|• FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2012
For the transition period from _____ to _____
Commission file number 001-35164
(Exact name of registrant as specified in its charter)
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, 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: 8,523,524 shares outstanding as of July 31, 2012.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
(1) Derived from audited financial statements included in the 2011 Annual Report.
See accompanying notes to the unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations and Comprehensive Income
See accompanying notes to the unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
See accompanying notes to the unaudited condensed consolidated financial statements.
Notes To Condensed Consolidated Financial Statements (Unaudited)
1. Accounting Policies
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 and six month periods ended June 30, 2012 or 2011. 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, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“2011 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, recoverability of long-lived assets, idle lease accrual 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.
New Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2012, as compared to the recent accounting pronouncements described in our 2011 Annual Report, that are of significance, or potential significance to us.
Recently Adopted Accounting Guidance
On January 1, 2012, we adopted guidance issued by the Financial Accounting Standards Board, or FASB, on accounting and disclosure requirements related to fair value measurements. The guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. Adoption of this new guidance did not have a material impact on our financial statements.
2. Revenue Recognition
Onvia’s revenues are primarily generated from client subscriptions, content licenses and management reports. Onvia’s subscriptions are generally annual contracts; however, the Company also offers extended multi-year contracts to its subscription clients, and content licenses are generally multi-year agreements. Subscription fees and content licenses are recognized ratably over the term of the agreement. Onvia also generates revenue from fees charged for management reports, document download services, and list rental services; revenue from these types of services is recognized upon delivery, or, if report refreshes are included, ratably over the service period.
Onvia’s subscription services and management reports are also sold together as a bundled offering. The Company allocates revenue from these bundled sales ratably between the subscription services and the management reports based on established list prices for those offerings.
Unearned revenue consists of payments received for prepaid subscriptions, as well as the invoiced, but unpaid, portion of subscriptions and content licenses whose terms extend into periods beyond the balance sheet date.
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):
Stock-based compensation for the six months of 2012 includes the impact of options forfeited upon the departure of our Vice President of Sales and Vice President of Content, which resulted in the reversal of approximately $62,000 in previously recognized expenses on forfeited 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:
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 six months ended June 30, 2012 and 2011.
Stock Option Activity
The following table summarizes stock option activity under Onvia’s equity incentive plan for the three and six months ended June 30, 2012:
(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 $3.97 at June 30, 2012 for options that were in-the-money at June 30, 2012. The number of in-the-money options outstanding and exercisable at June 30, 2012 was 555,010 and 183,972, respectively.
The weighted average grant date fair value of options granted during the three and six month periods ended June 30, 2012 was $1.82 and $1.32 per option, respectively, and $1.83 and $2.09 per option, respectively, for the same periods in 2011.
As of June 30, 2012, there was approximately $332,000 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 1.76 years.
During the six months ended June 30, 2012, approximately $59,000 was received for exercises of stock options and purchases under the employee stock purchase plan, compared to $111,000 for the same periods of 2011.
Restricted Stock Units
The following table summarizes changes in non-vested restricted stock units (“RSUs”) for the six months ended June 30, 2012:
RSUs granted during the first quarter of 2011 were valued on the grant date based upon the fair value of the underlying common stock on the grant date. Prior to the first quarter of 2011 no RSUs had been granted. The value of the RSUs granted is recognized as compensation expense over the applicable vesting period. The RSUs granted during the first quarter of 2011 have a three year vesting period and were subject to accelerated vesting based upon achievement of 2011 financial targets. The 2011 financial targets were not achieved and therefore these RSU’s will fully vest over three years, on December 31, 2013. As of June 30, 2012, there was $29,470 of total unrecognized compensation cost related to non-vested RSU’s and remaining unrecognized compensation cost associated with these RSUs is expected to be recognized over a weighted average period of 1.5 years.
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 six months ended June 30, 2012 and 2011 (in thousands, except per share data):
For the three months ended June 30, 2012, approximately 507,000 options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock of $3.85, were not included in the calculation because the effect would have been anti-dilutive. For the six months ended June 30, 2012, approximately 530,000 options to purchase shares of common stock were not included in the calculation because the effect would have been anti-dilutive.
For the three months ended June 30, 2011, 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 $4.06, were not included in the calculation because the effect would have been anti-dilutive. For the six months ended June 30, 2011, approximately 1.1 million options to purchase shares of common stock were not included in the calculation because the effect would have been anti-dilutive.
5. Short-Term Investments
Onvia classifies short-term investments in debt securities as available-for-sale at June 30, 2012, stated at fair value as summarized in the following table (in thousands):
(1) We evaluated certificates of deposits held as of June 30, 2012 and concluded that they meet the definition of securities as available for sale.
Onvia accounts for short-term and long-term investments 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, short-term investments classified as available-for-sale at June 30, 2012, stated at fair value (in thousands):
There were no transfers in or out of Level 1 or Level 2 investments during the first six months of 2012, and there was no activity in Level 3 fair value measurements during that period.
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
7. Property and Equipment
Property and equipment to be held and used consist of the following (in thousands):
During the first six months of 2012, Onvia disposed of fully depreciated computer equipment valued at $207,000.
Depreciation expense was $195,000 and $378,000 for the three and six months ended June 30, 2012, respectively, compared to $175,000 and $364,000, respectively, for the same periods of 2011.
8. Internal Use Software
Onvia capitalizes qualifying computer software costs incurred during the “application development stage” and other costs as permitted by GAAP. 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.
The following table presents a roll-forward of capitalized internal use software for the six months ended June 30, 2012 (in thousands):
9. Accrued Expenses
Accrued expenses consist of the following (in thousands):
Other current liabilities consist of the following (in thousands):
10. Commitments and Contingencies
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.
As of June 30, 2012, the remaining future minimum lease payments required on non-cancellable operating leases are as follows for the years ending December 31 (in thousands):
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 2012 to 2014. Future required payments under these non-cancellable agreements are as follows for the years ending December 31 (in thousands):
Section 16(b) Litigation
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 IPOs. 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 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.
On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including Onvia's) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit reversed and remanded the District Court’s decision on the underwriters’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations.
On December 16, 2010, underwriters filed a petition for panel rehearing and petition for rehearing en banc and Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc.
On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including Onvia's and other moving issuers) is stayed for ninety days pending Appellant’s filing of a petition for writ of certiorari in the United States Supreme Court.
On June 27, 2011, the United States Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ position relating to the statute of limitations issue. Oral argument was heard on November 29, 2011. On March 26, 2012, the Supreme Court vacated the Ninth Circuit’s holding that her claims were not time barred, and remanded the cases to the District Court.
On April 5, 2011, Simmonds filed a Petition for Writ of Certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the adequacy of the pre-suit demand. On April 15, 2011, underwriter defendants filed a Petition for Writ of Certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the statute of limitations issue. On June 27, 2011, the Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ petition relating to the statute of limitations issue. Oral arguments on underwriters’ petition were heard on November 29, 2011. On March 26, 2012, the Supreme Court vacated the Ninth Circuit's holding that petitioner's claims were not time-barred, and remanded the cases to the District Court for proceedings consistent with the Supreme Court’s opinion. On June 7, 2012, the mandate of the Ninth Circuit was formally entered. On June 11, 2012, Plaintiffs voluntarily dismissed the case with prejudice as to the adequacy-of-the-pre-suit demand issue, and without prejudice as to all other issues.
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.
11. Provision for Income Taxes
Onvia has recorded a valuation allowance for the majority of its net deferred tax assets because it has a history of net operating losses (“NOLs”). As of December 31, 2011, the Company has recognized net deferred tax benefits in the amount of $616,000. No additional deferred tax benefits were recognized in the first two quarters of 2012. 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 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 June 30, 2012, Onvia had tax NOL carryforwards of $73.2 million available to offset future taxable income. These NOLs expire in dates ranging from 2021 through 2029.
12. 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. As of June 30, 2012, the outstanding security deposit balance was $90,000.
13. Subsequent Events
In January 2012, Symphony Technology Group, LLC a private equity fund, which, together with its affiliates STG UGP, LLC, STG III GP, L.P., STG III-A, L.P. and Romesh Wadhwani (collectively, the “Symphony Group”), owns 14.63% of Onvia’s common stock, made a non-binding, conditional proposal to acquire Onvia. Onvia’s Board determined that the Symphony Group’s acquisition proposal was inadequate and not in the best interests of Onvia and its stockholders. Onvia filed its preliminary proxy statement on April 6, 2012 and on April 10, 2012, the Symphony Group subsequently launched a proxy contest in an attempt to have three of its own director nominees elected to the Onvia Board. At the Annual Meeting of Stockholders held on May 31, 2012, the Company’s stockholders voted to re-elect Onvia’s three director nominees, Jeffrey C. Ballowe, Robert G. Brown and Michael E.S. Frankel, to Onvia’s Board of Directors. Onvia incurred $95,000 in non-recurring expenses to address the proxy contest early in the second quarter of 2012.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 clients, contracts and contract value, cash flow, profitability and stockholder value and expected stabilization of ACV. 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. 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 2011 Annual Report. 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 or to reflect the occurrence of anticipated events. 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 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.
Onvia is a leading provider of business information and research solutions that help companies plan, market and sell to government agencies throughout the United States, or U.S. Onvia’s business solution provides clients online access to a proprietary database of government procurement opportunities across the federal, state, local, and education sectors. The business intelligence derived from our database allows clients to identify new market opportunities, analyze market trends, and obtain insights about their competitors and channel partners. We believe our business solutions provide clients with a distinct competitive advantage, increased revenue opportunities, and strategic insight into the public sector market.
Since 2000, Onvia’s strategy was to provide actionable and timely public sector sales leads to companies of all sizes. For a number of years, Onvia delivered hard to find, actionable content at a very reasonable price. This business model was transactional in nature and as the client base grew, the business became difficult to scale. The broad target market and the generic value proposition of sales leads did not maximize the pricing power of a high value, high margin information business. Financial results became unpredictable and unsustainable under this model.
Between 2008 and 2010, Onvia invested significantly in upgrading its technology infrastructure and built the foundation for a robust proprietary database. In 2011, Onvia began to transform the business model to leverage this investment and deliver the high, differentiated value of a rich public sector procurement database.
The powerful public procurement database includes proprietary content and analytical tools that deliver essential insight and intelligence required by the market to effectively do business with state and local governments. Onvia now targets a well-defined market of companies that have a long term strategic interest in the public sector, and the government market is a core part of their business. All three of our sales channels, Small/Medium Business, Enterprise, and Channel, focus on this market. The high margins of this model provide the flexibility to price products based upon the value that we create for clients, not based upon the cost of fulfillment.
We developed a three-year product roadmap in 2011 to realize this vision. Last year, we began to move beyond content aggregation to content normalization and enhancement. We achieved the first product milestone in February 2012 with the launch of “Onvia 5,” which improved the usability and “findability” features of the database. In early July 2012, Onvia launched a new solution, Term Contract Center, to provide our clients maximum visibility into these opportunities, efficiently identify the ones they should pursue, and get the award data and competitor and partner information they need to win more government business. We will continue to normalize key data types to deliver more relevant search results to our clients. This normalized database of public sector procurement information will represent the foundation for the series of strategic analytical tools that we plan to launch in 2013.
Onvia’s solution includes access to the Onvia Online Database, Spending Forecast Center, Term Contract Center, and the Onvia Guide. These services are sometimes bundled with management information reports in multiple elements arrangements. Refer to the discussions below under “Products and Services” for a description of these products and services, and under “Critical Accounting Policies and Management Estimates” for a discussion of how sales price is allocated between the elements in a multiple elements arrangement and how revenue is recognized on each element. Subscriptions to the Onvia Online Database 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 the number of users accessing the database.
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. Revenue from businesses who license our content for resale to their own clients is classified as content license revenue. 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.
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.
Selling to the public sector is highly competitive and insight into this market is extremely valuable. The variety, volume and unstructured nature of public sector information make it difficult for businesses to analyze and evaluate the market for their goods and services. The agency reporting process provides short term visibility into specific government contracting information and events, but does not provide businesses the on-demand intelligence or context required to guide strategic decisions. There is a strong need for a single source of procurement information, which businesses can use to evaluate opportunities using standardized data and interpretive analysis.
The procurement capture process is complicated and comprised of multiple elements and information types. Businesses must evaluate a variety of different sources of procurement information and activities to understand their individual markets and to make strategic decisions. These data types include:
Individually, these sources rarely provide the context necessary to make informed decisions. All of these sources should be reviewed collectively to qualify an opportunity, including research on the agency, the decision maker, historical purchasing practices and pricing, and incumbent vendor relationships to name a few. For a comprehensive understanding of the public sector procurement market for specific goods and services, this in depth research must be ongoing and continuous. This research is extremely inefficient and in many cases, impossible.
A database of standardized public sector procurement information is necessary to provide a comprehensive view of specific opportunities and of the overall marketplace. Combined with the right analytical tools, this database can provide the essential insight and intelligence required to prequalify opportunities, improve win rates, increase contract size and support a public sector strategic plan. We believe that we have the historical content and infrastructure to create this proprietary database over the next 24 months.
Onvia’s Comprehensive Online Database
Onvia’s database of proprietary public sector information has been built over more than eleven years, and includes comprehensive, historical and real-time information on public sector activities unavailable elsewhere in the marketplace. Our database provides information on over 5 million procurement-related records connected to over 378,000 companies from across approximately 78,000 government agencies and purchasing offices nationwide. Thousands of records are standardized, added, formatted and classified within our database each day.
Information related to each stage of the procurement cycle is linked together to provide a comprehensive view of each project including:
The database can be analyzed using many different search filters including:
Our database includes many important data fields to further qualify opportunities as available, including:
Our comprehensive government procurement database contains much of the relevant decision making information required by businesses on both a historical and real-time basis. Through our solutions, we provide the market intelligence a business needs to design and manage a public sector strategy, build relationships with agency buyers and private sector contractors, and target more qualified revenue opportunities. The confluence of these activities should help clients create more winning proposals, increase close rates, increase contract size and, ultimately, increase public sector revenues.
Products and Services
Onvia’s business solutions are tailored to the business objectives of each client, and support both strategic planning and sales and marketing activities. We offer our clients specialized tools to access, analyze and evaluate our information. Over time, we expect to continue to enhance our existing information, marketing and analytic services and develop additional services that make use of our comprehensive database to meet the needs of our existing clients as well as potential new categories of clients. Our key offerings are described below.
Onvia Online Database - Onvia’s flagship business solution is the Onvia Online Database which provides rich search functionality on our proprietary database of local, state and federal government agency purchasing information. Our database is organized around two key hubs of information, Project Center and Agency Center.
Project Center provides our clients with a complete view of individual public sector procurement projects at each stage of the purchasing cycle. Project Center makes it easier for clients to identify and qualify opportunities to sell their goods and services into the public sector. Project Center should help our clients:
Agency Center provides users with agencies’ procurement histories, current projects, and spending forecasts in a single application. Agency Center helps businesses identify and qualify government agencies, agency buyers and procurement opportunities within their target markets. By developing agency relationships, users can identify government purchases that never go out to formal bid. Four out of five government purchases never go out to formal bid, because they fall below agencies’ purchasing thresholds. Agency Center is included with standard access to the Onvia Online Database.
Spending Forecast Center – In June 2010, Onvia launched Spending Forecast Center, to provide insight into budgets and capital improvement plans of agencies within the top 366 Metropolitan Statistical Areas in the United States. Spending Forecast Center provides valuable, strategic information on future capital spending used by larger corporations to execute their public sector 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. These spending forecasts generally include the name of the initiative or type of expense, project timing, the funding source and the budget amount. Businesses can use spending forecasts to inform business development, evaluate and target markets, as advance notices of projects, and for short to mid-term business planning. We collect plans from 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.
Term Contract Center - In early July Onvia launched a new solution, Term Contract Center, to help Onvia’s clients take advantage of the growing trend by government agencies to make purchases using term contracts. Term Contract Center ensures that the clients have maximum visibility into these opportunities, can efficiently identify the ones they should pursue, and can get the award data and competitor and partner information they need to win more government business. In addition, we significantly increased our coverage and collection of term contracts and awards to provide clients with a single source they can rely on to grow revenues.
Using term contract center, our clients can:
The Onvia Guide – The Onvia Guide automatically tracks the procurement activity of the agencies, industries and markets customized for each client. Clients receive their tailored Onvia Guide delivered to their inbox every day. Daily use of the Onvia Guide provides clients with next day notification of key events and updates within their public sector market. The Onvia Guide can be purchased separately or comes bundled with a subscription to the Onvia Online Database.
Management Reports - We also provide our clients with management reports to help target upcoming contract renewals, identify agency buyers, and inform the proposal development process. These solutions include:
Our mission is to deliver essential, actionable business intelligence that our clients rely upon to compete more effectively in the government business marketplace. We intend to achieve this mission by delivering exceptional products that offer our clients significant value in maximizing their business in the public sector market. If we are able to effectively achieve this mission, we should see increased retention rates and, ultimately, increased stockholder value. Key elements of our strategy include:
Our business solutions support the largest industry verticals, with a focus on the infrastructure verticals, which include:
Key Business Metrics
We manage the business using the following key client metrics:
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 clients 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.
ACV for the second quarter of 2012 declined by 7% to $18.6 million from $19.9 million for the same quarter of the previous year, but increased 1% compared to the first quarter of 2012. ACV stabilized because the acquisition and retention of profitable client contracts continues to improve. Future improvements in client retention rates and new client acquisitions will be additive to the contract base and will drive future revenue growth.
At the end of the second quarter of 2012, Onvia’s total client base decreased 18% to 4,200 clients from 5,100 clients in the same quarter of the previous year, and declined 2% from 4,300 clients in the first quarter of 2012. In the second quarter, we lost only 100 net clients compared to 200 clients in each of the previous two quarters. We only experienced net client losses in subscription levels less than $5,000 per year. The increase in ACVC offset the impact of lost clients on annual contract value.
ACVC for the second quarter of 2012 grew 14% to an average of $4,431 per client from an average of $3,885 per client during the same quarter of the previous year and 3% from $4,315 from the first quarter of 2012. ACVC improved, in part by targeting more strategic clients and because renewals were weighted toward strategic clients with higher contract values.
Our client acquisition business is historically subject to some seasonal fluctuations. The second and third quarters are generally slower than the first and fourth quarters for client acquisition. The construction industry is our single largest market and these prospects are typically engaged on projects during the spring and summer months, not 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. It is possible that the historical seasonality was characteristic of our previous target market which included smaller companies not strategically focused on the public sector. As we concentrate on our new target market, we may not experience the same strong historical seasonality we experienced in the past.
Results of Operations for the Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011
Revenue and Cost of Revenue
The following table provides a breakdown of revenue for the periods presented as a percentage of total revenue:
Compared to last year, second quarter revenues declined as expected by 5% from $5.8 million and represents an accelerating improvement over the first quarter negative growth rate of 11%. Our year over year revenue declined due to the planned reduction of contract value from non-strategic clients. Revenues increased by nearly 1% compared to the first quarter of 2012 due to growth in ACV in the second quarter of 2012. We expect revenue growth rates to stabilize and begin to grow in the second half of 2012.
Cost of revenue for the three and six months ended June 30, 2012 and June 30, 2011 was as follows (in thousands of dollars):
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 six month periods was primarily due to decreases of $58,000 and $88,000, respectively, in third party content costs due to the application of a more efficient data, capture and application process.
Sales and Marketing
Sales and marketing expenses for the three and six months ended June 30, 2012 and June 30, 2011 were as follows (in thousands of dollars):
The increase in expenses for the comparable three month periods was due to individually immaterial changes.
The increase in expenses for the comparable six month periods is primarily comprised of $107,000 increase in payroll-related expenses and $89,000 increase in amortization costs. These increases were partially offset by a $64,000 decrease in marketing costs. Our targeted marketing activities are more effective and less expensive than our traditional lead generation process.
Technology and Development
Technology and development expenses for the three and six months ended June 30, 2012 and June 30, 2011 were as follows (in thousands of dollars):
The increase in expenses for the comparable three month periods is primarily attributed to a $60,000 decrease in capitalized internal use software costs.
The increase in expenses for the comparable six month periods is primarily attributed to a $41,000 increase in amortization costs from the launch of new product offset by a $127,000 decrease in capitalized internal use software costs on products in development and $77,000 decrease in payroll related costs and other individually immaterial changes.
General and Administrative
General and administrative expenses for the three and six months ended June 30, 2012 and June 30, 2011 were as follows (in thousands of dollars):
The decrease in expenses for the comparable three month periods is primarily related to a $167,000 decrease in payroll related costs due to realignment of responsibilities of four employees who were included in General and Administrative expenses in the prior period and currently reported in Sales and Marketing expenses and other individually immaterial changes. General and Administrative expenses include $95,000 in non-recurring expenses incurred to address the proxy contest early in the second quarter of 2012.
The decrease in expenses for the comparable six month periods is primarily related to a $336,000 decrease in payroll related costs for the reasons described above, a $73,000 decrease in professional services costs related to the preparation of the Section 382 analysis, and other individually immaterial changes.
Interest and Other Income, Net
Net interest and other income was $8,000 and $24,000 for the three and six months ended June 30, 2012, respectively, compared to $9,000 and $20,000, respectively, for the same periods in 2011. Interest expense is immaterial for the three and six months ended June 30, 2012 and 2011.
Net Income and Net Income per Share
Net income for the three months and six months ended June 30, 2012 was $72,000 and $132,000, respectively compared to $235,000 and $628,000, respectively, for the same periods in 2011. On a diluted per share basis, net income was $0.01 for the three and six months ended June 30, 2012, compared to net income of $0.03 and $0.07 for the three and six months ended June 30, 2011.
Critical Accounting Policies and Management Estimates
Use of Estimates
The preparation of financial statements in conformity with GAAP 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, idle lease accrual, accounts receivable and allowance for doubtful accounts.
Our revenues are primarily generated from subscriptions, content licenses and management reports. Our subscriptions are generally annual contracts; however, we also offer 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, or, if report refreshes are included, ratably over the service period.
Our subscription services and management information reports are also sold together as a bundled offering. 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.
Unearned revenue consists of payments received for prepaid subscriptions, as well as the invoiced, but unpaid, portion of subscriptions and content licenses whose terms extend into periods beyond the balance sheet date.
We account for stock-based compensation by measuring 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. An impairment loss is required to 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 six months ended June 30, 2012 or 2011.
Internal Use Software
We account for the costs to develop or obtain software for internal use in accordance with GAAP, whereby we capitalize qualifying computer software costs incurred during the “application development stage.” Amortization of these costs begins once the product is ready for its intended use. These capitalized software 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.
We periodically evaluate 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 as described above under “Property and Equipment”.
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 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. A valuation allowance has been established for the majority of the net deferred tax assets as we have determined that the recognition criteria for realization have not been met. Our valuation allowance reduces our deferred tax assets to a level that is more-than-likely-than-not to be recognized. In determining the amount of the valuation allowance we consider whether it is more likely that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to be deductible. We will continue to review the estimate of future taxable income and will adjust the valuation allowance accordingly as new information becomes available.
Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to an ownership change 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 “5% stockholders” or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.
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 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.
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 $12.1 million at June 30, 2012, and our working capital was $4.3 million. At June 30, 2012 we held $8.6 million in FDIC insured or U.S. government backed short-term investments. From December 31, 2011 to June 30, 2012, our cash, cash equivalents and short-term investments increased by $580,000 for the reasons described below under operating, investing and financing activities.
As we continue to execute our turnaround plan, our sales results may not be as consistent or predictable in the near term and we may experience a decrease in sales and cash flow in the near term. However, we expect that, over the longer term, focusing on our defined target market will result in profitable new client acquisitions, 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 may utilize our current cash, cash equivalents, short-term investments and current revenues to fund operations.
If the decline in the renewal rates of non-strategic clients continues beyond our expectations, 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.
Net cash provided by operating activities was $1.3 million for the six months ended June 30, 2012, compared to $929,000 in the same period in the prior year. The increase in operating cash flow is due primarily to the decrease in unearned revenue partially offset by decrease in net income and all other cash from operations activities.
Net cash used by investing activities was $1.2 million in the six months ended June 30, 2012, compared to $6.3 million in the same period in 2011. The decrease of $5.1 million in cash used is attributable to an increase of $5.5 million in maturities and sales of investments and a reduction of $0.5 million in purchases of investments, offset by a decrease of $234,000 in additions to property and equipment and internal use software. In addition, there was partial reduction of our security deposit for the lease of our corporate headquarters.
Net cash provided by financing activities was $35,000 in the six months ended June 30, 2012, compared to $111,000 in the same period of 2011. The decrease in cash provided by financing activities is due to $52,000 reduction in proceeds from stock options exercises offset by $24,000 in principal payments on capital lease in the first quarter of 2012.
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
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 and 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 changes in our internal control over financial reporting during the quarter ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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
The Company believes that there have been no material changes from risk factors previously disclosed in our 2011Annual Report. You should carefully consider the risk and uncertainties described in our 2011 Annual Report. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results or liquidity could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
+ Filed herewith
++ Furnished herewith
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.
Date: August 14, 2012