s (LSE’s) Alternative Investment Market (AIM) in the first London Stock Exchange AIM IPO of a U.S. company since July 2008.

HaloSource is a clean water and antimicrobial technology company that manufactures products and out-licenses proprietary technology for the water treatment and antimicrobial coatings markets. The Company was founded in the 90s with its core water-cleansing/antimicrobial technologies licensed from Auburn University and the University of California.  The Company’s main operations are in the U.S. with subsidiaries in the emerging markets of India and China and a future sales focus on Brazil.  As of August 31, 2010, the company had 115 employees; 84 in the United States, 20 in India and 11 in China.

Key London AIM Listing Metrics
  • $50.3m gross was raised on the London Stock Exchange's  AIM for the Company, $46.2m net of offering costs, intended to be used for: 
    • $14.5m  - Repayment of debt 
    • $10.0m  - Funding of capital expenditures for new plants 
    • $10.0m[1] - Funding of future acquisitions 
    • $11.7m[2] - Working capital
  • Offering costs on the London Stock Exchange's AIM amounted to 8.1% of the gross capital raised for the Company 
    • Undertaken on a ‘best efforts’ basis, as opposed to being underwritten 
      • AIM Nominated Broker commission of 4.5% 
      • Plus an additional 0.5% at the discretion of the Company
    • Corporate finance fee of £125k ($200k)
  • Opening market capitalization on London's AIM of $159.3m
  • Dilution to existing shareholders of 31.6%
  • Free float on London's AIM of 78%
  • PE & EBITDA multiples on London's AIM N/A given losses
  • Trailing and forward revenue multiples on the London Stock Exchange's AIM of 13.5 and 9.3, respectively
  • Share price gain on first day of trading on London's AIM of 20%, currently 11% as of November 1, 2010

Key Financial Metrics

(in USD millions)
Y/E 12/31/07
Y/E 12/31/08
Y/E 12/31/09
Δ from 2007
Δ from 2008

Cost of Goods Sold
Operating Expenses
Other Expenses and Taxes
Loss from Continuing Ops.
Accumulated Deficit
Cash and Cash Equivalents

The Company generated revenue of $8.7m for the eight months ended August 31, 2010 and expects its revenue to grow by 40% - 50% to the $16.5m - $17.7m range for the full-year 2010.  The Company’s market capitalization on London's AIM was $177.1m as of November 1, 2010, 15.0 and 10.4 times trailing and forward revenue, respectively.

Shareholder Base
The Company had 50.5m shares outstanding prior to the London AIM IPO, issued 23.3m shares in connection with the London Stock Exchange AIM IPO and currently has 73.8m AIM-listed shares outstanding.  The table below details those who held 3% or more prior to and after the London Stock Exchange AIM IPO along with the collective holdings of the Angel Investors, Others and London Institutions and the Directors.

  Pre-IPO %
  Post-IPO %
IPO $ Realized

London-controlled, India/China-focused PEG
U.K./Caribbean VC
London Institution
European Strategic Investor
U.S. Strategic Investor
Singaporean PEG
Angel Investors, Others & London Institutions

The Company was backed by two foreign PEGs, one foreign and one U.S.-based VC, one foreign and one U.S.-based Strategic Investor, one London Institution and 200 Angel Investors.  The London-controlled PEG and the foreign VC sold down significant portions of their holdings in the London AIM IPO and the foreign Strategic Investor exited entirely in the London Stock Exchange AIM IPO.  The Angel Investors took some money off the table in the London AIM IPO and the new London Institutions purchased a combination of existing shares from the Selling Shareholders and new shares issued by the Company in the London AIM IPO, each ultimately holding less than 3%.  The benefit to the Selling Shareholders is obvious.  The benefits to the Company are a more diversified shareholder base from which to create post-IPO liquidity and new London AIM Institutions to diversify the of risk future financings on London's AIM.

London AIM Board of Directors and Corporate Governance
The Board of Directors consists of two Executive Directors (CEO and CFO) and five Non-Executive Directors, all with solid resumes and a good blend of complementary experiences and skill sets.

Companies listed on the London Stock Exchange's AIM are not required to comply with the U.K. Corporate Governance Code, which is mandatory for companies listed on the Main Market of the London Stock Exchange (LSE); however, the Company intends to comply with its main provisions, where practical.   The Company has made a similar commitment to comply with the Quoted Companies Alliance Guidelines and the Policy and Voting Guidelines for AIM Companies issued by the National Association of Pension Funds.

The Company has established an Audit Committee, a Compensation Committee, a Nomination Committee and an AIM Compliance and Corporate Governance Committee.  Each committee consists of between two and four members with the only representation from the Executive Directors being the CEO on the AIM Compliance and Corporate Governance Committee.

London AIM Legal Considerations
While the Company retained its U.S domicile in the State of Washington, its constitutional documents were amended to incorporate the most important elements of English corporate law as follows:
  1. Pre-emption Rights (i.e. anti-dilution) – Shareholders may participate in, or the Company has to obtain their approval for, the issuance of shares on the London Stock Exchange's AIM for cash of more than 10% of the outstanding shares listed on London's AIM during any 12-month period.
  2. Notifiable Interests – Shareholders are required to notify the Company of, and the Company is required to announce, holdings at or above the 3% level and whenever a full percentage point is breached in either direction.
  3. Takeovers – If any party, or parties acting in concert, accumulates a holding of 30% or more, they must make a cash offer to the other holders of London Stock Exchange AIM-listed shares at the highest price they paid for the Company’s shares listed on AIM during the last 12 months.
All of the above will cease to apply if the Company listed on London's AIM becomes a reporting company under the U.S. Exchange Act (i.e. migrates its listing to NASDAQ).

Since the company did not re-domicile into the U.K. or one of its Crown Dependencies, the Channel Islands and Isle of Man, its shares listed on London's AIM are not eligible for trading within CREST; the most common electronic system for the holding and transfer of shares listed on London's AIM in the U.K.  As such, a Depository was appointed and Depository Interests were created which are eligible for trading with CREST.

Separate from the above, the Company relied on the safe harbor afforded by Regulation S of the U.S. Securities Act of 1933 so as to not have to file a registration statement with the U.S. SEC.  Shares subject to Reg. S (generally, those issued in the London Stock Exchange AIM IPO, issued one year before the London AIM IPO and/or held by affiliates) are not eligible for dematerialization and, as such, are held and traded in certificated form outside CREST.  For this reason, the Company has two trading lines on London's AIM; however, both represent securities with identical rights.

London AIM Accounting Considerations
Since the Company did not re-domicile into a European Economic Area country, which includes the U.K., they chose to report using U.S. GAAP.  While, not required, a summary of the relevant differences between U.S. GAAP and IFRS was provided.

The U.K. Member Firm of an international accountancy network acted as Reporting Accountant while the U.S. Member Firm of that same network audited the 2009 financials.  The 2007 and 2008 financials were audited by a predecessor firm.

Since the 2009 audited financials became ‘stale’ after six months, unaudited, six-month stub periods were included for 2008 and 2009 and an unaudited pro forma statement of net assets was provided to illustrate the effect of the debt repayment and the net proceeds from the London Stock Exchange AIM IPO on the net assets of the Company.

Given the nature of the Company’s business, clean water and antimicrobial technology, experts’ reports on the technology and intellectual property were required.

[1] Up to.
[2] At least.
[3] Includes stock subscriptions receivable of $10.0m.
[4] Subject to a 12-month lock-in on London's AIM and customary orderly marketing provisions on London's AIM for a further six months.

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