Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - ONVIA INC | exh_322.htm |
| EX-32.1 - EXHIBIT 32.1 - ONVIA INC | exh_321.htm |
| EX-31.2 - EXHIBIT 31.2 - ONVIA INC | exh_312.htm |
| EX-31.1 - EXHIBIT 31.1 - ONVIA INC | exh_311.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, 2017
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 001-35164
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). [X] Yes [ ] No
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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: 7,330,393 shares outstanding as of November 1, 2017.
ONVIA, INC.
INDEX
Item 1. Unaudited Condensed Consolidated Financial Statements
Onvia, Inc.
Condensed Consolidated Balance Sheets
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| (In thousands, except share data) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 782 | $ | 2,306 | ||||
| Short-term investments, available-for-sale | 4,164 | 4,817 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $52 and $34 | 2,011 | 1,543 | ||||||
| Prepaid expenses and other current assets | 750 | 1,035 | ||||||
| Total current assets | 7,707 | 9,701 | ||||||
| LONG TERM ASSETS: | ||||||||
| Property and equipment, net of accumulated depreciation | 625 | 844 | ||||||
| Internal use software, net of accumulated amortization | 5,737 | 5,480 | ||||||
| Long-term investments, available-for-sale | 93 | - | ||||||
| Other long-term assets | 222 | 263 | ||||||
| Total long term assets | 6,677 | 6,587 | ||||||
| TOTAL ASSETS | $ | 14,384 | $ | 16,288 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 1,227 | $ | 851 | ||||
| Accrued expenses | 1,047 | 1,534 | ||||||
| Unearned revenue, current portion | 9,119 | 9,500 | ||||||
| Other current liabilities | 147 | 134 | ||||||
| - | ||||||||
| Total current liabilities | 11,540 | 12,019 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Unearned revenue, net of current portion | 40 | 41 | ||||||
| Deferred rent, net of current portion | 431 | 529 | ||||||
| Other long-term liabilities | - | 16 | ||||||
| Total long term liabilities | 471 | 586 | ||||||
| TOTAL LIABILITIES | 12,011 | 12,605 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||
| 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; 8,915,197 and 8,730,152 shares issued; and 7,322,893 and 7,137,848 shares outstanding | 1 | 1 | ||||||
| Treasury stock, at cost: 1,592,304 and 1,592,304 shares | (5,446 | ) | (5,446 | ) | ||||
| Additional paid in capital | 355,196 | 354,448 | ||||||
| Accumulated other comprehensive income/( loss) | - | - | ||||||
| Accumulated deficit | (347,378 | ) | (345,320 | ) | ||||
| Total stockholders’ equity | 2,373 | 3,683 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 14,384 | $ | 16,288 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 1 |
Onvia, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| (In thousands, except per share data) | (In thousands, except per share data) | |||||||||||||||
| Revenue | ||||||||||||||||
| Subscription | $ | 5,947 | $ | 5,762 | $ | 17,798 | $ | 16,977 | ||||||||
| Content license | 111 | 328 | 320 | 1,050 | ||||||||||||
| Management information reports | 57 | 43 | 139 | 96 | ||||||||||||
| Other | 41 | 40 | 132 | 132 | ||||||||||||
| Total revenue | 6,156 | 6,173 | 18,389 | 18,255 | ||||||||||||
| Cost of revenue (exclusive of depreciation and amortization included below) | 631 | 689 | 2,026 | 2,195 | ||||||||||||
| Gross margin | 5,525 | 5,484 | 16,363 | 16,060 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 2,936 | 3,207 | 8,709 | 9,058 | ||||||||||||
| Technology and development | 1,731 | 1,732 | 5,484 | 4,636 | ||||||||||||
| General and administrative | 1,368 | 1,050 | 4,275 | 2,992 | ||||||||||||
| Total operating expenses | 6,035 | 5,989 | 18,468 | 16,686 | ||||||||||||
| Loss from operations | (510 | ) | (505 | ) | (2,105 | ) | (626 | ) | ||||||||
| Interest and other income, net | 26 | 13 | 47 | 28 | ||||||||||||
| Net loss | $ | (484 | ) | $ | (492 | ) | $ | (2,058 | ) | $ | (598 | ) | ||||
| Unrealized gain/(loss) on available-for-sale securities | (1 | ) | 1 | - | 4 | |||||||||||
| Comprehensive loss | $ | (485 | ) | $ | (491 | ) | $ | (2,058 | ) | $ | (594 | ) | ||||
| Basic net loss per common share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.28 | ) | $ | (0.08 | ) | ||||
| Diluted net loss per common share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.28 | ) | $ | (0.08 | ) | ||||
| Basic weighted average shares outstanding | 7,314 | 7,131 | 7,253 | 7,129 | ||||||||||||
| Diluted weighted average shares outstanding | 7,314 | 7,131 | 7,253 | 7,129 | ||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
Onvia, Inc.
Condensed Consolidated Statements of Cash Flows
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| (In thousands) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (2,058 | ) | $ | (598 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,341 | 1,754 | ||||||
| Stock-based compensation | 480 | 153 | ||||||
| Loss on sale of property and equipment | - | (4 | ) | |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (468 | ) | 5 | |||||
| Prepaid expenses and other assets | 324 | 420 | ||||||
| Accounts payable | 449 | 128 | ||||||
| Accrued expenses | (486 | ) | 269 | |||||
| Unearned revenue | (380 | ) | 377 | |||||
| Deferred rent | (82 | ) | 6 | |||||
| Net cash provided by operating activities | 120 | 2,510 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additions to property and equipment | (180 | ) | (138 | ) | ||||
| Additions to internal use software | (2,292 | ) | (1,510 | ) | ||||
| Purchases of investments | (4,156 | ) | (5,756 | ) | ||||
| Sales of investments | 1,550 | 252 | ||||||
| Maturities of investments | 3,167 | 5,217 | ||||||
| Proceeds from sale of equipment | - | 4 | ||||||
| Net cash used in investing activities | (1,911 | ) | (1,931 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of stock | 111 | - | ||||||
| Proceeds from exercise of stock options and purchases under employee stock purchase plan | 156 | 20 | ||||||
| Net cash provided by financing activities | 267 | 20 | ||||||
| Net increase/(decrease) in cash and cash equivalents | (1,524 | ) | 599 | |||||
| Cash and cash equivalents, beginning of period | 2,306 | 1,483 | ||||||
| Cash and cash equivalents, end of period | $ | 782 | $ | 2,082 | ||||
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Property and equipment additions in accounts payable | $ | - | $ | (114 | ) | |||
| Internal use software additions in accounts payable | $ | (179 | ) | $ | (251 | ) | ||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 3 |
Onvia, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| 1. | Accounting Policies |
Basis of Presentation
In this report, when we refer to “Onvia,” the “Company” “we,” “our,” or “us,” we are referring to Onvia, Inc.
The unaudited interim Condensed Consolidated Financial Statements and related notes thereto have been prepared pursuant to generally accepted accounting principles in the United States of America, (“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 unaudited 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“2016 Annual Report”).
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.
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, allowance for doubtful accounts, capitalization of costs for internally developed software, recoverability of long-lived assets, including internally developed software, and the valuation allowance for Onvia’s net deferred tax assets. 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.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2014-09 (“ASU 2014-09”) for revenue from contracts with customers, which provides a single comprehensive revenue recognition model to apply in determining how and when to recognize revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When applying the new revenue model to contracts with customers the guidance requires five steps to be applied, which include: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures, which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing, and uncertainty of revenue and the related cash flow. This guidance will be effective for Onvia in the first quarter of 2018 and early adoption was permitted beginning in the first quarter of 2017. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for our contracts will generally be recognized ratably over time, which is consistent with the revenue recognition method we currently use for the majority of our contracts. Based on our evaluation of ASU 2014-09, Onvia currently does not expect it to have a material impact on our financial statements upon adoption for our current product offerings and anticipates adopting the full retrospective approach.
| 4 |
In February 2016, the FASB issued authoritative guidance which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new guidance will require both types of leases to be recognized on the balance sheet. This guidance will be effective for Onvia in the first quarter of 2019. This guidance shall be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes a number of practical expedients that an entity may elect to apply. Early application of the guidance is permitted. The Company has determined the office lease for the corporate headquarters is the only material lease affected by this guidance. The office space lease is currently classified as an operating lease and will continue to be classified as an operating lease under the new standard, and as such, Onvia will recognize a right-of-use asset and lease liability upon adoption of the new guidance.
| 2. | Stock-Based Compensation |
The impact to Onvia’s interim unaudited Condensed Consolidated Statements of Operations for recording stock-based compensation was as follows for the periods presented (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Sales and marketing | $ | 17 | $ | 20 | $ | 16 | $ | 52 | ||||||||
| Technology and development | 19 | 9 | 40 | 35 | ||||||||||||
| General and administrative | 116 | 21 | 424 | 66 | ||||||||||||
| Total stock-based compensation | $ | 152 | $ | 50 | $ | 480 | $ | 153 | ||||||||
The employment agreement with the current CEO and President includes nonqualified stock options to purchase 125,000 shares of the Company’s common stock, vesting based on performance criteria as set forth in the Employment Agreement. As of September 30, 2017, the performance criteria had yet to be established. The expected future expense associated with the nonqualified stock options was approximately $150,000 as of September 30, 2017.
| 3. | Net Loss per Share |
Basic net loss per share is calculated by dividing the net loss for the period by the weighted average shares of common stock outstanding for the period. Diluted loss per share is calculated by dividing the net 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 net loss per share are identical because inclusion of potentially dilutive common shares would be anti-dilutive.
| 5 |
The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share data):
| Three Months September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net loss | $ | (484 | ) | $ | (492 | ) | $ | (2,058 | ) | $ | (598 | ) | ||||
| Shares used to compute basic net loss per share | 7,314 | 7,131 | 7,253 | 7,129 | ||||||||||||
| Dilutive potential common shares: | ||||||||||||||||
| Stock options | - | - | - | - | ||||||||||||
| Shares used to compute diluted net income/(loss) per share | 7,314 | 7,131 | 7,253 | 7,129 | ||||||||||||
| Basic net loss per share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.28 | ) | $ | (0.08 | ) | ||||
| Diluted net loss per share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.28 | ) | $ | (0.08 | ) | ||||
For the three and nine months ended September 30, 2017, the weighted average effect of stock options to purchase approximately 903,000 and 967,000 shares of common stock, respectively, were excluded from the computation of diluted net loss per share because their effect would be anti-dilutive.
For the three and nine months ended September 30, 2016, the weighted average effect of stock options to purchase approximately 885,000 and 864,000 shares of common stock, respectively, were excluded from the computation of diluted net loss per share because their effect would be anti-dilutive.
| 4. | Investments |
Onvia classifies investments in debt securities as available-for-sale, stated at fair value as summarized in the following table (in thousands):
| September 30, 2017 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Short-Term Investments | ||||||||||||||||
| U.S. Government backed securities | $ | 579 | $ | - | $ | - | $ | 579 | ||||||||
| Certificates of Deposit (1) | 3,585 | - | - | 3,585 | ||||||||||||
| Total Short-Term Investments | 4,164 | - | - | 4,164 | ||||||||||||
| Long-Term Investments | ||||||||||||||||
| Certificates of Deposit (1) | $ | 93 | $ | - | $ | - | $ | 93 | ||||||||
| Total Long-Term Investments | 93 | - | - | 93 | ||||||||||||
| Total Investments | $ | 4,257 | $ | - | $ | - | $ | 4,257 | ||||||||
| 6 |
| December 31, 2016 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| U.S. Government backed securities | $ | 110 | $ | - | $ | - | $ | 110 | ||||||||
| Certificates of Deposit (1) | 4,707 | - | - | 4,707 | ||||||||||||
| Total Investments | $ | 4,817 | $ | - | $ | - | $ | 4,817 | ||||||||
(1) The Company evaluated certificates of deposits held as of September 30, 2017 and December 31, 2016 and concluded that they meet the definition of securities as available for sale.
Onvia accounts for investments held as available for sale according to their fair values, which is defined 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. The Company utilizes 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 following are the 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.
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, investments classified as available-for-sale at September 30, 2017 and at December 31, 2016, stated at fair value (in thousands):
| Fair Value Measurements as of September 30, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| U.S. Government backed securities | $ | - | $ | 579 | $ | - | $ | 579 | ||||||||
| Certificates of Deposit | - | 3,678 | - | 3,678 | ||||||||||||
| Total Investments | $ | - | $ | 4,257 | $ | - | $ | 4,257 | ||||||||
| Fair Value Measurements as of December 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| U.S. Government backed securities | $ | - | $ | 110 | $ | - | $ | 110 | ||||||||
| Certificates of Deposit | - | 4,707 | - | 4,707 | ||||||||||||
| Total Investments | $ | - | $ | 4,817 | $ | - | $ | 4,817 | ||||||||
| 7 |
There were no transfers in or out of Level 2 investments during the first nine months of 2017 and fourth quarter of 2016, and there was no activity in Level 1 or Level 3 fair value measurements during those periods.
| 5. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| Prepaid software licenses and maintenance | $ | 349 | $ | 630 | ||||
| Prepaid insurance | 167 | 133 | ||||||
| Other prepaid expenses | 122 | 107 | ||||||
| Other receivables | 98 | 78 | ||||||
| Prepaid rent | - | 76 | ||||||
| Interest receivable | 14 | 11 | ||||||
| Total prepaid expenses and other current assets | $ | 750 | $ | 1,035 | ||||
| 6. | Property and Equipment |
Property and equipment, net of accumulated depreciation, consist of the following (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| Computer equipment | $ | 3,862 | $ | 3,822 | ||||
| Software | 1,811 | 1,805 | ||||||
| Furniture and fixtures | 119 | 119 | ||||||
| Leasehold improvements | 815 | 815 | ||||||
| Total cost basis | 6,607 | 6,561 | ||||||
| Less accumulated depreciation | (5,982 | ) | (5,717 | ) | ||||
| Net book value | $ | 625 | $ | 844 | ||||
Depreciation expense was $112,000 and $342,000 for the three and nine months ended September 30, 2017, respectively, compared to $122,000 and $398,000, respectively, for the same periods of 2016. Depreciation expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
| 7. | Internal Use Software |
Onvia capitalizes qualifying computer software costs incurred during the “application development stage” and other costs. 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.
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. No impairment has been recorded during the nine months ended September 30, 2017 and December 31, 2016.
| 8 |
During 2016 the Company determined that ongoing product development would replace the functionality of certain internal use software costs and evaluated the then current estimates of remaining useful lives of the affected internal use software. The Company determined that unamortized internal software costs of approximately $962,000 are subject to a reduced estimated remaining useful life. During the three and nine months ended September 30, 2017, we accelerated the remaining $150,000 and $516,000, respectively, in amortization expense related to the reduced useful lives of the impacted assets.
The following table presents a roll-forward of capitalized internal use software for the nine months ended September 30, 2017 (in thousands):
| Balance at December 31, 2016 | Additions | Balance at September 30, 2017 | ||||||||||
| Capitalized internal use software | $ | 21,213 | $ | 2,256 | $ | 23,469 | ||||||
| Accumulated amortization | (15,733 | ) | (1,999 | ) | (17,732 | ) | ||||||
| Internal use software, net | $ | 5,480 | $ | 257 | $ | 5,737 | ||||||
Amortization expense was $697,000 and $2.0 million for the three and nine months ended September 30, 2017, respectively, compared to $616,000 and $1.4 million respectively, for the same periods of 2016. Amortization expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
| 8. | Accrued Expenses and Other Current Liabilities |
Accrued expenses consist of the following (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| Payroll and related liabilities | $ | 965 | $ | 1,430 | ||||
| Taxes payable and other | 82 | 104 | ||||||
| Total accrued expenses | $ | 1,047 | $ | 1,534 | ||||
Other current liabilities consist of the following (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| Deferred rent, current portion | $ | 124 | $ | 107 | ||||
| Obligations under capital leases, current portion | 23 | 27 | ||||||
| Total other current liabilities | $ | 147 | $ | 134 | ||||
| 9 |
| 9. | Commitments and Contingencies |
Operating Leases
Onvia has a lease agreement for its corporate offices located in Seattle, Washington that expires in April 2021. Onvia also has a non-cancellable operating lease for office equipment, which expires in June 2019.
The office lease contains rent escalation clauses and rent holidays. Rent expense is recorded on a straight-line basis over the lease term with the difference between the rent paid and the straight-line rent expense recorded as a deferred rent liability. Total rent expense associated with real estate operating leases was $197,000 and $590,000 for the three and nine months ended September 30, 2017, respectively, compared to $193,000 and $578,000 for the same periods in 2016. Rent expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
As of September 30, 2017, remaining future minimum lease payments required on non-cancellable operating leases are as follows for the years ending December 31 (in thousands):
| Real Estate Operating Leases | Office Equipment Operating Lease | Total Operating Leases | ||||||||||
| 2017 | $ | 218 | $ | 4 | $ | 222 | ||||||
| 2018 | 896 | 20 | 916 | |||||||||
| 2019 | 918 | 10 | 928 | |||||||||
| 2020 | 940 | - | 940 | |||||||||
| 2021 | 320 | - | 320 | |||||||||
| Total | $ | 3,292 | $ | 34 | $ | 3,326 | ||||||
Purchase Obligations
Onvia has non-cancellable 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 March 2018 through 2019. Future required payments under these non-cancellable agreements are as follows for the years ending December 31 (in thousands):
| Purchase Obligations | ||||
| 2017 | $ | 165 | ||
| 2018 | 469 | |||
| 2019 | 26 | |||
| Total | $ | 660 | ||
Transition Agreement for Former CEO
On March 28, 2016, the Company and its then President and Chief Executive Officer Henry Riner entered into a Transition and Release Agreement (the “Transition Agreement”) that sets forth the terms pursuant to which Mr. Riner retired as President and Chief Executive Officer of the Company. Mr. Riner resigned as a Director, Chief Executive Officer and President effective January 30, 2017 (“Transition Date”).
| 10 |
Under the terms of the Transition Agreement, Mr. Riner continued to serve as the Company’s President and Chief Executive Officer on a full-time basis through the Transition Date and (i) received his full annual base salary through June 30, 2017; (ii) participated in the Company’s employee benefit plans through the Transition Date; (iii) was eligible to exercise any vested options on a cashless basis until September 30, 2017; and (iv) participated in the Company’s 2016 management incentive plan pursuant to which Mr. Riner was eligible to earn up to 50% of base salary if Company’s 2016 corporate bookings and EBITDA objectives had been achieved. Additionally, Mr. Riner received compensation for any unused paid time off up to a maximum of 150 hours. Mr. Riner has made and will continue to make himself available as a consultant to the Company’s Board of Directors and the Company executive team as requested from time to time by the Board of Directors or the Company’s new CEO for a period of 12 months after the Transition Date.
In exchange for Mr. Riner’s entry into the Transition Agreement, his covenants and promises described therein, and his entry into an additional Release of Claims Agreement on his last of date of employment with the Company, the Company paid Mr. Riner a lump sum cash payment of $362,000 on July 8, 2017.
Costs related to the Transition Agreement were accrued over the requisite service period and the expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
Legal Proceedings
Transaction Litigation
On October 25, 2017, Chanie Dembitzer, a purported stockholder, filed a putative class action lawsuit challenging aspects of the Transactions (as defined in Note 12) in King County Superior Court in the State of Washington. The complaint is captioned Chanie Dembitzer v. Onvia, Inc., et al., Case No. 17-2-27799-1 SEA. The complaint names as defendants the Company, members of the Board of Directors of the Company (the “Board”), Deltek, Inc., a Delaware corporation (“Deltek”), Project Diamond Intermediate Holdings Corp., a Delaware corporation (“Parent”), and Project Olympus Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Purchaser”). The complaint alleges, among other things, that the Board violated fiduciary duties of care, loyalty, and good faith and that Deltek, Parent, and Purchaser aided and abetted the Board’s breaches of fiduciary duties. As relief, the complaint seeks, among other things, an injunction preventing the consummation of the Transactions, rescission of the Transactions or rescissory damages should the Transactions be consummated, and an award of attorneys’ and experts’ fees. The defendants believe that the allegations in the suit are without merit.
On October 27, 2017, Louis Scarantino, a purported stockholder, filed a putative class action lawsuit challenging aspects of the Transactions in the United States District Court for the Western District of Washington in Seattle. The complaint is captioned Louis Scarantino v. Onvia, Inc., et al., Case No. 2:17-1601. The complaint names as defendants the Company, members of the Board, Parent, Purchaser, and Deltek. The complaint alleges, among other things, that the defendants violated provisions of the Securities Exchange Act of 1934 by making untrue statements of material facts in the Schedule 14D-9 or failing to provide in the Schedule 14D-9 all material information needed by stockholders to make an informed decision whether to tender their Shares. As relief, the complaint seeks, among other things, an injunction preventing the consummation of the Transactions, rescission of the Transactions or rescissory damages should the Transactions be consummated, and an award of attorneys’ and experts’ fees. The defendants believe that the allegations in the suit are without merit.
Although the defendants believe that the allegations in the putative class action lawsuits described above are without merit and deny that any additional disclosure was or is required under any applicable rule, statute, regulation or law, in order to moot the plaintiffs’ unmeritorious claims and alleviate the costs, risks and uncertainties inherent in such litigation, the Company voluntarily supplemented the Schedule 14D-9 with additional disclosures.
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Other Proceedings
From time to time, legal proceedings may arise in the ordinary course of business. Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any other legal proceeding in which the outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business or financial position.
| 10. | Income Taxes |
As of September 30, 2017 and December 31, 2016, Onvia has recorded a valuation allowance against its net deferred tax assets because the Company has determined it is not more likely than not that the asset will be realized. 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.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), utilization of net operating loss (NOL) carryforwards to offset future taxable income are subject to substantial annual limitations if we experience a cumulative change in ownership as defined by the Code. In general, an ownership change, as defined by 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.
As of September 30, 2017 and December 31, 2016, Onvia’s Federal NOL carryforwards for income tax purposes were approximately $77.5 million. The Federal NOL carryforwards are subject to limitations under Section 382 of the Internal Revenue Code. If not utilized, the Federal NOL carryforwards will begin to expire in 2021. The latest date available for a portion of the Federal NOL carryforwards to be utilized to offset future income is 2035.
| 11. | Security Deposits |
Pursuant to Onvia’s lease for its current corporate office space, Onvia has established a stand by letter of credit as security to the lease in the amount of $150,000. The letter of credit will be returned at lease termination in April 2021, or earlier, subject to certain office lease conditions. As of September 30, 2017, the stand by letter of credit is secured by a security deposit of $150,000 and included within other long-term assets on the unaudited Condensed Consolidated Balance Sheet.
| 12. | Subsequent Events |
Merger Agreement
On October 4, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Parent and Purchaser, providing for the acquisition of the Company by Parent in an all-cash transaction, consisting of a tender offer (the “Offer”), followed by a back-end merger of Purchaser with and into the Company (the “Merger” and, together with the Offer and the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent is the sole stockholder of Deltek, which has guaranteed all of Parent’s and Purchaser’s obligations under the Merger Agreement.
On October 19, 2017, and pursuant to the terms of the Merger Agreement, Purchaser commenced the Offer for all of the Company’s outstanding shares of common stock at a purchase price of $9.00 per share net to the seller in cash (the “Offer Price”), without interest and subject to any withholding taxes. The consummation of the Offer is subject to customary closing conditions, including (1) shares of common stock having been validly tendered and not properly withdrawn that represent, together with the shares of common stock then owned by Purchaser and its subsidiaries (if any), at least one more share than half of the then outstanding shares of common stock, (2) the absence of any law, injunction, judgment or other legal restraint that prohibits the consummation of the Offer or the Merger, (3) the absence of any legal proceeding by and governmental body having authority over Parent, Purchaser or the Company challenging or seeking to restrain or prohibit the consummation of the Offer or the Merger, (4) the accuracy of the Company’s representations and warranties contained in the Merger Agreement (generally subject to Material Adverse Effect (as defined in the Merger Agreement) and materiality qualifiers), (5) the Company’s performance of its obligations, agreements and covenants under the Merger Agreement in all material respects, (6) the absence, since the date of the Merger Agreement, of a Material Adverse Effect, and (7) the Merger Agreement not having been validly terminated in accordance with its terms.
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Following the consummation of the Offer, and subject to the satisfaction or waiver of certain customary conditions set forth in the Merger Agreement, the Merger will be effected under Delaware law without a meeting or vote of the Company’s stockholders (the “Effective Time”). At the Effective Time, each share of common stock issued and outstanding immediately prior to the Effective Time (other than shares (1) held by the Company (including as treasury stock), (2) held by Parent, Purchaser, or any other wholly owned subsidiary of Parent, including any shares acquired by Purchaser in the Offer or (3) owned by any stockholder who is entitled to demand and properly demands the appraisal of such shares) will be automatically cancelled and converted into the right to receive the Offer Price, without interest and subject to any withholding taxes. After the closing of the Merger, the Company will be a wholly owned subsidiary of Parent and will cease to be a publicly-traded company.
As of the Effective Time (1) each outstanding Company stock option, whether or not then vested, will be cancelled in exchange for the right to receive an amount in cash, without interest and subject to any withholding taxes, equal to the excess, if any, of the Merger Consideration (as defined in the Merger Agreement) over the per share exercise price applicable to such Company stock option, multiplied by the total number of shares subject to such Company stock option, and (2) each outstanding restricted stock unit (“RSU”) award of the Company shall be cancelled in exchange for the right to receive an amount in cash, without interest and subject to any withholding taxes, equal to (a) the Merger Consideration multiplied by (b) the total number of shares of Common Stock subject to the RSU award.
Transaction Litigation
For information regarding legal proceedings related to the Transactions, see Note 9 under the subsection titled “Legal Proceedings” in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
In addition to the historical information contained herein, the discussion and analysis in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding expected increases in revenue, clients, contracts and contract value, cash flow, profitability and stockholder value. When used in this discussion, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “plans,” “estimates,” “predicts,” “potential,” “continue,” “intends”, “indicates” or the negative of these and similar expressions are intended to identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not a forward-looking statement. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and are subject to risks and uncertainties that could cause actual results to differ materially from those expected or implied by these forward-looking statements.
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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the factors described under “Risk Factors”, “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as applicable, in this report and in our 2016 Annual Report on Form 10-K for the year ended December 31, 2016. Except as required by law, Onvia undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof. Readers are urged, however, to review the factors and risks described in reports Onvia files from time to time with the Securities and Exchange Commission. The following discussion should also be read in conjunction with the Condensed unaudited Consolidated Financial Statements and accompanying Notes thereto included in this report.
In this report, the words “we,” “our,” “us,” “Onvia,” or the “Company” refer to Onvia, Inc.
Company Overview
At Onvia, we believe there is a better way for government agencies and businesses to work together. The Business to Government, or B2G, marketplace is one of the largest, most unstructured and fragmented markets in the world. We believe that equipping this market with data and technology will build trusted connections between businesses and governments. These connections should make the B2G market more productive and efficient. By resolving the friction in this vital, complex, multi-trillion dollar marketplace, we can create mutual value for private and public sectors, taxpayers and society at large.
Onvia is a leading sales intelligence and acceleration company at the core of B2G marketplace. Over the last 17 years Onvia has developed domain expertise and advanced technologies to curate data on millions of exchanged contracts, agencies and decision makers, vendors and channels, projects and investment plans, awards records and market trends. The Onvia core platform, Onvia 8, applies advanced data science and search technologies to transform unstructured government contracting data into meaningful commerce intelligence for buyers and sellers. Businesses leverage our platform to increase their sales pipeline, pursue opportunities and make strategic decisions. Government agencies employ the DemandStar and Exchange portions of the platform to improve process transparency and efficiency, identify potential suppliers, and to meet their fiduciary responsibilities to their constituents.
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”.
The Onvia platform provides the most comprehensive coverage of agencies and their procurement activity, with a goal of covering 95% of published dollar spending. The platform leverages Onvia’s robust database of proprietary public sector procurement information which includes comprehensive historical and real-time information on procurement activities unavailable elsewhere in the marketplace. We provide access to over 5 million procurement-related records connected to over 400,000 companies from across approximately 82,000 procurement entities nationwide. These records are standardized, formatted and classified within our database each day. We harvest data on a daily basis from thousands of agencies and sources, processing millions of records every year. This enables us to typically publish 90% of all collected government solicitations within 24 hours of issuance. Opportunities are curated using state-of-the-art algorithms and machine tagging, which makes our contracting data extremely actionable and industry-relevant. Onvia helps businesses discover more relevant opportunities to fill their sales pipelines and receive earlier notice of potential contracts. Agencies can use this data to make their procurement processes more efficient.
Onvia’s curation process makes analyzing millions of records easy. Today, other data providers typically use existing agency codes and keyword searches to identify relevant content. Agency contracts usually include many different deliverables, and using a single code or keyword may be inaccurate, return irrelevant results or miss critical projects. Onvia has developed a proprietary vocabulary, or “ontology” to simplify the search process and improve the identification of projects. This ontology summarizes tens of thousands of synonyms and terms used by governments into a few thousand key industry terms. Onvia’s curation process uses natural language processing to determine the essence of a project and consistently categorizes the opportunity using this taxonomy. Searching Onvia’s database using our ontology returns targeted results. Our ontology continues to improve every day. We review thousands of projects a day and use machine learning to identify and add new terms and language to our ontology, which further improves the accuracy and relevance of search results. Users of the Onvia platform can focus on value added activities such as pipeline creation and pursuit strategies, instead of sifting through hundreds of irrelevant records every day.
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We have a diverse client base from large Fortune 500 companies to small businesses that have been Onvia clients for many years. Onvia’s strategic target client has a long-term strategic interest in the public sector with a primary focus on the B2G market. As companies expand geographically, their market becomes less transparent and they have a greater need for B2G information. Our target prospects do business on a regional or national level.
Most of Onvia’s revenues are generated from sales to companies that leverage our information for their own internal use, and to businesses that license our content for redistribution.
Recent Events
Subsequent Events
| · | On October 4, 2017, the Company entered into the Merger Agreement providing for the acquisition of the Company by Parent in an all cash transaction, consisting of a tender offer, followed by a back-end merger of Purchaser with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. See Note 12: Subsequent Events in our Notes to Consolidated Financial Statements for additional information. |
| · | On October 19, 2017, and pursuant to the terms of the Merger Agreement, Parent caused Purchaser to commence the Offer for all of the Company’s outstanding shares of common stock at the Offer Price. |
We measure our clients, excluding the self-serve ecommerce leads solution transactions, using the following key metrics:
Annual Contract Value (“ACV”)
ACV represents the annualized aggregate revenue value of all subscription contracts as of the end of the quarter. ACV is driven by annual contract value per client and the number of clients. Most of Onvia’s revenues are generated from subscription contracts, which are typically prepaid and have a minimum term of one year, with revenues recognized ratably over the term of the subscription. Onvia also receives revenue from multi-year content distribution partnerships, stand-alone management reports, document download services, and list rental services, which are not included in the calculation of ACV. Content license contracts are excluded from ACV. ACV excludes subscribers to the self-serve leads solution.
Total ACV increased 1% to $23.1 million in the third quarter of 2017 from $22.9 million for the same period one year ago. Growth rate in ACV can fluctuate from year to year based on timing in the amount of ACV available for renewal in addition to the mix of tenured and first year clients expiring in each period as tenured clients tend to renew at a higher rate than first year clients.
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Number of Clients
Number of clients represents the number of individual businesses subscribing to our solutions.
At of the end of the third quarter of 2017, our total client base decreased 4% to 2,795 clients compared to 2,920 clients as of the end of the same period one year ago.
Annual Contract Value per Client (“ACVC”)
ACVC is the ACV divided by the number of clients and indicates the average annual value of each of our subscriptions.
Total ACVC increased 6% to $8,274 in the third quarter of 2017 compared to $7,824 in the same period one year ago. Growth in our overall ACVC demonstrates that an increasing portion of our total client base consists of clients who are purchasing our forward-looking intelligence and acceleration solution, not just lead solutions.
Dollar Retention
Dollar retention measures the dollars renewed on the available base of expiring contracts over the preceding twelve months. Dollar retention is calculated on a percentage basis by dividing the contract value of subscription contracts renewed, including the value of contract upgrades, during the most recent twelve-month period by the total value of subscription contracts expiring over the same period. Dollar retention measures the percentage of dollars retained from the population of expiring contracts over a twelve month period.
In the twelve months, ended September 30, 2017, dollar retention was 90% compared to 88% in the twelve months ended September 30, 2016. Dollar retention can fluctuate from period to period due to the client mix (first year and tenured clients) expiring in each period, list price achievement and contract expansions in the corresponding periods. Dollar retention, in conjunction with ACV, provides insight in to our subscription retention rate and ability to generate future subscription revenue.
Adjusted EBITDA
Adjusted EBITDA is not a financial measure calculated and presented in accordance with GAAP and should not be considered as an alternative to net income, operating income or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of the company’s liquidity. Onvia defines Adjusted EBITDA as net income/(loss) before interest expense and other non-cash financing costs; other income; taxes; depreciation; amortization; and non-cash stock-based compensation. Other companies (including Onvia’s competitors) may define Adjusted EBITDA differently. Onvia presents Adjusted EBITDA because it believes Adjusted EBITDA to be an important supplemental measure of performance that is commonly used by securities analysts, investors and other interested parties in the evaluation of companies in similar industries and size. Management also uses this information internally for forecasting and budgeting. It may not be indicative of the historical operating results of Onvia nor is it intended to be predictive of potential future results. Investors should not consider Adjusted EBITDA in isolation or as a substitute for analysis of results as reported under GAAP.
The following table provides a reconciliation of GAAP Net Loss to Adjusted EBITDA for the periods indicated (in thousands of dollars):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
| GAAP Net loss | $ | (484 | ) | $ | (492 | ) | $ | (2,058 | ) | $ | (598 | ) | ||||
| Reconciling items from GAAP to adjusted EBITDA | ||||||||||||||||
| Interest and other income, net | (26 | ) | (13 | ) | (47 | ) | (28 | ) | ||||||||
| Depreciation and amortization | 809 | 737 | 2,341 | 1,754 | ||||||||||||
| Amortization of stock-based compensation | 152 | 49 | 480 | 153 | ||||||||||||
| Adjusted EBITDA | $ | 451 | $ | 281 | $ | 716 | $ | 1,281 | ||||||||
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Seasonality
Our client acquisition business is subject to some seasonal fluctuations. The second and third quarters are generally slower than the first and fourth quarters for client acquisition and overall cash flow. Infrastructure is our single largest market and these prospects are typically engaged on projects during the spring and summer months, rather than prospecting for new work, which causes new client acquisition to decline compared to the first and fourth quarters in the year. For this reason, comparisons of the performance of our business quarter to consecutive quarter may not provide the most relevant information, and so in addition to sequential quarter comparisons, 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.
Results of Operations for the Three and Nine Months Ended September 30, 2017 Compared to the Three and Nine Months Ended September 30, 2016
Revenue and Cost of Revenue
The following table provides a breakdown of revenue for the periods presented as a percentage of total revenue (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | $ | 6,156 | $ | 6,173 | $ | 18,389 | $ | 18,255 | ||||||||
| Revenue: | ||||||||||||||||
| Subscription | 96 | % | 93 | % | 96 | % | 93 | % | ||||||||
| Content license | 2 | % | 5 | % | 2 | % | 6 | % | ||||||||
| Management information reports | 1 | % | 1 | % | 1 | % | 0 | % | ||||||||
| Other | 1 | % | 1 | % | 1 | % | 1 | % | ||||||||
| Total revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Subscription revenue for the three and nine months ended September 30, 2017 grew 3% to $5.9 million and 5% to $17.8 million, respectively, over the same periods in 2016. The growth in subscription revenue is primarily a result of improved sales to new clients and retention of existing clients compared to the same period last year.
Total revenue for the three months ended September 30, 2017 was $6.2 million, consistent with the same period last year. Total revenue for the nine months ended September 30, 2017 was $18.4 million, up 1% compared to the same period last year. In addition to subscription revenue, total revenue includes content license and report revenue. In 2016, we were notified that our largest content license customer, representing $810,000 in annual revenue, elected not to continue with our partnership. The combination of increased subscription revenue and a decrease in content license revenue resulted in the slight revenue growth for the nine months ended September 30, 2017 when compared to the same period last year.
Cost of revenue for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands of dollars):
| Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | |||||||||||||||||||||||||||||
| 2017 | 2016 | Amount | Percent | 2017 | 2016 | Amount | Percent | |||||||||||||||||||||||||
| Total | $ | 631 | $ | 689 | $ | (58 | ) | (8 | %) | $ | 2,026 | $ | 2,195 | $ | (169 | ) | (8 | %) | ||||||||||||||
| Percentage of revenue | 10 | % | 11 | % | 11 | % | 12 | % | ||||||||||||||||||||||||
Our cost of revenue primarily represents payroll-related expenses associated with the research, capture and enhancement of data in our proprietary database and third-party content fees, and also includes credit card processing fees. The decrease compared to the same prior year periods is due to process efficiencies and other individually immaterial changes.
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Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands of dollars):
| Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | |||||||||||||||||||||||||||||
| 2017 | 2016 | Amount | Percent | 2017 | 2016 | Amount | Percent | |||||||||||||||||||||||||
| Current period expenses | $ | 2,566 | $ | 2,835 | $ | (269 | ) | (9 | %) | $ | 7,623 | $ | 8,170 | $ | (547 | ) | (7 | %) | ||||||||||||||
| Depreciation and amortization | 353 | 352 | 1 | 0 | % | 1,070 | 836 | 234 | 28 | % | ||||||||||||||||||||||
| Stock based compensation | 17 | 20 | (3 | ) | (15 | %) | 16 | 52 | (36 | ) | (69 | %) | ||||||||||||||||||||
| Total | $ | 2,936 | $ | 3,207 | $ | (271 | ) | (8 | %) | $ | 8,709 | $ | 9,058 | $ | (349 | ) | (4 | %) | ||||||||||||||
| Percentage of Revenue | 48 | % | 52 | % | 47 | % | 50 | % | ||||||||||||||||||||||||
The decrease in expenses for the comparable three and nine month periods is primarily attributable to salary savings as a result of our sales force reorganization. This decrease in expenses was partially offset by an increase in marketing expenses related to the “Onvia On Tour” roadshow and an increase in amortization expense primarily related to the portion of accelerated capitalized software amortization allocated to sales and marketing.
Technology and Development
Technology and development expenses for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands of dollars):
| Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | |||||||||||||||||||||||||||||
| 2017 | 2016 | Amount | Percent | 2017 | 2016 | Amount | Percent | |||||||||||||||||||||||||
| Current period expenses | $ | 1,340 | $ | 1,407 | $ | (67 | ) | (5 | %) | $ | 4,402 | $ | 3,855 | $ | 547 | 14 | % | |||||||||||||||
| Depreciation and amortization | 372 | 316 | 56 | 18 | % | 1,042 | 746 | 296 | 40 | % | ||||||||||||||||||||||
| Stock based compensation | 19 | 9 | 10 | 111 | % | 40 | 35 | 5 | 14 | % | ||||||||||||||||||||||
| Total | $ | 1,731 | $ | 1,732 | $ | (1 | ) | (0 | %) | $ | 5,484 | $ | 4,636 | $ | 848 | 18 | % | |||||||||||||||
| Percentage of Revenue | 28 | % | 28 | % | 30 | % | 25 | % | ||||||||||||||||||||||||
The consistent expenses for the comparable three month periods is mainly attributable to an increase in amortization expense primarily related to the accelerated capitalized software amortization allocated to technology and development, offset by various immaterial decreases.
The increase in expenses for the comparable nine month periods is primarily attributable to an increase in product and development headcount to bring our development organization onshore to support the development of Onvia 8. In addition, there was an increase in amortization expense primarily related to the accelerated capitalized software amortization allocated to technology and development.
General and Administrative
General and administrative expenses for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands of dollars):
| Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | |||||||||||||||||||||||||||||
| 2017 | 2016 | Amount | Percent | 2017 | 2016 | Amount | Percent | |||||||||||||||||||||||||
| Current period expenses | $ | 1,168 | $ | 960 | $ | 208 | 22 | % | $ | 3,622 | $ | 2,754 | $ | 868 | 32 | % | ||||||||||||||||
| Depreciation and amortization | 84 | 69 | 15 | 21 | % | 229 | 172 | 57 | 33 | % | ||||||||||||||||||||||
| Stock based compensation | 116 | 21 | 95 | 452 | % | 424 | 66 | 358 | 542 | % | ||||||||||||||||||||||
| Total | $ | 1,368 | $ | 1,050 | $ | 318 | 30 | % | $ | 4,275 | $ | 2,992 | $ | 1,283 | 43 | % | ||||||||||||||||
| Percentage of Revenue | 22 | % | 17 | % | 23 | % | 16 | % | ||||||||||||||||||||||||
The increase in expenses for the comparable three month periods is primarily attributable to an increase in professional service expenses related to the pending acquisition of Onvia along with an increase in stock based compensation expense related to Onvia’s CEO. See Note 12: Subsequent Events in our Notes to Consolidated Financial Statements for additional information on the pending acquisition of Onvia.
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In addition to increased professional service expenses and stock based compensation expense, the comparable nine month periods also included an increase in CEO transition related expenses, performance based management incentives which were estimated and accrued, and costs related to the implementation of a new enterprise resource planning (“ERP”) system . No expenses related to management based incentives or ERP implementation were incurred in 2016.
Interest and Other Income, Net
Net interest and other income was $26,000 and $47,000 for the three and nine month periods ended September 30, 2017, compared to $13,000 and $28,000 for the same periods one year ago.
Net Income/(Loss) and Net Income/(Loss) per Share
We reported net losses of $484,000 and $2.1 million for the three and nine month periods ended September 30, 2017, compared to net losses of $492,000 and $598,000 for the same periods one year ago. On a diluted per share basis, net losses were $0.07 and $0.28 for the three and nine month periods ended September 30, 2017, compared to net losses of $0.07 and $0.08 for the comparable periods ended September 30, 2016, respectively.
Critical Accounting Policies and Management Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including, but not limited to, those affecting the fair value of stock-based compensation, allowance for doubtful accounts, capitalization of costs for internally developed software, recoverability of long-lived assets, including internally developed software, and the valuation allowance for net deferred tax assets. The brief discussion below is intended to highlight some of the judgments and uncertainties that can impact the application of these policies and the specific dollar amounts reported on our financial statements.
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 our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates. Many of our estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016 and elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise required by law, we do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances.
For a detailed discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2016.
There have been no material changes in the application of our critical accounting policies and estimates subsequent to that report.
See Note 1 to the accompanying unaudited Consolidated Financial Statements for the issuance of recent accounting pronouncements.
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Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents and available for sale investments. Our combined cash and cash equivalents and available for sale investments were $5 million at September 30, 2017. At September 30, 2017, we held $4.3 million in available for sale investments, primarily in FDIC insured or U.S. government backed securities. In 2016 we were notified that our largest content license customer representing $810,000 in annual revenue elected not to continue with our partnership. This will have a negative impact on bookings, revenue, and cash flow in 2017.
If the pending acquisition of Onvia is not consummated, we may require additional equity or debt financing to meet future working capital needs, particularly if we engage in other merger or acquisition transactions or our overall operating plans change. This may have a dilutive effect on existing stockholders or may include securities that have rights, preferences or privileges senior to those of the rights of our common stock. We cannot make assurances that if additional financing is required, it will be available, or that such financing can be obtained on satisfactory terms.
From December 31, 2016 to September 30, 2017, cash, cash equivalents, and available for sale investments decreased by $2.1 million primarily as a result of costs associated with our CEO transition, company reorganization, and variability in results due to the changes in our sales force.
Operating Activities
Net cash provided by operating activities was $120,000 for the nine months ended September 30, 2017 compared to $2.5 million for the same period in 2016. The decrease is primarily due to increased cash outflows resulting from the costs associated with our CEO transition, company reorganization, and recruiting costs to bring our development organization onshore to support the development of Onvia 8.
Investing Activities
Net cash used in investing activities was $1.9 million for the nine months ended September 30, 2017, consistent with the same period in 2016. Increased additions to internal use software and sale of investments were offset by decreased purchases of investments and maturities of investments.
Financing Activities
Net cash provided by financing activities was $267,000 for the nine months ended September 30, 2017, compared to $20,000 for the same period in the prior year. The increase is due to the CEO purchase of 25,000 shares of common stock as part of the CEO compensation package in the amount of $111,000 along with an increase of $136,000 in proceeds from stock options exercises and purchases under employee stock purchase plan.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The disclosures under this Item are not required for smaller reporting companies.
Item 4. Controls and Procedures
The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act")), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)) as of September 30, 2017. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2017.
We made no change in our internal control over financial reporting during the fiscal quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to refine our internal control over financial reporting on an ongoing basis, as we deem appropriate with a view towards continuous improvement.
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For more information regarding legal proceedings in which we are involved, see Note 9 under the subsection titled “Legal Proceedings” in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other than the risk factor discussed below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016.
On October 4, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Project Diamond Intermediate Holdings Corp., a Delaware corporation (“Parent”), and Project Olympus Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Purchaser”), providing for the acquisition of the Company by Parent in an all-cash transaction, consisting of a tender offer (the “Offer”), followed by a back-end merger of Purchaser with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent is the sole stockholder of Deltek, Inc., a Delaware corporation (“Deltek”), which has guaranteed all of Parent’s and Purchaser’s obligations under the Merger Agreement. The Offer and Merger are subject to various risks and uncertainties, including the following:
| · | risks that the proposed transactions, including the Offer and the Merger, may not be completed in a timely manner or at all; |
| · | uncertainties as to the percentage of our stockholders that will support the proposed transactions and tender their shares in the Offer; |
| · | the possibility that any or all of the various conditions to the consummation of the proposed transactions may not be satisfied or waived; |
| · | the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (such as the occurrence of a material adverse effect), including in circumstances that would require us to pay a termination fee or other expenses; |
| · | the effect of the announcement or pendency of the proposed transactions on our ability to retain and hire key personnel, our ability to maintain relationships with our customers and others with whom we do business, or otherwise on our operating results and business generally; |
| · | risks related to diverting management’s attention from our ongoing and future business operations; and |
| · | the risk that stockholder litigation in connection with the proposed transactions may result in significant costs of defense, indemnification and liability. |
If the Offer and the Merger are not consummated for any reason, our stockholders will not receive the consideration that Parent has agreed to pay upon the consummation of the Merger, and the price of our common stock may decline to the extent that its current market price reflects an assumption that the Merger will be consummated. Such decline could be significant.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
None.
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++ Furnished herewith
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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/ Russell Mann | ||
| Russell Mann | |||
| President and Chief Executive Officer | |||
| By: | /s/ Cameron S. Way | ||
| Cameron S. Way | |||
| Chief Financial Officer and Principal Accounting Officer | |||
Date: November 14, 2017
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