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Onvia 10-K 2007 Documents found in this filing:SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS
PURSUANT
TO SECTIONS 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2006
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from
to
Commission
File Number 000-29609
ONVIA,
INC.
(Exact
Name of Registrant as Specified in its Charter)
1260
Mercer Street, Seattle, Washington 98109
(Address
of Principal Executive Offices)
(206)
282-5170
(Registrant’s
Telephone Number, Including Area Code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Common
Stock, $.0001 Par Value per Share
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
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. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Exchange Act):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the voting and nonvoting common stock held by
nonaffiliates of the registrant, based on the closing price on June 30, 2006,
as
reported on the NASDAQ Global Market, was $30,516,725.
The
number of shares of the registrant’s common stock outstanding at March 1, 2007
was 7,992,198.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive Proxy Statement for the Registrant’s Annual Meeting of
Stockholders to be held on May 4, 2007 have been incorporated by reference
into
Part III of this Annual Report on Form 10-K.
ONVIA,
INC.
FORM
10-K
For
the Year Ended December 31, 2006
INDEX
PART
I
CAUTIONARY
STATEMENT
In
addition to the historical information contained herein, the disclosure and
analysis in this report contains forward-looking statements. When used in this
discussion, the words “believes,” “anticipates,” “may,” “will,” “should,”
“expects,” “plans,” “estimates,” “predicts,” “potential,” “continue,” “intends”
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 forward-looking. 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” and elsewhere in this report. We undertake 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 we file from time to time
with
the Securities and Exchange Commission.
ITEM 1. BUSINESS
In
this
report, the words “we,” “our,” “us,” “Onvia,” or the “Company” refer to Onvia,
Inc. and its wholly owned subsidiary. Certain previously reported amounts have
been reclassified to conform to the Company’s current presentation.
Company
Overview
Onvia
is
a leading provider of market intelligence about actionable public sector revenue
opportunities. Onvia’s proprietary database, Onvia Dominion®, has been compiled
over the last ten years, and includes comprehensive, historical and real-time
information unavailable elsewhere in the marketplace. Access to Onvia Dominion
provides businesses with insight and intelligence on relevant public sector
revenue opportunities, which is classified and linked within four key hubs
of
data: project history, agency research, buyer research and competitive
intelligence. Onvia’s database provides information on over 3.5 million
procurement records connected to over 275,000 companies from across
approximately 73,000 government agencies nationwide, and thousands of records
are added to our database each day. Information in Onvia’s database has been
collected, formatted and classified by an in-house team of researchers and
third
party providers so that clients are able to quickly find and analyze information
relevant to their businesses.
Since
2001, Onvia’s strategy has been to provide business professionals with critical
knowledge to explore and research opportunities and win new business by offering
comprehensive, timely and standardized information on government procurement
opportunities.
Beginning
in 2005, Onvia developed a strategic plan designed to differentiate the Company
within the public-sector information marketplace with the long-term objective
of
consistent revenue growth and increasing return on investment. The accessibility
of the unique information contained in the Onvia Dominion® database was
significantly enhanced with the introduction of Onvia Business Builder in 2005.
Prior to the release of Onvia Business Builder, data integration at this level
was only available to large companies with the resources to perform the research
and store the data themselves, or companies that could afford to hire outside
firms to perform the research for them. Advances in technology, broad use of
the
Internet by government agencies, and the diligent work of the Company’s research
team to collect and classify this information have enabled Onvia to make the
same high-value sales intelligence affordable for businesses of all sizes.
In
April
2006, Onvia launched Onvia Navigator, an online search tool allowing customized
searches of its government business intelligence database providing clients
with
self-directed access to its proprietary database of government procurement
information. In January 2007, the Company enhanced the functionality of Onvia
Navigator by adding the ability to search the contents of documents in its
database, which should significantly increase the number and relevancy of
self-directed search results.
Onvia’s
revenues are currently generated from two main business channels: client
subscriptions and content licenses. Contracts for its subscription based
services are typically prepaid, have a minimum term of one year and revenues
are
recognized ratably over the term of the subscription. Subscriptions are priced
based upon the geographic range, nature of content purchased and, in certain
products, the number of users.
Revenue
from content licenses is generated from clients who resell Onvia’s business
intelligence data to their customers. Content license contracts are generally
multi-year arrangements that are invoiced on a monthly or quarterly basis.
Revenue from content license agreements is recognized ratably over the term
of
the agreement, and these agreements generally have a higher annual contract
value than the Company’s subscription based services. Onvia also generates
revenue from fees charged for document download services, list rental services,
and other market intelligence reports, and these fees are recognized upon
delivery.
Onvia
was
incorporated in January 2000 in the state of Delaware. Onvia’s principal
corporate office is located in Seattle, Washington. Its common stock trades
on
the NASDAQ Global Market under the symbol ONVI.
1
Industry
Background
Government
agencies spend billions of dollars annually on the procurement of a large array
of goods and services. These public sector projects can provide businesses
with
a significant source of new sales opportunities. Tracking these public sector
projects can be difficult and companies spend a substantial amount of time
and
effort to locate and research these new opportunities to grow their businesses.
The Internet provides short-term visibility into government contracting
information for both government agencies and business suppliers but does not
provide the on-demand intelligence required to guide strategic
decisions.
Even
after a new business opportunity is identified, many companies do not have
enough information about the project to make informed and efficient decisions
about whether or not to pursue the opportunity, such as decision maker
information, the purchasing history of the government agency, and who competes
for similar projects. This information is useful not only for companies
contracting directly with a government agency, but also for subcontractors
that
would like to compete for work on awarded contracts. This information is rarely
available from one source, and may not be available at all for historical
projects.
Often,
revenue opportunities are included within the specification documents behind
the
RFP and RFQ documents, and without tools to quickly identify the pertinent
information businesses must read the entire documents to determine if there
are
opportunities relevant to their business.
Onvia’s
comprehensive database contains much of this information on both a historical
and real-time basis and thousands of records are added to our database each
day.
Much of the information in our database is linked, so clients can quickly
research information relevant to a particular project in one centralized
location. Clients can also perform customized searches on both the public record
and within the project specification documents to identify relevant
opportunities using any number of variables, such as publication date,
geographic location and contract value, among others. Using Onvia’s database and
tools, our clients spend less time on research and more time on preparing
winning proposals, establishing relationships and executing
contracts.
Products
and Services
Our
products and services provide access to our proprietary Dominion database of
project specific information and provide clients specialized tools for analyzing
information relevant to their business. We expect to continue to expand our
content and develop new database analysis and access tools to meet the needs
of
our existing clients as well as potential new categories of clients.
We
leverage technology, tools and business processes to research, classify and
publish actionable public sector opportunities from public and private sources.
Through an automated process, we link related records within our database,
prequalify business opportunities for our clients based upon the client’s
profile, and provide access to the information in a timely manner, generally
within 24 hours of their public release. Our database contains information
on
the largest industry verticals, including:
• Architecture
and Engineering
• Construction
and Building Supplies
• IT
/
Telecom
• Consulting
Services
• Operations
and Maintenance Services
• Transportation
Equipment
Within
these verticals we also provide hard to find content which creates a
comprehensive view of a project throughout the most critical phases of the
procurement lifecycle. These transactional records include:
• Advance
Notice - alerts businesses of projects in the development process, before the
bid is released in its final form;
• Requests
for proposal (“RFPs”), request for quotes (“RFQs”), and related amendments;
• Planholders
and Bidders Lists - provides competitive intelligence by presenting a list
of
competitors that have acquired plans, specifications, bidding documents and/or
proposals for specific projects in the active bid or proposal stage, and a
list
of competitors who submit bids for prime contracts with the owner of the
project;
• Bid
Results and Awards Information - notifies businesses of awarded bids, providing
valuable information for use in their own sales and marketing activities;
and
• Grants
-
supplies federal and state grant information critical to anyone tracking or
applying for publicly-funded projects.
Content
in our Dominion database is linked and associated around four key data points;
project, agency, agency buyer, and vendor. The association of each record makes
it possible to evaluate purchasing trends by agency and by agency buyer and
identify or evaluate potential competitors.
Our
suite
of information services is comprised of the following products:
2
Onvia’s
Solutions for Business Suppliers
Onvia
Business Builder
Onvia
Business Builder, launched in July 2005, is our most comprehensive product
and
is intended to enable businesses of all sizes to compete more effectively in
the
government procurement marketplace. This product leverages Onvia’s proprietary
database of historical information gathered from local, state and federal
government agencies and education entities to help clients evaluate and respond
to new bid requests and RFPs with more competitive bids by allowing them to
easily research competitor and buyer information.
Subscribers
to Onvia Business Builder receive customized daily email notifications about
relevant business opportunities focused on the verticals described above and
an
online user interface that provides business intelligence oriented around the
following four key hubs of data:
Project
History
Project
History tracks and provides information through a project’s life cycle,
including advance notice information, planholder/bidder lists and bid results.
This information offers competitive intelligence as well as leads on potential
subcontracting opportunities.
Agency
Research
Agency
Research offers historical research into government agencies, including
procurement archives, decision maker contact lists and purchasing contact lists.
This intelligence provides insight into purchasing trends within each agency
and
allows clients to tailor bids and proposals for each sales
opportunity.
Buyer
Research
Buyer
Research provides clients with a more comprehensive view of their potential
client, including their areas of expertise and past relationships with other
vendors. This information enables clients to effectively target their sales
activity and manage relationships with government purchasers.
Competitor
Research
Competitor
Research is a public sector activity archive that informs clients about where
their competitors have won work and provides detailed product and price
information that enables clients to conduct competitive analysis prior to
submitting bids and proposals.
Onvia
Business Builder provides information necessary to qualify opportunities,
improve decision making, prepare tailored bids, and manage agency relationships,
all of which should improve the success rates of our clients.
Onvia
Navigator
In
April
2006, we launched our database search tool, Onvia Navigator. Onvia Navigator
allows clients to easily identify market opportunities within our proprietary
database and search the contents of the related specification documents. Onvia
Navigator enables users to focus their research in many ways, including by
procurement types, submittal dates, contract locations, agencies, and contract
values. Once the desired results are identified using Onvia Navigator, clients
can employ Onvia Business Builder to provide detailed information on the search
results.
The
Onvia Guide
We
also offer a product that delivers the same customized daily email notifications
about relevant business opportunities that subscribers to the Onvia Business
Builder product receive, without the user interface to research information
in
our database. This product is available at a lower price point and is published
as The Onvia Guide.
Onvia’s
Solutions for Government Agencies
Government
agencies are faced with inefficient notification systems requiring significant
paperwork and high costs associated with the procurement process. Although
many
government agencies maintain long-term supplier relationships, the agencies
still must publicize contract opportunities to both existing and potential
suppliers. The Onvia platform offers increased distribution of their RFPs and
RFQs to potential business suppliers. By using our solution, government agencies
can reduce operating costs, increase administrative efficiency, heighten
competition leading to more competitive pricing, and quickly and efficiently
notify businesses of their requirements online.
Onvia’s
agency tools automate the process of RFP and RFQ creation, posting, and document
distribution. Our tools provide agencies with a variety of benefits: our online
tools eliminate many manual steps traditionally found in the RFP and RFQ
process; agencies save time and money by outsourcing the bid package production
and distribution to us; and, by posting bids and quotes to a database of
suppliers, agencies increase the number of businesses competing for their
projects, which can drive contract prices down.
Onvia’s
agency tools consist of BidWire and QuoteWire. BidWire is a web-based tool
set
that provides government agencies with a step-by-step template for creating
and
posting RFPs and other requests for bids. All posted bids are coded by the
agency and distributed to subscribing business suppliers. Some of BidWire’s
other features include bid document distribution services, and tools to update
open RFPs and view a list of suppliers who have downloaded bid documents.
QuoteWire
provides agencies requesting quotes with the same efficiencies as BidWire does
for RFPs. Some of QuoteWire’s primary features include: tools that allow the
agency to modify standard RFQ forms and create individual line items for each
quote; a specialized version of the RFQ form, whereby business suppliers can
input prices and other information; automatic tabulation of business supplier
responses for comparison and award; and specific award notification to the
selected business supplier.
3
Strategy
Onvia’s
mission is to become the authoritative source that businesses rely on for
relevant information, insight and intelligence required to grow their
public-sector related business. Onvia’s strategic plan calls for differentiating
the Company within the public-sector information marketplace with the long-term
objective of consistent revenue growth and increasing return on investment.
Key
elements of the Company’s strategy include:
Clients
Onvia
serves two primary and distinct client groups: businesses and government
agencies.
Businesses
Onvia
serves two separate business channels for its business clients: client
subscriptions and content licenses. Client subscriptions are sold directly
to
the end user of the business intelligence. At December 31, 2006, Onvia had
approximately 9,200 subscribing clients. Client subscriptions contributed
approximately 86% of the Company’s revenue in 2006, compared to 88% in 2005. At
December 31, 2006, the annual contract value of Onvia’s client subscribers was
approximately $15.5 million, compared to $13.1 million at December 31,
2005.
Onvia’s
second business channel, content licenses, represents clients who resell Onvia’s
business intelligence to their customers. These clients represented
approximately 13% of the Company’s revenue in 2006, compared to 11% in 2005. The
annual contract value of Onvia’s content license clients was approximately $2.1
million at December 31, 2006 and 2005.
We
also
generate revenue from fees charged for document download services, list rental
services, and one-time informational reports, and these fees represented 1%
of
our revenue in 2006.
Government
Agencies
Although
many government agencies maintain long-term supplier relationships, the agencies
still must publicize contract opportunities to both existing and potential
suppliers. By using Onvia’s solution, government agencies reduce operating costs
by quickly and efficiently notifying business suppliers of their requirements,
and improve competition through the increased distribution of their RFPs and
RFQs. In addition, Onvia’s agency relationships provide a direct connection
between business suppliers and buying agencies, providing business suppliers
with bid documents and online response tools. At December 31, 2006, Onvia had
approximately 400 government agencies signed to use its service.
Sales
Strategy
The
primary objective of Onvia’s sales strategy is to increase annual contract value
and client retention. The Company’s sales strategy is based on organizational
design, increased efficiencies and establishing a predictable model of new
client acquisition:
The
Onvia
2007 sales strategy also has strong emphasis on performance management processes
around forecasting, managing activities and results, and prioritizing activity
around at risk clients.
4
Marketing
Strategy
Onvia
deploys an integrated approach to its marketing, incorporating email direct
marketing, online search engine marketing, public relations, and supporting
sales tools and collateral. Client retention and upgrade marketing are an
integral part of the Company’s marketing strategy. Marketing programs are
intended to keep the Onvia name and solutions in front of its clients in a
relevant and meaningful way, through informative newsletters, new product
updates, government best practice emails and personalized renewal reminders,
among others.
In
2006,
Onvia focused its marketing efforts on generating high quality sales leads
at
the lowest cost, while providing the proper sales tools to support high-value
sales. The Company refined its online marketing program to drive more qualified
leads from people using search engines to identify revenue opportunities. In
2007 the Company’s lead generation efforts will focus on driving high quality,
targeted leads and will supplement this effort by building a prospect marketing
database that will aid in prioritizing and targeting prospects for
sales and marketing efforts. In 2007 the Company will also build a new website
to drive more targeted leads with the same characteristics of our ideal clients
and create a more efficient web experience. In addition, the Company will
continue to provide sales tools and collateral to support customer acquisition
and retention efforts.
Agency
Relationships
Agency
partners bring value through source contributed content and by providing
referrals of their business suppliers. As of December 31, 2006, Onvia had
approximately 400 active partner agencies nationwide. These relationships are
established in key metropolitan areas nationwide. Onvia continues to sign a
variety of government agencies including cities, counties, housing authorities,
transportation authorities and school districts. Some recent agency additions
include the City of Palo Alto, CA and Metropolitan Transportation Authority
of
NY.
Technology
Onvia
supports its operations and online solutions using an advanced technology
platform designed to serve a large and rapidly increasing volume of web traffic
in a reliable and efficient manner without critical failures. Onvia’s systems
are designed to:
• Provide
fast, secure and uninterrupted visitor access to its web site;
• Validate
and process client requests promptly and accurately;
• Provide
timely, comprehensive and accurate management-reporting capabilities;
• Accommodate
upgrades to tools and features on its web site;
• Scale
to
accommodate growth in its operations; and
• Provide
redundancy in case of component system failures.
Onvia’s
systems use a combination of proprietary technologies and commercially available
licensed technologies. The backbone of its technology infrastructure consists
of
database servers running Microsoft SQL Server 2000 on HP/Compaq hardware. The
front end consists of multiple, redundant web servers that are expandable as
operations grow.
Onvia’s
web servers, database servers, transaction-processing servers and other core
systems that conduct essential business operations are housed at its corporate
headquarters in Seattle, Washington. The Company’s network operations personnel
provide 24x7 monitoring and engineering support in a climate-controlled and
physically secure environment. Onvia’s onsite data center has redundant
communication lines from multiple Internet service providers and has its own
emergency power and backup systems. The Company also houses all non-critical
systems such as development servers, quality assurance servers, and internal
network servers at its headquarters in Seattle.
In
addition to maintaining responsibility for the technical architecture, security
and uptime of its online solutions, the Company’s technology department works
closely with the sales and marketing departments to ensure that client feedback
for new features is incorporated into new products and services.
Competition
The
market for comprehensive intelligence around government procurement is
underserved. Competitors include, to a limited extent, bid aggregators, industry
analysts and government e-procurement platforms.
Onvia’s
current and potential competitors include, but are not limited to, the
following:
• Information
companies who target specific verticals also covered by its services, such
as
McGraw-Hill, Contractors Register and Input; and
• Lead
generation and bid matching companies such as FedMarket, BidNet, GovernmentBids
and True Advantage.
5
Onvia
may
face additional competition in the future as well-funded companies look to
develop new government procurement database products and services. Onvia must
differentiate itself by increasing the value of its database, developing
products and services with high switching costs, and by creating a loyal,
recurring base of clients and agency users. To achieve this Onvia must
continually enhance its content and sources, and provide its clients with
relevant, customized views of its database.
The
Company believes that the principal competitive factors affecting its market
include, but are not limited to, breadth and depth of content, content quality,
base of existing clients and client service. In order to excel at these
principal competitive factors, Onvia strives to achieve a superior understanding
of its target clients, offer greater value in its content and services and
sustain a more efficient operating model. Onvia also mitigates some potential
competitive pressures by selling its content to some of its competitors for
redistribution to their clients. The Company believes that its current database
offering compares favorably to select offerings available in the marketplace
today based on the depth and history of its information, breadth of content
types, and daily updates.
Seasonality
The
new
client acquisition side of Onvia’s business is subject to some seasonal
fluctuations. The third quarter is generally the Company’s slowest quarter for
new client acquisition. The construction industry is its single largest market
and these prospects are typically engaged on projects during the summer months,
not prospecting for new work, which causes new client acquisition to decline
compared to the remaining quarters in the year. For this reason, it may not
be
possible to compare the performance of Onvia’s business quarter to consecutive
quarter, and the Company’s quarterly results 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 for the previous year.
Intellectual
Property Rights
Onvia’s
future success depends in part on its intellectual property rights, proprietary
rights, and technology. Onvia relies on a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements and
other methods to protect its proprietary rights. Onvia seeks to protect its
internally developed products, documentation, and other written materials under
trade secret and copyright laws, which afford only limited protection. Onvia
cannot ensure that any of its proprietary rights with respect to its
e-marketplace will be viable or of value in the future since the validity,
enforceability and type of protection of proprietary rights in Internet-related
industries is uncertain and still evolving.
Onvia
licenses and will continue to license certain products integral to its services
from third parties, including products that are integrated with internally
developed products and used jointly to provide key content and services. These
third-party product licenses may not continue to be available on commercially
reasonable terms and the Company may not be able to successfully integrate
such
third-party products into its solutions.
Onvia
presently has no issued U.S. patents and has one U.S. patent application
pending. Onvia filed a U.S. patent application for its Onvia Business Builder
product in 2006. It is possible that the Company may not develop future
proprietary products or technologies that are patentable and that the patents
of
others will seriously harm its ability to do business.
Onvia
has
registered trademarks in the United States for Onvia, Onvia and the design
(current logo with the orange circular design), Onvia Dominion, DemandStar.com,
DemandStar, the DemandStar.com logo, QuoteWire, BidWire, Bidline, and
e-Journal of Commerce. Onvia also has registered trademarks in Canada for Onvia
(previous logo), the Onvia checkmark logo, and Onvia.com.
Employees
As
of
March 1, 2007, Onvia had 174 employees working in the following departments:
82
in sales and marketing, 47 in research included in cost of sales, 34 in
technology and development and 11 in general and administrative.
None
of
Onvia’s employees is represented by a union or collective bargaining agreement.
Onvia has never had a work stoppage and considers relations with its employees
to be good.
Geographic
Financial Information
During
the years ended December 31, 2006, 2005 and 2004, all of Onvia’s revenues were
generated from clients located in the United States. All of Onvia’s long lived
assets are located in the United States. A portion of Onvia’s net operating
losses (“NOLs”) are denominated in Canadian dollars; however, a full valuation
allowance has been recorded for the net deferred tax asset associated with
these
NOLs, because realization of the future tax benefit is not currently
likely.
6
ITEM 1A. RISK
FACTORS
In
addition to other information in this Report, the following risk factors should
be carefully considered in evaluating Onvia and its business because such
factors may have a significant impact on our business, results of operations
and
financial condition and could cause our stock price to decline. As a result
of
the risk factors set forth below and elsewhere in this report, and the risks
discussed in our other Securities and Exchange Commission filings, actual
results could differ materially from historical results or those projected
in
any forward-looking statements.
Risks
related to our growth strategy
We
may not be able to meet our projected renewal rates.
Our
ability to continually enhance our products and services to provide relevant
information to our clients, appropriately classify and distribute information,
provide excellent client service, maintain competitive pricing and meet our
clients’ expectations for source coverage and new content will significantly
impact our clients’ satisfaction with our products and services and will impact
their decision to renew. If we are unable to meet our clients’ expectations, our
renewal rates and our projected growth and profitability will suffer.
The
change in our sales methodology may not be successful and we may be required
to
increase our sales and marketing expenses in order to achieve our revenue goals.
We
have
historically generated a significant portion of our marketing prospects and
sales leads from our in-house database of vendors. Our new team of sales and
marketing executives has implemented a new sales methodology that is intended
to
place much lower reliance on direct marketing to generate sales, and we have
reallocated resources previously used in direct marketing efforts towards sales
operations and sales processes. We have a limited history on which to evaluate
this new sales methodology and if we are unable to increase sales as a result
of
this new methodology, we may be required to increase marketing expenses to
generate additional sales.
We
may not be able to increase subscribership to our high value products.
We
expect
that a significant portion of our future growth will come from increasing our
annual contract value per client, and we expect this to be driven by increased
adoption of our high value products. Subscribers to our high value products
have
higher annual contract value, higher renewal rates and provide greater lifetime
value to the Company. Failure to increase subscribership to these products
would
adversely impact our future growth.
We
may not achieve our projections for adoption of our products by targeted
enterprise clients.
We
anticipate that a significant portion of our future revenue will be generated
from sales to larger businesses. Our enterprise sales team targets larger
companies that will purchase multiple licenses for our database products, for
redistribution of our data to their employees or clients, or for remarketing
their own products. If we fail to achieve our targeted adoption rates by
enterprise clients, our operating results would be harmed.
We
may not achieve our projections for adoption of our new products by new and
existing clients.
We
made
significant investments in 2005 and 2006 to expand our database and develop
the
Onvia Business Builder and Onvia Navigator research tools and we plan to launch
additional content and tools in 2007 and beyond. We expect to see an increase
in
retention rates for our existing clients because of the added features in these
new products and an increase in new customer acquisition as a result of the
launch of these products. Adoption of these products by new and existing clients
may not be consistent with our estimates.
We
may fail to hire, train and retain sales associates who can effectively
communicate the benefits of our products to our clients and prospects, and
they
may be unable to achieve expected sales targets.
In
order
to achieve our projected revenue growth rates, our sales teams must be able
to
effectively communicate the benefits of our products to existing and potential
clients. We expect to see increases in client retention rates and in new client
acquisition revenue, and our sales goals are aggressive. If we are unable to
retain our current sales associates and hire and train new sales associates
with
the appropriate skills, we may not be able to achieve our projected sales
targets and revenue growth rates.
Our
ability to grow our business depends in part on government agencies and
businesses increasing their use of the Internet to conduct commerce.
Our
growth depends in part on increased use of the Internet by government agencies
and businesses. If use of the Internet as a medium for government, consumer
and
business communications and commerce does not continue to increase, demand
for
our services and products will be limited.
We
may lose the right to use the content that we distribute, which we collect
from
governmental entities and other third parties.
We
do not
own or create the content distributed to our vendors in the form of requests
for
proposal and related information. We aggregate this information from various
public data sources and we do not have an exclusive right to this content.
We
cannot ensure that these data sources will continue to be available in the
future. Moreover, public disclosure laws, which require governmental entities
to
produce bid information directly to members of the public, may negatively impact
our business and reduce the value of our services to our clients. Governmental
entities and other third parties could terminate their contracts to provide
data
or restrict the distribution of such data. The loss or the unavailability of
our
data sources in the future, or the loss of our right to distribute some of
the
data sources, would harm our business.
7
If
we cannot effectively satisfy our clients across all our targeted industry
verticals, we may decide to target fewer industries, and as a result, may lose
clients.
If
we
find that our retention and acquisition rates in any of our focused verticals
are not meeting our expectations due to lack of bid-flow or for other reasons,
we may choose to target fewer industry verticals to improve client satisfaction
and retention in core verticals, and we may lose clients in our other non-core
verticals. Focusing on these core verticals may not generate the expected level
of increased retention and acquisition.
Intense
competition could impede our ability to gain market share and could harm our
financial results.
Our
business could be severely harmed if we are not able to compete successfully
against current or future competitors. Although we believe that there may be
opportunities for several providers of products and services similar to ours,
a
single provider may dominate the market.
Our
current and potential competitors include Internet-based and traditional
companies such as BidNet (Govbids), TrueAdvantage, FedMarket, McGraw-Hill,
Contractors Register, Input and other companies focused on providing services
to
government agencies and their vendors.
Many
of
our current and potential competitors have longer operating histories, larger
client bases and/or greater brand recognition in business and Internet markets
and significantly greater financial, marketing and technical resources than
we
do. Our competitors may be more successful than we are in developing their
technologies, adapting more aggressive pricing policies and establishing more
comprehensive marketing and advertising campaigns.
Our
competitors may develop web sites that are more sophisticated than ours, with
better online tools, or service and product offerings superior to ours. For
these and other reasons, our competitors’ web sites may achieve greater
acceptance than ours, limiting our ability to gain market share and client
loyalty and to generate sufficient revenue to achieve profitability.
We may be required to increase our source coverage due to competitive pressures,
and we may be required to add additional resources to our research team to
offset these competitive pressures, which would increase our cost of sales.
Risks
related to our new product strategy
We
may fail to introduce new content and products that are broadly accepted by
our
clients, and there may be delays in the introduction of these tools and
products.
We
expect
to introduce new content products in 2007 that will complement our current
suite
of products. If client acceptance and adoption of these new products is below
our expectations, our projected growth rates may not be achieved, and our
financial results would be harmed. We expect to utilize internally developed
technology and technology licensed from third parties for the development of
new
tools and content. If we are unable to develop or acquire the required
technology on time, or at all, or if the launch of these new products is delayed
for any other reason beyond their anticipated launch dates, our projected growth
rates may not be achieved.
We
may be unable to control the cost of ongoing content collection or the cost
of
collecting new content types to support new product
offerings.
We
continue to adopt more efficient content collection methods which allow us
to
increase our content collection without significantly increasing our cost of
revenue. We will need to identify cost effective sources and develop efficient
collection processes for new content types required to support our new product
development plan. If we are unable to find new ways to collect content
efficiently, and aggregate new content types in a cost effective manner, our
gross margins may decrease.
We
have invested significant capital into the development of new products, such
as
Onvia Business Builder and Onvia Navigator, and if new products fail to meet
expectations we may not achieve our anticipated return on these
investments.
Onvia
Business Builder was launched in July 2005 and Onvia Navigator was launched
in
April 2006 and we have been pleased with the adoption of these products. We
expect to launch additional new products in 2007 and expect to see continued
increases in adoption of Onvia Business Builder and Onvia Navigator throughout
2007 and beyond. If adoption of these and other new product introductions is
not
consistent with our expectations, we will not see the expected return on these
investments.
Our
clients may be dissatisfied with the accuracy, coverage and timeliness of our
content and performance of our new products.
We
expect
to see an increase in both new client acquisition and retention rates for our
existing clients, as well as an improvement in annual contract value per client
resulting in part from the introduction of new products offering more
comprehensive and timely access to the information in our database. If our
clients become dissatisfied with the performance, coverage or content of our
new
products, they may not renew at expected renewal rates and new client
acquisition may be adversely impacted.
We
may improperly price our new product offerings for broad client
acceptance.
We
plan
to implement price increases to some of our existing products in 2007 and we
will be required to develop new pricing strategies for planned new product
launches in 2007. If existing clients do not perceive that the pricing of our
products is commensurate with the value they receive from the products, or
if
our sales staff is unable to communicate the value of the products, new client
adoption and existing client retention would be adversely impacted.
We
may overestimate the value of sales intelligence to companies doing business
with the government.
We
believe there is a large unmet market need for robust public-sector sales and
marketing information. Our business model assumes that clients will pay us
an
annual fee for this information and that we will see increases in the annual
value of these contracts in the near-term and in the long-term. If we have
overestimated the value of this information, we will not achieve our forecasted
revenue goals.
8
Our
competitors may develop similar technologies that are more broadly accepted
in
the marketplace.
The
functionality in Onvia Business Builder is robust, and we expect that if
adoption of this tool is in line with our expectations that our competitors
may
introduce products with similar functionality. If our competitors introduce
products with similar functionality or are able to more effectively market
their
products for broad customer acceptance, new client acquisition and existing
client retention would be adversely impacted. If we are unable to enhance our
functionality or increase our marketing efforts to offset challenges from our
competitors, we may lose market share.
Financial,
economic and market risks
We
have a limited operating history, making it difficult to evaluate our business
and future prospects.
Onvia
has
been serving businesses since March 1997 and have been focusing on including
government agencies in our network since April 2001. We have a limited operating
history upon which an investor may evaluate our business and prospects. Our
potential for future profitability must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies
in
early stages of development, particularly companies in new and rapidly evolving
markets, such as e-marketplaces. We may not successfully address any of these
risks.
We
have incurred negative cash flows from operations in each quarter since
inception, and under our current operating plan we expect to continue to incur
negative cash flows in the near term.
To
increase revenue, we will need to continue to attract new clients and improve
retention of existing clients and expand our service offerings. We expect
operating expenses in 2007 to be relatively flat compared to 2006; however,
we
expect to increase revenues through more efficient and effective marketing
and
sales processes. If we are unable to generate expected efficiencies in our
sales
and marketing efforts, we may be required to increase expenses, which would
extend the timeline to achieve profitability in the future.
Our
quarterly financial results are subject to fluctuations that may make it
difficult to forecast our future performance.
We
have
experienced some seasonal fluctuations in our business, reflecting a combination
of seasonal trends for the services and products we offer, as well as seasonal
trends in the buying habits of our target business clients and government
agencies. We expect our revenue and operating results to continue to vary
significantly from quarter to quarter, making it difficult to formulate
meaningful comparisons of our results between quarters. Our limited operating
history and evolving business model further contribute to the difficulty of
making meaningful quarterly comparisons. A significant portion of our
subscription revenue for a particular quarter is derived from transactions
that
are initiated in previous quarters, because revenue is recognized ratably over
the subscription term.
Our
current and future levels of operating expenses and capital expenditures are
based largely on our growth plans and estimates of future revenue. These
expenditure levels are, to a large extent, fixed in the short term. We may
not
be able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall, and any significant shortfall in revenue relative to planned
expenditures could harm our business and results of operations.
We
may require significant additional capital in the future, which may not be
available on suitable terms, or at all.
The
expansion and development of our business may require significant additional
capital, which we may be unable to obtain on suitable terms, or at all. If
we
are unable to obtain adequate funding on suitable terms, or at all, we may
have
to delay, reduce or eliminate some or all of our advertising, marketing,
engineering efforts, general operations or other initiatives.
We
may
require substantial additional funds to expand our marketing activities, to
continue to develop and upgrade our technology and to make corporate
acquisitions. If we issue convertible debt or equity securities to raise
additional funds, our existing stockholders will be diluted.
Our
stock price has fluctuated significantly in the past and could fluctuate
significantly in the future in response to various factors, some of which are
beyond our control.
Factors
which may cause fluctuations in Onvia’s stock price include:
• actual
or
anticipated variations in quarterly results of operations;
• announcements
of technological innovations or new products or services by Onvia or our
competitors;
• announcements
of or expectations regarding significant acquisitions, strategic relationships,
joint ventures, capital commitments, dividends, cash distributions or other
corporate transactions;
• additions
or departures of key personnel;
9
• changes
in financial estimates or recommendations by securities analysts;
• conditions
or trends in the Internet and online commerce industries;
• changes
in the market values of other Internet or online service companies;
• actual
or
anticipated changes in governmental spending;
• sales,
repurchases or splits of our common stock;
• general
market conditions; and
• other
events or factors, many of which are beyond our control.
In
addition, the stock market in general, and the NASDAQ Global Market and the
market for Internet and technology companies in particular, have experienced
extreme price fluctuations that have often been unrelated or disproportionate
to
the operating performance of these companies. These broad market and industry
conditions may materially and adversely affect our stock price, regardless
of
our operating performance.
We
have implemented anti-takeover provisions that may discourage takeover attempts
and depress the market price of our stock.
Provisions
of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, Onvia’s state of incorporation, can have the effect of making it
difficult for a third party to acquire Onvia, even if doing so would be
beneficial to our stockholders. These provisions include:
• the
classification of Onvia’s Board of Directors into three classes so that the
directors serve staggered three-year terms, which may make it difficult for
a
potential acquirer to gain control of our Board;
• authorizing
the issuance of shares of undesignated preferred stock without a vote of
stockholders; and
• non-cumulative
voting for the election of directors.
In
addition, in 2002, our Board of Directors adopted a Stockholders Rights
Agreement, designed to protect stockholder interests in the event of an
unsolicited takeover attempt by distributing one preferred stock purchase right
for each outstanding share of common stock. The Rights Agreement may make it
more difficult for a third party to acquire Onvia.
Changes
in accounting and reporting policies or practices may affect our financial
results or presentation of results, which may affect our stock
price.
Changes
in accounting and reporting policies or practices could increase our net loss,
and such increases may be independent of changes in our operations. These
increases in reported net losses could cause our stock price to decline. For
example, beginning January 1, 2006, we were required to adopt the provisions
of
Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based
Payment,
which
required us to record an operating expense charge associated with the calculated
fair value of new and outstanding stock options and purchases under our employee
stock purchase plan. We incurred approximately $1.2 million in operating
expenses in 2006 as a result of adopting this Statement. If other changes in
accounting and reporting policies or practices are made in the future, these
changes may also impact our reported operating results and the price of our
stock.
Risks
related to integrating future mergers, acquisitions or other corporate
transactions
We
may fail to successfully evaluate, execute and integrate future mergers,
acquisitions or other corporate transactions.
Management
is often exploring acquisition opportunities to increase stockholder value.
There are significant challenges to implementing any corporate transaction.
Integrating companies and technologies involves significant challenges and
is a
complex process, and the anticipated benefits of any corporate transaction
may
not be achieved within the anticipated timeline, or at all. Some of the
challenges involved in corporate transactions include:
• properly
evaluating the technology, personnel and clients;
• retaining
existing clients and strategic partners;
• retaining
and integrating management and other key employees;
• coordinating
research and development activities to enhance the introduction of new products,
services and technologies;
10
• addressing
public perceptions of changes in our business focus;
• combining
service and product offerings quickly and effectively;
• implementing
consistent integrated internal controls;
• transitioning
the business systems to a common information technology system;
• persuading
employees of both businesses that the business cultures are compatible;
• offering
the services and products of both businesses to each other’s clients and
business associates;
• marketing
the combined company;
• blending
the pricing models;
• developing
and maintaining uniform standards, controls, procedures and policies;
• minimizing
the potential disruption of both businesses and distraction of the Company’s
management;
• incorporating
the acquired technology, products and services into existing product and service
offerings; and
• controlling
expenses related to the implementation of the transaction.
We
may
not succeed in overcoming these risks or any other problems encountered in
connection with a merger, acquisition or other corporate transaction. The
diversion of the attention of our management and any difficulties encountered
in
such a transaction could cause the disruption of, or a loss of momentum in,
the
activities of our business. If we do not successfully execute any future merger,
acquisition or other corporate transaction, the market price of our common
stock
may decline and future operating results may suffer.
In
the
event that our common stock does not maintain sufficient value, or potential
acquisition candidates are unwilling to accept our common stock as consideration
for the sale of their businesses, we may be required to use more cash, if
available, in order to make acquisitions. If we do not have sufficient cash,
our
growth through acquisitions could be limited unless we are able to obtain
capital through additional debt or equity financings.
If
a merger, acquisition or other corporate transaction does not meet the
expectations of financial or industry analysts or Onvia’s investors, the market
price of our common stock may decline.
We
may
make incorrect assumptions about potential acquisitions, mergers or other
corporate transactions, such as the ability to secure additional business from
government clients and vendors selling to those clients as a result of any
such
transaction. Consequently, we may not achieve the forecasted benefits of the
transaction, including improved financial results, to the extent anticipated
by
us or by financial or industry analysts. In addition, significant stockholders
of Onvia following any corporate transaction may decide to dispose of their
shares if the transaction fails to meet their expectations. In either event,
the
market price of our common stock may decline.
Operational
risks
Our
current technology infrastructure and network software systems may be unable
to
accommodate our anticipated growth, and we may require a significant investment
in these systems to accommodate performance and storage requirements of new
and
planned products.
Our
new
Onvia Business Builder and Onvia Navigator research tools and future product
offerings will place additional demands on our network and on our database.
We
add thousands of records to our database each day, which has required us to
expand the storage capacity of our database. As part of the $5 million strategic
investment in new products approved by our Board of Directors at the end of
2004, we believe we addressed the immediate and near term database and storage
requirements
of our expanding database. However, if new content types or product
introductions change current network and database requirements or if growth
in
our client base exceeds our expectations, we may be required to make significant
investments to upgrade our systems to accommodate such changes, which could
negatively impact our cash flows and results of operations. We may not be
successful in our efforts to upgrade our systems, or if we do successfully
upgrade our systems, we may not do so on time and within budget. Failure to
achieve a stable technological platform in time to handle increasing network
traffic may discourage potential clients from using our network.
We
may not be able to retain the services of our executive officers, directors,
senior managers and other key employees, which would harm our business.
Our
business and operations are substantially dependent on the performance of our
senior management, directors and key employees. The loss of any of these
employees or directors would likely harm our business.
11
Our
network and software may be vulnerable to security breaches and similar threats
that could result in our liability for damages and harm our business.
Our
network infrastructure is vulnerable to computer viruses, break-ins, network
attacks and similar disruptive problems. This could result in Onvia’s liability
for related damages, and our reputation could suffer, thus deterring existing
and potential clients from transacting business with Onvia. Security problems
caused by third parties could lead to interruptions and delays or to the
cessation of service to our clients. Furthermore, inappropriate use of the
network by third parties could also jeopardize the security of confidential
information stored in our computer systems.
We
intend
to continue to implement industry-standard security measures, but we cannot
ensure that the measures we implement will not be circumvented. The costs and
resources required to alleviate security problems may result in interruptions,
delays or cessation of service to our clients.
We
may be unable to effectively combat unauthorized redistribution of our published
information.
In
the
past we have identified a number of entities that have redistributed our
proprietary information without our authorization and against our terms of
use.
We have been and will continue to be aggressive about monitoring and combating
such unauthorized use, and are considering technological avenues for blocking
such users from our database. However, if we fail to effectively combat such
unauthorized use, our business could be harmed.
System
failures could cause an interruption in the services of our network and impact
our ability to compile information and deliver our product to our
clients.
Any
system failure that causes an interruption in the service of our suite of
products or a decrease in their responsiveness could result in reduced activity
and reduced revenue. Further, prolonged or ongoing performance problems on
our
web sites or our application servers, which support bid creation and
distribution, could damage our reputation and result in the permanent loss
of
clients. In the past, system interruptions have made our web sites and our
application servers totally unavailable, slowed their response time or prevented
us from making our service available to our clients, and these problems may
occur again in the future.
All
of
our business application servers operate within secure data centers at our
corporate headquarters in Seattle, Washington. Our experience and expertise
in
maintaining servers may not be adequate to prevent all possible interruptions
and failures of our services. Our electrical power backup systems may not be
sufficient to sustain business operations during a major interruption to public
utility service. We may not have sufficient business interruption insurance
to
cover losses from major interruptions. We have deployed our disaster recovery
site to a secure offsite facility with backup utility power and redundant
Internet connectivity. Our current disaster recovery systems are designed to
ensure that a portion of our Information Technology and Research department
functions will be operational in the event of a local building disaster, so
that
delivery of our product will not be significantly interrupted. Our disaster
recovery plan is not yet finalized to include automated failover of product
distribution-related systems; requiring some manual intervention to complete
the
failover process. During 2006 and 2007, we will focus on expanding our disaster
recovery system to cover additional operating functions within the Company.
Clients
and visitors to our web site depend on their own Internet service providers,
online service providers and other web site operators for access to our web
sites. These providers have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to Onvia’s systems.
Our
services and products depend upon the continued availability of licensed
technology from third parties, and we may not be able to obtain those licenses
on commercially reasonable terms, or at all.
We
license, and will continue to license, technology integral to our services
and
products from third parties. If we are unable to acquire or retain key
third-party product licenses or integrate the related third-party products
into
our network services, our service and product development may be delayed. We
also expect to require new licenses in the future as our business grows and
technology evolves. We may not be able to obtain these licenses on commercially
reasonable terms, or at all.
Increased
blocking of our emails could negatively impact client satisfaction with our
products and could inhibit the effectiveness of our marketing efforts.
Portions
of our content are currently delivered in the form of an attached file via
email. Some network administrators could flag and block emails from Onvia due
to
increased filtering of email attachments as a result of the threat of email
borne viruses or unwanted “spam”, or for other reasons. We also conduct
marketing campaigns to our customer base and occasionally these campaigns are
done via email. Excessive filtering of our emails could negatively impact client
satisfaction and could inhibit our marketing efforts.
Regulatory,
judicial or legislative risks
Any
settlement or claim awarded against Onvia in our ongoing litigation matters
could negatively impact our operating results.
Onvia
is
defending against the litigation matters as detailed in the legal proceedings
section in Item 3 of Part I of this report. We have directors and officers
insurance of $30 million that would cover defense costs and any award or
settlement, less our deductible of $250,000, in the securities class action
suit; however, our directors and officers policy does not cover defense costs,
awards or settlements under the unsolicited facsimile suit. While we believe
we
have strong defenses in both cases, we cannot be certain that the outcome of
either case will be favorable to Onvia. A settlement or award in these or other
potential suits could negatively impact our operating results. It is also
possible that defense of these and future claims may result in a significant
diversion of management attention.
12
Future
regulations could be enacted that either directly restrict our business or
indirectly impact our business by limiting the growth of e-commerce.
As
e-commerce evolves, federal, state, local and foreign agencies could adopt
regulations covering issues such as privacy, content and taxation of services
and products. If enacted, government regulations could limit the market for
our
services and offerings. Although many regulations might not apply to our
business directly, we expect that laws regulating the collection or processing
of personal or consumer information could indirectly affect our business. It
is
possible that legislation could expose companies involved in e-commerce to
restrictions or liability, which could limit the growth of e-commerce generally.
Legislation could hinder the growth in Internet use and decrease its acceptance
as a medium for communication and commerce. If laws were enacted that made
our
products taxable at the state level, we may be required to pass those additional
taxes along to our customers, which would increase the overall cost of our
product to our end users and could impact the buying decisions of existing
and
potential new clients.
If
regulations or legal restrictions are imposed upon bid aggregation on the
Internet or upon charging a fee for publicly available bid information, our
business will be materially harmed.
Our
proprietary bid aggregation technology is integral to our success. If the
process of bid aggregation becomes regulated in the future and our process
for
acquiring government bids is no longer cost-effective, our business will be
significantly harmed. If new regulations restricting our ability to charge
a fee
for public bid information are enacted, our business will be significantly
harmed.
Available
Information
Onvia
files with and furnishes to the Securities and Exchange Commission ("SEC")
periodic reports, including annual reports on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K, proxy and information statements, and
other information, along with amendments to such reports. Onvia’s SEC filings
are posted on the SEC’s Web site at http://www.sec.gov,
which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. Materials that the
Company files with the SEC are also available at the SEC’s Public Reference Room
at 100 F Street, NE, Room 1580, Washington, DC 20549. Information regarding
the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. Onvia’s annual report on Form 10-K, along with all
other
reports and amendments filed with or furnished to the SEC are available on
the
“About Onvia” section of the Company’s website at www.onvia.com
as soon
as reasonably practicable after they file them with, or furnish them to, the
SEC.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Onvia’s
headquarters are located in Seattle, Washington, where the Company leases 29,785
square feet in two floors of a four-story office complex. As of January 1,
2007,
Onvia is fully utilizing the 29,785 square feet and believes the space is
adequate to meet current and near term capacity requirements. The lease expires
in April 2010.
In
September 2006, Onvia entered into an amended lease on its corporate
headquarters building, reducing its lease obligation by 49,215 square feet.
The
amendment coincided with a direct lease between Onvia’s landlord and the Bill
and Melinda Gates Foundation (“Gates”) to lease all of its previously idle
office space in this building. Onvia retains 29,785 square feet in the same
building through April 2010 subsequent to the amendment. Onvia’s total future
lease obligation decreased by approximately $3.2 million as a result of the
lease amendment.
In
August
2006, Onvia’s lease of approximately 19,000 square feet on its former corporate
headquarters in Seattle, Washington expired. This space had been subleased
to
another party and the sublease also expired in August 2006. Onvia has no further
obligation on this space.
ITEM 3. LEGAL
PROCEEDINGS
Class
Action Securities Litigation
During
the year ended December 31, 2001, five securities class action suits were filed
against Onvia, former executive officers Glenn S. Ballman and Mark T. Calvert,
and Onvia’s lead underwriter, Credit Suisse First Boston (“CSFB”). The suits
were filed in the United States District Court for the Southern District of
New
York on behalf of all persons who acquired securities of Onvia between March
1,
2000 and December 6, 2000. On or around April 19, 2002, these five suits were
consolidated, a lead plaintiff was appointed, and the consolidated complaint
was
filed. The complaint charged defendants with violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated
thereunder) and Sections 11 and 15 of the Securities Act of 1933, for issuing
a
Registration Statement and Prospectus that contained material misrepresentations
and/or omissions. The complaint alleged that the Registration Statement and
Prospectus were false and misleading because they failed to disclose (i) the
agreements between CSFB and certain investors to provide them with significant
amounts of restricted Onvia shares in the initial public offering (“IPO”) in
exchange for excessive and undisclosed commissions; and (ii) the agreements
between CSFB and certain customers under which the underwriters would allocate
shares in the IPO to those customers in exchange for the customers’ agreement to
purchase Onvia shares in the after-market at predetermined prices. The complaint
sought an undisclosed amount of damages, as well as attorneys’ fees. On October
9, 2002, an order of dismissal without prejudice was entered, dismissing former
officers Glenn S. Ballman and Mark T. Calvert. This action is being coordinated
with approximately 300 other nearly identical actions filed against other
companies. On October 13, 2004, the Court certified a class in six of the
approximately 300 other actions (the “focus cases”). In her Opinion, Judge
Scheindlin noted that the decision is intended to provide strong guidance to
all
parties regarding class certification in the remaining cases. The Underwriter
Defendants appealed the decision and the Second Circuit vacated the district
court’s decision granting class certification in those six cases on December 5,
2006. Plaintiffs have not yet moved to certify a class in the Onvia case.
13
In
June
2003, Onvia, along with most of the companies named as defendants in this
litigation, approved a settlement agreement negotiated among plaintiffs,
underwriters, and issuers. It is unclear what impact the Second Circuit’s
decision vacating class certification in the six focus cases will have on the
settlement, which has not yet been finally approved by the Court. On December
14, 2006, Judge Scheindlin held a hearing. Plaintiffs informed the Court that
they planned to file a petition for rehearing and rehearing en banc. The Court
stayed all proceedings, including a decision on final approval of the settlement
and any amendments of the complaints, pending the Second Circuit’s decision on
Plaintiffs’ petition for rehearing. Plaintiffs filed a petition for rehearing
and rehearing en banc on January 5, 2007. Among
other provisions, the settlement, if it receives final approval by the Court,
provides for a release of Onvia and the individual defendants for the conduct
alleged in the action to be wrongful. Onvia would agree to undertake certain
responsibilities, including agreeing to assign away, not assert, or release
certain potential claims Onvia may have against its underwriters. The settlement
agreement also provides a guaranteed recovery of $1 billion to plaintiffs for
the cases relating to all of the approximately 300 issuers. To the extent that
the underwriter defendants settle all of the cases for at least $1 billion,
no
payment will be required under the issuers’ settlement agreement. To the extent
that the underwriter defendants settle for less than $1 billion, the issuers
are
required to make up the difference. On April 20, 2006 JPMorgan Chase and the
Plaintiffs reached a preliminary agreement to settle for $425 million. The
JPMorgan Chase preliminary agreement has not yet been approved by the Court.
In
an amendment to the issuers’ settlement agreement, the issuers’ insurers agreed
that the JPMorgan preliminary agreement, if approved, would offset the insurers’
obligation to cover the remainder of Plaintiffs’ guaranteed $1 billion recovery
by 50% of the value of the JPMorgan settlement, or $212.5 million. Therefore,
if
the JPMorgan preliminary agreement to settle is preliminarily and then finally
approved by the Court, then the maximum amount that the issuers’ insurers will
be potentially liable for is $787.5 million. However, future settlements with
other underwriters would further reduce that liability. It is unclear what
impact the Second Circuit’s decision vacating class certification in the focus
cases will have on the JPMorgan preliminary agreement.
It
is
anticipated that any potential financial obligation of Onvia to plaintiffs
pursuant to the terms of the issuer’s settlement agreement and related
agreements will be covered by existing insurance. The Company currently is
not
aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers
are
solvent, and the company is not aware of any uncertainties as to the legal
sufficiency of any insurance claim with respect to any recovery by plaintiffs.
Therefore, we do not expect that the settlement will involve any payment by
Onvia. If material limitations on the expected recovery of the potential
financial obligation to the plaintiffs from Onvia’s insurance carriers should
arise, Onvia’s maximum financial obligation to plaintiffs pursuant to the
settlement agreement would be less than $3.4 million. However, if the JPMorgan
Chase preliminary agreement is preliminarily and then finally approved, Onvia’s
maximum financial obligation to the plaintiffs pursuant to the settlement
agreement would be approximately $2.7 million.
There
is
no assurance that the court will grant final approval to the issuers’
settlement. If the settlement agreement is not approved and Onvia is found
liable, we are unable to estimate or predict the potential damages that might
be
awarded, whether such damages would be greater than Onvia’s insurance coverage,
and whether such damages would have a material impact on our results of
operations or financial condition in any future period.
Class
Action Faxing Litigation
On
February 3, 2005, a lawsuit was filed against Onvia in King County, Washington
by Responsive Management Systems. The complaint alleged that Onvia had sent
unsolicited facsimiles to recipients in violation of the federal Telephone
Consumer Protection Act, Washington’s facsimile law, and the Washington Consumer
Protection Act. The complaint sought injunctive relief as well as incidental
statutory damages allowed under the federal and Washington facsimile laws on
behalf of the plaintiff and each member of the proposed class who received
a
facsimile in 2001-2004. We send facsimiles to customers with whom we have an
existing business relationship, or to vendors with whom our agency partners
have
an existing relationship. The parties reached a settlement on April 28, 2006,
which was preliminarily approved by the court on July 13, 2006. Under the
settlement agreement, Onvia has no liability, but Onvia has agreed to assign
its
rights and claims under its general commercial liability insurance to the
plaintiff class. We received final court approval on the settlement agreement
on
November 19, 2006. Onvia’s commercial insurance company St. Paul Fire and Marine
Insurance Company appealed the final court approval of the settlement. The
outcome of the appeal will not impact Onvia’s release under the settlement
agreement.
On
or
around July 28, 2006, Onvia’s commercial insurance company St. Paul Fire and
Marine Insurance Company filed a complaint for declaratory relief against Onvia
and Responsive Management Systems in the United States District Court for the
Western District of Washington. St. Paul is seeking determination that it owes
no duty to defend Onvia in the lawsuit brought by Responsive Management Systems
and that it has no coverage obligation under our commercial insurance policy.
Onvia was dismissed from this declaratory action on March 7, 2007.
Onvia
considers this matter closed.
Potential
Future Litigation
In
addition, from time to time the Company is subject to various other legal
proceedings that arise in the ordinary course of business. While management
believes that the disposition of these matters will not have a material adverse
effect on the financial position, results of operations, or cash flows of the
Company, the ultimate outcomes are inherently uncertain.
14
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
ended December 31, 2006.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
executive officers of the Company are as follows:
Michael
D. Pickett
has
served as Chief Executive Officer and Chairman of the Board of the Company
since
April 2001. Mr. Pickett has also served as President of the Company since
September 2004.
Irvine
N. Alpert
has
served as Executive Vice President of the Company since July 2001. From February
1995 to July 2001, Mr. Alpert was the founder and Chief Executive Officer of
ProjectGuides, Inc., an architecture, engineering, and construction market
information service, which was acquired by Onvia in June 2001. From 1993 to
1995, Mr. Alpert served as President of RCI Environmental, Inc., a regional
construction company. Mr. Alpert holds a Bachelor of Arts from the University
of
California, Santa Cruz and a Master of Environmental Planning from the
University of California, Berkeley.
Matthew
S. Rowley
has
served as Chief Information Officer of the Company since July 2001. Prior to
becoming Chief Information Officer of the Company, Mr. Rowley served as Vice
President of Development from June 2001 to July 2001, Director of Site
Development from December 2000 to June 2001, and Development Manager from August
2000 to December 2000. From November 1999 to August 2000, Mr. Rowley served
as
Director of Electronic Commerce of Hardware.com, Inc., an online source for
total home improvement solutions, which was acquired by Onvia in September
2000.
From May 1999 to November 1999, Mr. Rowley was Director of Electronic Commerce
Operations of Multiple Zones International, a direct reseller of name-brand
information technology products and services to small to medium businesses.
Mr.
Rowley holds a Bachelor of Arts in History from Seattle Pacific University.
Peter
W. Noble
served
as Senior Vice President of Sales of the Company since July 2005. From October
2001 to June 2005, Mr. Noble was Regional Vice President with Gartner, Inc.,
a
provider of research and analysis on the global IT industry. Mr. Noble holds
a
Bachelor of Arts in Business Administration from University of Puget Sound.
Teri
L. Wiegman
served
as Vice President of Marketing of the Company from March 2005 until her
departure in January 2007. Ms. Wiegman continues to serve as an independent
consultant for the Company. From May 2002 to March 2005, Ms. Wiegman was a
consultant with The Resonance Group, working with clients Hewlett-Packard and
Microsoft. From January 1999 to October 2001, Ms. Wiegman served as Vice
President of Marketing for Content Technologies, makers of MIMEsweeper email
security software. Ms. Wiegman holds a Bachelor of Science in Communications
from University of Idaho.
Michael
S. Balsam
served
as Vice President of Products and Services of the Company since January 2005.
Prior to becoming Vice President, Mr. Balsam served as Director of Product
Management since November 2002. From June 2001 to November 2002, Mr. Balsam
served as a Product Marketing Manager with the Company. Mr. Balsam holds a
Bachelor of Science in Zoology from University of New Hampshire.
Cameron
S. Way
has
served as Chief Accounting Officer of the Company since January 2003. Mr. Way
served as Controller from September 2001 to June 2005, Assistant Controller
from
December 2000 to September 2001, and finance manager from August 1999 to
December 2000. Mr. Way was an audit manager with PricewaterhouseCoopers LLP
from
January 1999 to August 1999 prior to joining the Company. Mr. Way holds a
Bachelor of Arts from Claremont McKenna College.
There
are
no family relationships between any directors or executive officers of the
Company. 15
PART
II
ITEM 5. MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Onvia
common stock trades on the NASDAQ Global Market under the symbol ONVI. The
table
below lists the high and low closing prices per share of Onvia’s common stock
for each quarterly period during the past two fiscal years as reported on the
NASDAQ Global Market.
Holders
As
of
March 1, 2007, there were approximately 521 holders of record of Onvia common
stock. The number of recordholders was determined from the records of the
Company’s transfer agent and does not include the number of persons whose stock
is held in nominee or “street name” accounts through brokers.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
information required by this item is incorporated by reference to the section
entitled “Equity Compensation Plan Information” in the Proxy Statement for our
Annual Meeting of Stockholders to be filed not later than April 30, 2007.
Recent
Sales of Unregistered Securities
None.
Issuer
Purchases of Equity Securities
None.
16
Stock
Price Performance Graph
The
following graph compares the cumulative total return to shareholders on Onvia’s
common stock during the five years ending December 31, 2006 to the cumulative
total returns on the NASDAQ Composite Index and the AMEX Interactive Week
Internet Index. The comparison assumes $100 was invested on December 31,
2001 in
shares of Onvia’s common stock and in each of the indices shown. The stock price
performance shown on the following graph is not necessarily indicative of
future
performance of Onvia’s common stock.
 17
ITEM 6. SELECTED
CONSOLIDATED FINANCIAL DATA
FAS
123R
requires companies to estimate expected volatility over the expected term
of the
options granted. Management has primarily used the historical volatility
of
Onvia’s common stock to estimate the future volatility of its common stock for
purposes of estimating the fair value of options granted during 2006; however,
management also considered the volatility of the common stock of other companies
with business models similar to Onvia’s to the extent necessary given the
expected life of the options. Prior to adoption of FAS 123R, Onvia’s expected
volatility was calculated in a similar manner.
The
following selected consolidated financial data for the fiscal years ended
December 31 for the years presented should be read in conjunction with the
consolidated financial statements and related notes of Onvia and its
subsidiaries included in this and previous Annual Reports on Form 10-K, as
well
as the section of this and previous reports entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” Historical
results are not necessarily indicative of future results.
18
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY
STATEMENT
In
addition to the historical information contained herein, the disclosure and
analysis in this report contains forward-looking statements. When used in this
discussion, the words “believes,” “anticipates,” “may,” “will,” “should,”
“expects,” “plans,” “estimates,” “predicts,” “potential,” “continue,” “intends”
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 forward-looking. 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” and elsewhere in this report. We undertake 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 we file from time to time
with
the Securities and Exchange Commission.
Management
Overview
Beginning
in 2005, Onvia developed a strategic plan designed to differentiate the Company
within the public-sector information marketplace with the long-term objective
of
consistent revenue growth and increasing return on investment. In 2005 we
launched the Onvia Dominion® database, a comprehensive resource for government
agency research, agency buyer history, competitive intelligence, and government
project histories unavailable elsewhere in the marketplace. Onvia’s product line
expanded to include Onvia Business Builder, our flagship market intelligence
product, along with the original Onvia Guide lead notification product.
Consistent
with the strategic plan, we successfully executed initiatives in 2006 intended
to accelerate revenue growth, including new product releases, improving the
execution of our sales force and improvements in client retention rates. During
2006 we launched a new database search tool, Onvia Navigator, which allows
clients to easily identify market opportunities within the database and search
the contents of the related specification documents. Nearly 34% of our client
base has purchased one of our new products, Onvia Business Builder or Onvia
Navigator, since launch.
The
next
stages of our strategic plan will be executed over the next three years. The
current phase of the Company’s strategic plan focuses on new product releases,
continued improvement in all aspects of sales and marketing, and constant focus
on efficiency in 2007.
Management
evaluates four key operating metrics, among others, to assist in the evaluation
of Onvia’s operating performance, and believes these metrics provide a means to
compare our business with other businesses in the information industry. The
operating metrics used to measure our two business channels are as follows:
number of clients, annual contract value, annual contract value per client,
and
quarterly contract value per client.
During
2006 we announced that we were discontinuing our county-level product, and
during the third quarter of 2006 we made a change to our client metrics. County
clients have an average contract value of $62 per client, and in the aggregate,
represent less than 1% of total contract value. Because our county product
is
not part of our ongoing business, and is inconsequential to our total contract
value, we have excluded county clients from our client metrics and historical
metrics have been recast to reflect this change.
Number
of Clients
Number
of
clients represents the number of individual businesses subscribing to our
products. At December 31, 2006 we had approximately 9,200 clients, down from
approximately 9,600 at December 31, 2005 and unchanged from September 30, 2006.
This decline in the number of clients is almost exclusively due to the loss
of
metropolitan coverage clients who receive the least amount of content due to
their small geographic scope. The value of the non-renewed metropolitan coverage
clients represented less than 1% of our annual contract value.
Annual
Contract Value (“ACV”)
Annual
contract value is the aggregate annual revenue value of our subscription client
base. Growth in annual contract value demonstrates our success in increasing
the
number of high value clients and upgrading existing clients into new
and
higher valued products. At December 31, 2006, annual contract value was $15.5
million, up 18% compared to $13.1 million at December 31, 2005, and up 4% from
$14.9 million at September 30, 2006.
Annual
Contract Value per Client (“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. At
December 31, 2006, ACVC was $1,692, compared to $1,371 at December 31, 2005,
an
increase of 23%, and an increase of 4% compared to $1,629 at September 30,
2006.
These increases were driven by increased adoption of Onvia Business Builder
and
Onvia Navigator and scheduled price increases.
Quarterly
Contract Value per Client (“QCVC”)
Quarterly
contract value per client represents the average annual contract value of all
new and renewing clients transacting during the quarter and is a leading
indicator of future annual contract value per client. QCVC increased to $1,810
in the fourth quarter of 2006 compared to $1,500 in the fourth quarter of 2005,
and decreased slightly from $1,823 during the third quarter of 2006. Quarterly
contract value per client was slightly lower than in the third quarter of 2006
due to a higher number of Onvia Guide products sold in the fourth quarter.
The
Onvia Guide is Onvia’s lower cost entry level lead notification product, and its
users represent an excellent opportunity for expansion into our higher valued,
new product offerings.
19
In
2006,
we increased revenue 14% to $16.7 million, compared to $14.7 million in 2005,
as
a result of increases in ACVC. Gross margin improved to 80% in 2006, compared
to
78% in 2005, as a result of efficiencies in our research group. Operating
expenses increased 4% to $19.8 million, compared to $19.1 million in 2005,
primarily as a result of planned growth in our sales organization and increased
selling expenses as a result of increased sales during 2006 and increases in
noncash stock-based compensation as a result of the adoption of Statement of
Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based
Payments
(“FAS
123R”). Net loss decreased 20% to $5.5 million in 2006, compared to $6.9 million
in 2005. Net loss per share decreased 21% to $0.70 in 2006, compared to $0.89
in
2005.
Cash
used
in operations decreased 45% to $3.6 million in 2006, compared to $6.6 million
in
2005, primarily due to increased sales during 2006. Year over year, unearned
revenue increased 41% to $8.8 million at December 31, 2006, compared to $6.3
million at December 31, 2005. Unearned revenue represents the unrecognized
value
of paid or billed client subscriptions and content license
contracts.
In
the
fourth quarter of 2006, we leased all of our idle office space through the
remainder of our lease, which expires in April 2010. A direct lease between
our
landlord and The Bill and Melinda Gates Foundation (“Gates”) resulted in an
amendment of Onvia’s lease, effective January 1, 2007, reducing our lease
obligation by 49,215 square feet, leaving us with 29,785 square feet. The lease
of this idle space decreases our future lease obligation by approximately $3.2
million over the remaining term of the lease. The remaining idle lease accrual
of $3.8 million represents the difference between Onvia’s original contractual
obligation on the 49,215 square feet and the rates negotiated in the direct
lease between our landlord and Gates.
Application
of Critical Accounting Policies and Management Estimates
Our
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us 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. We believe the
following are our most significant accounting policies and estimates:
Revenue
Recognition
Our
revenues are primarily generated from client subscriptions and content licenses.
Subscription revenues are generally prepaid at the beginning of the subscription
term and we offer annual, quarterly and monthly payment options. We also offer,
on a limited basis, extended multi-year contracts to our subscription clients.
Content licenses are generally multi-year agreements and are typically invoiced
on a monthly or quarterly basis. Subscription fees and content licenses are
recognized ratably over the term of the agreement. Unearned revenue consists
of
payments received for prepaid subscriptions from our non-enterprise clients
whose terms extend into periods beyond the balance sheet date, as well as the
invoiced portion of enterprise contracts and content licenses whose terms extend
into periods beyond the balance sheet date. We also generate
revenue from fees charged for document download services, informational reports
and list rental services and revenue from these services are recognized upon
delivery.
Internal
Use Software
We
account for the costs to develop or obtain software for internal use in
accordance with Statement of Position No. 98-1 ("SOP 98-1"), Accounting
for Costs of Computer Software Developed for or Obtained for Internal
Use.
As a
result, 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.
Noncash
Stock-Based Compensation
On
January 1, 2006, we adopted the provisions of FAS 123R, which requires
measurement of compensation cost for all stock-based awards at fair value on
the
date of grant and recognition of stock-based compensation cost over the
requisite service period for awards expected to vest. The fair value of stock
options is determined using the Black-Scholes valuation model, which is
consistent with our valuation techniques previously utilized for options in
footnote disclosures required under SFAS No. 123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation — Transition and Disclosure—an amendment of FASB
Statement No. 123.
Such
value is recognized as expense over the service period, net of estimated
forfeitures, using the accelerated method under Financial Accounting Standards
Board (“FASB”) Interpretation No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans.
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 2 to the consolidated financial
statements for additional information on the estimation of these variables.
Actual results, and future changes in estimates, may differ substantially from
our current estimates.
20
Lease
Obligations
In
September 2006, we entered into an amended lease on our current corporate
headquarters building, reducing our lease obligation by 49,215 square feet
effective January 1, 2007. We recorded a net decrease to operating expenses
of
$67,000 in the year ended December 31, 2006 to adjust our estimated idle lease
accrual to the actual remaining obligation pursuant to the terms of the amended
lease. Idle lease charges in the years ending December 31, 2005 and 2004 were
$1.2 million and $916,000, respectively. Our remaining idle lease accrual of
$3.8 million at December 31, 2006 represents the difference between our original
contractual obligation on the 49,215 square feet and the lease rates in the
direct lease between Gates and our landlord for the remainder of our lease
term.
The balance of the accrual will be paid out through the remainder of our lease
term, which runs through April 2010.
In
August
2006 our lease on 19,000 square feet of office space in a former corporate
facility in Seattle, Washington expired. This space had been subleased to
another party and the sublease also expired in August 2006. We have no further
obligation on this space.
Accounts
Receivable and Allowance for Doubtful Accounts
We
record
accounts receivable for the invoiced portion of our enterprise contracts and
content licenses once we have a signed agreement and an invoice has been
created. We do not record a receivable for the unbilled portion of our
enterprise contracts or content licenses. As of December 31, 2006 and 2005,
the
unbilled portion of enterprise contracts and content licenses was approximately
$3.1 million and $2.5 million, respectively. 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.
Contractual
Obligations
Future
required payments under contracts, excluding operating expenses for our lease
obligations, as of December 31, 2006 are as follows for the periods specified:
(1) Other
operating lease obligations relate to leases for office equipment.
(2) Purchase
obligations relate to annual installments for software licenses, third party
content agreements and telecom contracts.
Consolidated
Results of Operations
The
following table provides our selected consolidated results of operations for
the
indicated periods (in thousands of dollars and as a percentage of total
revenue):
21
Comparison
of Years Ended December 31, 2006 and 2005
Revenue
and Cost of Revenue
Revenue
increased 14% to $16.7 million for the year ended December 31, 2006, compared
to
$14.7 million for the year ended December 31, 2005. The increase is primarily
driven by an increase in ACVC, which is attributable to increased adoption
of
our Onvia Business Builder and Onvia Navigator products, upgrading clients
into
higher valued products and scheduled price increases. If adoption of Onvia
Business Builder and other anticipated new products is consistent with our
expectations, we expect to continue to see improvement in our ACV as well as
an
increase in client retention rates in future periods.
Cost
of
revenue increased 3% to $3.4 million, or 20.3% of revenue, for the year ended
December 31, 2006, compared to $3.3 million, or 22.3% of revenue, for the year
ended December 31, 2005. Our cost of revenue consist primarily of payroll
related expenses associated with collecting, categorizing and publishing our
content, and also include third party content fees and credit card processing
fees. Third party content and credit card processing fees were approximately
$995,000 and $1.1 million for the years ended December 31, 2006 and 2005,
respectively. Cost of revenue increased in total due in part to an increase
of
$235,000 in payroll related expenses as a result of headcount growth in our
research team. Weighted average headcount on our research team was 53 during
2006, compared to 43 during 2005. The headcount increase resulted from increased
information requirements for new product introductions. This increase was
partially offset by a decrease of $157,000
in third party content fees as a result of the expiration and renegotiation
of
content contracts. We expect to see a comparable increase in cost of revenue
in
2007, as we add additional content and new products to our offering.
Sales
and Marketing
Sales
and
marketing expenses were $11.7 million, or 70.0% of revenue, and $10.3 million,
or 70.3% of revenue, for the years ended December 31, 2006 and 2005,
respectively, representing an increase of $1.4 million, or 13%. The increase
in
total is attributable in part to an increase of $1.9 million in payroll-related
expenses due to planned increases in headcount, increases in commissions due
to
higher sales in 2006 and normal merit increases. Weighted average headcount
in
our sales and marketing teams was 91 in 2006, compared to 77 in 2005. We also
saw increases of $443,000 in stock-based compensation related to the adoption
of
FAS 123R, $334,000 in allocated expenses due to growth in headcount, and
$141,000 in telecom expenses primarily attributable to the increased use of
web
conferencing under our new sales methodology. Allocated expenses consist of
depreciation, amortization and other allocated expenses, and they are allocated
based on headcount in the respective departments. These increases were partially
offset by a decrease of $1.3 million in marketing-related expenses due to a
decrease in direct marketing expenses as a result of the implementation of
a new
sales methodology, and a decrease of $93,000 in consulting expenses. Consulting
expenses incurred during 2005 related to fees to assist in the implementation
of
the new sales methodology and these fees were not incurred during
2006.
Technology
and Development
Technology
and development expenses were $4.2 million, or 25.2% of revenue, and $4.0
million, or 27.4% of revenue, for the years ended December 31, 2006 and 2005,
respectively, representing an increase of $179,000, or 4%. The increase in
total
is attributable to increases of $81,000 in payroll related expenses due to
normal performance-based increases and increases in recruiting fees for new
hires, an increase of $80,000 in stock-based compensation expense due to
adoption of FAS 123R, and an increase of $48,000 in amortization of software
maintenance and license fees and other allocated expenses. Weighted average
headcount in this group was 33 in 2006, compared to 35 in 2005. Capitalization
of internally developed software costs increased by $29,000 in 2006 compared
to
2005, partially offsetting the increases in total expenses discussed
above.
General
and Administrative
General
and administrative expenses were $4.0 million, or 23.7% of revenue, and $3.5
million, or 23.7% of revenue, for the years ended December 31, 2006 and 2005,
respectively, representing an increase of $496,000, or 14%. The increase in
total was primarily attributable to increases of $625,000 in stock-based
compensation due to the adoption of FAS 123R, and $52,000 in payroll-related
expenses due to normal performance-based salary increases, and increases in
contract labor and consultants. Weighted average headcount in this group was
11
in both 2006 and 2005. These increases were partially offset by a decrease
of
$62,000 in recruiting fees due to fewer senior management hires in 2006, $56,000
in travel-related expenses due to a reduction in travel, and $39,000 in
insurance expenses due to a reduction in our insurance premiums.
Noncash
Stock-Based Compensation
We
adopted FAS 123R using the modified prospective method beginning January 1,
2006. Under this transition method, our reported stock-based compensation
expense includes: a) expense related to the remaining unvested portion of awards
granted prior to January 1, 2006, which is based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123 using
the
Black-Scholes valuation model; and b) expense related to awards granted
subsequent to January 1, 2006, which is based on the grant date fair value
estimated in accordance with the provisions of FAS 123R using the Black-Scholes
valuation model. We recognize compensation expense for all grants using the
accelerated amortization method under Financial Accounting Standards Board
(“FASB”) Interpretation No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans
(“FIN
28”).
FAS
123R
requires that stock-based compensation expense be based on awards that are
ultimately expected to vest; therefore, stock-based compensation for the year
ended December 31, 2006 has been reduced for estimated forfeitures. When
estimating forfeitures, we consider trends of actual option forfeitures as
well
as expected future activity.
Onvia’s
Savings and Retirement Plan (the “Retirement Plan”) has a provision to allow a
discretionary matching contribution, made in Onvia common stock, equivalent
to
25% of every dollar up to 6% of all eligible employee contributions. Matching
contributions are made in the first quarter following each plan year, and
employees must be employed on the last day of the plan year to be eligible
to
receive the matching contribution. Matching contributions were authorized for
both the 2005 and 2006 plan years. Stock-based compensation expense associated
with this match was $94,051 and $69,895 for the years ending December 31, 2006
and 2005, respectively.
We
recorded $1.3 million and $84,000 of noncash stock-based compensation expense
for the years ended December 31, 2006 and 2005, respectively.
22
Idle
Lease Charges
Onvia
recorded a net decrease to operating expenses of $67,000 in the year ended
December 31, 2006 to adjust our estimated idle lease accrual to the actual
remaining obligation pursuant to the terms of the amended lease. Our remaining
idle lease accrual of $3.8 million at December 31, 2006 represents the
difference between our original contractual obligation on the 49,215 square
feet
and the lease rates in the direct lease between Gates and our landlord for
the
remainder of the lease term. The balance of the accrual will be paid out through
the remainder of the lease term, which runs through April 2010. Please refer
to
the discussion under “Lease Obligations” above for a discussion of the
adjustment to the idle lease accrual in 2006 and 2005.
The
following table displays rollforwards of the accruals included in the
restructuring charge through December 31, 2006 by type (in thousands):
Interest
and Other Income, Net
Net
interest and other income consists of interest earned on our investment
accounts, letter of credit fees associated with our security deposits and other
miscellaneous income. Net interest and other income was $952,000 and $742,000
for the years ended December 31, 2006 and 2005, respectively. The increase
in
2006 is primarily attributable to an increase in short term interest rates
compared to 2005. Other income in 2005 was partially offset by a $50,000 loss
on
the settlement of a note receivable from our former Chief Strategy Officer.
Net
Loss, Net Loss per Share and Comprehensive Loss
Net
loss
decreased by 20% to $5.5 million for the year ended December 31, 2006, or $0.70
per share, compared with a loss of $6.9 million, or $0.89 per share, for the
year ended December 31, 2005. The decrease in net loss is primarily related
to
increases in revenue, and improvement in gross margin, as well as the impact
of
the $67,000 reduction to our idle lease accrual compared to an increase in
the
accrual of $1.2 million in 2005. These improvements were offset by the increase
in stock-based compensation as discussed above. Comprehensive loss was $5.5
million and $6.9 million for the years ended December 31, 2006 and 2005,
respectively.
Provision
for Income Taxes
We
have
incurred net operating losses from March 25, 1997 (inception) through December
31, 2006, and therefore have not recorded a provision for income taxes. At
December 31, 2006 and 2005, we had net operating loss carryforwards for tax
purposes of $252.8 million and $246.9 million, respectively. These loss
carryforwards are available to reduce future taxable income and expire at
various dates beginning in 2007 through 2026. Under the provisions of the
Internal Revenue Code, certain substantial changes in our ownership may limit
the amount of net operating loss carryforwards that could be utilized annually
in the future to offset taxable income. We have recorded a valuation allowance
for the full amount of our net deferred tax assets, as the future realization
of
the tax benefit is not currently likely.
Comparison
of Years Ended December 31, 2005 and 2004
Revenue
and Cost of Revenue
Revenue
increased 13% to $14.7 million for the year ended December 31, 2005,
compared to $13.1 million for the year ended December 31, 2004. The
increase was primarily driven by an increase in ACV attributable to adoption
of
our Onvia Business Builder product and upgrading clients to our higher value
products.
Cost
of
revenue increased 100% to $3.3 million, or 22.3% of revenue, for the year ended
December 31, 2005, compared to $1.6 million, or 12.6% of revenue, for the
year ended December 31, 2004. Third party content and credit card
processing fees were approximately $1.1 million and $537,000 for the years
ended
December 31, 2005 and 2004, respectively. Cost of revenue increased in
total and as a percentage of revenue due in part to an increase of $991,000
in
payroll related expenses as a result of headcount growth in our research team
and normal merit increases. Weighted average headcount on our research team
was
43 during 2005, compared to 24 during 2004. The headcount increase resulted
from
increased information requirements for new product introductions. In addition,
we saw an increase of $682,000 in third party content fees as a result of new
agreements to supplement our content for new product introductions.
Sales
and Marketing
Sales
and
marketing expenses were $10.5 million, or 71.3% of revenue, and $9.0 million,
or
69.1% of revenue, for the years ended December 31, 2005 and 2004,
respectively, representing an increase of $1.5 million, or 16%. The increase
in
total and as a percentage of revenue is attributable in part to an increase
in
headcount and commissions in our sales and marketing teams, which resulted
in an
increase of $991,000 in payroll expenses in 2005. Weighted average headcount
in
our sales and marketing teams was 77 in 2005, compared to 67 in 2004. We also
experienced increases of $441,000 in marketing related expenses attributable
to
the launch of Onvia Business Builder in the third quarter of 2005, $116,000
in
consulting expenses related to the development of a new consultative sales
methodology, and an increase of $67,000 in travel related expenses due to growth
in and increased travel by the sales teams. These increases were offset by
a
decrease of $242,000 in allocated expenses; although headcount increased
compared to the prior year in our sales and marketing teams, it decreased as
a
percentage of total headcount due to higher growth in our research and
technology teams, resulting in a smaller allocation of these expenses.
Technology
and Development
Technology
and development expenses were $3.9 million, or 26.4% of revenue, and $2.6
million, or 20.1% of revenue, for the years ended December 31, 2005 and
2004, respectively, representing an increase of $1.3 million, or 48%. The
increase in total and as a percentage of revenue is attributable in part to
an
increase of $637,000 in payroll related expenses due to an increase in headcount
in our technology and development teams. Weighted average headcount in these
teams was 35 in 2005, compared to 25 in 2004. In addition, allocated expenses
increased by $290,000 due to an increase in headcount in our technology and
development teams. Research headcount is included in technology and development
for purposes of allocating these expenses. We also experienced an increase
of
$218,000 in facilities expenses primarily due to the relocation of our research
department to a previously idle floor in our corporate headquarters building,
and an increase of $173,000 in software license fees due to new product
requirements and growth in our overall headcount. These increases in operating
expenses were partially offset by the capitalization of $113,000 in payroll
related costs for the internal development of software.
23
General
and Administrative
General
and administrative expenses were $3.5 million, or 23.7% of revenue, and $3.3
million, or 24.9% of revenue, for the years ended December 31, 2005 and
2004, respectively, representing an increase of $232,000, or 7%. The increase
is
partially attributable to an increase in amortization of capitalized software
costs of $136,000 as a result of the launch of Onvia Business Builder and the
launch of other internally developed software during the year. We also
experienced an increase of $99,000 in payroll related expenses in this group
as
a result of normal merit increases and a fractional increase in weighted average
headcount in this group during 2005 compared to 2004. Business taxes increased
$84,000 in 2005 as a result of the increase in revenue over the prior year,
professional services increased $83,000 due primarily to an increase in legal
fees incurred in defense of the faxing lawsuit, and training and strategic
planning expenses increased $62,000 as a result of a new management training
program and expenses associated with our new product launch. These increases
were partially offset by a decrease of $143,000 in recruiting expenses and
a
decrease of $94,000 in insurance expenses. Recruiting fees were higher in 2004
because of searches to fill vacancies on our Board of Directors and retainer
fees paid for other senior management positions. The Board of Directors
vacancies were filled in 2004 and we did not incur these expenses in 2005 and
a
majority of the retainer fees for senior management searches were paid in 2004.
The decrease in insurance expenses is due to a reduction in our directors and
officers (“D&O”) insurance premiums. Our D&O policy renews in March each
year and premiums were significantly higher in January and February of 2004.
Noncash
Stock-Based Compensation
Prior
to
the adoption of FAS 123R on January 1, 2006, we elected to account for our
employee and director stock-based awards under the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, for employee and director options, unearned stock
compensation was recorded as the excess, if any, of the fair market value of
the
underlying common stock at the date of grant over the exercise price of the
options. These amounts were amortized on an accelerated basis over the vesting
period of the option, typically four or five years. We applied the provisions
of
SFAS No. 123, Accounting for Stock-Based Compensation, for
stock-based awards to those other than employees and directors.
In
January 2005, Onvia’s Savings and Retirement Plan (the “Retirement Plan”) was
amended to add a discretionary matching contribution, made in Onvia common
stock, equivalent to 25% of every dollar up to 6% of all eligible employee
contributions. Matching contributions are made in the first quarter following
each plan year, and employees must be employed on the last day of the plan
year
to be eligible to receive the matching contribution. Stock compensation
associated with this match was $69,895 in 2005.
We
recorded $84,239 and $9,593 of noncash stock-based compensation expense for
the
years ended December 31, 2005 and 2004, respectively. Idle
Lease Charges
During
the year ended December 31, 2005, we recorded net restructuring charges of
$1.2 million, compared to $916,000 for the year ended December 31, 2004.
Restructuring charges recorded during 2005 and 2004 related entirely to
contractual obligations and operating expenses on our lease arrangements and
estimated broker fees associated with the assumed sublease of our idle office
space based on information available at the time of the estimate.
The
following table displays rollforwards of the accruals included in the
restructuring charge through December 31, 2005 by type (in thousands):
Interest
and Other Income, Net
Net
other
income was $742,000 and $493,000 for the years ended December 31, 2005 and
2004,
respectively. The increase in 2005 is primarily attributable to an increase
in
short term interest rates compared to 2004. The increase in 2005 was partially
offset by a $50,000 loss on the settlement of a note receivable from our former
Chief Strategy Officer.
Net
Loss, Net Loss per Share and Comprehensive Loss
Net
loss
increased by 77% to $6.9 million for the year ended December 31, 2005, or $0.89
per share, compared with a loss of $3.9 million, or $0.51 per share, for the
year ended December 31, 2004. The increase is primarily attributable to the
increase in costs of revenues and operating costs as a result of the
implementation of our growth strategy in 2005, combined with an increase in
our
idle lease accrual. Other comprehensive loss was $6.9 million and $3.9 million
for the years ended December 31, 2005 and 2004, respectively. Other
comprehensive gain of $8,000 in 2005 and other comprehensive loss of $31,000
in
2004 represent unrealized gains and losses, respectively, on available-for-sale
investments.
Provision
for Income Taxes
We
have
incurred net operating losses from March 25, 1997 (inception) through December
31, 2006, and therefore have not recorded a provision for income taxes. At
December 31, 2005 and 2004, we had net operating loss carryforwards for tax
purposes of $246.9 million and $236.3 million, respectively. We have recorded
a
valuation allowance for the full amount of our net deferred tax assets, as
the
future realization of the tax benefit is not currently likely.
24
Liquidity
and Capital Resources
Our
principal sources of liquidity are cash, cash equivalents and short-term
investments. Our combined cash, cash equivalents and short-term investments
were
$14.4 million at December 31, 2006, and our working capital was $4.9 million.
From December 31, 2005 to December 31, 2006, our cash, cash equivalents and
short-term investments decreased $6.1 million, partially due to the purchase
of
$1.5 million in long-term investments and partially due to planned increases
in
our sales force and the development of new products. We also used approximately
$2.7 million on net payments for our idle office space leases. In September
2006
we entered into an amended office lease on our current corporate headquarters
building which reduces our square footage in the building by 49,215 square
feet
and reduces our future lease obligation over the remaining term by approximately
$3.2 million. Our total remaining contractual obligation on the operating lease
for our corporate headquarters is $5.4 million, excluding operating costs.
This
amount will be paid over the remaining term, which expires in April
2010.
We
currently have no debt and, under current operating plans, do not expect to
incur any debt in the near-term. We expect to begin generating positive cash
flows from operations before we would be required to seek additional financing
to fund operations by increasing client retention and acquisition, increasing
our ACVC, and reducing our cash used for idle leased office space. Until such
time as we begin generating positive cash flows from operations, we will utilize
our current cash and cash equivalents and current revenues to fund operations.
We
expect
to increase revenue from current operations by improving retention rates for
our
existing clients and increasing our ACV through a combination of expansion
of
our product offering, and scheduled price increases. ACVC at December 31, 2006
was $1,692, compared to $1,371 at December 31, 2005, representing an increase
of
23%. The increase over the previous year is primarily attributable to sales of
our new Onvia Business Builder and Onvia Navigator products, which
have a higher price-point than our entry-level Onvia Guide product, combined
with a scheduled price increase that occurred in April 2006.
If
we
engage in merger or acquisition transactions or our overall operating plans
change, we may require additional equity or debt financing to meet future
working capital needs, which 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.
Operating
Activities
Net
cash
used by operating activities was $3.6 million, $6.6 million and $4.1 million
for
the years ended December 31, 2006, 2005 and 2004, respectively. The decrease
in
net cash used in 2006 compared to 2005 was primarily attributable to an increase
in cash collected for unearned revenue in 2006 compared to 2005, and a reduction
in the payment of prepaid expenses related to timing of payments. These
increases were partially offset by planned increases in operating expenses
due
to the implementation of our growth strategy related to additional headcount
and
new product introductions.
The
increase in cash used in 2005 compared to 2004 is the result of an increase
in
cost of sales and operating expenses as a result of the strategic investment
made during 2005 to develop and launch new products and grow our sales team.
Timing differences in the collection of accounts receivable and payments on
accounts payable also contributed to the increase in cash used.
Investing
Activities
Net
cash
used in investing activities was $269,000 for the year ended December 31, 2006,
compared to net cash provided by investing activities of $12.8 million and
$2.4
million for the years ended December 31, 2005 and 2004, respectively.
The
change to net cash used in investing activities in 2006 from net cash provided
by investing activities in 2005 is primarily due to a decrease in sales and
maturities of investments in 2006 compared to 2005 due to timing of investment
maturity dates. In addition to the decrease in sales and maturities, we saw
an
increase in the purchase of property and equipment in 2006 compared to 2005
as a
result of additional requirements related to the deployment of new products
and
build-out of our existing office space to accommodate existing staff in a new
floor plan subsequent to the lease amendment. These increases in net cash used
were partially offset by the return of our security deposit on our lease for
our
previous corporate headquarters, which expired in August 2006.
The
increase in net cash provided by investing activities in 2005 compared to 2004
is primarily due to an increase in maturities of investments compared to the
prior year due to timing of investment maturity dates. Increases in maturities
were partially offset by an increase in purchases of new investments, and
increases in the purchase of property and equipment and additions to internally
developed software as a result of new product development and deployment
pursuant to our strategic plan.
Financing
Activities
Net
cash
provided by financing activities was $260,000, $181,000 and $307,000 for the
years ended December 31, 2006, 2005 and 2004, respectively. All cash provided
by
financing activities in 2006, 2005 and 2004 relates to the exercise of stock
options and purchases of stock under our employee stock purchase plan.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“FAS
159”). FAS 159 permits entities to choose to measure selected financial
instruments and certain other items at fair value that are not currently
required or permitted to be measured at fair value. This Statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective no later
than fiscal years beginning on or after November 15, 2007. The Company is
currently evaluating the impact adoption of FAS 159 will have on its financial
position and results of operations.
25
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“FAS
157”). This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement does not require any new fair
value measurements. This Statement is effective for fiscal years beginning
after
November 15, 2007. Onvia does not believe that adoption of this Statement will
have a significant impact on its financial position, results of operations
or
cash flows.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
("SAB
108"). SAB 108 was issued in order to eliminate the diversity of practice in
how
public companies quantify financial statement misstatements, including
misstatements that were not material to prior years' financial statements.
Application of this guidance did not have a material impact on our results
of
operations, financial position, or cash flows.
In
July
2006 the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement
109
(“FIN
48”). The rule clarifies what criteria must be met prior to recognition of the
financial statement benefit of a position taken in a tax return. The effective
date for FIN 48 is for fiscal years beginning after December 15, 2006. Onvia
is
currently analyzing the impact, if any, the rule will have on its results of
operations, financial position, and cash flows.
In
May
2006 the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
Statement No. 3
(“FAS
154”). This Statement changes the requirements for the accounting for and
reporting of a change in accounting principle. The Statement applies to all
voluntary changes in accounting principle, as well as changes required by an
accounting pronouncement in the event the new pronouncement does not include
specific transition provisions. APB Opinion No. 20 previously required that
most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the
new
accounting principle. This Statement requires retrospective application to
prior
periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine the period-specific effects or the cumulative effect
of the change. This Statement is effective for fiscal years beginning after
December 15, 2005. Adoption of this statement did not have an impact on Onvia’s
results of operations, financial position or cash flows. ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are
exposed to financial market risks, including changes in interest rates and
equity prices; however, we consider our exposure to these risks to be
insignificant.
Interest
Rate Risk
We
have
assessed our susceptibility to certain market risks, including interest rate
risk associated with financial instruments. We manage our interest rate risk
by
purchasing investment-grade securities and diversifying our investment portfolio
among issuers and maturities. Due to the fact that we carry no debt at December
31, 2006 and due to our investment policies and the short-term nature of our
investments, we believe that our risk associated with interest rate fluctuations
is negligible.
Our
investment portfolio consists of any or all of the following (U.S. denominated
only): money market funds, commercial paper, municipal securities, auction
rate
securities and corporate debt securities with remaining maturities of thirteen
months or less (except auction rate securities). Our primary investment
objectives are preservation of principal, a high degree of liquidity and a
maximum total return consistent with the investment objectives. Investments
in
U.S. government and agency securities (and money market funds investing in
them)
are exempt from size limitations; all other securities are limited to 10% of
the
portfolio at the time of purchase, per issuer. In addition, the cumulative
investments in an individual corporation, financial institution or financial
institution’s security are limited to $10 million. We consider the reported
amounts of these investments to be reasonable approximations of their fair
values.
Foreign
Currency Risk
Our
foreign currency risk exposure is insignificant, because all of our sales are
currently denominated in U.S. currency. A portion of our net operating losses
("NOLs") are denominated in Canadian dollars. We have recorded a full valuation
allowance for the net deferred tax asset associated with these NOLs, because
realization of the future tax benefit is not currently likely; therefore, we
believe our foreign currency risk exposure associated with these NOLs is
insignificant.
Equity
Price Risk
We
do not
own any significant equity instruments and we do not currently have plans to
raise additional capital in the equity markets; therefore, our equity price
risk
is insignificant.
26
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The
Board of Directors and Stockholders of
Onvia,
Inc.
Seattle,
Washington
We
have
audited the accompanying consolidated balance sheets of Onvia, Inc. and
subsidiary (the "Company") as of December 31, 2006 and 2005, and the related
consolidated statements of operations and other comprehensive loss, cash flows,
and changes in stockholders’ equity for each of the three years in the period
ended December 31, 2006. Our audits also included the consolidated financial
statement schedule listed in the index at item 15. These financial statements
and the financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2006 and
2005, and the results of its operations, cash flows, and changes in
stockholders' equity for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for share-based compensation upon adoption
of
Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment.
/s/ DELOITTE
& TOUCHE LLP
Seattle,
Washington
March
27,
2007
27
ITEM 8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ONVIA,
INC.
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2006 AND 2005
28
ONVIA,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004
See
notes
to consolidated financial statements.
29
ONVIA,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004
See
notes
to consolidated financial statements.
30
ONVIA,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004
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