Attached files

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EX-31.1 - HENRY RINER CERTIFICATION 302, EXHIBIT 31.1 - ONVIA INCexh_31-1ceo.htm
EX-31.2 - CAMERON WAY CERTIFICATION 302, EXHIBIT 31.2 - ONVIA INCexh_31-2cfo.htm
EX-32.1 - HENRY RINER SECTION 906, EXHIBIT 32.1 - ONVIA INCexh_32-1ceo.htm
EX-32.2 - CAMERON WAY SECTION 906, EXHIBIT 32.2 - ONVIA INCexh_32-2cfo.htm
EX-10.16 - EXECUTIVE TRANSITION SERVICES AGREEMENT MICHAEL S. BALSAM - ONVIA INCtransition-agreement.htm
EX-10.17 - SEPARATION AND RELEASE AGREMENT WITH ERIC T. GILLESPIE - ONVIA INCseparation-agreement.htm
EX-10.15 - OFFER LETTER TO HENRY G. RINER - ONVIA INCofferletter_ceo.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


 
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010
 
 
OR

 
[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-29609


ONVIA, INC.
(Exact name of registrant as specified in its charter)

Delaware
91-1859172

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)
509 Olive Way, Suite 400, Seattle, Washington 98101
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (206) 282-5170


Indicate by check mark whether the registrant (1) has 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.  [X] Yes    [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [  ] Yes    [  ] No 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [  ]   Accelerated filer [  ]   Non-accelerated filer [  ]   Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [  ] Yes    [X] No

Common stock, par value $.0001 per share: 8,424,600 shares outstanding as of October 31, 2010.

 
 

 

ONVIA, INC.

INDEX

   
Page
 
 PART I.  FINANCIAL INFORMATION
    1  
Item 1.  Unaudited Condensed Consolidated Financial Statements
    1  
Condensed Consolidated Balance Sheets (Unaudited)
    1  
Condensed Consolidated Statements of Operations and Comprehensive Income / (Loss) (Unaudited)
    2  
Condensed Consolidated Statements of Cash Flows (Unaudited)
    3  
Notes To Condensed Consolidated Financial Statements (Unaudited)
    4  
1.        Basis of Presentation
    4  
2.        Use of Estimates
    4  
3.        Stock-Based Compensation and Stock Option Activity
    4  
4.        Earnings per Share
    7  
5.        Short-Term and Long-Term Investments
    8  
6.        Prepaid and Other Current Assets
    9  
7.        Property and Equipment
    9  
8.        Internal Use Software
    9  
9.        Accrued Expenses
    10  
10.      New Accounting Pronouncements
    10  
11.      Commitments and Contingencies
    11  
12.      Provision for Income Taxes
    13  
13.      Security Deposits
    14  
14.      Subsequent Events
    14  
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
    15  
Company Overview
    15  
Executive Summary of Operations and Financial Position
    19  
Seasonality
    21  
Results of Operations for the Three and Nine Months Ended September 30, 2010 Compared to the Three and Nine Months Ended September 30, 2009
    22  
Critical Accounting Policies and Management Estimates
    24  
Contractual Obligations
    27  
Liquidity and Capital Resources
    27  
Recent Accounting Pronouncements
    28  
Item 3. Quantitative and Qualitative Disclosures about Market Risk
    29  
Item 4(T). Controls and Procedures
    29  
PART II. OTHER INFORMATION
    30  
Item 1.  Legal Proceedings
    30  
Item 1A.  Risk Factors
    30  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    31  
Item 3.  Defaults Upon Senior Securities
    31  
Item 4.  Removed and Reserved
       
Item 5.  Other Information
    31  
Item 6.  Exhibits
    32  
SIGNATURES
    33  

 
 

 

           PART I.  FINANCIAL INFORMATION
 
Item 1.  Unaudited Condensed Consolidated Financial Statements
 
Onvia, Inc.
Condensed Consolidated Balance Sheets

   
September 30,
2010
   
December 31, 2009 (1)
 
   
(Unaudited)
 
   
(In thousands, except share data)
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 5,633     $ 1,647  
Short-term investments, available-for-sale
    5,301       12,632  
Accounts receivable, net of allowance for doubtful accounts of $62 and $119
    1,242       1,687  
Prepaid expenses and other current assets, current portion
    556       716  
Reimbursable tenant improvements
    -       147  
Security deposits, current portion
    135       135  
                 
Total current assets
    12,867       16,964  
                 
LONG TERM ASSETS:
               
Property and equipment, net of accumulated depreciation
    1,407       1,226  
Reimbursable tenant improvements
    147       -  
Security deposits, net of current portion
    134       269  
Internal use software, net of accumulated amortization
    6,529       6,615  
Long-term investments
    787       -  
Prepaid expenses and other assets, net of current portion
    6       20  
                 
Total long term assets
    9,010       8,130  
                 
TOTAL ASSETS
  $ 21,877     $ 25,094  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 1,046     $ 1,585  
Accrued expenses
    1,113       1,268  
Obligations under capital leases
    -       6  
Unearned revenue, current portion
    10,032       11,275  
Deferred rent, current portion
    109       88  
                 
Total current liabilities
    12,300       14,222  
                 
LONG TERM LIABILITIES:
               
Unearned revenue, net of current portion
    278       270  
Deferred rent, net of current portion
    746       832  
                 
Total long term liabilities
    1,024       1,102  
                 
TOTAL LIABILITIES
    13,324       15,324  
                 
COMMITMENTS AND CONTINGENCIES (Note 11)
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock; $.0001 par value: 2,000,000 shares authorized; no shares issued or outstanding
    -       -  
Common stock; $.0001 par value: 11,000,000 shares authorized; 8,424,626 and 8,283,296 shares issued; and 8,424,600 and 8,283,270 shares outstanding
    1       1  
Treasury stock, at cost: 26 and 26 shares
    -       -  
Additional paid in capital
    352,350       352,615  
Accumulated other comprehensive income / (loss)
    1       (3 )
Accumulated deficit
    (343,799 )     (342,843 )
                 
Total stockholders’ equity
    8,553       9,770  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 21,877     $ 25,094  

(1) Derived from audited financial statements included in the 2009 Annual Report.
See accompanying notes to the unaudited condensed consolidated financial statements.

 
1

 

Onvia, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income / (Loss)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands, except per share data)
   
(In thousands, except per share data)
 
                         
Revenue
                       
 Subscription
  $ 5,710     $ 5,728     $ 17,616     $ 16,127  
 Content license
    633       623       1,959       1,753  
 Management information reports
    272       188       699       645  
 Other
    90       73       259       190  
                                 
Total revenue
    6,705       6,612       20,533       18,715  
                                 
Cost of revenue
    972       1,160       3,126       3,613  
                                 
Gross margin
    5,733       5,452       17,407       15,102  
                                 
Operating expenses:
                               
Sales and marketing
    3,394       3,300       10,860       10,018  
Technology and development
    968       853       2,753       2,252  
General and administrative
    1,272       1,147       4,831       3,520  
                                 
 Total operating expenses
    5,634       5,300       18,444       15,790  
                                 
Income / (loss) from operations
    99       152       (1,037 )     (688 )
                                 
Interest and other income, net
    10       15       81       26  
                                 
Net income / (loss)
  $ 109     $ 167     $ (956 )   $ (662 )
                                 
Unrealized (loss) / gain on available-for-sale securities
    (3 )     2       4       1  
                                 
Comprehensive income / (loss)
  $ 106     $ 169     $ (952 )   $ (661 )
                                 
Basic net income / (loss) per common share
  $ 0.01     $ 0.02     $ (0.11 )   $ (0.08 )
                                 
Diluted net income / (loss) per common share
  $ 0.01     $ 0.02     $ (0.11 )   $ (0.08 )
                                 
Basic weighted average shares outstanding
    8,425       8,271       8,362       8,261  
 
                               
Diluted weighted average shares outstanding
    8,465       8,570       8,362       8,261  

See accompanying notes to the unaudited condensed consolidated financial statements.

 
 
2

 

Onvia, Inc.
Condensed Consolidated Statements of Cash Flows
 
   
Nine Months Ended September 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (956 )   $ (662 )
Adjustments to reconcile net loss to net cash provided by operating activities:
         
Depreciation and amortization
    2,072       1,234  
Loss on abandonment of assets
    967       -  
Stock-based compensation
    112       284  
Change in operating assets and liabilities:
               
Accounts receivable
    445       258  
Prepaid expenses and other assets
    174       196  
Accounts payable
    (179 )     199  
Accrued expenses
    (160 )     (305 )
Unearned revenue
    (1,235 )     1,750  
Deferred rent
    (65 )     (45 )
                 
Net cash provided by operating activities
    1,175       2,909  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Additions to property and equipment
    (767 )     (154 )
Additions to internal use software
    (2,719 )     (1,953 )
Purchases of investments
    (5,947 )     (7,736 )
Sales of investments
    2,292       -  
Maturities of investments
    10,203       -  
Return of security deposits
    135       135  
                 
Net cash provided by / (used in) investing activities
    3,197       (9,708 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Principal payments on capital lease obligations
    (6 )     (76 )
Proceeds from exercise of stock options and purchases under employee stock purchase plan
    47       51  
Repurchase of common stock for minimum tax obligations on options exercise
    (427 )     -  
                 
Net cash used in financing activities
    (386 )     (25 )
                 
Net increase / (decrease) in cash and cash equivalents
    3,986       (6,824 )
                 
Cash and cash equivalents, beginning of period
    1,647       13,043  
                 
Cash and cash equivalents, end of period
  $ 5,633     $ 6,219  
                 
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
Unrealized gain on available-for-sale investments
  $ (4 )   $ (1 )
Issuance of treasury stock for 401K matching contribution
  $ -     $ (44 )
Property and equipment additions in accounts payable
  $ (16 )   $ (33 )
Internal use software additions in accounts payable
  $ (133 )   $ (603 )
Proceeds from options exercise
  $ 807     $ -  
Repurchase of stock for net settlement of options exercise
  $ (807 )   $ -  
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 

 
3

 
 
Onvia, Inc.
Notes To Condensed Consolidated Financial Statements (Unaudited)

1.  
     Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Onvia, Inc. and its wholly owned subsidiary, collectively referred to as "Onvia" or the ”Company.” There was no business activity in the subsidiary in the three or nine month periods ended September 30, 2010 or 2009. The unaudited interim condensed consolidated financial statements and related notes thereto have been prepared pursuant to accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The accompanying interim condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K.

The information furnished is unaudited, but reflects, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

 
2.  
     Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of stock-based compensation, the allowance for doubtful accounts, recoverability of long-lived assets, and the valuation allowance for Onvia’s net operating losses. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ significantly from the Company’s estimates. In addition, any significant unanticipated changes in any of the Company’s assumptions could have a material adverse effect on its business, financial condition, and results of operations.

 
3.  
     Stock-Based Compensation and Stock Option Activity

The impact on Onvia’s results of operations of recording stock-based compensation was as follows for the periods presented (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Cost of sales
   $ 2     $ 4      $ 3     $ 14  
Sales and marketing
    20       (21 )     (35 )     63  
Technology and development
    11       30       32       69  
General and administrative
    45       54       112       138  
                                 
Total stock-based compensation
  $ 78     $ 67     $ 112     $ 284  

Stock-based compensation for the nine months of 2010 includes the impact of options forfeited upon the departure of our Senior Vice President of Sales, which resulted in the reversal of approximately $89,000 in previously recognized expenses on forfeited options.

 
4

 
Since Onvia has a full valuation allowance for its deferred tax assets, there was no impact to its cash flows related to excess tax benefits associated with the provisions of Accounting Standards Codification, or ASC, 718, Compensation – Stock Compensation.

Valuation Assumptions

Stock Options
Onvia calculated the fair value of each option award on the date of grant using the Black-Scholes valuation model. The following weighted average assumptions were used for options granted in each respective period:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Risk-free interest rate
    1.08 %     1.93 %     2.15 %     1.94 %
Expected volatility
    52 %     51 %     49 %     48 %
Expected dividends
    0 %     0 %     0 %     0 %
Expected life (in years)
    3.7       3.7       5.1       4.7  
 
Employee Stock Purchase Plan (“ESPP”)
The fair value of each employee purchase under Onvia’s ESPP is estimated on the first day of each purchase period using the Black-Scholes valuation model. Purchase periods begin on May 1 and November 1 of each year.  The following weighted average assumptions were used for the purchase periods beginning during the three and nine months ended September 30, 2010 and 2009:

   
Three and Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Risk-free interest rate
    0.25 %     0.30 %
Expected volatility
    51 %     95 %
Expected dividends
    0 %     0 %
Expected life (in years)
    0.5       0.5  

 
5

 
Stock Option Activity
The following table summarizes activity under Onvia’s equity incentive plan for the three and nine months ended September 30, 2010:
 
   
Options Outstanding
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term (in years)
   
Aggregate Intrinsic Value (1)
 
                         
Total options outstanding at January 1, 2010
    1,887,357     $ 8.48              
Options granted
    35,000                      
Options exercised
    (4,028 )                    
Options forfeited and cancelled
    (74,274 )                    
Total options outstanding at March 31, 2010
    1,844,055     $ 7.08       4.49     $ 3,452,888  
Options granted
    31,925                          
Options exercised
    (302,979 )                        
Options forfeited and cancelled
    (38,639 )                        
Total options outstanding at June 30, 2010
    1,534,362     $ 7.89                  
Options granted
    17,980                          
Options forfeited and cancelled
    (15,634 )                        
Total options outstanding at September 30, 2010
    1,536,708     $ 7.83                  
                                 
Options exercisable at September 30, 2010
    1,327,484     $ 7.89       4.41     $ 114,887  
Options vested and expected to vest at
September 30, 2010
    1,516,964     $ 7.84       4.90     $ 114,887  

 (1) Aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of Onvia’s common stock of $2.97 at September 30, 2010 for options that were in-the-money at September 30, 2010. The number of in-the-money options outstanding and exercisable at September 30, 2010 was 137,041 and 137,041, respectively.

The weighted average grant date fair value of options granted during the three and nine month periods ended September 30, 2010 was $1.34 and $2.95 per option, respectively, compared to $2.30 and $1.65 for the same periods in 2009.

As of September 30, 2010, there was approximately $244,000 of unrecognized compensation cost related to unvested stock options and estimated purchases under the ESPP. That cost is expected to be recognized over a weighted average period of 1.33 years.

On May 3, 2010, Michael Pickett, Onvia’s former CEO, performed a cashless exercise of 302,979 options by surrendering 112,016 options with a fair market value of $807,000. In addition to surrendering options to cover the exercise price, Mr. Pickett surrendered 59,314 options to cover the minimum taxes associated with his exercise. In May 2010, Onvia remitted approximately $427,000 to the Internal Revenue Service on Mr. Pickett’s behalf to settle his tax obligation associated with this exercise. All of these options were fully vested prior to Onvia’s adoption of FAS 123(R), so no expense was recorded for them.

In addition to this cashless exercise, Onvia received approximately $0 and $47,000 during the three and nine months ended September 30, 2010, respectively, for exercises of stock options and purchases under the employee stock purchase plan, compared to $14,000 and $51,000 in the same periods of 2009.
 
 
6

 
At the Board of Directors' discretion, option holders may be allowed to execute a “cashless exercise” of their vested options, whereby when issuing the underlying shares, the Company would withhold a number of shares sufficient in value to satisfy the exercise price of the option award. Further, at the Board of Directors’ discretion, the Company may withhold common shares sufficient in value to pay minimum tax withholding upon exercise of option holders’ stock options.
 
 
4.  
     Earnings per Share

Basic earnings per share are calculated by dividing the net income or loss for the period by the weighted average shares of common stock outstanding for the period. Diluted earnings per share are calculated by dividing the net income or loss per share by the weighted average common stock outstanding for the period, plus dilutive potential common shares using the treasury stock method.  In periods with a net loss, basic and diluted earnings per share are identical because inclusion of potentially dilutive common shares would be anti-dilutive.

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share data):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income / (loss)
  $ 109     $ 167     $ (956 )   $ (662 )
                                 
Shares used to compute basic net income / (loss) per share
    8,425       8,271       8,362       8,261  
Dilutive potential common shares:
                               
Stock options
    40       299       -       -  
Shares used to compute diluted net income / (loss) per share
    8,465       8,570       8,362       8,261  
Basic net income / (loss) per share
  $ 0.01     $ 0.02     $ (0.11 )   $ (0.08 )
Diluted net income / (loss) per share
  $ 0.01     $ 0.02     $ (0.11 )   $ (0.08 )

For the three months ended September 30, 2010, approximately 1.4 million options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock of $3.16, were not included in the calculation because the effect would have been anti-dilutive. For the nine months ended September 30, 2010, options to purchase approximately 1.5 million shares of common stock are excluded from the calculation because they would have been anti-dilutive since Onvia was in a net loss position in that period.

For the three months ended September 30, 2009, approximately 1.2 million options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock of $4.83, were not included in the calculation because the effect would have been anti-dilutive. For the nine months ended September 30, 2009, options and warrants to purchase approximately 1.9 million shares of common stock are excluded from the calculation because they would have been anti-dilutive since Onvia was in a net loss position in that period. All outstanding warrants expired in August 2009.
 
 
7

 
 
5.  
     Short-Term and Long-Term Investments

In accordance with ASC 320,  Investments – Debt and Equity Securities, Onvia classifies short-term and long-term investments in debt securities as available-for-sale at September 30, 2010, stated at fair value as summarized in the following table (in thousands):
 
   
September 30, 2010
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Short-Term Investments
                       
U.S. Government backed securities
  $ 4,055     $ 1     $ -     $ 4,056  
Certificate of Deposit (1)
    1,245       -       -       1,245  
    Total Short-Term Investments
    5,300       1       -       5,301  
Long-term Investments
                               
Corporate Bonds
    787       -       -       787  
    Total Long-Term Investments
    787       -       -       787  
Total Investments
  $ 6,087     $ 1     $ -     $ 6,088  

(1) We evaluated certificates of deposits held as of September 30, 2010 and concluded that they meet the definition of securities as defined in ASC 320.

Onvia accounts for short-term and long-term investments in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value as the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 
8

 
Onvia uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following table summarizes, by major security type, short-term and long-term investments classified as available-for-sale at September 30, 2010, stated at fair value (in thousands):

   
Fair Value Measurements as of September 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Balance as of September 30, 2010
 
Description
                       
U.S. Government backed securities
  $ -     $ 4,056     $ -     $ 4,056  
Certificate of Deposit
    -       1,245       -       1,245  
Corporate Bonds
    -       787       -       787  
    $ -     $ 6,088     $ -     $ 6,088  

6.  
     Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Prepaid expenses
  $ 440     $ 673  
Interest and other receivable
    116       43  
    $ 556     $ 716  
 
 
7.  
     Property and Equipment

Property and equipment to be held and used consist of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
 Computer equipment
  $ 3,474     $ 2,787  
 Software
    1,104       1,089  
 Furniture and fixtures
    107       99  
 Leasehold improvements
    735       710  
 
               
 Total cost basis
    5,420       4,685  
                 
 Less accumulated depreciation and amortization
    (4,013 )     (3,459 )
                 
 Net book value
  $ 1,407     $ 1,226  

Property and equipment includes $224,000 of property financed under capitalized leases as of December 31, 2009. These capital leases expired in March 2010.

 
8.  
     Internal Use Software

Onvia capitalizes qualifying computer software costs incurred during the “application development stage” and other costs as permitted by ASC 350-40, Intangibles – Goodwill and Other Subtopic Internal-Use Software. Amortization of these costs begins once the product is ready for its intended use.  These costs are amortized on a straight-line basis over the estimated useful life of the product, typically 3 to 5 years.  The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period.

 
9

 
Onvia periodically evaluates the remaining useful lives and carrying values of internal use software.  If management determines that all or a portion of the asset will no longer be used, or the estimated remaining useful life differs from existing estimates, an abandonment will be recorded to reduce the carrying value or adjust the remaining useful life to reflect revised estimates.  In addition, if the carrying value of the software exceeds the estimated future cash flows, an impairment will be recorded to reduce the carrying value to the expected realizable value.

The following table presents a rollforward of capitalized internal use software for the nine months ended September 30, 2010 (in thousands):

   
Balance at December 31, 2009
   
Additions
   
Abandonments
   
Balance at September 30,
2010
 
Capitalized Internal Use Software
  $ 9,112      $ 2,362      $ (1,779 )   $ 9,695  
Accumulated amortization
    (2,497 )     (1,481 )     812       (3,166 )
    $ 6,615      $ 881      $ (967 )   $ 6,529  

During the second quarter of 2010, Onvia abandoned three internal use software projects.  The abandoned assets relate to code developed for its commercial sector information, search engine marketing, and an internal cross-system integration project.  In the second quarter, the Company made the decision to no longer append contact and project specific information to its commercial sector content.  This decision was made as a result of a change to focus exclusively on the government business, or gBusiness, sector and to no longer position private sector data as a differentiator within the Company’s gBusiness solution.  Without this actionable contact and project specific information, Onvia does not believe there is future value associated with this content.  This project represents 93% of the total abandoned costs. Pursuant with the guidance in ASC 360-35-47, Onvia recorded a loss on abandonment of approximately $967,000, representing the balance as of June 30, 2010 for these three assets.  This loss is included in operating expenses under the general and administrative category in the nine months ended September 30, 2010.

 
9.  
     Accrued Expenses

Accrued expenses consist of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Payroll and related liabilities
  $ 990     $ 1,102  
State income, other taxes payable and other
    123       166  
    $ 1,113     $ 1,268  

10.  
     New Accounting Pronouncements
 
Except as noted below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, that are of significance, or potential significance to us.
 
 
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In October 2009, the FASB issued Accounting Standards Update, or ASU, No. 2009-13, Multiple-Deliverable Revenue Arrangements. This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, but early adoption is permitted. The Company has decided not to early adopt this ASU. Onvia has evaluated the impact this ASU will have once adopted, and does not believe adoption will materially impact reported revenue.
 
 
11.  
     Commitments and Contingencies

Operating Leases

Onvia has a non-cancellable operating lease for its current corporate headquarters building, which expires in October 2015. Rent expense is being recognized on a straight-line basis over the term of the lease.  Onvia also has a non-cancellable operating lease for office equipment, which expires in July 2014.

   
Real Estate
   
Office Equipment
   
Total
 
   
Operating Leases
   
Operating Lease
   
Operating Leases
 
                   
Remainder of 2010
  $ 232     $ 5     $ 237  
2011
    954       18       972  
2012
    983       18       1,001  
2013
    1,012       18       1,030  
2014
    1,042       11       1,053  
Thereafter
    894       -       894  
                         
    $ 5,117     $ 70     $ 5,187  

As of September 30, 2010, remaining future minimum lease payments required on non-cancellable operating leases are as follows for the years ending December 31 (in thousands):
 
Purchase Obligations
 
Onvia has noncancellable purchase obligations for software development and license agreements, co-location hosting arrangements, telecom agreements, marketing agreements and third-party content agreements. The agreements expire in dates ranging from 2010 to 2012.  Future required payments under these non-cancellable agreements are as follows for the years ending December 31 (in thousands):
 
 

   
Purchase
 
   
Obligations
 
       
2010
  $ 642  
2011
    490  
2012
    621  
2013
     524  
Thereafter
     160  
    $ 2,437  

 
 
11

 
  Legal Proceedings

Class Action Securities Litigation
In 2001, five securities class action suits were filed against Onvia, certain former executive officers, and the lead underwriter of Onvia’s Initial Public Offering, or IPO, Credit Suisse First Boston, or CSFB.  The suits were filed in the U.S. District Court for the Southern District of New York on behalf of all persons who acquired securities of Onvia between March 1, 2000 and December 6, 2000.  In 2002, a consolidated complaint was filed.  The complaint charged defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) and Sections 11 and 15 of the Securities Act of 1933, for issuing a Registration Statement and Prospectus that failed to disclose and contained false and misleading statements regarding certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in the offering.  The complaint sought an undisclosed amount of damages, as well as attorneys’ fees.  This action is being coordinated with approximately 300 other nearly identical actions filed against other companies.  At the Court’s request, plaintiffs selected six “focus” cases, which do not include Onvia.  The Court indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases.

The parties in the coordinated cases, including Onvia’s case, reached a settlement.  The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Onvia.  On October 5, 2009, the Court granted final approval of the settlement.  Objectors to the settlement filed six notices of appeal and one petition seeking permission to appeal to the United States Court of Appeals for the Second Circuit.  Two objectors to the settlement filed briefs in support of their appeals.  Plaintiffs-Appellees have requested that the Court require answering briefs to be filed by December 17, 2010.  The remaining objectors withdrew their appeals with prejudice.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of this matter.   If the settlement does not survive appeal and Onvia is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than Onvia’s insurance coverage, and whether such damages would have a material impact on its results of operations or financial condition in any future period.

On October 2, 2007, Vanessa Simmonds, a purported stockholder of Onvia, filed suit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, JPMorgan Chase & Co. and Bank of America Corporation, the lead underwriters of Onvia’s IPO in March 2000, alleging violations of Section 16(b) of the Securities Exchange Act of 1934. The complaint alleges that the combined number of shares of Onvia's common stock beneficially owned by the lead underwriters and certain unnamed officers, directors, and principal stockholders exceeded ten percent of its outstanding common stock from the date of Onvia’s IPO on March 2, 2000, through at least February 28, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any "short-swing profits" obtained by them in violation of Section 16(b). Onvia was named as a nominal defendant in the action, but has no liability for the asserted claims. No directors or officers of Onvia are named as defendants in this action. On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various initial public offerings. On February 25, 2008, Ms. Simmonds filed an Amended Complaint asserting substantially similar claims as those set forth in the initial complaint. Onvia waived service. On July 25, 2008, Onvia joined with 29 other issuers to file the Issuer Defendants' Joint Motion to Dismiss. Underwriter Defendants also filed a Joint Motion to Dismiss on July 25, 2008. Plaintiff filed oppositions to both motions on September 8, 2008. All replies in support of the motions to dismiss were filed on October 23, 2008. Oral argument on the motions to dismiss was held on January 16, 2009.  On
 
 
12

 
March 12, 2009, the Court granted the Issuer Defendants' Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that Ms. Simmonds had failed to make an adequate demand on Onvia prior to filing her complaint.  In its order, the Court stated it would not permit Plaintiff to amend her demand letters while pursuing her claims in the litigation.  Because the Court dismissed the case on the ground that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether Plaintiff's claims were barred by the applicable statute of limitations.  However, the Court also granted the Underwriters' Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable statute of limitations because the issuers' shareholders had notice of the potential claims more than five years prior to filing suit. 

Ms. Simmonds filed a Notice of Appeal on March 31, 2009, and an Amended Notice of Appeal on April 10, 2009.  The underwriters subsequently filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving issuers should have been with prejudice because the claims were untimely under the applicable statute of limitations. Ms. Simmonds' opening brief in the appeal was filed on August 26, 2009; Onvia and the underwriters’ responses and the underwriters' brief in support of their cross-appeal were filed on October 2, 2009; Ms. Simmonds' reply brief and opposition to the cross-appeal was filed on November 2, 2009; and the underwriters' reply brief in support of their cross-appeals was filed on November 17, 2009.   On October 5, 2010, the U.S. Court of Appeals for the Ninth Circuit heard oral argument regarding this matter.  Onvia currently believes that the outcome of this litigation will not have a material adverse impact on its consolidated financial position and results of operations.

Other Litigation
In addition, from time to time the Company is subject to various other legal proceedings that arise in the ordinary course of business. While management believes that the disposition of these matters will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company, the ultimate outcomes are inherently uncertain.

 
12.  
     Provision for Income Taxes

Because of Onvia’s history of net operating losses, or NOLs, until net income is generated on a consistent basis, Onvia does not currently believe that the future realization of the tax benefit associated with its NOL carryforwards is more likely than not; therefore, Onvia has recorded a valuation allowance for the full amount of its net deferred tax assets.  Onvia will continue to evaluate the likelihood that these tax benefits may be realized, and may reverse all or a portion of its valuation allowance in the future if it is determined that realization of these benefits is more likely than not.

Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

Onvia plans to complete a Section 382 analysis regarding ownership changes that may have occurred, but at this time the Company cannot reasonably estimate the impact of such a change.  Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

 
13

 
 
13.  
     Security Deposits

Pursuant to Onvia’s lease for its current corporate office space, Onvia provided a security deposit of $538,000, which is reduced annually by $135,000 in the first three years of the lease beginning in March 2009, and by $45,000 on the fourth anniversary of the commencement date. The balance will be returned at lease termination in October 2015.

14.  
     Subsequent Events

Effective October 4, 2010, Onvia’s Board of Directors appointed Henry Riner as President and CEO of Onvia. Mr. Riner is expected to be elected to Onvia’s Board of Directors at the first Board meeting after Mr. Riner’s employment with the company has commenced. Mr. Riner’s employment with the company is at-will. Under his offer of employment, Mr. Riner will have an annual base salary of $350,000 and will be eligible to receive a 2011 bonus targeted at $200,000 based upon goals to be mutually agreed upon. Mr. Riner will have an opportunity to receive a bonus award beyond target based on Onvia’s performance. His bonus paid for 2010 performance will be guaranteed at $75,000. On his first day of employment, Mr. Riner was granted 180,000 stock options under Onvia’s 2008 Equity Incentive Plan, to vest 20% after one year with the remainder vesting in 48 equal monthly installments. If Mr. Riner’s employment is terminated without cause, Onvia will pay him 12 months’ base salary.
 
On October 15, 2010 Eric T. Gillespie resigned as Senior Vice President, Products, Technology and Information of Onvia, effective October 15, 2010. Pursuant to Mr. Gillespie’s separation and release agreement, Onvia will make severance payments totaling $225,000 and $21,364 for accrued but unused vacation in November 2010.
 
On November 1, 2010 Michael S. Balsam announced his resignation as Chief Strategy Officer of Onvia, effective December 31, 2010.  Pursuant to Mr.Balsam’s transition services agrement he will provide executive transition services until the Separation Date. Onvia will pay Mr.Balsam a transition payment of $135,000 on December 31, 2010, subject to all required or agreed upon deductions and withholdings.
 
 
14

 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
CAUTIONARY STATEMENT
 
The information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and is subject to the safe harbor created by those Sections. Factors that could cause results to differ materially from those projected in the forward-looking statements are set forth in this section and later in this Report under Part II - Item 1A “Risk Factors,” and in “Part I - Item 1A - Risk Factors” in our 2009 Annual Report on Form 10-K. The following discussion should also be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto.

In this Report, the words “we,” “our,” “us,” “Onvia,” or the “Company” refer to Onvia, Inc. and its wholly owned subsidiary.

Company Overview
 
We are a leading provider of government business, or gBusiness, information products and research tools that help companies plan, market and sell to targeted public sector buyers throughout the United States, or U.S.  The gBusiness market place is defined as the market funded by federal, state and local government spending. Our products, proprietary databases and research tools, focus on federal, state, local and educational purchasing entities. Our information helps our clients proactively track which goods and services government agencies plan to purchase, what they actually purchase, and from whom they purchase.  This allows our clients to identify new market opportunities, analyze market trends, and obtain useful information about their competitors.  Historically, comprehensive market intelligence was only available to large companies with the resources to perform the research and store the data themselves, or companies that could afford to hire outside firms to perform the research for them.  Our processes, which collect and organize transactional information into actionable market intelligence, have enabled us to make this same high-value business intelligence affordable to businesses of all sizes.  We believe our business solutions provide our clients with a distinct competitive advantage and increased revenue opportunities.

Our  information products and research tools leverage our proprietary databases, which have been compiled for more than ten years, and include comprehensive, historical and real-time information on public sector  activities unavailable elsewhere in the marketplace. Our databases provide information on over 7 million procurement related records connected to over 275,000 companies from across approximately 89,000 government agencies and purchasing offices nationwide.  Thousands of records are standardized, added, formatted and classified within our database each day.

Transparency and open government initiatives continue to be a key topic for federal, state and local government officials.  In response to this market demand, we launched the website Recovery.org to provide visibility into how federal funds distributed under the American Recovery and Reinvestment Act are flowing into local communities.  As of September 30, 2010, www.Recovery.org was tracking more than 81,000 projects and an aggregate of $222 billion in government stimulus spending.  Recovery.org has also attracted the attention of major business media, including National Public Radio, CNN, BusinessWeek, MSNBC, Bloomberg and USA Today, among others.  Our Recovery.org website and the recognition of major business media outlets have enhanced our position as an authoritative source for government spending information and analytics.

Most of our revenues are currently generated from three main business channels: subscriptions, content licenses, and management reports.  Subscription-based services are typically prepaid, have a minimum term of one year and revenues are recognized ratably over the term of the subscription.  Subscriptions are priced based upon the geographic range, nature of content purchased and, with respect to certain products, the number of users or number of records purchased.

 
15

 
Revenue from content licenses is generated from clients who resell our business content data to their customers.  Content license contracts are generally multi-year arrangements that are invoiced on a monthly or quarterly basis, and these agreements typically have a higher annual contract value, than our subscription-based services. Revenue from content license agreements is recognized ratably over the term of the agreement.

Revenue from the sale of management information reports is recognized upon delivery of the report to the client if we have vendor specific objective evidence, or VSOE, of selling price. If we do not have VSOE, revenue is recognized ratably over the service period.  Pricing for management information reports is generally based on one, or a combination of, the following: the number of records included in the report; the geographic range of the report; or a flat fee based on the type of report.  We also generate revenue from document download services and list rental services, and these fees are recognized upon delivery of the document or list.
 
 
Onvia was incorporated in January 2000 in the state of Delaware. Our principal corporate office is located in Seattle, Washington. Our securities trade on The NASDAQ Capital Market under the symbol ONVI.

Industry Background
 
 
Since early 2009, government spending on goods and services has accelerated dramatically and now represents more than 40% of the GDP of the United States. The gBusiness marketplace exceeds $5 trillion in government expenditures annually, and continues to grow as the federal government becomes more involved in industries like energy, manufacturing, financial services and healthcare, among others. We believe that government will increasingly rely on the private sector to fulfill more of its functions.  Government is increasingly involved in business through spending, legislation, regulation, and public-private partnerships.  Traditional government-sponsored job creation methods rely on investment in infrastructure to stem the unemployment rate, and ongoing state budget shortfalls will require tax increases in the coming years, resulting in even more government spending.  Progressive enterprises are recognizing the substantial opportunity and the significant challenges presented by this market and are developing their own gBusiness strategies to take advantage of this new revenue opportunity.  Businesses are now finding that they are competitively disadvantaged if they are not actively pursuing a gBusiness strategy.

Over 3.4 million businesses compete for opportunities within this highly competitive gBusiness marketplace and identifying qualified business partners and prospects is essential to a company’s success.  Identifying relevant projects and partners can be difficult and companies spend a substantial amount of time and effort to locate and research new partners and opportunities to grow their gBusiness segments. The Internet provides short-term visibility into government contracting information for both government agencies and businesses alike, but does not provide the on-demand intelligence or context required to guide strategic decisions.

Often, revenue opportunities are included within the specification documents behind the request for proposal, or RFP, and request for quote, or RFQ, documents. Without tools to quickly identify the pertinent information, businesses must read the entire RFP or RFQ to determine if it offers opportunities relevant to their business. Even after a new business opportunity is identified, many companies do not have enough information about the project to prequalify the opportunity, such as decision maker information, the purchasing history of the government agency or project owner, and who competes for similar projects.  This information is useful not only for companies contracting directly with the project owner, but also for subcontractors that would like to compete for work on awarded contracts. This information is rarely available from one source, and may not be available at all for historical projects.

Our comprehensive databases contain much of this relevant decision making information on both a historical and real-time basis, and thousands of records are added to our database each day.  Much of the information in our database is linked, so that clients can quickly research information relevant to a particular project in one centralized location. Clients can also perform customized searches on both the public record and within the project specification
 
 
16

 
documents to identify relevant opportunities using any number of variables, such as publication date, geographic location and contract value, among others.  Using our database and tools, our clients spend less time on research and more time preparing winning proposals, establishing relationships, and executing contracts.

Products and Services

Our products and services provide access to our proprietary Onvia Online Database of project specific information and provide clients with specialized tools for analyzing information relevant to their businesses. We expect to continue to expand our content and develop new database analysis tools to meet the needs of existing clients as well as potential new categories of clients.
 
We leverage technology, tools and business processes to research, classify and publish actionable gBusiness opportunities from public and private sources. We link related records within our databases, prequalify business opportunities for clients based upon the client’s profile, and provide access to information in a timely manner, generally within 24 hours of release. Our database contains information on the largest industry verticals, with a focus on the infrastructure verticals, which include:

·  
Architecture and Engineering
·  
Construction and Building Supplies
·  
IT / Telecommunications
·  
Professional Services
·  
Operations and Maintenance Services
·  
Transportation
·  
Healthcare
·  
Water and Energy / Alternative Energy

Within these verticals we provide hard-to-find content, presented with a comprehensive view of a project throughout the most critical phases of the procurement lifecycle. These transactional records include:
 
·  
Advance Notices – alerts businesses of projects in the early stages of the development process, before the bid or RFP is released in its final form, or before final zoning and planning board approval;
·  
RFPs, RFQs, and related amendments;
·  
Planholders and Bidders Lists – provides competitive intelligence by presenting a list of competitors that have acquired plans, specifications, bidding documents and/or proposals for specific projects in the active bid or proposal stage, and a list of competitors who submit bids for prime contracts with the owner of the project;
·  
Bid Results and Awards Information – notifies businesses of awarded bids, providing information for use in their own sales and marketing activities; and
·  
Grants – supplies federal grant information critical to businesses tracking or applying for publicly-funded projects.

Our business solutions are comprised of the following products:
 
The Onvia Online Database
The Onvia Online Database is our flagship gBusiness product and is intended to enable businesses of all sizes to effectively compete in the government procurement marketplace. This product provides rich search functionality on our proprietary database of local, state and federal government agency purchasing information. Users of the database can research project histories, agency purchasing trends, agency buyer contact information, agency relationships
 
 
17

 
with existing vendors, contract awardees, and can evaluate pricing for goods and services. Subscribers to the Onvia Online Database also receive customized daily email notifications about relevant business opportunities based upon their subscription profile.  The Onvia Online Database provides information necessary to qualify opportunities, improve decision making, prepare tailored bids, and manage agency relationships, all of which should improve the success rates of our clients in obtaining new procurement awards.

The Onvia Guide
Onvia Guide subscribers receive the same customized daily email notifications about relevant business opportunities that subscribers to the Onvia Online Database product receive, without the user interface to research information in our databases.  This product is an affordable entry-level option for our clients.

Onvia Spending Forecast Center
Onvia launched Spending Forecast Center in June 2010, which provides insight into capital improvement plans by agencies within the top 366 Metropolitan Statistical Areas in the United States. Spending Forecast Center provides valuable, early stage information on future capital spending used by larger corporations to execute their gBusiness strategies.

Most governmental bodies, such as departments of transportation, city and county governments, and boards of education publish a plan that maps out their major initiatives and forecasts spending over the next 3-6 years.  This information generally includes:

·  
The name of the initiative or type of expense
·  
The timeframe 
·  
The funding source
·  
The budgeted amount

Businesses can use these documents to inform business development, evaluate and target markets, as advance notices of projects, and for short-term business planning. We collect plans from all state, county and city government agencies, representing over 85% of all government spending. We add a powerful search tool that allows users to find plans based on keywords, as well as type of agency, location, spending focus, and other plan details.

Onvia Agency Center

Onvia launched Agency Center in September 2010.  Agency Center is a new module of the Onvia Online Database that makes it easier for businesses to find and market to the government agencies that buy what they sell. Agency Center helps businesses to:
 
·  
Get a road map to the most promising projects. Search for projects in their industry, then display the agencies involved with those projects.
·  
Equip their sales team with the leads that matter. Search for agencies to target based on location, purchasing history, annual budget, and area of focus.
·  
Create a saved search of the agencies they have targeted and their daily Onvia Guide will track those agencies’ buying activities, from pre-bid notices to bids and requests for proposal to contract awards.
·  
Look at agencies’ past, present and future. Using Agency Center along with Online Database and the Spending Forecast Center, businesses can access agencies’ procurements histories, current projects, and spending forecasts in a single service. This gives businesses an unprecedented view of agency buying patterns and plans, as well as the markets where their competitors are.
·  
Line up their business for hidden revenue streams. Four out of five government purchases never go out to formal bid, because they fall below agencies’ purchasing thresholds. Businesses can use Agency Center to find these thresholds and then register for the vendor lists agencies use to award informal, unpublished contracts.

 
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Management Information Reports

In addition to subscription services, we also offer a number of custom management information reports. These reports are generally one-time deliverables and revenue is recognized upon delivery, or, if report refreshes are included, ratably over the service period.
·  
Term Contracts – Provide clients with actionable sales information on term or continuing service contracts pending renewal at public agencies. These reports identify what contracts exist, when they are coming up for renewal, who the incumbent is and who the buyers are.  With this report, our clients are able to perform an early evaluation of the opportunity so they can be more competitive with their proposals to increase their public sector business.
·  
Contact Lists – Provide clients a comprehensive list of decision makers, agency procurement officers and zoning officials that can be used to develop relationships and identify potential business partners.
·  
Market Opportunity Reports and Customer Analytics – Provide clients with market intelligence needed for strategic planning and marketing, such as:
o  
Year-over-year growth rates by market or category to help understand buying trends;
o  
Market growth rates to assist in business planning;
o  
Distribution of state and local opportunities by sales territory to help allocate resources;
o  
Competitive analysis; and
o  
Seasonality and buying trends.
·  
Winning Proposals Library – Compare and contrast winning proposals submitted by competing firms in order to gain competitive insights.  Provides insight into how other companies position their qualifications and personnel, structure and format persuasive proposals, incorporate supporting materials, price goods and services, and differentiate themselves from their competitors.

Executive Summary of Operations and Financial Position

We evaluate the following four key operating metrics, among others, to assist in the evaluation of our operating performance, and believe these metrics provide a means to compare our business with other businesses in the information industry.  These operating metrics are not financial measures calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and should not be considered as an alternative to revenue or any other financial measures so calculated. We use this information as a basis for planning and forecasting core business activities for future periods, and believe it is useful in understanding the results of our operations.

Annual Contract Value, or ACV
Annual contract value is the aggregate annual revenue value of our client base.  Growth in ACV demonstrates our success in increasing the number of high value clients and upgrading existing clients to new and higher valued products. Content licenses are excluded from ACV.
 
Number of Clients
Number of clients represents the number of individual businesses subscribing to our products. This excludes subscribers to the Company’s entry level Metropolitan notification product.

Annual Contract Value per Client, or ACVC
Annual contract value per client is the annual contract value divided by the number of clients and indicates the average value of each of our subscriptions.
 
 
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Quarterly Contract Value per Client, or QCVC
Quarterly contract value per client represents the average annual contract value of all new and renewing clients transacting during the quarter, and is a leading indicator of future annual contract value per client.

Revenue for the third quarter of 2010 decreased 2% to $6.7 million from $6.8 million in the previous quarter and increased 1% from $6.6 million in the same year-ago period. Sequential quarter revenue decreased due to lower client retention rates, particularly with first-year clients that we believe were testing the public sector as a potential market and did not renew. The year-over-year improvement in revenue was due to strong bookings results in the fourth quarter of 2009 and first quarter of 2010, which will continue to impact revenue through the fourth quarter of 2010 and first quarter of 2011, respectively.

In 2009, enthusiasm for the American Recovery and Reinvestment Act (“ARRA”) encouraged a significant number of small companies to explore opportunities in the public sector. As a result, we signed many new, predominantly smaller companies, which accelerated top line revenue growth. After the first year, these same small clients are renewing at lower than historical rates. Lower client retention rates have negatively impacted our results for the last three sequential quarters.

We believe government is going to increasingly rely on the private sector to fulfill more of its functions. In the second quarter of 2010, we consolidated our existing suite of products to focus exclusively on the gBusiness sector, and will no longer position private sector data as a differentiator within our gBusiness solution. We believe a targeted suite of products will enhance our ability to execute our gBusiness growth strategy. 

We launched Spending Forecast Center in June 2010, which provides insight into capital improvement plans by agencies within the top 366 metropolitan statistical areas in the United States. Spending Forecast Center provides valuable, early stage information on future capital spending used by larger corporations to execute their gBusiness strategies.

In September 2010 we launched Agency Center which helps businesses pre-qualify and target agencies that purchase their goods and services. Agency Center provides insights into the buying patterns, current projects and competitive landscape at the agency level to help businesses execute their gBusiness strategies and better compete for available contracts.

ACVC grew 5% from the previous quarter and 20% from the same year-ago period to an average of $3,383 per client. ACVC increased in the third quarter, in part by targeting higher value prospects and because non-renewals were weighted toward smaller clients.

At September 30, 2010, our total client base excluding the entry-level metropolitan product decreased 10% to 6,500 from 7,200 in the previous quarter, and decreased 18% from 7,900 in the same year-ago period.  The sequential and year-over-year quarterly decrease in the customer base is primarily attributed to a decline in our client retention rates of first year, smaller clients. This decline was expected and is consistent with the Company’s new focus on larger customers with more defined gBusiness strategies. Approximately 75% of loss clients were in non-strategic markets.

Year-over-year, unearned revenue decreased by 5% to $10.3 million at September 30, 2010, compared to $10.9 million at September 30, 2009.  The year-over-year decrease is due to a decrease in sales in the second and third quarters of 2010, compared to the prior year periods, primarily due to decline in retention rates discussed above. Unearned revenue consists of payments received for prepaid subscriptions whose terms extend into periods beyond the balance sheet date, as well as the invoiced portion of contracts whose terms extend into periods beyond the balance sheet date.
 
In the third quarter of 2010, QCVC was $4,030, an increase of 12% compared to $3,103 in the third quarter of 2009.  This increase demonstrates our success in targeting larger companies, which have a higher propensity to subscribe to our higher value database products.

 
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We are rigorously reviewing all expenditures and investments for an acceptable return on investment, and underperforming expenditures are being eliminated or reallocated to performing projects.  We have already begun the process of reducing nonessential expenses and rightsizing the business.  During October we eliminated 8 non-strategic positions and elected not to fill an additional 11 open positions.  These actions will save approximately $1 million in annual operating expenses.  We will begin to realize these savings in the first quarter of 2011. 

Seasonality

Our customer acquisition business is subject to some seasonal fluctuations. The third quarter is generally our slowest quarter for customer acquisition. The construction industry is our single largest market and these prospects are typically engaged on projects during the summer months, not prospecting for new work, which causes new customer acquisition to decline compared to the other quarters in the year.  For this reason, it may not be possible to compare the performance of our business quarter to consecutive quarter, and our quarterly results and metrics should be considered on the basis of results for the whole year or by comparing results in a quarter with the results in the same quarter of the previous year.
 
 
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Results of Operations for the Three and Nine Months Ended September 30, 2010 Compared to the Three and Nine Months Ended September 30, 2009

Revenue and Cost of Revenue

The following table provides a break-down of revenue for the periods presented as a percentage of total revenue:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenue
  $ 6,705     $ 6,612     $ 20,533     $ 18,715  
                                 
Revenue:
                               
 Subscription
    85 %     87 %     86 %     87 %
 Content license
    10 %     9 %     10 %     9 %
 Management information reports
    4 %     3 %     3 %     3 %
 Other
    1 %     1 %     1 %     1 %
 Total revenue
    100 %     100 %     100 %     100 %

Revenue increased as a result of prior and current period increases in our ACV in the first half of 2010, which is attributable to increased acquisition of higher value customers in 2010. The increase in revenue is explained in more detail under the “Executive Summary of Operations and Financial Position” section above.

Cost of revenue for the three and nine months ended September 30, 2010 and September 30, 2009 was as follows (in thousands of dollars, except percentage):
 
               
Increase / (Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 972     $ 1,160     $ (188 )     (16 %)
        Percentage of Revenue
    14 %     18 %                
 Nine months ended September 30,
  $ 3,126     $ 3,613     $ (487 )     (13 %)
        Percentage of Revenue
    15 %     19 %                

Our cost of revenue primarily represents payroll-related expenses associated with the research and aggregation of the data in our proprietary database and third-party content fees, and also includes credit card processing fees. The decrease for the comparable three and nine month periods was primarily due to decreases of $108,000 and $455,000, respectively, in payroll-related expenses.  Payroll expenses decreased as a result of a decline in weighted average headcount in our content team to 38 during the third quarter of 2010, compared to 44 in the third quarter of 2009. Headcount decreased as a result of higher utilization of third-party content aggregators. Weighted average headcount during the nine months ended September 30, 2010, was 39 compared to 47 in the same period in 2009.

Sales and Marketing

Sales and marketing expenses for the three and nine months ended September 30, 2010 and September 30, 2009 were as follows (in thousands of dollars, except percentage):
 
               
Increase / (Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 3,394     $ 3,300     $ 94       3 %
        Percentage of Revenue
    51 %     50 %                
 Nine months ended September 30,
  $ 10,860     $ 10,018     $ 842       8 %
        Percentage of Revenue
    53 %     54 %                

The increase in expenses for the comparable three month periods is primarily comprised of $105,000 in marketing costs primarily as a result of higher public relations costs and branding activities expenses, $74,000 in depreciation and amortization expense and $41,000 in stock options expenses. The increase in amortization and depreciation expense was due to the launch of several new internally developed technology platforms and products in the last several
 
 
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quarters. Weighted average headcount in our sales and marketing teams was 87 during the three months ended September 30, 2010, compared to 101 in the same period in 2009. These increases were partially offset by a $130,000 decrease in commission expenses due to higher sales in the third quarter of 2009 compared to the same period in 2010.

For the nine months ended September 30, 2010, sales and marketing expenses increased $842,000, or 8%, compared to the same period in 2009.  The increase is primarily comprised of $505,000 in allocated expenses, $467,000 in marketing costs primarily as a result of increased search engine marketing costs, non-capitalizable website costs and increased public relations activity, $158,000 in severance due to the departure of our Senior Vice President of Sales, and $122,000 in travel and entertainment due to increased travel to enterprise customers and higher training costs. Allocated expenses consist of depreciation and amortization and other facilities related expenses and are allocated based on headcount in the respective departments. Weighted average headcount in our sales and marketing teams was 97 during the nine months ended September 30, 2010, compared to 98 in the same period in 2009. These increases were partially offset by a decrease of $342,000 in payroll related expenses, primarily commission expense due to lower acquisition sales in the nine months of 2010 compared to the same period in 2009, and a $99,000 decrease in stock-based compensation expense mostly due to the forfeiture of options upon the departure of our Senior Vice President of Sales.

Technology and Development

Technology and development expenses for the three and nine months ended September 30, 2010 and September 30, 2009 were as follows (in thousands of dollars, except percentage):
 
               
Increase / (Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 968     $ 853     $ 115       13 %
 Percentage of Revenue
    14 %     13 %                
 Nine months ended September 30,
  $ 2,753     $ 2,252     $ 501       22 %
 Percentage of Revenue
    13 %     12 %                
 
The increase in expenses for the comparable three month periods is attributed to: an increase of $64,000 in contract labor for post-implementation maintenance activities on the new technology platform and products which are not capitalizable, an increase of $57,000 in amortization from internal use software and software licenses related to the launch of new platforms and products, and a $56,000 decrease in capitalized internal use software costs. Weighted average headcount in our technology and development teams was 19 during the three and nine months ended September 30, 2010, and 2009.

The increase in expenses for the nine months ended September 30, 2010 is attributed to an increase of $262,000 in amortization from internal use software and software licenses as discussed above, an increase of $161,000 in contract labor for post-implementation maintenance activities on the new technology platform and products, and a $105,000 reduction in capitalized salaries and benefits for internal use software costs. These increases were partially offset by a decrease of $72,000 in allocated facilities costs.

General and Administrative

General and administrative expenses for the three and nine months ended September 30, 2010 and September 30, 2009 were as follows (in thousands of dollars, except percentage):

               
Increase / (Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 1,272     $ 1,147     $ 125       11 %
        Percentage of Revenue
    19 %     17 %                
 Nine months ended September 30,
  $ 4,831     $ 3,520     $ 1,311       37 %
        Percentage of Revenue
    24 %     19 %                
 
 
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The increase in expenses for the comparable three month periods is related to an increase of $125,000 in payroll related costs due to an increase in headcount, and a $64,000 increase in professional services. Weighted average headcount in this group was 18 during the three months ended September 30, 2010 and 13 for the same period in 2009. The increase in headcount is due to hiring for open positions, and the realignment of responsibilities of two employees who were included in Sales and Marketing and one employee who was included in Technology and Development in the prior period. These increases were offset by decrease of $42,000 in bad debt expenses.

The increase in expenses for the nine months ended September 30, 2010 is primarily related to $967,000 internal use software abandonment, an increase of $378,000 in payroll related costs due to an increase in headcount, an increase of $259,000 in transition expenses primarily related to Mike Pickett’s transition agreement, an increase of $166,000 in allocated expenses, and a $94,000 increase in contractors and consultants expenses, in part due to fees related to CEO search. Allocated expenses consist of depreciation and amortization and other facilities related expenses and are allocated based on headcount in the respective departments. Weighted average headcount in this group was 18 and 12 in the nine months ended September 30, 2010 and 2009, respectively. As discussed above, the increase in headcount is partially attributable to a realignment of responsibilities for three employees.  These increases were offset by a decrease of $412,000 in business taxes mostly due to a Washington state tax refund associated with a reapportionment of prior year in-state revenues, a decrease of $132,000 in public relations primarily due to eliminating 2009 costs related to the efforts to drive transparency into the ARRA to the public, and a $89,000 decrease in bad debt expense.

Interest and Other Income, Net
Net interest and other income was $10,000 and $81,000 for the three and nine months ended September 30, 2010, respectively, compared to $15,000 and $26,000, respectively, for the same periods in 2009. Interest expense is immaterial for the three and nine months ended September 30, 2010 and 2009.

Net Income (Loss) and Net Income (Loss) per Share
We reported net income of $109,000 and net loss of $1.0 million for the three and nine months ended September 30, 2010, respectively, compared to net income of $167,000 and a net loss of $662,000, respectively, in the same periods in 2009.  The increase in net loss was primarily due to increases in operating expenses as discussed above, offset by higher revenues and improved gross margin. On a diluted per share basis, net income and loss were $0.01 and $(0.11) for the three and nine months ended September 30, 2010, compared to $0.02 and $(0.08), respectively, for the same periods in 2009.

Critical Accounting Policies and Management Estimates

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from our estimates. In addition, any significant unanticipated changes in any of our assumptions could have a material adverse effect on our business, financial condition, and results of operations. Our critical accounting policies involve judgments associated with our accounting for revenue recognition, stock-based compensation, property and equipment, internal use software, income taxes, accounts receivable and allowance for doubtful accounts.

Revenue Recognition
Our revenues are primarily generated from subscriptions, content licenses and management information reports.  Our subscriptions are generally annual contracts; however, we also offer, on a limited basis, extended multi-year contracts to our subscription clients, and content licenses are generally multi-year agreements.  Subscription and content licenses are recognized ratably over the term of the agreement. We also generate revenue from fees charged for management reports, document download services, and list rental services, and revenue from these types of services is recognized upon delivery.

 
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Our subscription services and management information reports are also sold together as a bundled offering.  Pursuant to the provisions of ASC 605-25, Revenue Recognition, we allocate revenue from these bundled sales ratably between the subscription services and the management reports based on their relative fair values, which are consistent with established list prices for those offerings.

Revenue from the sale of management information reports is recognized upon delivery of the report to the client if we have VSOE of selling price. If there is no VSOE, revenue is recognized ratably over the service period.  Pricing for management information reports is generally based on one, or a combination of, the following: the number of records included in the report; the geographic range of the report; or a flat fee based on the type of report.  We also generate revenue from document download services and list rental services, and these fees are recognized upon delivery of the document or list.

Unearned revenue consists of payments received for prepaid subscriptions whose terms extend into periods beyond the balance sheet date, as well as the invoiced portion of contracts whose terms extend into periods beyond the balance sheet date.

Stock-Based Compensation
We account for stock-based compensation according to the provisions of ASC 718, Compensation – Stock Compensation, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of stock-based compensation cost over the requisite service period for awards expected to vest. The fair value of our stock options is determined using the Black-Scholes valuation model.  Such value is recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including employee class and historical experience. There is also significant judgment required in the estimation of the valuation assumptions used to determine the fair value of options granted.  Please refer to the discussion of valuation assumptions in Note 3 of the “Notes to Condensed Consolidated Financial Statements” of this Report for additional information on the estimation of these variables.  Actual results, and future changes in estimates, may differ substantially from our current estimates.

Property and Equipment
Equipment and leasehold improvements are stated at cost, net of accumulated depreciation. Depreciation expense on software, furniture and equipment is recorded using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are depreciated over the shorter of their useful lives or the term of the underlying lease.

We periodically evaluate our long-lived assets for impairment in accordance with ASC 360-40, Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets. ASC 360-40 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances indicate that any of our long-lived assets might be impaired, we will analyze the estimated undiscounted future cash flows to be generated from the applicable asset and will record an impairment loss to the extent that the carrying value of the asset exceeds the fair value of the asset. Fair value is generally determined using an estimate of undiscounted future net cash flows from operating activities or upon disposal of the asset.  No property and equipment was impaired during the three and nine months ended September 30, 2010 or 2009.

Internal Use Software
We account for the costs to develop or obtain software for internal use in accordance with ASC 350-40, Intangibles – Goodwill and Other Subtopic Internal-Use Software.  As a result, we capitalize qualifying computer software costs incurred during the “application development stage” and other costs as permitted by ASC 350-40. Amortization of these costs begins once the product is ready for its intended use.  These costs are amortized on a straight-line
 
 
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basis over the estimated useful life of the product, typically 3 to 5 years.  The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period.  We capitalized $677,000 and $2.4 million in internal use software costs during the three and nine months ended September 30, 2010, respectively, compared to $887,000 and $2.6 million, respectively, during the same periods in 2009. Amortization related to capitalized software was $413,000 and $1.5 million, for the three and nine months ended September 30, 2010, compared to $271,000 and $678,000, respectively, in the same periods in 2009.

Onvia periodically evaluates the remaining useful lives and recoverability of internal use software and will record an impairment or abandonment if management determines that all or a portion of the asset will no longer be used or is no longer recoverable based on the estimated future cash flow, or will adjust the remaining useful life to reflect revised estimates in accordance with ASC 360-40 as described above under “Property and Equipment”.

During the second quarter of 2010, we abandoned three internal use software projects.  The abandoned assets relate to code developed for our commercial sector information, search engine marketing, and internal cross-system integration.  During the second quarter, management made the decision to no longer append contact and project specific information to our commercial sector content.  This decision was made as a result of our change to focus exclusively on the gBusiness sector and to no longer position private sector data as a differentiator within our gBusiness solution.  Without this actionable contact and project specific information, we do not believe there is future value associated with this content.  This project represents 93% of the total abandoned costs.   Pursuant with the guidance in ASC 360-35-47, we recorded a loss on abandonment of approximately $967,000, representing the full unamortized balance as of June 2010 for these three assets.  This loss is included in operating expenses under the general and administrative category in the nine months ended September 30, 2010.

Income taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, or NOL, carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

We plan to complete a Section 382 analysis regarding ownership changes that may have occurred, but at this time we cannot reasonably estimate whether such a change has occurred.  Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

We currently have a full valuation allowance for our deferred tax assets as the future realization of the tax benefit is not more likely than not.  Based on information currently available, we do not reasonably believe that the unrecognized tax benefit will change significantly within the next twelve months.

Accounts Receivable and Allowance for Doubtful Accounts
We record accounts receivable for the invoiced portion of our contracts once we have a signed agreement and amounts are billable under the contract.  All of our subscription contracts are non-cancellable upon activation. We do not record an asset for the unbilled or unearned portion of our contracts.  Accounts receivable are recorded at their net realizable value, after deducting an allowance for doubtful accounts.  Such allowances are determined based on a
 
 
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review of an aging of accounts and reflect either specific accounts or estimates based on historical incurred losses.  If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, and our ability to recognize sales to certain clients may be affected.
 
Contractual Obligations

Future required payments under operating leases excluding operating expenses, and other purchase obligations as of September 30, 2010 are as follows for the periods specified (in thousands):

   
Payments due by period
 
   
Total
   
Less than 1 year
   
1 - 3 years
   
3 - 5 years
   
More than
5 years
 
Real estate operating lease obligations
  $ 5,117     $ 947     $ 1,980     $ 2,100     $ 90  
Purchase obligations (1)
    2,437       975       1,222       240       -  
Office equipment operating lease obligations
    70       18       37       15       -  
Total
  $ 7,624     $ 1,940     $ 3,239     $ 2,355     $ 90  
 
 
 
(1) Purchase obligations relate to co-location hosting arrangements, software development and licensing agreements, marketing agreements, telecom agreements and third party content agreements.

Liquidity and Capital Resources
 
Our principal sources of liquidity are cash, cash equivalents and short-term investments. Our combined cash and cash equivalents and short term investments were $10.9 million at September 30, 2010, and our working capital was $567,000. At September 30, 2010 we held $5.3 million in FDIC insured or U.S. government backed short-term investments. From December 31, 2009 to September 30, 2010, our cash, cash equivalents and short-term investments decreased by $3.3 million for the reasons described below under operating, investing and financing activities.

We are rigorously reviewing all expenditures and investments for an acceptable return on investment, and underperforming expenditures are being eliminated or reallocated to performing projects.  We have already begun the process of reducing nonessential expenses and rightsizing the business.  During October we eliminated 8 non-strategic positions and elected not to fill an additional 11 open positions.  These actions will save approximately $1 million in annual operating expenses.  We will begin to realize these savings in the first quarter of 2011. 

As we continue to focus our marketing and sales efforts toward medium to large businesses and less toward smaller businesses, we may experience a short-term decrease in sales and cash flow in the near term.  We expect, however, that over the longer term, focusing on these larger clients will result in improved retention rates and ACV and, ultimately, increased sales, cash flow and operating income.  Until such time as we are able to generate recurring positive cash flow and earnings, we will utilize our current cash, cash equivalents, short-term investments and current revenues to fund operations.  We have broadened our appeal to these larger clients by introducing new products targeted directly at these businesses.

If the decline in the renewal rates for smaller companies continues, our operating cash flow may be adversely impacted in the near term; however, we believe that our current cash and cash equivalents are sufficient to fund current operations for the near-term foreseeable future.

In May 2010, Michael Pickett, our former Chief Executive Officer, President and Chairman of the Board, exercised 302,979 options.  Mr. Pickett surrendered 171,330 shares subject to the options to satisfy the exercise price of the options and the tax withholding obligations resulting from the exercise. The tax obligation associated with this exercise was approximately $427,000 and was settled in May 2010.  This payment is presented under financing activities on the statement of cash flows.

 
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On October 15, 2010 Eric T. Gillespie resigned as Senior Vice President, Products, Technology and Information of Onvia, effective October 15, 2010. Pursuant to Mr. Gillespie’s separation and release agreement, we will make severance payments totaling $225,000 and $21,364 for accrued but unused vacation in November 2010.

On November 1, 2010 Michael S. Balsam announced his resignation as Chief Strategy Officer of Onvia, effective December 31, 2010.  Pursuant to Mr.Balsam’s transition services agreement he will provide executive transition services until the Separation Date. We will pay Mr.Balsam a transition payment of $135,000 on December 31, 2010, subject to all required or agreed upon deductions and withholdings.

Operating Activities
Net cash provided by operating activities was $1.2 million for the nine months ended September 30, 2010, compared to $2.9 million in the same period in the prior year. The decrease in operating cash flow is due primarily to a decrease in sales in the second quarter of 2010 compared to the same period in 2009, which resulted in a decrease in cash collections. In addition, $156,000 was paid in the first quarter of 2010 for executive compensation associated with 2009 operating results.

Investing Activities
Net cash provided by investing activities was $3.2 million in the nine months ended September 30, 2010, compared to net cash used in investing activities of $9.7 million in the same period in 2009. We purchased $5.2 million in short term investments and $789,000 in long-term investments during the nine months of 2010, while $12.5 million was received from the sale and maturity of short term investments during the nine months ended September 30, 2010. Purchases of property and equipment and investments in our technology platform increased by $613,000 in the nine months of 2010 compared to the same period in 2009. In addition, $135,000 of our security deposit on the lease for our corporate headquarters was returned to us in March 2010.

Financing Activities
Net cash used in financing activities was $386,000 in the nine months ended September 30, 2010, compared to $25,000 in the nine months ended September 30, 2009.  The increase in cash used is primarily due to tax obligations associated with Mr. Pickett’s option exercise discussed above.

Recent Accounting Pronouncements
 
Except as noted below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, that are of significance, or potential significance to us.
 
In October 2009, the FASB issued Accounting Standards Update, or ASU, No. 2009-13, Multiple-Deliverable Revenue Arrangements. This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including
 
 
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information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made, and changes to those judgments, and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, but early adoption is permitted. We have decided not to early adopt this ASU. We have evaluated the impact this ASU will have once adopted, and do not believe adoption will materially impact reported revenue.


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The disclosures under this Item are not required for smaller reporting companies.

Item 4(T). Controls and Procedures

Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s, or SEC, rules and forms.  Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There were no other changes in our internal control over financial reporting during the quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
29

 

           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The information set forth under “Legal Proceedings” in Note 11, “Commitments and Contingencies”, of the notes to our unaudited condensed consolidated financial statements of this Report is incorporated herein by reference.

Item 1A.  Risk Factors

Our decision to no longer focus on private sector opportunities and target larger clients may negatively impact client satisfaction and retention.

In the second quarter of 2010, Onvia consolidated its existing suite of products to focus exclusively on the gBusiness sector, specifically medium to large sized businesses in this sector, and will no longer market a private sector offering. We may unable to achieve estimated market penetration as a result of this growth strategy refocus on high value clients, which would negatively impact our operating results and cash flows.  
The concentration of product servers in the Seattle area makes us susceptible to service interruptions in the event of natural disasters.

All of our product servers are located in the Seattle area. Any natural disaster or infrastructure breakdown in the Seattle area, which are outside of our control, may impact our ability to compile information and deliver our product to our clients.

The pre-existing risk factors described below should be read in conjunction with the risk factors and information disclosed in our 2010 Annual Report.

 
·
Risks related to our growth strategy
o  
Continued weakness in the U.S. economy may negatively impact our client retention rates
o  
We may not be able to meet projected renewal rates
o  
We may be required to increase sales and marketing expenses in order to achieve revenue goals
o  
We may not be able to increase subscribership to high value products
o  
We may fail to attract, hire and retain sales associates who can effectively communicate the benefits of our products to our clients, and they may be unable to achieve expected sales targets
o  
If we cannot effectively satisfy our clients across all targeted industry verticals and of all sizes, we may decide to target fewer industries and, as a result, may lose clients
o  
Our competitors may develop similar technologies that are more broadly accepted in the marketplace
o  
Rapid advances in technology and new mediums for distributing information may diminish the value of our service offerings
o  
We may not be able to increase our market penetration into the medium to large business segments
o  
Weakness in the U.S. economy and in the commercial-residential housing market specifically, could drive reduced spending by our clients and prospective clients on business intelligence services

 
·
Risks related to our new product strategy
o  
We may fail to introduce new content and products that are broadly accepted by clients and there may be delays in the introduction of these tools and products
o  
We may be unable to control the cost of ongoing content collection or the cost of collecting new content types to support new product offerings
o  
We may improperly price our new product offerings for broad client acceptance
o  
We may overestimate the value of sales intelligence to companies in the infrastructure marketplace
 
 
30

 
 
·
Financial, economic and market risks
o  
We may be required to withhold common shares to cover tax withholding upon exercise of    certain executive stock options and settle the obligations with the Internal Revenue Service, which would negatively impact our cash flow in the future
o  
We may not be able to generate recurring positive cash flows from operations
o  
Our quarterly financial results are subject to fluctuations that may make it difficult to forecast future performance
o  
We implemented anti-takeover provisions that may discourage takeover attempts and depress the market price of our stock

 
·
Operational risks
o  
We may not effectively implement new technologies and new product functionality could fail to perform as designed
o  
System failures could cause an interruption in the services of our network and impact our ability to compile information and deliver our product to our clients
o  
Our current technology infrastructure and network software systems may be unable to accommodate our anticipated growth, and we may require a significant investment in these systems to accommodate performance and storage requirements of new and planned products
o  
We may be unable to retain the services of executive officers, directors, senior managers and other key employees, which would harm our business
o  
Political, social or environmental conditions in off-shore locations may impact the collection and delivery of our content and/or development of new products
o  
We may be unable to effectively monitor and prevent unauthorized redistribution of our published information
o  
Our services and products depend upon the continued availability of licensed technology from third parties and we may not be able to obtain those licenses on commercially reasonable terms, or at all
o  
Increased blocking of our emails could negatively impact client satisfaction with our product and could inhibit the effectiveness of our marketing efforts
o  
Increased sales to clients who are new to the public sector may impact our first year retention rates

 
·
Regulatory, judicial or legislative risks
o  
Any settlement or claim awarded against us in our ongoing litigation matters could negatively impact our operating results
o  
Future regulations could be enacted that either directly restrict our business or indirectly impact our business by limiting the growth of e-commerce
o  
Our access to new content from governmental entities and other third parties may be restricted if bid aggregation on the Internet is restricted by law or regulations
o  
Utilization of our net operating loss, or NOL, carryforwards may be subject to annual limitations provided by the Internal Revenue code

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 5.  Other Information

None.

 
31

 

Item 6.  Exhibits
 
Number
 
Description
     
  3.1  
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3(i).1 to the Form 10-Q for the quarter ended June 30, 2004, filed on August 12, 2004)
       
  3.2  
Bylaws of Onvia (incorporated by reference to Exhibit 3.2 to the Form 10-K for the year ended December 31, 2000, filed on  April 2, 2001)
       
  4.1  
Form of Onvia’s Common Stock Certificate (incorporated by reference to the Registration Statement on Form S-1 dated December 21, 1999, as amended (File No. 333-93273))
       
  4.2  
Form of Rights Agreement between the Company and U.S. Stock Transfer Corp. as a Rights Agent (including as Exhibit A the form of Certificate of Designation, Preferences and Rights of the Terms of the Series RP Preferred Stock, as Exhibit B the form of the Right Certificate, and as Exhibit C the Summary of Terms of Rights Agreement) (incorporated by reference to Exhibit 4.1 from the Form 8-K, filed on November 25, 2002)
       
  10.1 *
Onvia, Inc. 2008 Equity Incentive Plan (incorporated by Reference to the 2008 Proxy Statement filed on August 4, 2008)
       
  10.2 *
Amended Onvia, Inc. Savings and Retirement Plan (incorporated by reference to Exhibit 10.1 from the Form 10-K for the year ended December 31, 2004, filed on March 25, 2005)
       
  10.3 *
Form of Indemnification Agreement between Onvia and each of its officers and directors (incorporated by reference to Exhibit 10.1 the Registration Statement on Form S-1 filed on December 21, 1999 (File No. 333-93273))
       
  10.4 *
Amended 2000 Employee Stock Purchase Plan (incorporated by Reference to Exhibit 10.4 to the Report on Form 10-Q for the quarter ended September 30, 2008, filed on November 14, 2008)
       
  10.5 *
2000 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-1/A filed on February 2, 2000 (File No. 333-93273))
       
  10.6 *
Third Amendment to Employment and Noncompetition Agreement with Michael D. Pickett dated September 27, 2002 (incorporated by reference to Exhibit 10.2 to the Report on Form 10-Q for the quarter ended September 30, 2002, filed on November 6, 2002)
       
  10.7 *
Employment Agreement with Irvine N. Alpert dated February 22, 2002 and Commission and Bonus Plan with Irvine N. Alpert dated September 11, 2001 (incorporated by reference to Exhibit 10.4 to the Report on Form 10-K for the year ended December 31, 2001, filed on March 29, 2002)
       
  10.8  
Medical Dental Building Lease Agreement between Onvia and GRE 509 Olive LLC, dated July 31, 2007 (incorporated by reference to Exhibit 10.12 to the Report on Form 10-Q for the period ended September 30, 2007, filed on November 14, 2007)
       
  10.9 *
2010 Management Incentive Plan (incorporated by reference to Exhibit 10.10 to the Report on Form 10-K for the period ended December 31, 2009, filed on March 31, 2010)
       
  10.10 *
Separation and Release Agreement with Michael J. Tannourji, dated February 5, 2010 (incorporated by reference to Exhibit 10.11 to the Report on Form 10-K for the period ended December 31, 2009, filed on March 31, 2010)
       
  10.11 *
2010 Variable Compensation Plan for Irvine N. Alpert (incorporated by reference to Exhibit 10.12 to the Report on Form 10-K for the period ended December 31, 2009, filed on March 31, 2010)
       
  10.12 *
2010 Variable Compensation Plan for Michael S. Balsam (incorporated by reference to Exhibit 10.13 to the Report on Form 10-K for the period ended December 31, 2009, filed on March 31, 2010)
       
  10.13 *
Second Amendment to 2000 Employee Stock Purchase Plan (incorporated by Reference to Exhibit 10.13 to the Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 17, 2010)
       
  10.14 *
Executive Transition Services Agreement with Michael D. Pickett, dated May 17, 2010  (incorporated by Reference to Exhibit 10.13 to the Report on Form 10-Q for the quarter ended June 30, 2010, filed on Aufust 11, 2010)
       
  10.15 *++
Offer Letter to Henry G. Riner, dated August 26, 2010
       
  10.16 *++
Executive Transition Services Agreement with Michael S. Balsam, dated November 1, 2010
       
  10.17 *++
Separation and Release Agreement with Eric T. Gillespie, dated November 4, 2010
       
  31.1 ++
Certification of Henry G. Riner, Chief Executive Officer and President of Onvia, Inc., Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
  31.2 ++
Certification of Cameron S. Way, Chief Financial Officer of Onvia, Inc., Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
  32.1 ++
Certification of Henry G. Riner, Chief Executive Officer and President of Onvia, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
  32.2 ++
Certification of Cameron S. Way, Chief Financial Officer of Onvia, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
* Executive Compensation Plan or Agreement
 
++ Filed Herewith

 
 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

                                      ONVIA, INC.
 
 
 
 
                                      By:  /s/ Henry G. Riner
                                          ------------------------------
                                           Henry G. Riner
                                           President and Chief Executive Officer
 
 

                                      By:  /s/ Cameron S. Way
                                          ------------------------------
                                           Cameron S. Way
                                           Chief Financial Officer

Date:  November 15, 2010