<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
|_| TRANSISTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
_________
Commission File Number: 000-27861
Centra Software, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3268918
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
430 Bedford Street, Lexington, MA 02420
(Address of Principal Executive Offices)
(781) 861-7000
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the Registrant's common stock as of November
10, 2000 was 24,277,322.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 (unaudited).................................. 3
Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999 (unaudited) .............. 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited) .............. 5
Notes to Consolidated Financial Statements (unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................... 16
Item 6. Exhibits and Reports on Form 8-K.................................... 17
Signatures................................................................... 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRA SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................... $64,940 $ 7,878
Restricted cash ..................................... 100 --
Accounts receivable, net of reserves of approximately
$473 and $194 at September 30, 2000 and December 31,
1999, respectively ................................ 3,760 2,667
Prepaid expenses and other current assets ........... 2,238 510
---------- ----------
Total current assets ............................ 71,038 11,055
---------- ----------
Property and Equipment, at cost:
Computers and equipment ............................. 4,187 2,343
Furniture and fixtures .............................. 657 312
Leasehold improvements .............................. 187 93
---------- ----------
5,031 2,748
Less: Accumulated depreciation and amortization ..... 2,166 1,271
---------- ----------
2,865 1,477
Restricted cash ..................................... 400 --
Other Assets ........................................ 126 764
---------- ----------
$74,429 $13,296
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of term loan..................... $ 331 $ 339
Accounts payable.................................... 1,127 562
Accrued expenses.................................... 4,287 2,780
Deferred revenue.................................... 3,773 1,546
---------- ----------
Total current liabilities....................... 9,518 5,227
---------- ----------
Term loan, net of current maturities.................. 130 376
---------- ----------
Redeemable convertible preferred stock, $0.001 par value-
Authorized-9,164,490 shares
Issued and outstanding-0 shares and 9,164,490 shares
as of September 30, 2000 and December 31, 1999,
respectively, at carrying value..................... -- 32,480
---------- ----------
Stockholders' equity (deficit):
Preferred stock, $.001 par value-
Authorized-10,000,000 shares as of September 30,
2000; 0 shares as of December 31, 1999
Issued and outstanding-0 shares at September 30, 2000
and December 31, 1999 -- --
Common stock, $0.001 par value
Authorized-100,000,000 shares as of September 30,
2000;and 25,000,000 as of December 31, 1999
Issued-24,877,388 shares and 5,164,923 shares at
September 30, 2000 and December 31, 1999 ............... 25 5
Additional paid-in capital................................ 104,888 3,770
Accumulated deficit....................................... (37,608) (26,536)
Deferred compensation..................................... (2,484) (1,986)
Treasury stock (661,606 shares of common stock at
September 30, 2000 and December 31, 1999)................. (40) (40)
---------- ----------
Total stockholders' equity (deficit) ................. 64,781 (24,787)
---------- ----------
$74,429 $13,296
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CENTRA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License...................................................... $ 5,187 $ 2,345 $ 12,391 $ 4,534
Services..................................................... 1,148 371 2,752 1,048
---------- ---------- ---------- ----------
Total revenues.......................................... 6,335 2,716 15,143 5,582
---------- ---------- ---------- ----------
Cost of Revenues:
License...................................................... 154 47 216 138
Services(1).................................................. 829 411 2,219 1,058
---------- ---------- ---------- ----------
Total cost of revenues.................................. 983 458 2,435 1,196
---------- ---------- ---------- ----------
Gross profit............................................ 5,352 2,258 12,708 4,386
---------- ---------- ---------- ----------
Operating Expenses:
Sales and marketing(1)....................................... 6,243 2,001 15,487 5,218
Product development(1)....................................... 2,229 975 6,373 3,138
General and administrative(1)................................ 1,216 635 3,313 1,544
Compensation charge for issuance of stock options(1)......... 228 112 702 236
---------- ---------- ---------- ----------
Total operating expenses................................ 9,916 3,723 25,875 10,136
---------- ---------- ---------- ----------
Operating loss............................................... (4,564) (1,465) (13,167) (5,750)
Interest income................................................ 1,079 144 2,798 259
Interest expense............................................... 14 18 46 48
---------- ---------- ---------- ----------
Net loss before provision for income taxes................... (3,499) (1,339) (10,415) (5,539)
Provision for income taxes..................................... -- -- 8 --
---------- ---------- ---------- ----------
Net loss..................................................... (3,499) (1,339) (10,423) (5,539)
Accretion of discount on preferred stock....................... -- 126 649 380
---------- ---------- ---------- ----------
Net loss attributable to common stockholders................... $(3,499) $(1,465) $(11,072) $(5,919)
========== ========== ========== ==========
Basic and diluted net loss per share........................... $ (.15) $ (.22) $ (.52) $ (.92)
========== ========== ========== ==========
Pro forma basic and diluted net loss per share (Note 1(g)) $ (.15) $ (.09) $ (.49) $ (.40)
========== ========== ========== ==========
Weighted average shares outstanding:
Basic and diluted............................................ 23,271 6,550 21,265 6,427
========== ========== =========== ==========
Pro forma basic and diluted (Note 1(g))...................... 23,271 16,473 22,368 14,778
========== ========== =========== ===========
</TABLE>
-----------
(1) The following summarizes the departmental allocation of the
compensation charge for issuance of stock options:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of service revenues ............................... $ 7 $ -- $ 18 $ --
Sales and marketing .................................... 102 52 303 107
Product development .................................... 41 21 120 42
General and administrative.............................. 78 39 261 87
---- ---- ---- ----
Total compensation charge for issuance of stock options $228 $112 $702 $236
==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CENTRA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................................. $(10,423) $(5,539)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................................... 895 421
Provision for doubtful accounts........................................ 280 25
Compensation charge for issuance of stock options...................... 702 236
Changes in assets and liabilities:
Restricted cash...................................................... (100) --
Accounts receivable.................................................. (1,373) (784)
Prepaid expenses and other current assets............................ (1,728) (211)
Accounts payable..................................................... 565 (189)
Accrued expenses..................................................... 1,507 205
Deferred revenue..................................................... 2,227 606
-------- -------
Net cash used in operating activities.............................. (7,448) (5,230)
-------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment ...................................... (2,283) (557)
Purchase of short-term investments ...................................... -- (5,759)
Restricted cash.......................................................... (400) --
Other assets ............................................................ 638 (88)
-------- -------
Net cash used in investing activities.............................. (2,045) (6,404)
-------- -------
Cash Flows from Financing Activities:
Proceeds from initial public offering.................................... 80,500 --
Payments of initial public offering costs................................ (7,268) --
Proceeds from sale of preferred stock.................................... -- 13,423
Proceeds from exercise of stock options.................................. 57 209
Payments of dividends to preferred shareholders.......................... (6,480) --
Purchase of treasury stock............................................... -- (23)
Proceeds from term loan.................................................. -- 209
Payments on term loan.................................................... (231) (245)
Payments on capital lease obligations.................................... (23) (25)
-------- -------
Net cash provided by financing activities.......................... 66,555 13,548
-------- -------
Net Increase in Cash and Cash Equivalents.................................. 57,062 1,914
Cash and Cash Equivalents, beginning of period............................. 7,878 1,979
-------- -------
Cash and Cash Equivalents, end of period................................... $64,940 $ 3,893
======== =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest................................. $ 37 $ 50
======== =======
Supplemental Disclosure of Noncash Financing Activities:
Accretion of discount on series A and series B redeemable convertible
preferred stock.......................................................... $ 649 $ 380
======== =======
Issuance of common stock and stock subscription receivable $ -- $ 11
======== =======
In connection with the initial public offering of common stock, the following
were converted to common stock-
Conversion of redeemable convertible preferred
stock into common stock............................................ $33,130 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CENTRA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Centra Software, Inc. together with its wholly-owned subsidiaries
("Centra" or "the Company") is a leading provider of software and networked
services for live eLearning and Internet business collaboration. Centra's
Web-based enterprise solutions include Centra Symposium(TM) for hands-on
eLearning, Centra Conference 3.0 for large-scale, interactive Web presentations,
Centra eMeeting for ad-hoc virtual meetings, and the CentraNow(TM) network
service for Web meetings. Centra provides Web enabled enterprise software and
networked services that allow businesses to interact live over the intranet or
Internet with their customers, partners and employees in a variety of business
contexts, such as sales meetings and presentations, marketing seminars, as well
as enabling learning, training and interactive teamwork.
The accompanying consolidated financial statements reflect the
application of certain accounting policies, as described in this note and
elsewhere in the notes to consolidated financial statements.
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Centra
and its wholly-owned subsidiaries, Centra Software Europe Limited, which was
organized in the United Kingdom on June 25, 1999 and Centra Software Securities
Corporation, a Massachusetts securities corporation. All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying consolidated financial statements for the three and
nine months ended September 30, 2000 and 1999 are unaudited and have been
prepared on a basis consistent with the December 31, 1999 audited financial
statements and include normal recurring adjustments which are, in the opinion of
management, necessary for the fair statement of the results of these periods.
These consolidated statements should be read in conjunction with our
consolidated financial statements and notes thereto included in our Registration
Statement on Form S-1 File number 333-81817. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
results to be expected for the entire year or any other period.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
(c) REVENUE RECOGNITION
Centra recognizes revenues in accordance with the American Institute of
Certified Public Accountants' (AICPA) Statement of Position 97-2, SOFTWARE
REVENUE RECOGNITION (SOP 97-2), as amended. Centra derives substantially all of
its revenues from the sale of software licenses, post-contract support
(maintenance), professional services, and hosting services. Maintenance includes
telephone technical support, bug fixes and rights to upgrades and enhancements
on a when-and-if available basis. Professional services include training and
basic implementation consulting to meet specific customer needs. Hosting
services include server access and monitoring, network bandwidth and telephone
support.
Revenues from license fees are recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collectability is probable. Advance payments are recorded as
deferred revenue until the products are shipped, services are delivered or
obligations are met. Centra's products do not require significant customization.
Revenues related to maintenance and hosting services are recognized on
a straight-line basis over the period that the maintenance and hosting services
are provided and revenues allocable to professional services are recognized as
the services are performed.
6
<PAGE>
In December 1998, the AICPA issued Statement of Position 98-9,
MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
TRANSACTIONS (SOP 98-9). SOP 98-9 requires use of the residual method for
recognition of revenues when vendor-specific objective evidence exists for
undelivered elements but does not exist for delivered elements of a software
arrangement. Centra was required to comply with the provisions of SOP 98-9 for
transactions entered into beginning January 1, 2000. The adoption of SOP 98-9
has not had a material effect on the Company's financial position or results of
operations.
(d) CASH EQUIVALENTS
Centra considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Centra accounts for cash equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115, investments for
which Centra has the positive intent and the ability to hold to maturity,
consisting of cash equivalents, are reported at amortized cost, which
approximates fair market value. At September 30, 2000 and December 31, 1999,
Centra's cash equivalents consisted of money market accounts and highly rated
commercial paper. To date, Centra has not recorded any realized gains or losses.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents-
Cash ................................................................ $ 757 $ --
Money market accounts................................................ $ 33,319 $ 352
Commercial paper..................................................... $ 30,864 $ 7,526
--------- ---------
Total cash and cash equivalents.................................... $ 64,940 $ 7,878
========= =========
</TABLE>
(e) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Centra's comprehensive loss is equal to net loss for all
periods presented.
(f) NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with
SFAS No. 128, EARNINGS PER SHARE (SFAS No. 128) for all periods presented.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98
(SAB 98), common stock and redeemable convertible preferred stock issued or
granted for nominal consideration prior to the effective date of Centra's
initial public offering are included in the calculation of basic and diluted net
loss per share as if they had been outstanding for all periods presented. The
common shares that were issued upon conversion of the series A and series B
preferred stock were issued for nominal consideration due to the liquidation
premium that was payable to the holders of series A and series B preferred
stock. Accordingly, such shares of common stock have been included in the
calculation of basic and diluted net loss per share from the original date of
issuance of the underlying shares of preferred stock. In accordance with SFAS
No. 128, basic and diluted net loss per share has been computed by dividing the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase, into the net loss attributable to common
stockholders, which includes both the accretion of the discount and the
liquidation premium on the series A and series B preferred stock.
(g) PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed as described above and
also gives effect to the conversion of redeemable convertible preferred stock,
which shares automatically converted into common stock upon the completion of
Centra's initial public offering effective February 3, 2000, using the
if-converted method, from the original date of issuance.
7
<PAGE>
Historical and pro forma basic and diluted net loss per share are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
-------------------- -------------------
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
HISTORICAL:
Net loss attributable to common stockholders...................... $ (3,499) $ (1,465) $(11,072) $(5,919)
======== ========= ========= ========
Basic and diluted shares:
Weighted-average shares of common and series A and B
preferred stock outstanding..................................... 24,188 7,783 23,130 7,593
Less: weighted-average shares subject to repurchase............... (917) (1,233) (1,865) (1,166)
-------- -------- -------- -------
Weighted-average shares of common and series A and B
preferred stock outstanding used in computing basic and
diluted net loss per share....... .............................. 23,271 6,550 21,265 6,427
-------- -------- -------- -------
Basic and diluted net loss per share.............................. $(.15) $ (.22) $ (.52) $ (.92)
======== ======== ======== =======
PRO FORMA:
Net loss attributable to common stockholders...................... $ (3,499) $ (1,465) $(11,072) $(5,919)
======== ======== ======== =======
Weighted-average shares of common and series A and B
preferred stock outstanding used in computing basic and
diluted net loss per share....................................... 23,271 6,550 21,265 6,427
Adjusted to reflect the assumed conversion of series C, D
and E preferred stock from the date of issuance................. -- 9,923 1,103 8,351
-------- -------- -------- -------
Weighted-average shares used in computing pro forma basic
and diluted net loss per share 23,271 16,473 22,368 14,778
-------- -------- -------- -------
Pro forma basic and diluted net loss per share.................... $ (.15) $ (.09) $ (.49) $ (.40)
======== ======== ======== =======
</TABLE>
Options to purchase a total of 3,176,000 and 1,696,000 common shares have not
been included in the computation of dilutive EPS above for the three and nine
months ended September 30, 2000 and 1999, respectively. Inclusion of these
shares would have an antidilutive effect, as Centra recorded a net loss for all
periods presented.
(h) SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION (SFAS No. 131). As of September 30, 2000, Centra operates solely in
one segment, the development and marketing of software products and related
services, and therefore adoption of SFAS No. 131 has had no impact to Centra's
financial statements. Centra's revenues from customers outside of the North
America were approximately $824,000 and $169,000 for the three months ended
September 30, 2000 and 1999, respectively and $1,716,000 and $335,000 for the
nine months ended September 30, 2000 and 1999, respectively. No single country
outside of North America represented greater than 10% of total consolidated
revenues for the three and nine months ended September 30, 2000 and 1999.
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS"
(SAB No. 101). SAB No. 101 is effective for the fourth quarter of all fiscal
periods beginning after December 15, 1999. Adoption of SAB No. 101, as amended
by SAB No. 101 (b), is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements
that involve risks and uncertainties. Words such as anticipates, expects,
intends, plans, believes, seeks, estimates and similar expressions identify such
forward-looking statements. The forward-looking statements contained herein are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from these expressed in such
forward-looking statements. Factors that might cause such a difference include,
among other things, those set forth under "Overview", "Results of Operations",
"Liquidity and Capital Resources", and "Risk Factors" included in these sections
and those appearing elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company assumes no obligation to update
these forward-looking statements to reflect actual results or changes in factors
or assumptions affecting forward-looking statements.
OVERVIEW
We design, develop and support Web applications software and network
services, for live eBusiness collaboration that enables companies to perform
live eLearning, Web meetings and large scale on-line presentations. Our products
provide Internet infrastructure for comprehensive live collaboration and include
features such as voice-over-the-Internet, software application sharing,
real-time data exchange and shared workspaces. Our products to date have been
sold primarily to the Global 2000 market with product offerings and network
service solutions for corporate eLearning and training, collaborative sales and
marketing, and one-to-one customer, partner and employee relationships. We
offer: Centra Symposium, an enterprise Web application for highly interactive
eLearning and team collaboration; Centra Conference, an enterprise web
application for live interactive seminars and corporate briefings for large
dispersed audiences; Centra eMeeting, an enterprise web application for ad-hoc
virtual meetings where users can schedule, organize and run their own meeting;
and CentraNow, a network service for live, voice-enabled business meetings and
events.
Through September 30, 2000, our revenues were derived from licenses of
our software products, from related maintenance, and from the delivery of
implementation consulting, training and hosting services. We price licenses of
our enterprise application software on a rental or purchase basis under a
variety of licensing models, including named-user licenses, concurrent-user
licenses, time-limited licenses and revenue-sharing. Customers who license our
enterprise application software typically purchase renewable maintenance
contracts that provide software upgrades and technical support over a stated
term, usually a twelve-month period. Maintenance is priced as a percentage of
our license fees. We also offer implementation consulting, training and
education services to our customers primarily on a time-and-materials basis. In
August 1999, we began providing hosting services for customers on a temporary
basis under hosting agreements, with terms ranging from six to twelve months, to
outsource the administration and infrastructure necessary to operate our
enterprise application software. The hosting fees include a set-up fee and
monthly service fees, in addition to license fees for the software. We also
offer CentraNow both as a free service with limited functionality and as a
priced offering with expanded functionality.
We recognize our software license revenues in accordance with AICPA
Statement of Position 97-2, "Software Revenue Recognition," and related
amendments and interpretations contained in the AICPA's Statement of Position
98-4 and 98-9. We generally recognize revenues allocated to software licenses
upon delivery of the software products, when all of the following conditions
have been met:
o we have signed a non-cancelable license agreement with the
customer;
o the license fee is fixed or determinable; and
o the license fee is collectible.
Because substantially all of our software license agreements include
related services, these agreements are multiple-element arrangements. We
allocate the fees in multiple-element arrangements based on vendor-specific
objective evidence of value for each element. Delivery of the software generally
is deemed to occur upon shipment of the software. In situations where we provide
application hosting services, delivery of the
9
<PAGE>
software occurs upon initiation of the hosting service. Revenues from
maintenance and hosting services are recognized ratably over the related
contractual period. Revenues allocable to implementation, consulting and
training services are recognized as services are performed.
We record as deferred revenues any billed amounts due from customers in
excess of revenues recognized.
We sell our products and services primarily through a direct sales
force and through relationships with distributors, resellers and other strategic
partners. We have established European sales operations based in the United
Kingdom and have master distributors in Japan and Korea and value added
resellers throughout Europe, the Middle East, Australia, Brazil and Africa.
Revenues from international sales excluding Canada were 13% and 6% or $824,000
and $169,000 for the three month periods ended September 30, 2000 and 1999,
respectively. Revenues from international sales excluding Canada were 11% and 6%
of total revenues or $1,716,000 and $335,000 for the nine month periods ended
September 30, 2000 and 1999, respectively. During 1999, we began to invest in
the infrastructure necessary to expand our global operations, including the
formation and staffing of our European subsidiary. We expect to continue to
invest in our international operations as we expand our international direct and
indirect channels and enhance our marketing efforts to increase worldwide market
share. We anticipate that revenues derived from outside the United States will
increase both in terms of percentage of revenues and absolute dollars.
Our cost of license revenues includes royalties due to third parties
for technology included in our products, as well as costs of product
documentation, media used to deliver our products and fulfillment. Our cost of
service revenues includes (a) salaries and related expenses for our consulting,
education, technical support and information technology services organizations,
(b) an overhead allocation consisting primarily of our facilities,
communications and depreciation expenses, and (c) direct costs related to our
hosting services.
Our operating expenses are classified into four general categories:
sales and marketing, product development, general and administrative, and
compensation charge for issuance of stock options.
o Sales and marketing expenses consist primarily of (a) salaries
and other related costs for sales and marketing personnel and
(b) costs associated with marketing programs, including trade
shows and seminars, advertising, public relations activities
and new product launches.
o Product development expenses consist primarily of employee
salaries and benefits, fees for outside consultants and
related costs associated with the development of new products,
the enhancement of existing products, purchase of third party
source code, quality assurance, testing and documentation.
o General and administrative expenses consist primarily of
salaries and other related costs for executive, financial,
administrative and information technology personnel, as well
as accounting and legal costs.
o Compensation charge for issuance of stock options represents
the amortization, over the vesting period of the option, of
the difference between the exercise price of options granted
to employees and the deemed fair market value of the options
for financial reporting purposes.
In the development of new products and enhancements of existing
products, the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal product development have been expensed as incurred.
Our previously outstanding series A and series B preferred stock had
participation rights that allowed holders to receive a premium equal to 150% of
their original investment upon the redemption, liquidation and automatic
conversion of the preferred stock into common stock. For financial reporting
purposes, we discounted the value of series A and series B preferred stock by
the value of these participating rights. We had been increasing the carrying
value of the series A and series B preferred stock for the liquidation premium
and participation discount through charges to
10
<PAGE>
stockholders' deficit over the redemption period. This increase is also
reflected in the accretion of discount on preferred stock in our statement of
operations. Upon the automatic conversion of the series A and series B preferred
stock into common stock in February 2000, $649,000 in unamortized liquidation
premium and participation discount on the series A and series B preferred stock
was accreted.
We have experienced substantial losses in each fiscal period since our
inception. As of September 30, 2000, we had an accumulated deficit of $37.6
million. These losses and our accumulated deficit have resulted from our lack of
substantial revenues, as well as the significant costs incurred in the
development of our products and services and in the preliminary establishment of
our infrastructure. We expect to increase our expenditures in all areas in order
to execute our business plan, and to expand further internationally,
particularly in sales and marketing. The planned increase in sales and marketing
expense will result principally from the hiring of additional sales force
personnel and from marketing programs to increase brand awareness. Accordingly,
we expect to experience additional losses for the foreseeable future.
Although we have experienced revenue growth in recent periods, our
recent rate of revenue growth may not be sustainable. We may not be able to
continue to increase our revenues or to attain profitability and, if we do
achieve profitability, we may not be able to sustain profitability for any
period. We believe that period-to-period comparisons of our historical operating
results may not be meaningful, and you should not rely upon them as an
indication of our future financial performance.
RESULTS OF OPERATIONS
The following table sets forth operating data expressed as percentages
of total revenues for each period indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License 82 % 86 % 82 % 81 %
Services 18 14 18 19
----- ----- ----- -----
Total revenues 100 100 100 100
Cost of Revenues:
License 2 2 1 2
Services 13 15 15 19
----- ----- ----- -----
Total cost of revenues 15 17 16 21
----- ----- ----- -----
Gross margin 85 83 84 79
Operating expenses:
Sales and marketing 99 74 102 94
Product development 35 36 42 56
General and administrative 19 23 22 28
Compensation charge for issuance of stock options 4 4 5 4
----- ----- ----- -----
Total operating expenses 157 137 171 182
----- ----- ----- -----
Operating loss (72) (54) (87) (103)
Interest income, net 17 5 18 4
----- ----- ----- -----
Net loss (55) % (49) % (69) % (99) %
===== ===== ===== =====
</TABLE>
11
<PAGE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total revenues increased by $3.6 million, or 133%, to $6.3 million
for the three months ended September 30, 2000, from $2.7 million for the three
months ended September 30, 1999. The increase was attributable to the
significant growth in our customer base resulting in substantial growth in
license and service revenues.
License revenues increased by $2.9 million, or 121%, to $5.2 million for the
three months ended September 30, 2000, from $2.3 million for the three months
ended September 30, 1999. The increase was attributable to an increase in the
number and average transaction size of customer license sales.
Service revenues increased by $777,000, or 209%, to $1,148,000 for the three
months ended September 30, 2000, from $371,000 for the three months ended
September 30, 1999. The increase was primarily related to an increase in
maintenance support contracts to new and existing customers and to a lesser
extent an increase in professional and hosting services. Service revenues
represented 18% and 14% of total revenues for the three months ended September
30, 2000 and 1999, respectively.
COST OF LICENSE REVENUES. Cost of license revenues increased by $107,000, or
228%, to $154,000 for the three months ended September 30, 2000, from $47,000
for the three months ended September 30, 1999. Cost of license revenues was 2%
of license revenues for the three months ended September 30, 2000 and 1999,
respectively. The increase was attributable to an increase in royalty
obligations to third parties. We anticipate that cost of license revenues will
increase in the future both in terms of absolute dollars as licensing revenues
from our products increase and as a percent of license revenues due to the
licensing of additional technologies from third parties.
COST OF SERVICE REVENUES. Cost of service revenues increased by $418,000, or
102%, to $829,000 for the three months ended September 30, 2000, from $411,000
for the three months ended September 30, 1999. The increase was due primarily to
an increase in the number of technical support, consulting and education
personnel providing services to our customers. Cost of service revenues were 72%
and 111% of service revenues for the three months ended September 30, 2000 and
1999, respectively. The decrease as a percentage of service revenues was due
primarily to service revenues increasing at a greater rate than service costs.
We anticipate that the cost of service revenues will continue to increase in
absolute dollars to the extent that we continue to generate new customers and
associated license and service revenues. Cost of service revenues as a
percentage of service revenues can be expected to vary significantly from period
to period depending on the mix of services that we provide and overall
utilization rates of our service personnel.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $4.2
million, or 212%, to $6.2 million for the three months ended September 30, 2000,
from $2.0 million for the three months ended September 30, 1999. The increase
was primarily attributable to an increase in marketing programs, including
advertising, trade shows, and promotional expenses. To a lesser extent, the
increase was related to an increase in the number of direct sales and marketing
employees. Sales and marketing expenses were 99% and 74% of total revenues for
the three months ended September 30, 2000 and 1999. We expect that sales and
marketing expenses will continue to increase in absolute dollars to support
marketing programs for new product launches, international expansion and
increased sales efforts.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased by $1.3
million, or 129%, to $2.2 million for the three months ended September 30, 2000,
from $975,000 for the three months ended September 30, 1999. The increase
primarily resulted from salaries associated with newly hired product development
personnel and, to a lesser extent, consulting fees and translation services to
localize the products into international languages. Product development expenses
were 35% and 36% of total revenues for the three months ended September 30, 2000
and 1999, respectively. The decrease as a percentage of total revenues was due
to our revenues increasing at a greater rate than our product development
expenses. We believe that continued investment in product development is
critical to attaining our strategic objectives and, as a result, we expect
product development expenses will continue to increase in absolute dollars as
additional product development personnel are added and additional investments
are made into third party source code.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $581,000, or 91%, to $1.2 million for the three months ended
September 30, 2000, from
12
<PAGE>
$635,000 for the three months ended September 30, 1999. The increase resulted
primarily from costs associated with increased headcount and related operational
costs required to manage our growth as well as the costs associated with being a
public company. General and administrative expenses were 19% and 23% of total
revenues for the three months ended September 30, 2000 and 1999, respectively.
The decrease as a percentage of total revenues was due to our revenues
increasing at a greater rate than our general and administrative expenses. We
expect that general and administrative expenses will continue to increase in
absolute dollars, as we continue to add personnel to support our expanding
operations, incur additional costs related to the growth of our business, and
assume the responsibilities and the costs associated with being a public
company.
COMPENSATION CHARGE FOR ISSUANCE OF STOCK OPTIONS. We incurred a charge of
$228,000 and $112,000 for the three months ended September 30, 2000 and 1999,
respectively, related to the issuance of stock options to employees and
non-employees during 1999 and 2000. These options vest over periods up to five
years, which will result in additional compensation expense of approximately
$2.5 million through September, 2003.
INTEREST INCOME, NET. Interest income, net of interest expense, increased by
$939,000 to $1.1 million for the three months ended September 30, 2000, from
$126,000 for the three months ended September 30, 1999. The increase primarily
resulted from a higher average cash balance for the three months ended September
30, 2000 compared to the three months ended September 30, 1999 due to the
receipt of proceeds from our initial public offering in February 2000.
NET LOSS. Net loss increased by $2.2 million, or 161%, to $3.5 million for the
three months ended September 30, 2000, from $1.3 million for the three months
ended September 30, 1999. The increase was due to increased operating expenses,
partially offset by increased revenues.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total revenues increased by $9.6 million, or 171%, to $15.1 million
for the nine months ended September 30, 2000, from $5.6 million for the nine
months ended September 30, 1999. The increase was attributable to the
significant growth in our customer base resulting in substantial growth in
license and service revenues.
License revenues increased by $7.9 million, or 173%, to $12.4 million for the
nine months ended September 30, 2000, from $4.5 million for the nine months
ended September 30, 1999. The increase was attributable to an increase in the
number and average transaction value of customer license sales.
Service revenues increased by $1.7 million, or 162%, to $2.8 million for the
nine months ended September 30, 2000, from $1.1 million for the nine months
ended September 30, 1999. The increase was primarily related to an increase in
maintenance support contracts to new and existing customers and to a lesser
extent an increase in revenues from professional services. Service revenues
represented 18% and 19% of total revenues for the nine months ended September
30, 2000 and 1999, respectively.
COST OF LICENSE REVENUES. Cost of license revenues increased by $78,000, or
57%, to $216,000 for the nine months ended September 30, 2000, from $138,000 for
the nine months ended September 30, 1999. Cost of license revenues was 2% and 3%
of license revenues for the nine months ended September 30, 2000 and 1999,
respectively. The increase was attributable to an increase in royalty
obligations to third parties.
COST OF SERVICE REVENUES. Cost of service revenues increased by $1.1 million,
or 110%, to $2.2 million for the nine months ended September 30, 2000, from $1.1
million for the nine months ended September 30, 1999. The increase was due
primarily to an increase in the number of technical support, consulting and
education personnel providing services to our customers. Cost of service
revenues was 81% and 101% of service revenues for the nine months ended
September 30, 2000 and 1999, respectively. The decrease as a percentage of
service revenues was due primarily to service revenues increasing at a greater
rate than service costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $10.3
million, or 198%, to $15.5 million for the nine months ended September 30, 2000,
from $5.2 million for the nine months ended September 30, 1999. The increase was
primarily attributable to an increase in marketing programs, including
advertising, trade shows, and promotional expenses. To a lesser extent, the
increase was a result of an increase in the number of direct sales and marketing
employees.
13
<PAGE>
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased by $3.3
million, or 103%, to $6.4 million for the nine months ended September 30, 2000,
from $3.1 million for the nine months ended September 30, 1999. The increase was
primarily the result of increased salaries associated with newly hired product
development personnel during the period, and, to a lesser extent, increased
purchased technology and translation services costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.8 million, or 115%, to $3.3 million for the nine months ended
September 30, 2000, from $1.5 million for the nine months ended September 30,
1999. The increase was primarily attributable to costs associated with increased
headcount and related operational costs required to manage our growth and the
costs of being a public company.
COMPENSATION CHARGE FOR ISSUANCE OF STOCK OPTIONS. We incurred a charge of
$702,000 and $236,000 for the nine months ended September 30, 2000 and 1999,
respectively, related to the issuance of stock options to employees and
non-employees during 1999 and 2000.
INTEREST INCOME, NET. Interest income, net of interest expense, increased by
$2.5 million to $2.7 million for the nine months ended September 30, 2000, from
$211,000 for the nine months ended September 30, 1999. The increase primarily
resulted from a higher average cash balance for the nine months ended September
30, 2000 compared to the nine months ended September 30, 1999 due to the receipt
of proceeds from our initial public offering in February 2000.
NET LOSS. Net loss increased by $4.9 million, or 89%, to $10.4 million for the
nine months ended September 30, 2000, from $5.5 million for the nine months
ended September 30, 1999. The increase was the result of increased operating
expenses, partially offset by increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and met our capital
expenditure requirements primarily through private sales of equity securities,
commercial credit facilities and capital leases and with the proceeds from our
initial public offering. We completed our initial public offering of common
stock on February 3, 2000. A total of 5,750,000 shares were sold to the public
which resulted in net proceeds to the Company of $73.3 million.
As of September 30, 2000, cash and cash equivalents were $64.9 million,
an increase of $57.1 million compared with cash and cash equivalents held as of
December 31, 1999. This increase reflects the receipt of the proceeds from our
initial public offering in February 2000. Our working capital as of September
30, 2000 was $61.5 million compared to $5.8 million as of December 31, 1999.
Net cash used in operating activities was $7.4 million for the nine
months ended September 30, 2000, and was primarily related to operating losses
and, to a lesser extent, changes in working capital items consisting primarily
of cash used for prepaid expenses and other current assets and an increase in
accounts receivable partially offset by increases in deferred revenue, accrued
expenses and accounts payable. The increase in accounts receivable is due to
increased revenues offset by an improvement in days sales outstanding. The
increase in deferred revenue is due to increased billings for unearned license,
maintenance and service revenues. The increase in accrued expenses and accounts
payable is due to an increase in operating expenses. Net cash used in operating
activities was $5.2 million for the nine months ended September 30, 1999
primarily the result of operating losses.
Net cash used in investing activities was $2.0 million and $6.4 million
for the nine months ended September 30, 2000 and 1999, respectively. Our
investing activities for these periods consisted of purchases of short-term
investments and purchases of property and equipment to support our expanding
operations.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $66.6 million reflecting the net proceeds of $73.3
million received from our initial public offering. In March 2000 the series A
and B preferred shareholders were paid a total of $6.5 million that was due upon
completion of the Company's initial public offering. Net cash provided by
financing activities for the nine months ended September 30, 1999 was $13.5
million and consisted principally of our series E preferred
14
<PAGE>
stock financing in April 1999.
As of September 30, 2000, we had outstanding loans of $433,000, under
an equipment term loan line of credit, which bears interest at the rate of 9.5%
per year. Principal payments are due in 36 equal monthly installments through
September 30, 2002, and all borrowings are secured by substantially all of our
assets. As of September 30, 2000, we had outstanding capital leases of $28,000,
which bear interest at rates of 11% and 11.5% per year. Capital lease payments
are due through June 30, 2002.
Capital expenditures totaled $2.3 million and $557,000 for the nine
month periods ended September 30, 2000 and 1999, respectively. Our capital
expenditures consisted of purchases of computer hardware and software, office
furniture and equipment and leasehold improvements. Purchases of computer
equipment represent the largest component of our capital expenditures. We expect
capital expenditures to remain at the same level for the foreseeable future as
we continue to increase the number of employees, increase the size of our
operating facilities, and improve and expand our information systems and network
services. Since inception, we have generally funded capital expenditures either
through the use of working capital or with equipment bank loans.
We expect to experience significant increases in our operating
expenses, particularly in product development and sales and marketing expenses,
for the foreseeable future in order to execute our business plan. As a result,
we anticipate that such operating expenses, as well as planned capital
expenditures, international sales expansion and the expansion of our Web-based
services, will constitute a material use of our cash resources. We believe that
the net proceeds from the sale of common stock from our recent public offering,
together with our existing cash and cash equivalents, will be sufficient to
finance our operations through at least the next 12 months. Thereafter, we may
require additional funds and may seek to raise additional funds through public
or private equity financing or from other sources to develop new or enhanced
products or services or to acquire complementary businesses or technologies.
There can be no assurance that additional financing will be available at all or
that, if available, will be obtainable on terms favorable to us. Additional
financing could also be dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS"
(SAB No. 101). SAB No. 101 is effective for the fourth quarter of all fiscal
periods beginning after December 15, 1999. Adoption of SAB No. 101, as amended
by SAB No. 101 (b) is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
RISK FACTORS
As defined under Safe Harbor provisions of The Private Securities
Litigation Reform Act of 1995, some of the matters discussed in this filing
contain "forward-looking statements" regarding future events that are subject to
risks and uncertainties. The following factors, among others, could cause actual
results to differ materially from those described by such statements. These
factors include, but are not limited to: market acceptance of the CentraNow
network service and Centra eMeeting product, quarterly fluctuations in operating
results attributable to the timing and amount of orders for our products and
services, failure to manage rapid growth, failure to enhance our existing
products and services and to develop and introduce new products and services and
other risk factors contained in the section titled "Risk Factors" beginning on
page 6 of our final prospectus included as part of our Registration Statement on
Form S-1 (No. 333-89817) declared effective February 3, 2000 by the Securities
and Exchange Commission. If any of these risks actually occur, our business,
financial condition or results of operations could be seriously harmed and the
trading price of our common stock could decline.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell them worldwide. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since our sales are currently priced in U.S. dollars and translated to local
currency amounts, a strengthening of the dollar could make our products less
competitive in foreign markets. Interest income and expense are sensitive to
changes in the general level of U.S. interest rates, particularly since our
investments are in short-term instruments and our long-term debt and available
line of credit require interest payments calculated at variable rates. Based on
the nature and current levels of our investments and debt, however, we have
concluded that there is no material market risk exposure.
Our general investing policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. We
currently use a registered investment manager to place our investments in highly
liquid money market accounts and short-term investments. All highly liquid
investments with original maturities of three months or less are considered to
be cash equivalents.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities
On February 8, 2000 we closed the initial public offering of our common
stock. The shares of common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Registration No.
333-89817) that was declared effective by the Securities and Exchange
Commission on February 3, 2000. The 5,000,000 shares offered under our
Registration Statement were sold at a price of $14.00 per share.
FleetBoston Robertson Stephens Inc., Chase Securities Inc., and Dain
Rauscher Wessels, the managing underwriters of the offering, also
exercised an over-allotment option on March 2, 2000 for 750,000 shares.
The over-allotment shares were sold at a price of $14.00 per share. The
aggregate proceeds from the offering were $80.5 million. Our total
expenses in connection with the offering were approximately $7.3
million, of which approximately $5.6 million was for underwriting
discounts and commissions to underwriters and $1.7 million was for
other expenses paid to persons other than directors or officers of our
company or persons owning more than 10 percent of any class of equity
securities of Centra Software, Inc. Our net proceeds from the offering
were approximately $73.2 million. From the effective date through
September 30, 2000, we used approximately $6.5 million for payments of
dividends to preferred shareholders, $5.7 million to fund operations,
$2.0 million for capital expenditures, and $218,000 to pay amounts
outstanding under our loans. As of September 30, 2000, we had
approximately $58.8 million of net proceeds remaining, and pending use
of these proceeds, we intend to invest such proceeds primarily in
high-quality short-term investments.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
3.1 Amended and Restated Certificate of Incorporation
(filed as exhibit 3.2 to the Company's Registration
Statement, on From S-1, File No. 333-89817 and
incorporated herein by reference.)
3.2 Amended and Restated by-laws (filed as exhibit 3.4 to
the Company's Registration Statement, on Form S-1,
File No. 333-89817 and incorporated herein by
reference.)
27.1 Financial Data Schedule for fiscal quarter ended
September 30, 2000
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of November 14, 2000.
Centra Software, Inc.
By: /s/ Stephen A. Johnson
-----------------------------
Stephen A. Johnson
Chief Financial Officer,
Treasurer, and Secretary (duly
authorized officer and principal
financial and accounting officer)
17
<PAGE>
EXHIBIT INDEX
(a) Exhibits
Exhibit Description
3.1 Amended and Restated Certificate of Incorporation
(filed as Exhibit 3.2 to the Company's Registration
Statement, on Form S-1, file No. 333-89817 and
incorporated herein by reference.)
3.2 Amended and Restated by-laws (filed as Exhibit 3.4 to
the Company's Registration Statement, on Form S-1,
file No. 333-89817 and incorporated herein by
reference.)
27.1 Financial Data Schedule for fiscal quarter ended
September 30, 2000
18
