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
Revenue	$9.6	$10.1	$11.8	+23%	+17%
Cost of Goods Sold	4.5	5.1	6.0	+33%	+18%
Operating Expenses	11.7	13.4	12.9	+10%	-4%
Other Expenses and Taxes	1.4	0.9	2.4	+71%	+167%
Loss from Continuing Ops.	8.1	9.3	9.6	+19%	+3%
Accumulated Deficit	37.3	46.0	54.9	N/A	N/A
Cash and Cash Equivalents	5.6	9.2	13.0[3]	N/A	N/A

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.

Shareholder	Pre-IPO %	Post-IPO %	IPO $ Realized
London-controlled, India/China-focused PEG	16.45	4.30[4]	$11.1m
U.K./Caribbean VC	15.40	4.024	10.4
U.S. VC	8.41	5.754	NIL
London Institution	7.98	5.46	NIL
European Strategic Investor	6.58	NIL	7.2
U.S. Strategic Investor	5.35	3.664	NIL
Singaporean PEG	4.44	3.03	NIL
Angel Investors, Others & London Institutions	33.39	72.25	1.5
Directors	2.00	1.534	NIL
Totals	100.00	100.00	$30.2

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.

Other

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

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[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.

AimZine - Meet The London AIM Players ... Mark McGowan of AIM Advisers, Inc. - Promoting London's AIM in the USA

I am pleased to share a feature included in AimZine which discusses AIM Advisers' marketing of the London Stock Exchange's AIM across the U.S. and some key points for U.S. companies considering an IPO on London's AIM versus other venues for capital raising and access to public shares, such as NASDAQ.

Michael Crockett, Co-Founder and Managing Editor, AimZine, London, England

Did you know that there are 57 U.S. companies listed on London's AIM?  Furthermore, did you know that U.S.-based London AIM-listed companies have outperformed the London AIM index over the last three years by a considerable margin?

These facts I gleaned from a fascinating conversation I had with Mark McGowan, Managing Director of US-based AIM Advisers, Inc.  Mark founded AIM Advisers in 2001 to help US companies who wish to list on the London Stock Exchange's AIM.  As a former Finance Director of AIM-listed DDD Group he is well qualified to assist US companies, particularly in the lead up to an Initial Public Offering (IPO) on London's AIM.

Potential

My first question was naturally: ‘what are the benefits to a US Company to list on the London Stock Exchange's AIM?’  The answer is that for the right companies there are considerable advantages and Mark is optimistic that these compelling reasons will help him to attract significant further business over the coming years.

Mark spent the early years focused on building relationships in London, most notably with AIM Nominated Advisers (Nomads) and AIM Nominated Brokers.  Since then, Mark has focused the majority of his attention on marketing activities in the US and serving clients.  When I spoke to Mark in mid-May he was in Houston, almost half way through a 12-week driving tour covering seven key US cities - Phoenix, Austin/San Antonio, Houston, Dallas, St. Louis, Minneapolis/St. Paul and Denver/Boulder.  On this business development tour Mark is presenting to key advisors such as accountants and lawyers and key investors such as VCs and PEGs.  In the first 4 weeks Mark had already completed 70 meetings.

Mark explains that the goal is to make advisors and investors aware that the London Stock Exchange's AIM is an option for US companies when seeking their next stages of growth capital and access London AIM-listed shares for acquisitions.  Many of the firms he has met to date have had little awareness of the considerable attractions of London's AIM.  However, Mark’s view is that US companies need to tick a number of boxes before considering a London Stock Exchange AIM IPO.

Mark has been pleased with the interest shown in London's AIM by US advisors and investors and, when looking at the benefits, it is not difficult to understand the interest.

AIM vs. NASDAQ

Small US growth companies often aspire to list on the US NASDAQ exchange.  However, London's AIM can provide similar benefits to NASDAQ but with some considerable savings.  The cost of an IPO on the London Stock Exchange's AIM is broadly similar to the cost of listing on the US NASDAQ exchange.  However, London's AIM has a significant advantage when comparing the costs of maintaining the listing due to the high regulatory burden in the US, where companies need to comply with the requirements of the Exchange Act and Sarbanes-Oxley (SOX).

However, it is not just a matter of cost.  Mark told AimZine: ‘I think a more fundamental point from a U.S. company's point-of-view, beyond less regulation and less cost on London's AIM vs. NASDAQ, is that a company with a market capitalization of $100 million will actually be paid attention to on London's AIM since it will be in the top 15%.  I describe this main benefit to those with whom I am meeting as the opportunity for a quality, growth-oriented U.S. company to be a 'big fish in a small pond' on London's AIM.  London AIM investors will actually care about a company of this size on London's AIM and equity research will be written.  On NASDAQ, 1,000 of the 2,800 companies have a market cap, below $100 million but no one cares about these small companies which are often described as NASDAQ's orphans.  Less regulation and less cost on London's AIM is just a follow-on benefit.  What the company really wants is the ability to raise capital and get noticed so that they can use their London Stock Exchange AIM-listed shares for acquisitions and/or attract the attention of larger corporates who may consider paying a significant premium over the London AIM market price to acquire the company which is what I call the 'Trojan Horse Strategy'.’

In his presentation Mark suggests that to be suitable for a London AIM IPO, a US Company should be profitable, or close to profitability, and be able to command a market capitalisation of over $24 million.  At this level there is scope to grow to around $500 million where it then begins to make sense to list on NASDAQ, given the liquidity and valuation advantages.  A $500 million company should be big enough to bear the internal and external costs of the Exchange Act and SOX.

One key message that is conveyed is that London's AIM is a ‘real stock exchange’ and the company needs to have the right mindset before embarking on the process of listing.  For example, the due diligence required for a London AIM IPO is no less than that required for NASDAQ.

Two common questions that have arisen from US advisors and investors concern the availability of institutional capital on London's AIM and liquidity on London's AIM.  On the former point the London Stock Exchange's AIM scores well as a significant number of institutions have fairly ‘deep pockets’ and quality US companies have proved to be popular with these institutions.  On the liquidity point, Mark is confident that a good company with the right AIM Nominated Broker(s) and financial PR/IR firm can achieve a fair valuation with plenty of interest in their shares.

Significant Savings

When looking at the costs of ongoing listing, AIM Advisers estimates that a NASDAQ listing will cost $2 - $3 million per year compared to $320 - $480 thousand on London's AIM.  This is one of the reason AIM Advisers offers for why companies under $500 million may be better served on the London Stock Exchange's AIM.  Therefore, it is surprising to note that 75% of the 2,800 companies on NASDAQ are capitalized at less than $500 million.

Mark explains: ‘The reason why many of these 2,100 companies on NASDAQ do not delist or utilize AIM's Designated Markets Route and then delist is because they already have more than 500 shareholders and would have to comply with the Exchange Act and SOX anyway.  The genie is out of the bottle and it is impossible to put him back in.  This is a key point for a U.S. company considering its next steps.  I think many would be better served by taking their (suitable) $50 million, $100 million, $150 million market cap. company to London's AIM with a 3 - 5 year view and see if they can actually grow the business as they believe they can and, if so, great, now they're ready for primetime; dual list on NASDAQ and either strike off the London AIM listing or, more likely, move it up to the Main Market of the London Stock Exchange where even more investors are able to invest.  My role in acting as a strategic adviser to the company is key in terms of being able to identify the most suitable AIM Nominated Advisers (Nomads) and AIM Nominated Brokers along the key attributes of reputation, sector and size focus, initial and secondary capital raising ability, sectoral equity research analysts and, finally, the all-important sales and trading aftermarket on London's AIM since much of the economic incentive for the AIM Nominated Broker vanishes after the London AIM IPO but the company wants to ensure that its London Stock Exchange AIM-listed shares are liquid since a core strategy of many is to be able to use those shares for acquisitions.’

One interesting statistic in comparing London's AIM with NASDAQ is that 62% more capital has been raised on London's AIM than NASDAQ since 2005.

Mark is keen to stress that the London Stock Exchange's AIM is not right for everyone and as well as the size and profitability criteria, he believes it is preferable for the candidate company to have some overseas exposure, ideally with some business in or plans for Europe.

Once a company has decided that it is interested in a London AIM listing, AIM Advisers will work with the company to determine the suitability of a London Stock Exchange AIM IPO by viewing the company through the eyes of potential AIM Nominated Advisers (Nomads) and AIM Nominated Brokers, assisting with their selection and the appointment of the various other key advisors as well as supporting the company with three hands-on services through the London AIM IPO process.

AimZine Comment: We will be keeping watch for further suitable U.S. companies completing IPOs on London's AIM, particularly those that are assisted by AIM Advisers.  Mark views London's AIM as a 3 - 5 year ‘bridge’ to grow quality companies from $24 million to $500 million.  UK Private Investors may be keen to help such companies across that bridge!

Mark McGowan is the Founder and Managing Director of AIM Advisers, Inc., a California-based business that helps small and medium-sized, growth-oriented US companies complete IPOs on London's AIM.  Mark was the chief financial officer of DDD Group plc, a London AIM-listed company with its corporate headquarters in the US.  Mark is a qualified accountant, having previously worked for Grant Thornton in Los Angeles, Hong Kong and throughout the Asia-Pacific region.

London's AIM - U.S. Company Performance - Share Price and Liquidity - 2009

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 44%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 83%
• FTSE AIM All-Share Index rises 66%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

While there were 41 U.S. domiciled companies listed on the London Stock Exchange's AIM and 35 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning of 2009, only 26 of the former and 31 of the latter traded on London's AIM for the entire year.  The loss of 19 U.S. companies from London's AIM during 2009 is not unexpected; London's AIM lost 293 companies during 2009 to end the year with just under 1,300 companies listed on London's AIM.  The U.S. share of delistings was only 6.5%, which is less than the 7.8% share of U.S. company IPOs on London's AIM from 2005 – 2009 (66 of 846).  It is during the early years when it typically becomes evident that a company’s commercial aspirations will not be achieved, often resulting in a reevaluation of its public company status, a natural process that has been accelerated by the financial crisis.

Of the 19 U.S. companies that left the London Stock Exchange's AIM during 2009, there was an even split between those citing a lack of liquidity on London's AIM and a low profile on the market and those where the business simply failed.  These companies are not included in the chart and analysis below because their aggregate market capitalization on London's AIM as of the beginning of 2009 was only 19% of the U.S. companies’ market capitalization on the London Stock Exchange's AIM and one large company dominated and actually increased in value, therefore, their effect on the share price return analysis is immaterial.

  

*    U.S. operating companies listed on London's AIM directly through a U.S. entity.

**  U.S. operating companies listed on the London Stock Exchange's AIM through a UK or tax haven entity with central operations and/or decision making in the U.S.

2009 was clearly a ‘stock picker’s year’ with 14 of the 57 U.S. companies listed on London's AIM posting returns of more than 100%.

The weighted returns in the table below were calculated using the average market capitalizations of the U.S. companies listed on the London Stock Exchange's AIM during the year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted	Weighted Excluding Market Cap. > £150m
U.S. Domiciled Companies	116%	44%	44%
Foreign Domiciled Companies	55%	83%	22%
FTSE AIM All-Share Index	N/A	66%	N/A

The returns for the U.S. domiciled companies listed on London's AIM are heavily skewed by one company which returned a staggering 2,686%.  If this company is excluded, the unweighted return would drop to 13% and the weighted return would actually be negative 9%.  If similar analysis was carried out on the constituents of the FTSE AIM All-Share Index, the likely conclusion is that 2009 was also a ‘stock picker’s year’ on the broader London's AIM.

In some respects, weighted results are a self-fulfilling prophesy in that companies listed on the London Stock Exchange's AIM with increasing share prices, and therefore increasing market capitalizations on London's AIM, become more heavily weighted relative to those with decreasing share prices / market capitalizations.  In addition, a company listed on London's AIM that is performing well has a better chance of completing a secondary offering on the London Stock Exchange's AIM and for its share price on London's AIM to hold up relative to the dilutive effects, further increasing its market capitalization on London's AIM and relative weighting.  This was even more true during 2009 compared to 2008 because of the full-year effect of the challenging capital raising environment on London's AIM.  When these factors are controlled for by weighting the companies’ returns by their market capitalizations on London's AIM as of the beginning of 2009, the 26 U.S. domiciled companies listed on the London Stock Exchange's AIM lost 25% and the 31 foreign domiciled U.S. operating companies listed on London's AIM gained 52%.

In terms of average monthly liquidity on London's AIM (see the table below), the foreign domiciled U.S. operating companies listed on London's AIM outperformed the U.S. domiciled companies listed on London's AIM and, in fact, London's AIM as a whole.  In more normal times, all of the weighted results exceed all of the unweighted results, reflecting the positive relationship between a company’s liquidity on London's AIM and its market capitalization listed on London's AIM.  The unweighted results represent the level of monthly liquidity on the London Stock Exchange's AIM that the average company can expect to achieve.  The reversal of this relationship for the U.S domiciled companies listed on London's AIM indicates that relative trading volumes were greatest for the companies listed on London's AIM with the smallest market capitalizations.  This could represent London AIM investors coming into companies listed on London's AIM that they felt were undervalued but is more likely reflective of London AIM investors exiting small companies listed on the London Stock Exchange's AIM where they are no longer comfortable with the risk/reward relationship.  This view is supported by the share price underperformance of the U.S. domiciled companies listed on London's AIM relative to the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM and London's AIM as a whole.

Average Monthly Liquidity on London's AIM	Foreign Domiciled U.S. Operating Companies Listed on London's AIM	U.S. Domiciled Companies Listed on London's AIM	Entire London's AIM
Weighted	5.84%	1.30%	5.72%
Unweighted	4.85%	2.65%	3.97%

 

The key takeaway from the chart above is that there is a liquidity advantage for U.S. companies that list on the London Stock Exchange's AIM via a UK holding company.  The four main reasons being:

1. Once the Reg. S period expires, the London AIM IPO shares can trade directly within CREST
2. Pre-IPO shares not subject to Reg. S can immediately trade directly within CREST
3. Articles of incorporation fully conform to UK law providing comfort to UK investors
4. London AIM institutional investors only allocate a portion of their investments to non-UK companies

Nevertheless, irrespective of where a company is domiciled, liquidity on London's AIM can be improved.  The reasons for a lack of liquidity on the London Stock Exchange's AIM are often company specific and not obvious.  As a consequence, thoughtful and thorough investigation is needed in order to formulate actionable solutions.  Several strategic decisions can be taken during the planning of the London AIM IPO to minimize the risk of lack of liquidity on the London Stock Exchange's AIM becoming a problem in the first instance; including, selection of the most appropriate London AIM Nominated Adviser (Nomad), London AIM Nominated Broker, financial PR/IR firm and Independent Equity Research firm.