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Onvia 10-Q 2008
onviaq3-0810q.htm

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

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from _____ to _____

Commission file number 000-29609


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

Delaware
91-1859172

(State or other jurisdiction of incorporation or organization)

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

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X] Yes    [  ] No

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

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

Common stock, par value $.0001 per share: 8,235,825 shares outstanding as of October 31, 2008.

 
 

 

ONVIA, INC.

INDEX



  
 
 

 

 
Page
  PART I.  FINANCIAL INFORMATION
1
Item 1.  Unaudited Condensed Consolidated Financial Statements
1
Condensed Consolidated Balance Sheets (Unaudited)
1
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
3
Notes To Condensed Consolidated Financial Statements (Unaudited)
4
1.        Basis of Presentation
4
2.        Use of Estimates
4
3.        Stock-Based Compensation and Stock Option Activity
4
4.        Net Loss per Share
6
5.        Prepaid Expenses and Other Current Assets
7
6.        Property and Equipment
7
7.        Internal Use Software
8
8.        Accrued Expenses
8
9.        Interest and Other Income, net
8
10.      New Accounting Pronouncements
9
11.      Commitments and Contingencies
10
12.      Provision for Income Taxes
12
13.      Security Deposits
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
13
Company Overview
13
Executive Summary of Operations and Financial Position
17
Seasonality
19
Results of Operations for the Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007
20
Critical Accounting Policies and Management Estimates
22
Contractual Obligations
25
Liquidity and Capital Resources
25
Recent Accounting Pronouncements
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
27
Item 4(T). Controls and Procedures
28
PART II. OTHER INFORMATION
29
Item 1.  Legal Proceedings
29
Item 1A.  Risk Factors
29
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 3.  Defaults Upon Senior Securities
31
Item 4.  Submission of Matters to a Vote of Security Holders
31
Item 5.  Other Information
31
Item 6.  Exhibits
32
SIGNATURES
34

 
 
 

 

 
 
Onvia, Inc.
Condensed Consolidated Balance Sheets (Unaudited)

   
September 30, 2008
   
December 31, 2007
 
   
(Unaudited)
 
   
(In thousands, except share data)
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 14,693     $ 14,301  
Accounts receivable, net of allowance for doubtful accounts of $73 and $52
    1,197       1,393  
Prepaid expenses and other current assets
    655       549  
Reimbursable tenant improvements
    147       2,663  
Security deposits, current portion
    134       3,500  
                 
Total current assets
    16,826       22,406  
                 
LONG TERM ASSETS:
               
Property and equipment, net of accumulated depreciation of $3,083 and $6,209
    1,913       957  
Security deposits, net of current portion
    404       538  
Internal use software, net of accumulated amortization of $1,550 and $1,079
    3,588       1,838  
Other assets
    8       2  
                 
Total long term assets
    5,913       3,335  
                 
TOTAL ASSETS
  $ 22,739     $ 25,741  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 1,169     $ 2,220  
Accrued expenses
    1,430       1,335  
Obligations under capital leases, current portion
    106       113  
Unearned revenue, current portion
    8,611       9,096  
Deferred rent, current portion
    48       3  
                 
Total current liabilities
    11,364       12,767  
                 
LONG TERM LIABILITIES:
               
Obligations under capital leases, net of current portion
    12       89  
Unearned revenue, net of current portion
    142       342  
Deferred rent, net of current portion
    824       279  
                 
Total long term liabilities
    978       710  
                 
TOTAL LIABILITIES
    12,342       13,477  
                 
COMMITMENTS AND CONTINGENCIES (Note 11)
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock; $.0001 par value: 2,000,000 shares authorized; no shares issued or outstanding
    -       -  
Common stock; $.0001 par value: 11,000,000 shares authorized; 8,243,906 and 8,224,383 shares issued; and 8,235,825 and 8,207,465 outstanding
    1       1  
Treasury stock, at cost: 8,081 and 16,918 shares
    (40 )     (83 )
Additional paid in capital
    351,885       351,268  
Accumulated deficit
    (341,449 )     (338,922 )
                 
Total stockholders’ equity
    10,397       12,264  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 22,739     $ 25,741  

See accompanying notes to the unaudited condensed consolidated financial statements.

 
1

 

Onvia, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands, except per share data)
   
(In thousands, except per share data)
 
                         
Revenue
                       
 Subscription
  $ 4,488     $ 4,578     $ 13,391     $ 13,173  
 Content license
    562       607       1,655       1,853  
 Management information reports
    73       146       389       206  
 Other
    43       59       196       183  
                                 
Total revenue
    5,166       5,390       15,631       15,415  
                                 
Cost of revenue
    1,066       928       3,228       2,700  
                                 
                                 
Gross margin
    4,100       4,462       12,403       12,715  
                                 
Operating expenses:
                               
Sales and marketing
    3,069       2,700       8,854       8,565  
Technology and development
    975       784       3,069       3,151  
General and administrative
    986       1,021       3,418       2,909  
Idle lease expense
    -       (2,653 )     -       (2,653 )
                                 
 Total operating expenses
    5,030       1,852       15,341       11,972  
                                 
(Loss) / income from operations
    (930 )     2,610       (2,938 )     743  
Interest and other income, net
    99       247       410       743  
                                 
Net (loss) / income
  $ (831 )   $ 2,857     $ (2,528 )   $ 1,486  
                                 
Unrealized gain on available-for-sale securities
    -       19       -       14  
                                 
Comprehensive (loss) / income
  $ (831 )   $ 2,876     $ (2,528 )   $ 1,500  
                                 
Basic net (loss) / income per common share
  $ (0.10 )   $ 0.35     $ (0.31 )   $ 0.18  
                                 
Diluted net (loss) / income per common share
  $ (0.10 )   $ 0.33     $ (0.31 )   $ 0.18  
                                 
Basic weighted average shares outstanding
    8,236       8,119       8,226       8,049  
                                 
Diluted weighted average shares outstanding
    8,236       8,547       8,226       8,443  

See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
2

 

Onvia, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Nine Months Ended September 30,
 
   
2008
   
2007
 
   
(Unaudited)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) / income
  $ (2,528 )   $ 1,486  
Adjustments to reconcile net (loss) / income to net cash (used in) / provided by operating activities:
 
Depreciation and amortization
    1,114       1,232  
Loss on abandoned assets
    97       45  
Loss on sale of property and equipment
    -       7  
Stock-based compensation
    557       673  
Change in operating assets and liabilities:
               
Accounts receivable
    197       (82 )
Prepaid expenses and other current assets
    (106 )     (311 )
Other assets
    20       7  
Accounts payable
    (1,051 )     811  
Accrued expenses
    78       (255 )
Idle lease accrual
    -       (3,582 )
Unearned revenue
    (686 )     494  
Deferred rent
    590       (77 )
                 
Net cash (used in) / provided by operating activities
    (1,718 )     448  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Additions to property and equipment
    (1,568 )     (130 )
Proceeds from sales of property and equipment
    3       -  
Additions to internal use software
    (2,352 )     (814 )
Purchases of investments
    -       (9,044 )
Maturities of investments
    -       8,261  
Return / (issuance) of security deposits
    3,500       (538 )
Reimbursable tenant improvements
    2,516       -  
                 
Net cash provided by / (used in) investing activities
    2,099       (2,265 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Principal payments on capital lease obligations
    (83 )     (24 )
Proceeds from exercise of stock options and purchases under employee stock purchase plan
    94       1,084  
                 
Net cash provided by financing activities
    11       1,060  
                 
Net increase / (decrease) in cash and cash equivalents
    392       (757 )
                 
Cash and cash equivalents, beginning of period
    14,301       8,430  
                 
Cash and cash equivalents, end of period
  $ 14,693     $ 7,673  
                 
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
Unrealized gain on available-for-sale investments
  $ -     $ (14 )
Issuance of treasury stock for 401K matching contribution
    (69 )     (83 )
Purchases under capital lease obligations
    -       (250 )

See accompanying notes to the unaudited condensed consolidated financial statements.


 
3

 

Onvia, Inc.

Notes To Condensed Consolidated Financial Statements (Unaudited)

1.  
Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Onvia, Inc. and its wholly owned subsidiary, collectively referred to as "Onvia" or “the Company.” There was no business activity in the subsidiary in the three or nine month periods ended September 30, 2008 or 2007.  The unaudited interim condensed consolidated financial statements and related notes thereto have been prepared pursuant to accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the Securities and Exchange Commission, or SEC.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The accompanying interim condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2007 Annual Report on Form 10-K.

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

2.  
Use of Estimates

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

3.  
Stock-Based Compensation and Stock Option Activity

The impact on Onvia’s results of operations of recording stock-based compensation was as follows for the periods presented (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Cost of sales
  $ 4     $ 3     $ 16     $ 12  
Sales and marketing
    11       60       157       238  
Technology and development
    41       38       147       72  
General and administrative
    74       118       237       351  
                                 
Total stock-based compensation
  $ 130     $ 219     $ 557     $ 673  
 
Since Onvia has a full valuation allowance for its deferred tax assets, there was no impact to its cash flows related to excess tax benefits associated with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment.


 
4

 

Valuation Assumptions

Stock Options
Onvia calculated the fair value of each option award on the date of grant using the Black-Scholes valuation model. The following weighted average assumptions were used for options granted in each respective period:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Risk-free interest rate
    2.60 %     4.27 %     2.87 %     4.45 %
Expected volatility
    35 %     46 %     40 %     46 %
Dividends
    0 %     0 %     0 %     0 %
Expected life (in years)
    3.6       5.5       5.0       4.9  
 
In September 2008, Onvia’s stockholders approved the amendment and restatement of the Amended and Restated 1999 Stock Option Plan, or 1999 Plan, as the Onvia, Inc. 2008 Equity Incentive Plan, or 2008 Plan.  The 2008 Plan is a tool for providing incentive compensation in the form of equity or equity-based awards. All employees, officers, directors and consultants of Onvia are eligible to participate in the 2008 Plan, although it is not anticipated that every eligible employee or consultant will receive awards.

The primary purpose of the amendment and restatement is to:

·  
Increase the number of shares reserved for issuance by 190,000 shares;
·  
Expand the types of awards available from only stock options to stock awards, restricted stock, restricted stock units and stock appreciation rights as well as stock options;
·  
Provide that awards could be granted for ten years after the Board’s adoption of the plan in July 2008;
·  
Require the exercise price for all options to be at least 100% of the fair market value of the underlying shares on the date of grant;
·  
Expand the specific provisions that govern awards in the event of a change in control; and
·  
Provide for compliance with the requirements of Section 409A of the Internal Revenue Code to the extent that awards are treated as deferred compensation.

The complete text of the 2008 Plan is included as Exhibit 10.1 in Part II, Item 6 of this Form 10-Q.

Employee Stock Purchase Plan (“ESPP”)
The fair value of each employee purchase under Onvia’s ESPP is estimated on the first day of each purchase period using the Black-Scholes valuation model. Purchase periods begin on May 1 and November 1 of each year. The following weighted average assumptions were used for the purchase periods beginning during the nine months ended September 30, 2008 and 2007:

   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Risk-free interest rate
    1.86 %     4.98 %
Expected volatility
    28 %     28 %
Dividends
    0 %     0 %
Expected life (in years)
    0.5       0.5  


 
5

 

Stock Option Activity
The following table summarizes activity under Onvia’s equity incentive plans for the three and nine months ended September 30, 2008:

   
Options Outstanding
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term (in years)
   
Aggregate Intrinsic Value (1)
 
                         
Total options outstanding at January 1, 2008
    1,847,563     $ 8.55              
Options granted
    95,000       9.35              
Options exercised
    (2,778 )     3.46              
Options forfeited and cancelled
    (3,317 )     9.49              
Total options outstanding at March 31, 2008
    1,936,468       8.59              
Options granted
    40,000       6.32              
Options exercised
    (835 )     3.86              
Options forfeited and cancelled
    (29,175 )     7.91              
Total options outstanding at June 30, 2008
    1,946,458       8.56              
    Options granted
    6,000       4.75              
    Options exercised
    -       -              
    Options forfeited and cancelled
    (40,333 )     8.47              
Total options outstanding at September 30, 2008
    1,912,125     $ 8.55       5.89     $ 935,607  
                                 
Options exercisable at September 30, 2008
    1,337,592     $ 8.38       5.00     $ 935,000  
Options vested and expected to vest at September 30, 2008
    1,796,436     $ 8.52       5.75     $ 935,436  
 
(1) Aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of Onvia’s common stock of $4.54 at September 30, 2008 for options that were in-the-money at September 30, 2008.  The number of in-the-money options outstanding and exercisable at September 30, 2008 was 518,051 and 513,384, respectively.

The weighted average grant date fair value of options granted during the three and nine month periods ended September 30, 2008 was $1.39 and $2.36 per option, respectively, compared to $3.72 and $2.99 in the same periods in 2007.

As of September 30, 2008, there was approximately $717,000 of unrecognized compensation cost related to unvested stock options and estimated purchases under the ESPP.  That cost is expected to be recognized over a weighted average period of 1.32 years.

During the three and nine months ended September 30, 2008, approximately $0 and $94,000, respectively, was received for exercises of stock options and purchases under the employee stock purchase plan, compared to $691,000 and $1.0 million in the same periods in 2007.

4.  
Net Loss per Share

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


 
6

 

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2008 and 2007 (in thousands, except per share data):

   
Three Months
   
Nine Months
 
   
2008
   
2007
   
2008
   
2007
 
Net (loss) / income
  $ (831 )   $ 2,857     $ (2,528 )   $ 1,486  
Shares used to compute basic net (loss) / income per share
    8,236       8,119       8,226       8,049  
Dilutive potential common shares:
                               
Stock options
    -       428       -       394  
Shares used to compute diluted net (loss) / income per share
    8,236       8,547       8,226       8,443  
Basic net (loss) / income per share
  $ (0.10 )   $ 0.35     $ (0.31 )   $ 0.18  
Diluted net (loss) / income per share
  $ (0.10 )   $ 0.33     $ (0.31 )   $ 0.18  

For the three and nine months ended September 30, 2008, options and warrants to purchase approximately 2.0 million shares of common stock are excluded from the calculation because they would have been anti-dilutive since we were in a net loss position in those periods.
Comparatively, for the three and nine months ended September 30, 2007 options and warrants to purchase approximately 786,000 and 1.0 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $8.67 and $7.34, respectively, were not included in the calculation because the effect would have been anti-dilutive.

5.  
Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

   
September 30,
   
December 31,
 
   
2008
   
2007
 
Prepaid expenses
  $ 644     $ 511  
Interest and other receivable
    5       32  
Other
    6       6  
    $ 655     $ 549  

6.  
Property and Equipment

Property and equipment to be held and used consist of the following (in thousands):

   
September 30
   
December 31,
 
   
2008
   
2007
 
             
 Computer equipment
  $ 2,644     $ 2,757  
 Software
    1,049       1,074  
 Furniture and fixtures
    597       531  
 Leasehold improvements
    706       2,804  
                 
 Total property and equipment
    4,996       7,166  
                 
 Less accumulated depreciation and amortization
    (3,083 )     (6,209 )
                 
 Net book value
  $ 1,913     $ 957  

 
7

 

Property and equipment includes $222,000 of property financed under capitalized leases as of September 30, 2008 and December 31, 2007.

7.  
Internal Use Software

During the second quarter of 2008, Onvia abandoned $97,000 related to internal use software.  The abandoned assets relate to internal use code that was initially developed to enhance the functionality of existing products and internal workflow.  The Company no longer believes that the code will be compatible with the new platform currently being developed and believes that these costs have no future value to the Company.  The $97,000 abandonment represents the full unamortized value of these assets and is included in operating expenses under the general and administrative category in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2008.

8.  
Accrued Expenses

Accrued expenses consist of the following (in thousands):

   
September 30,
   
December 31,
 
   
2008
   
2007
 
Payroll and related liabilities
  $ 1,080     $ 1,143  
Accrued professional fees
    120       112  
State income and other taxes payable
    230       80  
    $ 1,430     $ 1,335  

State income and other taxes payable at September 30, 2008 includes $167,000 for sales taxes owed to the state of Texas.  Onvia had outside sales representatives located in Texas during 2001 to 2003 and again from 2004 to 2006, creating nexus for Onvia in that state during these periods.  Onvia did not collect sales tax from its clients during this time, because it believed its services were proprietary and, thus, not subject to sales tax.  Onvia received a determination letter from Texas in May 2008 indicating that its services were taxable in Texas.

After receiving the determination letter, Onvia calculated the sales tax exposure for Texas clients and believes its maximum sales tax exposure is $167,000.  Onvia will take reasonable measures to collect sales taxes from its affected clients to reduce its obligation to the state; however, the Company has accrued the entire amount of the assessment, as management cannot reasonably estimate the amount of any such recoveries and does not expect them to be significant.  The amount of the assessment is included in the general and administrative category in Onvia’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2008.

9.  
Interest and Other Income, net

Net interest and other income consist of the following for the periods presented (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Interest income
  $ 104     $ 259     $ 423     $ 761  
Interest expense
    (5 )     (5 )     (17 )     (5 )
Other (expense) / income
    -       (7 )     4       (13 )
    $ 99     $ 247     $ 410     $ 743  


 
8

 

10.  
New Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2008, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, that are of significance, or potential significance, to the Company.

In October 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of FAS 157 in situations in which the market for a financial asset is inactive.  This FSP was effective upon issuance.  Adoption of this FSP did not have a material impact on the Company’s financial position or results of operations.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.  This FSP amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, to require additional disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments.  This FSP also amends FASB Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require additional disclosure about the current status of the payment/performance risk of a guarantee.  The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. This FSP also clarifies the effective date in SFAS 161, Disclosures about Derivative Instruments and Hedging Activities. Disclosures required by SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Because FSP FAS 133-1 and FIN 45-4 only require additional disclosures, the adoption will not impact the Company’s consolidated financial position, results of operations or cash flows.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP is effective for fiscal years beginning after December 15, 2008. This FSP classifies unvested share-based payment grants containing non-forfeitable rights to dividends as participating securities that will be included in the computation of earnings per share. As of September 30, 2008, Onvia had no unvested share-based payment grants with non-forfeitable dividend rights. Onvia will adopt FSP EITF 03-6-1 on January 1, 2009, but does not expect the adoption of this FSP to have a material impact on its financial position, cash flows or results of operations.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP 142-3.  FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.  This FSP is effective for financial statements issued for fiscal years or interim periods beginning after December 15, 2008.  Onvia does not currently hold any intangible assets that would be affected by this FSP and, as such, the adoption of this FSP is not expected to have a material impact on its financial position, cash flows or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133, or FAS 161.  This Statement changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  Onvia

 
9

 

does not currently hold any derivative instruments and is not involved in any hedging activities at September 30, 2008 and, as such, the adoption of this Statement is not expected to have a material impact on its financial position or results of operations.

In February 2008, the FASB issued FSP 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.  FSP 157-1 amends FAS 157 to exclude SFAS No. 13, Accounting for Leases, or FAS 13, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FAS 13.  This FSP is effective upon initial adoption of FAS 157. Adoption of this FSP did not have a material impact on the Company’s financial position or results of operations.

11.  
Commitments and Contingencies

Operating Leases
Onvia was released from its non-cancellable operating lease on its former corporate headquarters building effective January 11, 2008.  Onvia has a new non-cancellable operating lease for its current office space, which expires in October 2015.  Rent is abated for the first nine months of the new office lease; however, rent expense is being recognized on a straight-line basis over the term of the lease.  Onvia also has a non-cancellable operating lease for office equipment. The lease for office equipment expires in January 2010.

As of September 30, 2008, remaining future minimum lease payments required on non-cancellable operating leases are as follows for the years ending December 31 (in thousands):
  
   
Real Estate
   
Other
   
Total
 
   
Operating Leases
   
Operating Leases
   
Operating Leases
 
                   
Remainder of 2008
  $ 102     $ 5     $ 107  
2009
    899       19       918  
2010
    926       -       926  
2011
    954       -       954  
2012
    982       -       982  
Thereafter
    2,949       -       2,949  
                         
    $ 6,812     $ 24     $ 6,836  
 
Capital Leases
In June 2007, Onvia entered into non-cancellable capital leases for server equipment and maintenance related to this equipment.  Remaining future minimum lease payments required on these capital leases are as follows for the years ending December 31 (in thousands):

   
Capital Leases
 
   
Principal
   
Interest
   
Total
 
Remainder of 2008
  $ 30     $ 3     $ 33  
2009
    82       6       88  
2010
    6       1       7  
Thereafter
    -       -       -  
                         
    $ 118     $ 10     $ 128  

Purchase Obligations
Onvia has non-cancellable purchase obligations for marketing services, co-location hosting arrangements, software development and licensing agreements and third party content agreements. The current agreements expire in dates ranging from 2007 to 2010.


 
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Remaining future required payments under these non-cancellable agreements are as follows for the years ending December 31 (in thousands):
  
   
Purchase
 
   
Obligations
 
       
Remainder of 2008
  $ 766  
2009
    642  
2010
    377  
    $ 1,785  

Legal Proceedings

Class Action Securities Litigation
In 2001, five securities class action suits were filed against Onvia, certain former executive officers, and the lead underwriter of Onvia’s Initial Public Offering, or IPO, Credit Suisse First Boston, or CSFB.  The suits were filed in the U.S. District Court for the Southern District of New York on behalf of all persons who acquired securities of Onvia between March 1, 2000 and December 6, 2000.  In 2002, a consolidated complaint was filed.  The complaint charged defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) and Sections 11 and 15 of the Securities Act of 1933, for issuing a Registration Statement and Prospectus that failed to disclose and contained false and misleading statements regarding certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in the offering.  The complaint sought an undisclosed amount of damages, as well as attorneys’ fees.  This action is being coordinated with approximately 300 other nearly identical actions filed against other companies. 
 
On December 5, 2006, the Court of Appeals for the Second Circuit vacated a decision by the district court granting class certification in six of the coordinated cases, which are intended to serve as test, or “focus,” cases.  The plaintiffs selected these six cases, which do not include Onvia.  On April 6, 2007, the Second Circuit denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify more narrow classes than those that were rejected.  On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The amended complaints include a number of changes, such as changes to the definition of the purported class of investors and the elimination of the individual defendants as defendants. On September 27, 2007, the plaintiffs moved to certify classes in the six focus cases.  The six focus case issuers and the underwriters named as defendants in the focus cases filed motions to dismiss the amended complaints against them.  On March 26, 2008, the District Court dismissed the Section 11 claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period.  With respect to all other claims, the motions to dismiss were denied.  On October 10, 2008, at the request of the plaintiffs, the plaintiffs’ motion for class certification was withdrawn, without prejudice.
 
Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of this matter.   If 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.

On October 2, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed suit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, JPMorgan Chase & Co. and Bank of America Corporation, the lead underwriters of the Company's initial public offering in March 2000, alleging violations of Section 16(b) of the Securities Exchange Act of 1934. The complaint alleges that the combined number of shares of the Company's common stock

 
11

 

beneficially owned by the lead underwriters and certain unnamed officers, directors, and principal stockholders exceeded ten percent of its outstanding common stock from the date of the Company's initial public offering on March 2, 2000, through at least February 28, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any "short-swing profits" obtained by them in violation of Section 16(b). The Company was named as a nominal defendant in the action, but has no liability for the asserted claims. No directors or officers of the Company are named as defendants in this action. On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various initial public offerings. On February 25, 2008, Ms. Simmonds filed an Amended Complaint asserting substantially similar claims as those set forth in the initial complaint. The Company waived service. On July 25, 2008, the Company joined with 29 other issuers to file the Issuer Defendants' Joint Motion to Dismiss. Underwriter Defendants also filed a Joint Motion to Dismiss on July 25, 2008. Plaintiff filed oppositions to both motions on September 8, 2008. All replies in support of the motions to dismiss were filed on October 23, 2008. Oral argument on the motions to dismiss is scheduled for January 16, 2009.  The Judge has stayed discovery pursuant to the Private Securities Litigation Reform Act (PSLRA) until he rules on all motions to dismiss. We believe that the outcome of this litigation will not have a material adverse impact on our consolidated financial position and results of operations.

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.

12.  
Provision for Income Taxes

Onvia has incurred net operating losses, or NOLs, from its inception through September 30, 2008, with the exception of the third quarter of 2007.  Because of this history of net operating losses Onvia does not currently believe that the future realization of the tax benefit associated with these NOL carryforwards is more likely than not; therefore, Onvia has recorded a valuation allowance for the full amount of its net deferred tax assets.  Onvia will continue to evaluate the likelihood that these tax benefits may be realized, and may reverse all or a portion of its valuation allowance in the future if it is determined that realization of these benefits is more likely than not.

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

13.  
Security Deposits

Pursuant to Onvia’s lease for its current corporate office space, Onvia provided a security deposit of $538,000, which will be reduced annually on a straight-line basis over a four year period beginning with the first anniversary of the commencement date of the lease.



 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 


FORWARD-LOOKING INFORMATION

Forward-looking information contained in this Report is subject to risk and uncertainty.

We have made forward-looking statements in this Report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations.  We have tried, wherever possible, to identify such statements by using words such as “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “plans,” “estimates,” “predicts,” “potential,” “continue,” “intends” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans and prospects.  We believe it is important to communicate our expectations to investors.  However, there may be events in the future we are not able to predict accurately or that we do not fully control, which could cause actual results to differ materially from those expressed or implied by our forward-looking statements, including changes in general economic and business conditions, changes in the information and internet services industries, and changes in our business strategies.   Readers should bear this in mind as they consider forward-looking statements.  Additional information that may impact these forward-looking statements is included in “Part II - Item 1A - Risk Factors” and elsewhere in this Report, and in “Part I – Item 1A – Risk Factors” in our 2007 Annual Report on Form 10-K.  We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.  Readers are advised, however, to consult any further disclosures we make on related subjects in reports we file from time to time with the Securities and Exchange Commission, or SEC.

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

Company Overview
 
Onvia is a leading provider of business solutions that help companies plan, market and sell to targeted markets throughout the United States, or U.S.  We have developed a unique process for collecting and organizing transactional information, which we convert into actionable market intelligence.  We believe our business solutions provide our clients with a distinct competitive advantage.

Many companies react to business opportunities instead of proactively and intelligently pursuing the best prospects for their products and services.  Our business solutions help clients more effectively target federal, state, local and educational purchasing entities, and as of February 2008, our solutions include in-depth analysis on early stage commercial and residential infrastructure projects.  Our business solutions allow clients to track their competitors, analyze market trends, and identify new market opportunities to stay ahead of market changes.  Our clients can leverage our database to identify prospects, establish alerts for upcoming contracting opportunities, review history on public and private infrastructure projects, and research government agencies and private sector businesses to effectively establish and maintain lucrative business relationships.

Our proprietary database, Onvia Dominion®, has been compiled over the last ten years, and includes comprehensive, historical and real-time information on public and private infrastructure activities unavailable elsewhere in the marketplace.  Public sector information within the Onvia Dominion® database is classified and linked within four key hubs of data: project history, agency research, buyer research and competitive intelligence.  Our database provides information on approximately 5 million procurement related records connected to over 275,000 companies from across approximately 78,000 government agencies and purchasing offices nationwide.  Thousands of records are added to our database each day.  Private sector data includes over 110,000 current and historical opportunities covering activity within the top 85 U.S. markets, and comprehensive information on tens of thousands of companies, including architects, developers, owners and land use attorneys.  The data collected covers high demand land use planning details, including zoning changes, development type, proposed use and key contacts for each

 
13

 

project.  We also provide contact information for over 24,000 planning and zoning officials.  Information in our database has been collected, formatted and classified by an in-house team of researchers and third-party providers so that our clients are able to quickly find and analyze information relevant to their businesses.

Historically, comprehensive market intelligence was only available to large companies with the resources to perform the research and store the data themselves, or companies that could afford to hire outside firms to perform the research for them.  Advances in technology, broad use of the Internet by government agencies, and the diligent work of our research team to collect and classify this information have enabled us to make the same high-value sales intelligence affordable to businesses of all sizes.

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

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

Revenue from fees charged for management information reports is recognized upon delivery of the report to the client.  Pricing for management information reports is generally based on one or a combination of the following: the number of records included in the report; the geographic range of the report; or a flat fee based on the type of report.  We also generate revenue from document download services and list rental services, and these fees are recognized upon delivery.

Onvia was incorporated in January 2000 in the state of Delaware.  Our principal corporate office is located in Seattle, Washington.  Our common stock trades on the NASDAQ Global Market under the symbol ONVI.

Industry Background

The infrastructure marketplace, defined as the industries supported by public and private construction projects and facilities maintenance, spends over $1 trillion annually on new projects and in support of new and existing facilities.  Over 3.4 million businesses compete for opportunities within this highly competitive marketplace and identifying qualified business partners and prospects is essential to a company’s success.  Identifying relevant infrastructure projects and partners can be difficult and companies spend a substantial amount of time and effort to locate and research new partners and opportunities to grow their businesses.  The Internet provides short-term visibility into government and private sector contracting information for both government agencies and businesses alike, 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 prequalify the opportunity, such as decision maker information, the purchasing history of the government agency or project owner, and who competes for similar projects.  This information is useful not only for companies contracting directly with the project owner, but also for subcontractors that would like to compete for work on awarded contracts.  This information is rarely available from one source, and may not be available at all for historical projects.

Success in the private commercial and residential construction marketplace is largely based upon strong business relationships and corporate positioning.  Development projects must be identified early in the planning and zoning process for a contractor or architect to be considered for the engagement.  Business relationships are essential for some specialties, such as environmental engineers, who may need to identify projects before presentation to the zoning and planning board.  Strong segment contacts are the primary

 
14

 

way for companies to identify private sector projects at the very earliest stage.  Companies competing in this market need to understand who the key decision makers are within their segment and geographic footprint to ensure that they are properly positioned to win future opportunities.

Public sector opportunities are difficult to prequalify for most businesses.  Often, revenue opportunities are included within the specification documents behind the request for proposal, or RFP, and request for quote, or RFQ, documents.  Without tools to quickly identify the pertinent information, businesses must read the entire documents to determine if there are opportunities relevant to their business.  Our 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 our database and tools, our clients spend less time on research and more time preparing winning proposals, establishing relationships, and executing contracts.

Products and Services

Our products and services provide access to our proprietary 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 and private 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, with a focus on the infrastructure verticals, which include:

·  
Architecture and Engineering
·  
Construction and Building Supplies
·  
IT / Telecommunications
·  
Business 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 early stages of the development process, before the bid or RFP is released in its final form, or before final zoning and planning board approval;
·  
RFPs, RFQs, and related amendments;
·  
Planholders and Bidders Lists – provides competitive intelligence by presenting a list of competitors that have acquired plans, specifications, bidding documents and/or proposals for specific projects in the active bid or proposal stage, and a list of competitors who submit bids for prime contracts with the owner of the project;
·  
Bid Results and Awards Information – notifies businesses of awarded bids, providing valuable information for use in their own sales and marketing activities; and

 
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·  
Grants – supplies federal grant information critical to anyone tracking or applying for publicly-funded projects.

Onvia’s public and private sector solutions are two distinct service offerings, but when used together, the combined information provides a comprehensive view of the infrastructure marketplace.

Onvia’s business solutions are comprised of the following products:

Onvia Business Builder
Onvia Business Builder is our most comprehensive public sector 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 responses 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 associated around four key data hubs; project history, agency research, agency buyer research, and competitor research.   The association of each record makes it possible to evaluate purchasing trends by agency and by agency buyer and identify or evaluate potential competitors.

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
Onvia Navigator is our database research tool, which 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.


 
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The Onvia Guide
Onvia Guide subscribers receive 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 an affordable entry level option for our clients.

Onvia Planning and Construction
In February 2008, Onvia expanded its business solutions to include information on the commercial and residential development market.  Onvia Planning and Construction provides early stage project information on commercial and residential development projects.  This market intelligence solution is comprehensive, covering the top 85 metropolitan areas within the U.S.  Our database of over 110,000 commercial and residential records provides a detailed overview of the commercial and residential marketplace.  This market intelligence can be leveraged to identify business expansion opportunities and growth markets, evaluate overall market conditions, forecast demand for specific products and services, and align personnel and resources with future opportunities.  At the tactical level, Onvia Planning and Construction helps companies identify upcoming projects and sales opportunities by monitoring land use planning and zoning information.  New and updated land use activities can be tracked with daily customized alerts delivered directly to our clients’ inbox.  Clients can research projects and the companies associated with each project, and track permit approval and project status as the engagement progresses.  The company and project information can be used to build relationships with corporate decision makers and planning officials to be in a good position to act upon future opportunities.

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

For the quarter ended September 30, 2008, revenue was down approximately 4% to $5.2 million compared to $5.4 million in the same period in 2007.  For the nine months ended September 30, 2008, revenue was $15.6 million, compared to $15.4 million in the same period in 2007, representing an increase of 1%.  Because we recognize revenue ratably over the term of a subscription, current period sales impact GAAP revenue over the following twelve months.  The decline in year-over-year quarterly revenue is the result of weakness in our business during the latter part of 2007 and the first quarter of 2008.  The weakness we experienced was partly attributable to a planned change in focus of our sales organization, partly

 
17

 

attributable to execution issues that we believe we have addressed, and partly attributable to economic challenges facing a portion of our client base.

Net loss in the third quarter of 2008 was $831,000, or $0.10 per share, compared to net income of $2.9 million, or $0.33 per diluted share, in the third quarter of 2007.  For the nine month periods, net loss was $2.5 million, or $0.31 per share, in 2008, compared to net income of $1.5 million, or $0.18 per diluted share, in 2007.  Our 2007 results include the impact of the termination of the operating lease on our former corporate headquarters, which resulted in the reversal of accrued idle lease expenses and acceleration of depreciation on certain leasehold improvements.  The net impact of this transaction for the three and nine month periods in 2007 was an approximately $2.4 million reduction in operating expenses.  We also recognized charges totaling $264,000 during the second quarter of 2008 related to a sales tax assessment and abandonment of internal use software.  Sales and marketing expenses increased because we increased the size of our acquisition sales force to accelerate new client acquisition, and we incurred higher third party content costs in the first nine months of 2008 as a result of the launch of Onvia Planning and Construction.  These factors, combined with the decline in revenue discussed above, resulted in the increased net loss.

The execution issues mentioned above relate to the transfer of our first year clients to new account managers in the first quarter of 2008.  This change was necessary to implement an enhanced on-boarding process for new clients, which we expect will improve first year client retention rates in the future.  This transfer of accounts was not smoothly executed and had a negative impact on our first year client retention rates.  To address this, we have developed health scores for all of our clients, and the scores for our new clients indicate that our first year client retention should begin to noticeably improve in the first quarter of 2009 when these clients first begin to come up for renewal.

We also believe our revenue growth has been affected by the increasing impact of the weak economy on a portion of our client and prospect base.  The majority of our clients and prospects are in the segments hardest hit by the economic slowdown; predominantly small to medium sized businesses in industries impacted by the soft construction market, including architects, engineers and construction companies.  While it’s difficult to estimate the impact of the weak economy on our business, we believe that new client acquisition and client retention has been slowed by the current economic environment.

We responded to our slowing revenue growth rate in the first quarter of 2008, in part, by increasing the size of our acquisition sales force, which contributed to 59% growth in new client sales in the third quarter of 2008 compared to the same period in 2007.  We continued to invest in sales and marketing in order to drive revenue and productivity per sales person in the face of the current economic headwinds.

In the third quarter, we tested a new high volume, lower touch sales process intended to create a profitable revenue channel from the smallest business segments.  The clients acquired through this channel have a lower contract value, which reduced overall Quarterly Contract Value per Client, or QCVC, in the third quarter of 2008 compared to the second quarter of 2008, but contributed to the growth in third quarter Annual Contract Value, or ACV.  We will continue to evaluate the profitability of this team through the fourth quarter.

The changes we implemented have stabilized GAAP revenue in the third quarter of 2008, and accelerated growth in metrics that indicate future revenue growth, such as ACV.  Year-over-year growth in ACV has accelerated to 9% over the third quarter of 2007, compared to 6% growth in the second quarter of 2008 over the same period in 2007.  In addition, client retention rates remained steady compared to the third quarter of last year, and the number of high value clients, which represent clients subscribing at the state level or above, and total clients has remained stable for three straight quarters.  We expect these improvements to be reflected in our GAAP statements over the next four quarters.

We evaluate the following four key operating metrics, among others, to assist in the evaluation of our operating performance, and believe these metrics provide a means to compare our business with other businesses in the information industry.


 
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Annual Contract Value (“ACV”)
Annual contract value is the aggregate annual revenue value of our client base.  Growth in ACV demonstrates our success in increasing the number of high value clients and upgrading existing clients to new and higher valued products.  At September 30, 2008, ACV was $19.0 million, up 9% compared to $17.5 million at September 30, 2007 and up 4% compared to $18.2 million at June 30, 2008.

Number of Clients
Number of clients represents the number of individual businesses subscribing to our products.  At September 30, 2008 we had approximately 8,100 clients, down 8% from approximately 8,800 at September 30, 2007 and flat compared to 8,100 at June 30, 2008.  At September 30, 2008, high value clients, or clients subscribing at the state level or above, totaled 7,500, down 5% compared to 7,900 at September 30, 2007 and flat compared to 7,500 at June 30, 2008.  The number of clients and high value clients has remained stable for three straight quarters.

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 September 30, 2008, ACVC was $2,338, an increase of 18% compared to $1,984 at September 30, 2007.

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.  In the third quarter of 2008, QCVC was $2,351, an increase of 9% compared to $2,163 in the third quarter of 2007.

Seasonality

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



 
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Results of Operations for the Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007

The following table provides selected consolidated results of operations for the periods presented as a percentage of total revenue:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenue:
                       
 Subscription
    87 %     85 %     86 %     85 %
 Content license
    11 %     11 %     11 %     12 %
 Management information reports
    1 %     3 %     2 %     2 %
 Other
    1 %     1 %     1 %     1 %
 Total revenue
    100 %     100 %     100 %     100 %
                                 
Cost of revenue
    21 %     17 %     21 %     18 %
                                 
                                 
Gross margin
    79 %     83 %     79 %     82 %
                                 
Operating expenses:
                               
 Sales and marketing
    59 %     50 %     57 %     56 %
 Technology and development
    19 %     15 %     20 %     20 %
 General and administrative
    19 %     19 %     22 %     18 %
 Idle lease expense
    0 %     (49 %)     0 %     (17 %)
                                 
 Total operating expenses
    97 %     35 %     98 %     77 %
                                 
Loss from operations
    (18 %)     48 %     (19 %)     5 %
Interest and other income, net
    2 %     5 %     3 %     5 %
                                 
Net loss
    (16 %)     53 %     (16 %)     10 %

Revenue and Cost of Revenue

Revenue for the three and nine months ended September 30, 2008 was $5.2 million and $15.6 million, respectively, compared to $5.4 million and $15.4 million for the same periods in 2007.  The decline in third quarter 2008 revenue compared to the same quarter in 2007 is the result of weakness in our business during the latter part of 2007 and the first quarter of 2008, which impacted third quarter revenue because we recognize revenue ratably over the subscription term of our products.  The reasons for this weakness are described in more detail under the “Executive Summary of Operations and Financial Position” section above.  Revenue for the nine months ended September 30, 2008 increased by 1% primarily as a result of strong bookings growth in the first quarter of 2007, which impacted revenue in the first quarter of 2008 because we recognize revenue ratably over the term of our subscriptions.

Costs of revenues increased to 21% of revenue for both the three and nine months ended September 30, 2008 compared to 17% and 18% in the respective periods in 2007.  In total, costs of revenue were $1.1 million and $3.2 million in the three and nine month periods in 2008, respectively, compared to $928,000 and $2.7 million for these respective periods in 2007, representing an increase of $138,000, or 15%, for the three month period in 2008 and $528,000, or 20%, for the nine month period in 2008.

Our costs of revenues primarily represent payroll-related expenses associated with the research and aggregation of the data in our proprietary database and third-party content fees, but also include credit card processing fees. The increase for the comparable three month periods was primarily due to an increase of $162,000 in third-party content costs as a result of an increase in content requirements for our new Onvia Planning and Construction product, offset by a decrease of $25,000 in payroll related expenses because of a decrease in weighted average headcount on the content team.  Weighted average headcount on our content team was 54 and 55 during the three and nine months ended September 30, 2008, respectively, compared to 59 and 55 during the same periods in 2007.  The increase for the comparable nine month periods was primarily related to an increase of $505,000 in third-party content costs for the same reason as discussed above.


 
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Sales and Marketing

Sales and marketing expenses increased in total and as a percentage of revenue to $3.1 million and 60% of revenue in the three months ended September 30, 2008, compared to $2.7 million and 50% in the same period in 2007.  In the nine month periods ended September 30, 2008 sales and marketing expenses decreased in total but increased slightly as a percentage of revenue to $8.9 million and 57% of revenue, compared to $8.6 million and 56% in the same period in 2007.

For the quarter ended September 30, 2008, sales and marketing expenses increased $369,000, or 14%, compared to the same period in 2007.  The increase is primarily comprised of $769,000 in payroll-related expenses due to a planned increase in headcount on these teams.  In addition, commissions were higher in the third quarter of 2008 as a result of increased acquisition sales compared to the same period in 2007.  Weighted average headcount in our sales and marketing teams was 92 during the three months ended September 30, 2008, compared to 77 in the same period in 2007. These increases were partially offset by a decrease of $330,000 in allocated expenses, $50,000 in stock-based compensation and $40,000 in recruiting fees.  Allocated expenses decreased in both the three and nine month periods in 2008 primarily because the termination of our office lease resulted in accelerated depreciation of leasehold improvements 2007.  Stock-based compensation decreased in both the three and nine month periods in 2008 because of the forfeiture of options held by our former Vice President of Sales.  Recruiting fees were higher in the three and nine month periods in 2007 primarily as a result of placement fees incurred for our new Vice President of Sales.

For the nine months ended September 30, 2008, sales and marketing expenses increased $290,000, or 3%, compared to the same period in 2007.  The increase was primarily related to an increase of $724,000 in payroll related expenses, primarily due to reasons discussed above, offset by a decreases of $251,000 in allocated expenses, $80,000 in stock-based compensation, $60,000 in recruiting fees, and $48,000 in marketing expenses.  Marketing expenses in 2007 were higher primarily as a result of costs incurred for the development of our website.  A portion of the website development costs incurred in 2007 were incurred during the planning stages of the project and costs incurred during this stage are required to be expensed pursuant to the guidance in Emerging Issues Task Force, or EITF, Issue No. 00-2, Accounting for Website Development Costs.  Weighted average headcount in our sales and marketing teams was 88 during the nine months ended September 30, 2008, compared to 80 in the same period in 2007.

Technology and Development

For the three months ended September 30, 2008, technology and development expenses were $975,000 and 18% of revenue, compared to $784,000 and 15% of revenue in the same period in 2007.  In the nine months ended September 30, 2008, technology and development expenses were $3.1 million and 19% of revenue, compared to $3.2 million and 20% of revenue in the same period in 2007.

For the comparable three month periods, technology and development expenses increased $191,000, or 24%.  The increase in expenses is partially attributed to an increase of $312,000 in payroll related expenses due to an increase in weighted average headcount on these teams, normal performance based salary increases and milestone incentive payments related to new product development. Weighted average headcount in our technology and development teams was 26 and 27 during the three and nine months ended September 30, 2008, respectively, compared to 23 and 30 in the same periods in 2007. Allocated expenses increased by $60,000 as a result of increased headcount on these teams, and co-location fees increased $46,000 because we moved our web, database and transaction-processing servers to a co-location facility. These increases were offset by an increase of $159,000 in the amount of capitalized internal use software development costs, which represent payroll related expenses for this group, during the quarter ended September 30, 2008 compared to the same period in 2007, and a decrease of $72,000 in recruiting fees.  Capitalized internal use software development costs were higher in 2008 because of the development of a new technology platform initiative scheduled for release in the fourth quarter of 2008.

For the nine months ended September 30, 2008, technology and development expenses decreased $82,000, or 3%.  Expenses decreased primarily because we capitalized $603,000 more in internal-use software development costs as discussed above and recruiting fees decreased $78,000.  These decreases were

 
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partially offset by increases of $338,000 in payroll-related expenses, $132,000 in third-party co-location fees as discussed above, $81,000 in non-cash stock-based compensation primarily for option grants to our new Chief Information Officer, which were granted in July 2007, and other technology personnel, and $30,000 in travel expenses associated with travel to our offshore development partner.

General and Administrative

For the three months ended September 30, 2008, general and administrative expenses were $986,000, or 19% of revenue, compared to $1.0 million, or 19% of revenue, in the same period in 2007.  In the nine months ended September 30, 2008, general and administrative expenses were $3.4 million and 22% of revenue, compared to $2.9 million and 18% in the same period in 2007.

For the comparable three month periods, general and administrative expenses decreased $35,000, or 3% in 2008 compared to 2007.  The decrease is primarily related to a decrease of $44,000 in non-cash stock-based compensation, primarily due to an increase in our estimated forfeiture rate due to an increase in actual forfeitures, and a $23,000 decrease in professional services. This decrease is offset by an increase of $25,000 in payroll related expenses as a result of a slight increase in headcount.   Weighted average headcount in this group was 13 and 12 during the three and nine months ended September 30, 2008, compared to 11 during the same periods in 2007.

For the comparable nine month periods, general and administrative expenses increased $509,000, or 17%, in 2008 compared to 2007.  The increase is partially attributed to two items that we do not expect to recur: In the second quarter of 2008, we recorded a $167,000 expense related to an assessment for past due sales taxes in the state of Texas.  In addition, we incurred $163,000 in office relocation expenses during the first quarter of 2008 associated with the move to our new corporate headquarters building.  In addition to these two items, recruiting expenses increased $153,000 primarily associated with the hire of our new Vice President of Marketing and senior technology personnel, and we had $52,000 more in abandoned internal use software during 2008, compared to 2007.   These increases were offset by a decrease of $115,000 in stock-based compensation as a result of revising our estimated forfeiture rate.


Interest and Other Income, Net

Net interest and other income was $99,000 and $410,000 for the three and nine months ended September 30, 2008, respectively, compared to $247,000 and $743,000, respectively, for the same periods in 2007.  The decreases are primarily attributable to a decrease in short term interest rates in 2008 compared to 2007.  Interest expense was $5,000 and $17,000 in the three and nine months ended September 30, 2008, respectively, compared to $6,000 in both the three and nine months ended September 30, 2007.  Interest expense relates to capital leases for server equipment.

Net Loss and Net Loss per Share

We reported net losses of $831,000 and $2.5 million for the three and nine months ended September 30, 2008, respectively, compared to net income of $2.9 million and $1.5 million in the same periods in 2007.  The increase in net loss resulted primarily from the increases in operating expenses and cost of revenue as discussed above.  On a diluted per share basis, net losses were $0.10 and $0.31 for the three and nine months ended September 30, 2008, respectively, compared to net income $0.33 and $0.18, respectively, for the same periods in 2007.


Critical Accounting Policies and Management Estimates

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of commitments and

 
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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.

Revenue Recognition
Our revenues are primarily generated from client subscriptions and content licenses.  Our subscriptions are generally annual contracts and revenues are typically prepaid at the beginning of the subscription term. 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. We also generate revenue from fees charged for management information reports, document download services, and list rental services, and revenue from these types of services is recognized upon delivery.

Onvia’s subscription services and management information reports are also sold together as a bundled offering.  Pursuant to the provisions of EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, we allocate revenue from these bundled sales ratably between the subscription services and the management information reports based on their relative fair values, which are consistent with established list prices for those offerings.

Unearned revenue consists of payments received for prepaid subscriptions 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.

Internal Use Software
We account for the costs to develop or obtain software for internal use in accordance with Statement of Position, or SOP, No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, or SOP 98-1.  As a result, we capitalize qualifying computer software costs incurred during the “application development stage” and other costs as permitted by SOP 98-1.  Amortization of these costs begins once the product is ready for its intended use.  These costs are amortized on a straight-line basis over the estimated useful life of the product, typically 3 to 5 years.  The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period.  We capitalized $858,000 and $2.4 million in internal use software costs during the three and nine months ended September 30, 2008, respectively, compared to $661,000 and $859,000, respectively, during the same periods in 2007. Capitalized costs during the three and nine month periods in 2008 increased significantly compared to the same periods in 2007 as a result of the development of the Onvia Planning and Construction product, the implementation of a new CRM system, and development for the new technology platform initiative.  Amortization related to capitalized software was $195,000 and $506,000 for the three and nine months ended September 30, 2008, respectively, compared to $64,000 and $189,000, respectively, in the same periods in 2007.

During the second quarter of 2008, we abandoned $97,000 related to internal use software.  The abandoned assets relate to internal use code that was initially developed to enhance the functionality of existing products and internal workflow.  We no longer believe that the code will be compatible with the new technology platform currently being developed and we believe these costs have no future value.  The $97,000 abandonment represents the full unamortized value of these assets and is included in operating expenses under the general and administrative category in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2008.

Stock-Based Compensation
We account for stock-based compensation according to the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment, or 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.

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

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

We periodically evaluate our long-lived assets for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or FAS 144. FAS 144 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances indicate that any of our long-lived assets might be impaired, we will analyze the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we will record an impairment loss to the extent that the carrying value of the asset exceeds the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.  No property and equipment was impaired during the three or nine months ended September 30, 2008 or 2007.

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

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

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

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

Accounts Receivable and Allowance for Doubtful Accounts
We record accounts receivable for the invoiced portion of our enterprise contracts and content license agreements once we have a signed agreement and amounts are billable under the contract.  We do not record an asset for the unbilled or unearned portion of our enterprise contracts or content licenses.

 
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Accounts receivable are recorded at their net realizable value, after deducting an allowance for doubtful accounts.  Such allowances are determined based on a review of an aging of accounts and reflect either specific accounts or estimates based on historical incurred losses.  If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, and our ability to recognize sales to certain clients may be affected.

Contractual Obligations

Future required payments under operating leases excluding operating expenses, capital leases including interest, and other purchase obligations as of September 30, 2008 are as follows for the periods specified (in thousands):

   
Payments due by period
 
   
Total
   
Less than 1 year
   
1 - 3 years
   
3 - 5 years
   
More than 5 years
 
Real estate operating lease obligations
  $ 6,812     $ 776     $ 2,841     $ 2,039     $ 1,156  
Purchase obligations (1)
    1,785       1,335       438       12       -  
Capital lease obligations (2)
    128       115       13       -       -  
Other operating lease obligations (3)
    24       20       4       -       -  
Total
  $ 8,749     $ 2,246     $ 3,296     $ 2,051     $ 1,156  

 
(1) Purchase obligations relate to co-location hosting arrangements, software development and licensing agreements, marketing agreements, telecom agreements and third party content agreements.
 
(2) Capital lease obligations relate to server equipment and related maintenance agreements.
 
(3) Other operating lease obligations relate to office equipment leases.


Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents and short-term investments.  Our combined cash and cash equivalents were $14.7 million at September 30, 2008, and our working capital was $5.5 million. All of our investments at September 30, 2008 were in a U.S. Treasury fund, which is considered cash equivalent; therefore, we did not hold any short-term investments at September 30, 2008.  From December 31, 2007 to September 30, 2008, our cash and cash equivalents increased $392,000.  The increase in cash and cash equivalents is primarily due to the return of our $3.5 million security deposit for the lease on our former corporate headquarters and the receipt of $2.5 million in reimbursable tenant improvement costs during the nine months ended September 30, 2008.  These increases in cash and cash equivalents were partially offset by $1.6 million in purchases of property and equipment, and $2.4 million in additions to internal-use software, $1.3 million of which was paid to external vendors. There was a $1.1 million increase in vendor payments primarily related to our office relocation, prepaid software licenses and third party content providers.  Unearned revenue decreased by $686,000,because we reduced our early renewal program and more of our clients now pay for their subscriptions on a quarterly basis.

Although we generated positive cash flow from operations in the first nine months of 2007 and for the fiscal year of 2007, we did not generate positive cash flow from operations in the first nine months of 2008, primarily because of increased vendor payments as discussed above and lower cash receipts as planned from a reduced focus on advance renewals.  We may not be able to generate positive cash flow from operations in the future; however, we do expect to generate recurring positive cash flows from operations before we would be required to seek additional financing to fund operations by increasing client retention and acquisition, and increasing our ACV. Until such time as we begin generating recurring 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 increasing our ACV through a combination of expansion of our product offering and scheduled price increases.

 
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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 in operating activities was $1.7 million for the nine months ended September 30, 2008, compared to net cash provided by operating activities of $448,000 in the same period in the prior year. The change to net cash used in operating activities from net cash provided by operating activities was primarily attributable to a decrease in cash collected for prepaid subscriptions in the first nine months of 2008 compared to the same period in 2007 because of a planned reduction in advance renewals in 2008, an increase in the number of clients receiving quarterly payment terms, and an increase in vendor payments associated with our office relocation in the first quarter of 2008, prepaid software licenses and third party content providers.

Investing Activities

Net cash provided by investing activities was $2.1 million in the nine months ended September 30, 2008, compared to net cash used in investing activities of $2.3 million in the same period in 2007.  Net cash provided in the first nine months of 2008 is primarily attributable to the return of our $3.5 million security deposit on the lease for our former corporate headquarters as a result of the termination of that lease and reimbursement of $2.5 million in reimbursable tenant improvements.  These increases were partially offset by additions to property and equipment and internal use software.  The property and equipment purchases were primarily comprised of $701,000 in computer hardware purchases required for the development of internal use software, and $704,000 in leasehold improvements for our new office building. We do not expect to incur significant new costs associated with leasehold improvements in future quarters.  Cash used in investing activities in the first nine months of 2007 was primarily related to purchases of investments.

Financing Activities

Net cash provided by financing activities was $11,000 and  $1.1 million in the nine months ended September 30, 2008 and 2007, respectively.  The decline in cash provided is primarily due to a reduction in stock option exercises in the first nine months of 2008 compared to the same period in 2007 and an increase in principal payments on our capital leases.


Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2008, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, that are of significance, or potential significance, to us.

In October 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of FAS 157 in situations in which the market for a financial asset is inactive.  This FSP was effective upon issuance.  Adoption of this FSP did not have a material impact on our financial position or results of operations.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.  This FSP amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, to require additional disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments.  This FSP also amends FASB

 
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Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require additional disclosure about the current status of the payment/performance risk of a guarantee.  The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. This FSP also clarifies the effective date in SFAS 161. Disclosures required by SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Because FSP FAS 133-1 and FIN 45-4 only require additional disclosures, the adoption will not impact our consolidated financial position, results of operations or cash flows.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP is effective for fiscal years beginning after December 15, 2008. This FSP classifies unvested share-based payment grants containing non-forfeitable rights to dividends as participating securities that will be included in the computation of earnings per share. As of September 30, 2008, we had no unvested share-based payment grants with non-forfeitable dividend rights. We will adopt this FSP on January 1, 2009, but do not expect the adoption of this FSP to have a material impact on our financial position, cash flows or results of operations.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP 142-3.  FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.  This FSP is effective for financial statements issued for fiscal years or interim periods beginning after December 15, 2008.  We do not currently hold any intangible assets that would be affected by this FSP and, as such, the adoption of this FSP is not expected to have a material impact on our financial position, cash flows or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133, or FAS 161.  This Statement changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  We do not currently hold any derivative instruments and we are not involved in any hedging activities at September 30, 2008 and, as such, the adoption of this Statement is not expected to have a material impact on our financial position or results of operations.

In February 2008, the FASB issued FSP 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.  FSP 157-1 amends FAS 157 to exclude SFAS No. 13, Accounting for Leases, or FAS 13, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FAS 13.  This FSP is effective upon initial adoption of FAS 157. Adoption of this FSP did not have a material impact on our financial position or results of operations.


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Onvia is exposed to financial market risks, including changes in interest rates and equity prices; however, we consider our exposure to these risks to be insignificant as explained further below.

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 only $118,000 in debt related to capital leases as of September 30, 2008, and due to our investment policies and

 
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the short-term nature of our investments, we believe that our risk associated with interest rate fluctuations is negligible.

Historically, our investment portfolio consisted 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; however, as of September 30, 2008 and December 31, 2007, our investments consisted entirely of money market funds.  Our primary investment objectives are preservation of principal, a high degree of liquidity and a maximum total return consistent with our 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; however, a portion of our 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 equity instruments and we do not currently have plans to raise additional capital in the equity markets; therefore, our equity price risk is insignificant.


Item 4(T). Controls and Procedures

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

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

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

Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II. OTHER INFORMATION


Item 1.  Legal Proceedings

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


Item 1A.  Risk Factors

Our 2007 Annual Report on Form 10-K includes a detailed discussion of certain risk factors facing our company. The risk factors described below should be read in conjunction with the risk factors and information disclosed in our 2007 Annual Report.  There are no material changes to the risk factors previously disclosed in our 2007 Annual Report.

·  
Risks related to our growth strategy

o  
Continued weakness in the commercial-residential housing market, or in the U.S. economy in general, could drive reduced spending by our clients and prospective clients on business intelligence services
o  
Continued weakness in the commercial-residential housing market, or in the U.S. economy in general, could reduce tax revenues collected by government agencies and may result in reduced government spending in the future
o  
We may not be able to meet our projected renewal rates
o  
We may not be able to increase subscribership to our high value products
o  
We may be required to increase our sales and marketing expenses in order to achieve our revenue goals
o  
We may not achieve our projections for adoption of our products by targeted enterprise clients
o  
We may not achieve our projections for adoption of new products by new and existing clients
o  
We may fail to attract, hire and retain sales associates who can effectively communicate the benefits of our products to our clients, and they may be unable to achieve expected sales targets
o  
If we cannot effectively satisfy our clients across all our industry verticals, we may decide to target fewer industries and, as a result, may lose clients
o  
Our competitors may develop similar technologies that are more broadly accepted in the marketplace

·  
Risks related to our new product strategy

o  
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 new content and products
o  
We may be unable to control the cost of ongoing content collection or the cost of collecting new content types to support new product offerings
o  
We have invested significant capital into the development of new products, such as Onvia Planning and Construction, and if new products fail to meet expectations we may not achieve our anticipated return on these investments
o  
We may improperly price our new product offerings for broad client acceptance
o  
We may overestimate the value of sales intelligence to companies in the infrastructure marketplace

 
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·  
Financial, economic and market risks

o  
We have a limited operating history, making it difficult to evaluate our business and future prospects
o  
We may not be able to generate recurring positive cash flows from operations
o  
Our quarterly financial results are subject to fluctuations that may make it difficult to forecast our future performance
o  
We have implemented anti-takeover provisions that may discourage takeover attempts and depress the market price of our stock
o  
Changes in accounting and reporting policies or practices may affect our financial results or presentation of results, which may affect our stock price

·  
Operational risks

o  
System failures could cause an interruption in the services of our network and impact our ability to compile information and deliver our product to our clients
o  
Our current technology infrastructure and network software systems may be unable to accommodate our anticipated growth, and we may require a significant investment in these systems to accommodate performance and storage requirements of new and planned products
o  
We may be unable to retain the services of executive officers, directors, senior managers and other key employees, which would harm our business
o  
We may be required to leverage third party recruiting firms to a greater extent than anticipated to assist in hiring key employees, which would increase our cost of hiring
o  
Portions of our content are aggregated and/or formatted by off-shore vendors.  Delivery of that content may be impacted by local political, social or environmental conditions, which may result in delayed delivery to our clients resulting in client dissatisfaction
o  
We may be unable to effectively monitor and prevent unauthorized redistribution of our published information
o  
Our services and products depend upon the continued availability of licensed technology from third parties and we may not be able to obtain those licenses on commercially reasonable terms, or at all
o  
Increased blocking of our emails could negatively impact client satisfaction with our product and could inhibit the effectiveness of our marketing efforts
o  
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

·  
Regulatory, judicial or legislative risks

o  
Any settlement or claim awarded against Onvia in our ongoing litigation matters discussed in Note 11, “Commitments and Contingencies,” of the notes to our unaudited condensed consolidated financial statements in this Report could negatively impact our operating results
o  
Future regulations could be enacted that either directly restrict our business or indirectly impact our business by limiting the growth of e-commerce
o  
Our access to new content from governmental entities and other third parties may be restricted if bid aggregation on the Internet is restricted by law or regulations
o  
Utilization of our net operating loss, or NOL, carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, which may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively

 
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