A local talent management software company is preparing for an initial public offering, airing its accomplishments as well as limited prospects of turning a profit in the coming years.
On April 2, Halogen Software filed a prospectus – a document for potential buyers in advance of going public – disclosing recent financials and plans for future growth.
The numbers aren’t all good, with eight straight quarters of net losses and a cumulative deficit of $48.9 million as of Dec. 31. But Halogen maintains that market opportunities and consistent recurring revenues will allow the company to flourish in the future.
Currently, only between five to 10 per cent of the potential market for talent management has been penetrated, according to Halogen. Armed with cash raised in an IPO, Halogen believes it can capture a large portion of that untapped market.
Halogen officials declined comment, as did Tim Foran, an account executive at TSX Equicom hired to assist Halogen with its potential IPO.
The 115-page document doesn’t disclose how much money Halogen is looking to raise. It does, however, outline the company’s plan for how to spend that money, with much of it likely to stay in Ottawa.
Approximately 25 per cent of the IPO’s net proceeds would be used to grow operations, strengthening and broadening its presence across the globe. That would also entail an expansion of its Ottawa headquarters beyond its current 60,000-square-foot facility on March Road, which Halogen states it will expand in the “near future.”
Ten per cent of the proceeds will be used for product development as well as adding new modules, functionality and content to its existing product suite. All product development is done in Ottawa.
The remaining funds will be used to strengthen its balance sheet as well as for working capital, general corporate purposes and potential acquisitions.
“We will consider making acquisitions of businesses, technologies and solutions on an opportunistic basis that complement our existing offerings in an effort to accelerate our growth, enhance the capabilities of our existing solution and broaden our solution offerings,” the prospectus states.
BY THE NUMBERS
Halogen has seen its revenues grow by 23 per cent year-over-year, bringing in $38 million last year, $31 million in 2011 and $22.7 million in 2010.
But those increasing revenues are accompanied by a net loss of $19.6 million in 2012, almost double its loss of $9.9 million in 2011. In 2010, the company’s net loss was $7.8 million.
“We ... are anticipating continuing to have losses for the foreseeable future as we continue to focus on growth in revenue and not profitability.”
Those losses and an accumulated deficit of $48.9 million are because of the “substantial investments we made to grow our business and acquire customers.”
One of those investments was into Halogen’s workforce, expanding its head count from 196 employees at the end of 2010 to 297 staff members by the end of last year. Operating expenses will continue to climb as the company seeks to expand.
“We cannot assure you that we will achieve profitability in the future, nor that, if we do become profitable, we will sustain profitability,” the document states.
The company currently carries $8.9 million in cash, cash equivalents and short-term investments, compared to $10.7 million in 2011 and $15 million in 2010.
WHAT ARE THE RISKS?
On top of the company’s history of losses, its foray into international markets is an uncertainty as well.
Despite opening offices in the United Kingdom in 2011 and Australia in March 2012, the company has not accumulated a significant amount of revenue from customers outside of the United States and Canada as of yet.
“Because of our limited experience with international operations, we cannot assure you that our international expansion will be successful,” the prospectus reads before highlighting other risks including Halogen’s competition and dependence on customer retention.
Since enduring a string of negative press linked to an admission of guilt after creating a false customer to gain proprietary information from a competitor in 2011, Halogen has enjoyed more favourable headlines in recent months.
Those include reports of its highest ever recurring revenue growth in the final quarter of fiscal 2011, appointing former Cognos CEO Rob Ashe to its board of directors earlier this year and winning contracts and accolades from the likes of Herzing University in Milwaukee, the Ontario Hospital Association and Finnish consultancy firm Logica Finland, to name a few.
According to a 2012 survey by PricewaterhouseCoopers quoted in the prospectus, 77 per cent of CEOS plan to revise their talent management strategies within the next year. It’s an industry that will see $3.3 billion of business in 2013, according to Gartner Inc.
With skill shortages highlighted in the media as of late, talent management may continue to be an important factor to organizations around the world.
After filing a preliminary prospectus to all provinces in Canada, Halogen will now wait for feedback from regulatory authorities, make changes accordingly, then submit an amended prospectus in its final form.
If Halogen does make the decision to go public, it will be permitted to begin selling securities as soon as a final receipt has been issued from the securities commission.
WHAT HALOGEN OFFERS
Incorporated in 1996 as Manta Corp., the company changed its name to Halogen Corp. in 2001.
With 1,750 customers worldwide, Halogen provides software-as-a-service, cloud-based talent management solutions targeted at customers in the mid-market range, with between 100 to 10,000 employees.
Its subscription-based revenue model is calculated on a per-end user, per-module basis, and customers typically enter into two-year agreements.
According to Halogen, 86 per cent of its revenue is recurring, and the company maintains a 90 per cent customer retention rate.
CEO Paul Loucks: Salary of $270,000; total compensation of $316,896
CFO Peter Low: Salary of $195,000; total compensation of $209,733 after other compensation.
The largest shareholder is Halogen co-founder Michael Slaunwhite – who now serves as chairman on the board – with 7.3 million shares. The prospectus does not state how large of a stake this is, beyond saying it is greater than 10 per cent.
Mr. Slaunwhite is followed by JMI Equity Fund VI, L.P. which owns 4.7 million shares, which is also at least 10 per cent of the company.
As of the date of the prospectus, 1.4 million options were outstanding under the company’s current stock option plans.