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8-K

 
Other

Onvia 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
f10q_111411.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, 2011
 
OR

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

For the transition period from _____ to _____

Commission file number 001-35164

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

Delaware
(State or other jurisdiction of incorporation or organization)

91-1859172
(I.R.S. Employer Identification No.)

509 Olive Way, Suite 400, Seattle, Washington 98101
(Address of principal executive offices, including zip code)

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

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

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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: 8,490,062 shares outstanding as of October 31, 2011.
 
 
 

 
 
Page
Item 4.  Removed and Reserved
 
 
 
 

 
 
   
September 30,
2011
   
December 31,
2010 (1)
 
   
(Unaudited)
 
   
(In thousands, except share data)
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 2,862     $ 7,522  
Short-term investments, available-for-sale
    7,548       3,362  
Accounts receivable, net of allowance for doubtful accounts of $36 and $73
    1,075       1,750  
Prepaid expenses and other current assets, current portion
    557       594  
Security deposits, current portion
    45       135  
                 
Total current assets
    12,087       13,363  
                 
LONG TERM ASSETS:
               
Property and equipment, net of accumulated depreciation
    1,381       1,419  
Internal use software, net of accumulated amortization
    6,315       6,587  
Reimbursable tenant improvements
    -       147  
Long-term investments
    850       -  
Prepaid expenses and other assets, net of current portion
    3       3  
Security deposits, net of current portion
    90       135  
                 
Total long term assets
    8,639       8,291  
                 
TOTAL ASSETS
  $ 20,726     $ 21,654  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 593     $ 1,172  
Accrued expenses and other
    803       992  
Idle lease accrual, current portion
    73       -  
Unearned revenue, current portion
    8,266       9,782  
Deferred rent, current portion
    140       115  
                 
Total current liabilities
    9,875       12,061  
                 
LONG TERM LIABILITIES:
               
Idle lease accrual, net of current portion
    71       -  
Unearned revenue, net of current portion
    270       228  
Deferred rent, net of current portion
    605       716  
                 
Total long term liabilities
    946       944  
                 
TOTAL LIABILITIES
    10,821       13,005  
                 
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; 8,490,088 and 8,430,605 shares issued; and 8,490,062 and 8,430,579 shares outstanding
    1       1  
Treasury stock, at cost: 26 and 26 shares
    -       -  
Additional paid in capital
    352,676       352,297  
Accumulated other comprehensive loss
    -       (1 )
Accumulated deficit
    (342,772 )     (343,648 )
                 
Total stockholders’ equity
    9,905       8,649  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 20,726     $ 21,654  
 
(1) Derived from audited financial statements included in the 2010 Annual Report.
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
1

 
Onvia, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands, except per share data)
   
(In thousands, except per share data)
 
                         
Revenue
                       
 Subscription
  $ 4,821     $ 5,710     $ 15,175     $ 17,616  
 Content license
    558       633       1,669       1,959  
 Management information reports
    142       272       463       699  
 Other
    109       90       312       259  
                                 
Total revenue
    5,630       6,705       17,619       20,533  
                                 
Cost of revenue
    889       972       2,685       3,126  
                                 
Gross margin
    4,741       5,733       14,934       17,407  
                                 
Operating expenses:
                               
Sales and marketing
    2,600       3,394       7,892       10,860  
Technology and development
    989       968       3,028       2,753  
General and administrative
    912       1,272       3,166       4,831  
                                 
 Total operating expenses
    4,501       5,634       14,086       18,444  
                                 
Income / (loss) from operations
    240       99       848       (1,037 )
                                 
Interest and other income, net
    8       10       28       81  
                                 
Net income / (loss)
  $ 248     $ 109     $ 876     $ (956 )
                                 
Unrealized (loss) / gain on available-for-sale securities
    -       (3 )     1       4  
                                 
Comprehensive income / (loss)
  $ 248     $ 106     $ 877     $ (952 )
                                 
Basic net income / (loss) per common share
  $ 0.03     $ 0.01     $ 0.10     $ (0.11 )
                                 
Diluted net income / (loss) per common share
  $ 0.03     $ 0.01     $ 0.10     $ (0.11 )
                                 
Basic weighted average shares outstanding
    8,477       8,425       8,460       8,362  
 
                               
Diluted weighted average shares outstanding
    8,541       8,465       8,555       8,362  
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
2

 
Onvia, Inc.
Condensed Consolidated Statements of Cash Flows
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income / (loss)
  $ 876     $ (956 )
Adjustments to reconcile net income / (loss) to net cash provided by operating activities:
 
Depreciation and amortization
    1,932       2,072  
Loss on abandonment of assets
    -       967  
Idle lease accrual
    144       -  
Stock-based compensation
    235       112  
Change in operating assets and liabilities:
               
Accounts receivable
    675       445  
Prepaid expenses and other assets
    37       174  
Accounts payable
    (580 )     (179 )
Accrued expenses
    (189 )     (160 )
Unearned revenue
    (1,474 )     (1,235 )
Deferred rent
    (85 )     (65 )
                 
Net cash provided by operating activities
    1,571       1,175  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
         
Additions to property and equipment
    (452 )     (767 )
Additions to internal use software
    (1,020 )     (2,719 )
Purchases of investments
    (10,534 )     (5,947 )
Sales of investments
    1,350       2,292  
Maturities of investments
    4,148       10,203  
Return of security deposits
    135       135  
                 
Net cash (used in) / provided by investing activities
    (6,373 )     3,197  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
         
Principal payments on capital lease obligations
    -       (6 )
Proceeds from exercise of stock options and purchases under employee stock purchase plan
    142       47  
Repurchase of common stock for minimum tax obligations on options exercise
    -       (427 )
                 
Net cash provided by / (used in) financing activities
    142       (386 )
                 
Net (decrease) / increase in cash and cash equivalents
    (4,660 )     3,986  
                 
Cash and cash equivalents, beginning of period
    7,522       1,647  
                 
Cash and cash equivalents, end of period
  $ 2,862     $ 5,633  
                 
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
Unrealized gain on available-for-sale investments
  $ (1 )   $ (4 )
Property and equipment additions in accounts payable
    (6 )     (16 )
Internal use software additions in accounts payable
    (171 )     (133 )
Non-cash proceeds from sale of equipment
    3       -  
Proceeds from options exercise
    -       807  
Repurchase of stock for net settlement of options exercise
    -       (807 )
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
3

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

1.  
Accounting Policies

Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Onvia, Inc. and its wholly owned subsidiary, collectively referred to as "Onvia" or the ”Company.”  There was no business activity in the subsidiary in the three and nine month periods ended September 30, 2011 or 2010.  The unaudited interim condensed consolidated financial statements and related notes thereto have been prepared pursuant to accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations.  The accompanying interim condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K.
 
Interim results are not necessary indicative of results for a full year. The information furnished is unaudited, but reflects, in the opinion of management, all adjustments, necessary for a fair presentation of the results for the interim periods presented, consisting of only normal recurring items, except as follows:

Out of Period Adjustments> – The results of operations include two adjustments relating to a prior period which have the effect of increasing net income by $98,000 for the nine months ended September 30, 2011 and $136,000 for the three months ended September 30, 2011. The amounts are immaterial to all periods.
 
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include the fair value of stock-based compensation, the idle lease accrual, the allowance for doubtful accounts, recoverability of long-lived assets, and the valuation allowance for Onvia’s net operating losses.  The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances.  Actual results may differ significantly from the Company’s estimates.  In addition, any significant unanticipated changes in any of the Company’s assumptions could have a material adverse effect on its business, financial condition, and results of operations.
 
2.  
Revenue Recognition

Onvia’s revenues are primarily generated from subscriptions, content licenses and management information reports.  These products and services may be sold individually or together as bundled offerings (“multiple-deliverable arrangements”).  Subscription services are generally annual contracts; however, we also offer extended multi-year contracts to our subscription clients, and content licenses are generally multi-year agreements.  Subscription services and content licenses are recognized ratably over the term of the agreement.  Onvia also generates revenue from fees charged for management reports, onsite training, data feeds, document download services, and list rental services.  Revenue from these types of services is recognized upon delivery or performance or, in the case of data feeds, ratably over the term of the agreement. Data feeds are included in the “Subscription” category on the Consolidated Statements of Operations.  Management reports are included in the “Management information reports” category on the Consolidated Statements of Operations.  Document download services, list rental services and onsite training are included in the “Other” category on the Consolidated Statements of Operations.

 
4

 
Onvia’s multiple-deliverable arrangements are generally comprised of a combination of subscription services, management information reports, data feed services and /or onsite training.  Onvia’s arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact revenue recognition.  Unearned revenue consists of payments received for prepaid subscriptions whose terms extend into periods beyond the balance sheet date, as well as the invoiced portion of contracts whose terms extend into periods beyond the balance sheet date.
 
Most of Onvia’s products and services qualify as separate units of accounting under the provisions of Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements.
Onvia evaluated the deliverables in its multiple-deliverable arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in its control.  Revenue is allocated to each deliverable in its multiple-deliverable arrangements based upon their relative selling prices.  Selling price for each deliverable is determined based on a selling price hierarchy.  The selling price for a deliverable is based on vendor specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.  Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.
 
VSOE of selling price is used in the selling price allocation in all instances where it exists.  VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately.  TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As Onvia’s products and services are unique to the market place, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE.  ESP represents the best estimate of the price at which the Company would transact a sale if the product or service were sold on a standalone basis.  Onvia determines ESP for a product or service by using profit margin rates that are consistent with historical rates. The determination of ESP is made through consultation with and approval by management.  Onvia may modify or develop new pricing practices and strategies in the future.  As these pricing strategies evolve, the Company may modify its pricing practices in the future, which may result in changes in ESP.  The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple-deliverable arrangements from the current fiscal quarter, which may change the pattern and timing of revenue recognition for these elements, but will not change the total revenue recognized for the arrangement.
 
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,
 
   
2011
   
2010
   
2011
   
2010
 
Cost of sales
  $ 1     $ 2     $ 3     $ 3  
Sales and marketing
    16       20       34       (35 )
Technology and development
    9       11       25       32  
General and administrative
    64       45       173       112  
                                 
Total stock-based compensation
  $ 90     $ 78     $ 235     $ 112  
 
 
5

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

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

Valuation Assumptions

Stock Options>
Onvia calculated the fair value of each option award on the date of grant using the Black-Scholes valuation model. The following weighted average assumptions were used for options granted in each respective period:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
      2011 *     2010       2011       2010  
Risk-free interest rate
    N/A       1.08 %     2.35 %     2.15 %
Expected volatility
    N/A       52 %     50 %     49 %
Expected dividends
    N/A       0 %     0 %     0 %
Expected life (in years)
    N/A       3.7       5.7       5.1  
 
* There were no option grants during the three months ended September 30, 2011.

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, 2011 and 2010. There were no purchase periods that began during the three months ended September 30, 2011 or September 30, 2010.
 
   
Nine Months Ended
   
   
September 30,
   
   
2011
   
2010
   
Risk-free interest rate
    0.10 %     0.25 %  
Expected volatility
    55 %     51 %  
Expected dividends
    0 %     0 %  
Expected life (in years)
    0.5       0.5    
 
 
6

 
Stock Option Activity
The following table summarizes stock option activity under Onvia’s equity incentive plan for the three and nine months ended September 30, 2011:
 
   
Options
Outstanding
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value (1)
                 
Total options outstanding at January 1, 2011
    1,695,349     $ 7.12      
Options granted
    87,000       4.35      
Options exercised
    (34,000 )     2.80      
Options forfeited and cancelled
    (183,201 )     8.53      
Total options outstanding at March 31, 2011
    1,565,148     $ 6.89      
Options granted
    6,000       4.00      
Options exercised
    -              
Options forfeited and cancelled
    (6,683 )     7.57      
Total options outstanding at June 30, 2011
    1,564,465     $ 6.88      
Options granted
    -              
Options exercised
    (19,751 )     1.54      
Options forfeited and cancelled
    (8,614 )     10.05      
Total options outstanding at September 30, 2011
    1,536,100     $ 6.93      
                     
Options exercisable at September 30, 2011
    1,137,639     $ 7.98  
                        2.14
 $       112,299
Options vested and expected to vest at September 30, 2011
    1,493,662     $ 7.02  
                        3.76
 $       196,940
 
 (1) Aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of Onvia’s common stock of $3.38 at September 30, 2011 for options that were in-the-money at September 30, 2011.  The number of in-the-money options outstanding and exercisable at September 30, 2011 was 325,240 and 87,490, respectively.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2011 was $2.09 per option. No options were granted during the three months ended September 30, 2011. The weighted average grant date fair value of options granted during the three and nine month periods ended September 30, 2010 was $1.34 and $2.95 per option, respectively.
 
As of September 30, 2011, there was approximately $319,000 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 1.59 years.
 
During the nine months ended September 30, 2011, approximately $142,000 was received for exercises of stock options and purchases under the employee stock purchase plan, compared to $47,000 for the same periods of 2010.

Restricted Stock Units>
The following table summarizes changes in non-vested restricted stock units (“RSUs”) for the nine months ended September 30, 2011:
 
   
Number of
shares
   
Weighted
Average Grant
Date Fair Value
   
               
Non-vested balance at January 1, 2011
    -     $ -    
Granted
    13,954       4.12    
Vested
    -       -    
Forfeited / Expired
    -       -    
Non-vested balance at September 30, 2011
    13,954     $ 4.12    
 
 
7

 
All RSUs were granted in the first quarter of 2011 and valued on the grant date based upon the fair value of the underlying common stock on the grant date.  Prior to the first quarter of 2011, no RSUs had been granted.  The value of the RSUs granted is recognized as compensation expense over the applicable vesting period.  The RSUs granted during the first quarter of 2011 have a three year vesting period; however, vesting of these RSUs will accelerate such that the RSUs become fully vested upon completion of Onvia’s 2011 fiscal year if certain financial targets are achieved.  As of September 30, 2011, there was $44,000 of total unrecognized compensation cost related to non-vested RSU’s and remaining unrecognized compensation cost associated with these RSUs is expected to be recognized over a weighted average period of 2.25 years.  We will continue to evaluate the likelihood of achievement of these financial targets, and will adjust the expected service period if circumstances indicate that it is probable that they will be achieved.

4.  
Earnings per Share

Basic earnings per share are calculated by dividing the net income or loss for the period by the weighted average shares of common stock outstanding for the period.  Diluted earnings per share are calculated by dividing the net income or loss per share by the weighted average common stock outstanding for the period, plus dilutive potential common shares using the treasury stock method.  In periods with a net loss, basic and diluted earnings per share are identical because inclusion of potentially dilutive common shares would be anti-dilutive.
 
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share data):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income / (loss)
  $ 248     $ 109     $ 876     $ (956 )
                                 
Shares used to compute basic net income/(loss) per share
    8,477       8,425       8,460       8,362  
Dilutive potential common shares:
                               
Stock options
    64       40       95       -  
Shares used to compute diluted net income per share
    8,541       8,465       8,555       8,362  
Basic net income/(loss) per share
  $ 0.03     $ 0.01     $ 0.10     $ (0.11 )
Diluted net income/(loss) per share
  $ 0.03     $ 0.01     $ 0.10     $ (0.11 )
 
For the three months ended September 30, 2011, approximately 1.2 million options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock during that three month period of $3.86, were not included in the calculation because the effect would have been anti-dilutive.  For the nine months ended September 30, 2011, approximately 1.1 million options to purchase shares of common stock were not included in the calculation because the effect would have been anti-dilutive.

For the three months ended September 30, 2010, approximately 1.4 million options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock during that three month period of $3.16, were not included in the calculation because the effect would have been anti-dilutive.  For the nine months ended September 30, 2010, approximately 1.5 million shares of common stock were excluded from the calculation because the effect would have been anti-dilutive.
 
 
8

 
5.  
Short-Term Investments

In accordance with ASC 320,  Investments – Debt and Equity Securities, Onvia classifies short-term investments in debt securities as available-for-sale at September 30, 2011, stated at fair value as summarized in the following table (in thousands):
 
   
September 30, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Short-Term Investments
                       
U.S. Government backed securities
  $ 2,939     $ -     $ -     $ 2,939  
Certificate of Deposit (1)
    1,735       -       -       1,735  
Corporate Bonds
    2,874       -       -       2,874  
Total Short-Term Investments
    7,548       -       -       7,548  
Long-term Investments
                               
U.S. Government backed securities
    850       -       -       850  
Total Long-Term Investments
    850       -       -       850  
Total Investments
  $ 8,398     $ -     $ -     $ 8,398  
 
(1) We evaluated certificates of deposits held as of September 30, 2011 and concluded that they meet the definition of securities as defined in ASC 320.

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

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

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

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Onvia uses the market approach to measure fair value for its financial assets and liabilities.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
 
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The following table summarizes, by major security type, short-term investments classified as available-for-sale at September 30, 2011, stated at fair value (in thousands):
 
   
Fair Value Measurements as of September 30, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Balance as of
September 30,
2011
 
Description
                       
U.S. Government backed securities
  $ -     $ 3,789     $ -     $ 3,789  
Certificate of Deposit
    -       1,735       -       1,735  
Corporate Bonds
    -       2,874       -       2,874  
    $ -     $ 8,398     $ -     $ 8,398  
 
There were no transfers in or out of Level 1 or Level 2 investments during the first nine months of 2011, and there was no activity in Level 3 fair value measurements during that period.

6.  
Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):
 
   
September 30,
   
December 31,
   
   
2011
   
2010
   
Prepaid expenses
  $ 293     $ 538    
City tax refund receivable
    208       -    
Interest receivable
    43       20    
Other receivables
    13       36    
    $ 557     $ 594    
 
7.  
Property and Equipment

Property and equipment to be held and used consist of the following (in thousands):
 
   
September 30,
   
December 31,
   
   
2011
   
2010
   
               
 Computer equipment
  $ 3,779     $ 3,658    
 Software
    945       1,107    
 Furniture and fixtures
    107       107    
 Leasehold improvements
    882       735    
 
                 
 Total cost basis
    5,713       5,607    
                   
 Less accumulated depreciation and amortization
    (4,332 )     (4,188 )  
                   
 Net book value
  $ 1,381     $ 1,419    
 
During the first nine months of 2011, Onvia disposed of $268,000 of fully depreciated computer equipment and $183,000 of fully depreciated software.

Depreciation expense was $232,000 and $595,000 for the three and nine months ended September 30, 2011, respectively, compared to $194,000 and $591,000, respectively, for the same periods of 2010.
 
 
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8.  
Internal Use Software

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

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

The following table presents a rollforward of capitalized internal use software for the nine months ended September 30, 2011 (in thousands):
 
   
Balance at
December 31,
2010
   
Additions
   
Abandonments
   
Balance at
September 30,
2011
 
Capitalized Internal Use Software
  $ 10,201     $ 1,065     $ (124 )   $ 11,142  
Accumulated amortization
    (3,614 )     (1,335 )     122       (4,827 )
    $ 6,587     $ (270 )   $ (2 )   $ 6,315  
 
During the first nine months of 2011, assets that were nearly fully amortized related to aging search technology were replaced with a new platform.  Onvia recorded an immaterial loss on this abandonment in operating expenses under the general and administrative category in the nine months ended September 30, 2011.

During the second quarter of 2010, Onvia abandoned three internal use software projects. Pursuant with the guidance in ASC 360-35-47, Onvia recorded a loss on abandonment of approximately $967,000, representing the full unamortized balance as of September 2010 for these three assets. The loss is included in operating expenses under the general and administrative category in the nine months ended September 30, 2010.

9.  
Accrued Expenses

Accrued expenses consist of the following (in thousands):
 
   
September 30,
   
December 31,
   
   
2011
   
2010
   
Payroll and related liabilities
  $ 686     $ 849    
Taxes payable and other
    117       143    
    $ 803     $ 992    
 
10.  
New Accounting Pronouncements
 
Except as noted below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2011, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, that are of significance, or potential significance to us.
 
 
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In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance.   ASU requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. This ASU will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted.  The adoption of this ASU will not have an impact on the Company’s consolidated financial statements, except for the prescribed changes in presentation. The Company does not plan to early adopt this ASU.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The adoption of this ASU will not have an impact on the Company’s consolidated financial statements.

11.  
Commitments and Contingencies


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

As of September 30, 2011, remaining future minimum lease payments required on non-cancellable operating leases are as follows for the years ending December 31 (in thousands):
 
   
Real Estate
   
Office Equipment
   
Total
 
   
Operating Leases
   
Operating Lease
   
Operating Leases
 
                   
2011
  $ 239     $ 5     $ 244  
2012
    983       18       1,001  
2013
    1,012       18       1,030  
2014
    1,042       11       1,053  
2015
    894       -       894  
    $ 4,170     $ 52     $ 4,222  
 
 
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Legal Proceedings

 
In 2001, five securities class action suits were filed against Onvia, certain former executive officers, and the lead underwriter of Onvia’s Initial Public Offering, or IPO, Credit Suisse First Boston, or CSFB.  The suits were filed in the U.S. District Court for the Southern District of New York on behalf of all persons who acquired securities of Onvia between March 1, 2000 and December 6, 2000.  In 2002, a consolidated complaint was filed.  The complaint charged defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) and Sections 11 and 15 of the Securities Act of 1933, for issuing a Registration Statement and Prospectus that failed to disclose and contained false and misleading statements regarding certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in the offering.  The complaint sought an undisclosed amount of damages, as well as attorneys’ fees.  This action is being coordinated with approximately 300 other nearly identical actions filed against other companies.  At the Court’s request, plaintiffs selected six “focus” cases, which do not include Onvia.  The Court indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases.
 
The parties in the coordinated cases, including Onvia’s case, reached a settlement.  The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Onvia.  On October 5, 2009, the Court granted final approval of the settlement.  Judgment was entered.  The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was remanded to the District Court to determine if the appellant is a class member with standing to appeal.  The District Court ruled that the appellant is not a class member.  The appellant has appealed the District Court’s decision to the United States Court of Appeals for the Second Circuit.
 
Due to the inherent uncertainties of litigation, Onvia cannot accurately predict the ultimate outcome of this matter.  If the settlement does not survive appeal and Onvia is found liable, Onvia is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than Onvia’s insurance coverage, and whether such damages would have a material impact on its results of operations or financial condition in any future period.
 
 
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On October 2, 2007, Vanessa Simmonds, a purported stockholder of Onvia, filed suit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, JPMorgan Chase & Co. and Bank of America Corporation, the lead underwriters of Onvia’s IPO in March 2000, alleging violations of Section 16(b) of the Securities Exchange Act of 1934. The complaint alleges that the combined number of shares of Onvia's common stock beneficially owned by the lead underwriters and certain unnamed officers, directors, and principal stockholders exceeded ten percent of its outstanding common stock from the date of Onvia’s IPO on March 2, 2000, through at least February 28, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any "short-swing profits" obtained by them in violation of Section 16(b). Onvia was named as a nominal defendant in the action, but has no liability for the asserted claims. No directors or officers of Onvia are named as defendants in this action. On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various IPOs. On February 25, 2008, Ms. Simmonds filed an Amended Complaint asserting substantially similar claims as those set forth in the initial complaint. Onvia waived service. On July 25, 2008, Onvia joined with 29 other issuers to file the Issuer Defendants' Joint Motion to Dismiss. Underwriter Defendants also filed a Joint Motion to Dismiss on July 25, 2008. Plaintiff filed oppositions to both motions on September 8, 2008. All replies in support of the motions to dismiss were filed on October 23, 2008. Oral argument on the motions to dismiss was held on January 16, 2009.  On March 12, 2009, the Court granted the Issuer Defendants' Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that Ms. Simmonds had failed to make an adequate demand on Onvia prior to filing her complaint.  In its order, the Court stated it would not permit Plaintiff to amend her demand letters while pursuing her claims in the litigation.  Because the Court dismissed the case on the ground that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether Plaintiff's claims were barred by the applicable statute of limitations.  However, the Court also granted the Underwriters' Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable statute of limitations because the issuers' shareholders had notice of the potential claims more than five years prior to filing suit. 

Ms. Simmonds filed a Notice of Appeal on March 31, 2009, and an Amended Notice of Appeal on April 10, 2009.  The underwriters subsequently filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving issuers should have been with prejudice because the claims were untimely under the applicable statute of limitations. Ms. Simmonds' opening brief in the appeal was filed on August 26, 2009; Onvia and the underwriters’ responses and the underwriters' brief in support of their cross-appeal were filed on October 2, 2009; Ms. Simmonds' reply brief and opposition to the cross-appeal was filed on November 2, 2009; and the underwriters' reply brief in support of their cross-appeals was filed on November 17, 2009.   On October 5, 2010, the U.S. Court of Appeals for the Ninth Circuit heard oral argument regarding this matter.   
 
On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including Onvia's) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice.  The Ninth Circuit reversed and remanded the District Court’s decision on the underwriters’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. 
 
On December 16, 2010, underwriters filed a petition for panel rehearing and petition for rehearing en banc and Appellant Vanessa Simmonds also filed a petition for rehearing en banc.  On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc.
 
 
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On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers.  On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court.  On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases.   On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including Onvia's and other moving issuers) is stayed for ninety days pending Appellant’s filing of a petition for writ of certiorari in the United States Supreme Court.   

On June 27, 2011, the United States Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ position relating to the statute of limitations issue.  The Ninth Circuit mandate for all cases continues to be stayed pending final disposition of the underwriters’ Petition.  Underwriters’ brief on the merits was submitted on August 18, 2011, and Simmonds’ brief was submitted on September 26, 2011.  Oral argument in that case is scheduled for November 29, 2011.

Onvia currently believes that the outcome of this litigation will not have a material adverse impact on its consolidated financial position and results of operations. 

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

12.
Idle Lease Accrual

Onvia has a non-cancellable operating lease for 35,000 square feet in its current corporate headquarters building, which expires in October 2015.  2,717 square feet has never been occupied and is still in shell condition.

During the third quarter of 2011, the Company completed a revised staffing forecast for the period of time that covers the remaining term on its office lease. Based on this staffing forecast, the Company does not foresee a need to expand into this vacant space over the remaining term of the lease and no longer expects to derive any future economic benefit from this unused space.

Pursuant to the guidance in ASC 420, Exit or Disposal Cost Obligations, a liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognized at the cease-use-date.  Management has determined that the cease-use-date is September 1, 2011, which approximates the date that the staffing forecast was completed and when management began engaging outside real estate brokers to market the space.  Accordingly, an accrual of approximately $150,000 was recorded in the three months ended September 30, 2011, representing the calculated fair value of Onvia’s remaining obligation on the idle space from the cease-use-date through the lease expiration date, net of estimated future sublease income.  Onvia currently expects that the space will not be sublet until the fourth quarter of 2012.  The accrual is recorded in the “General and administrative” category on the Consolidated Statements of Operations and Comprehensive Income.

13.
Provision for Income Taxes

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

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), utilization of NOL carryforwards to offset future taxable income are subject to substantial annual limitations if we experience a cumulative change in ownership as defined by the Code.  In general, an ownership change, as defined by the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

 
15

 
As of December 31, 2010, Onvia had tax NOL carryforwards of $255.2 million.  During the first quarter of 2011, Onvia completed a formal study (the “NOL Study”) for the period of February 25, 1999 through December 31, 2010.  The results of this study indicate that it is more likely than not that the Company experienced an ownership change under Section 382 on September 4, 2001.  Accordingly, the NOLs incurred prior to the ownership change are limited based on the value of the Company on the date of the ownership change under Section 382 (the “Loss Limitation”).  It is estimated that the Loss Limitation will result in the expiration of approximately $180.1 million in NOLs prior to utilization, leaving approximately $75.1 million available to offset future taxable income.  The remaining NOLs expire in dates ranging from 2021 through 2029. Onvia has a full valuation allowance on its NOLs; therefore, the Loss Limitation will not have an impact on Onvia’s results of operations or financial position.  See Note 14 for a discussion of measures taken to help preserve the remaining NOLs.

The estimate of the Loss Limitation is based upon certain conclusions in the NOL study pertaining to the date of the ownership change and the value of the Company on the date of the ownership change.  The overall determination of the Loss Limitation and the conclusions contained in the NOL Study are subject to interpretation, and therefore, the Loss Limitation could be subject to change.

14.
Security Deposits

Pursuant to Onvia’s lease for its current corporate office space, Onvia provided a security deposit of $538,000, which is reduced annually by $135,000 in the first three years of the lease beginning in March 2009, and by $45,000 on the fourth anniversary of the commencement date.  The balance will be returned at lease termination in October 2015.  As of September 30, 2011, the outstanding security deposit balance was $135,000.

15.
Preferred Stock Rights

On May 4, 2011, Onvia’s Board of Directors (the “Board”) approved an amendment to the Company’s Preferred Stock Rights Agreement, dated November 22, 2002. The amendment, which was subsequently executed on that date by the Company and Computershare Trust Company, N.A., as Rights Agent, changes the Final Expiration Date of the rights under the Original Rights Agreement from November 22, 2012 to May 4, 2011. As a result, the Original Rights expired and the Original Rights Agreement effectively terminated as of May 4, 2011.

On May 4, 2011, the Board of Directors adopted a tax benefits preservation plan in the form of a Section 382 Rights Agreement (the “382 Agreement”).  The 382 Agreement is designed to preserve stockholder value and the value of certain income tax assets primarily associated with net operating loss carryforwards (“NOL”) by acting as a deterrent to any person acquiring beneficial ownership of 4.9% or more of Onvia’s outstanding common stock without the approval of the Board. If there was an “ownership change” under Section 382, our ability to use NOLs could be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair the value of those NOLs. This would occur if stockholders owning (or deemed under Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a defined period of time. The 382 Agreement was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382.

Under the 382 Agreement, one Preferred Stock Purchase Right (each, a “Right”) was distributed for each share of Common Stock outstanding as of the close of business on May 23, 2011. If the Rights become exercisable, each Right would initially represent the right to purchase from Onvia one one-thousandth of a share (a “Unit”) of Series RA Junior Participating Preferred Stock, par value $0.0001 per share, of Onvia (the “Series RA Preferred Stock”) for a purchase price of $20.00 (the “Purchase Price”). If issued, each Unit of Series RA Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of Common Stock. However, prior to exercise, a Right does not give its holder any rights as a stockholder of Onvia, including, without limitation, any dividend, voting or liquidation rights.

 
16

 
As of the adoption of the 382 Agreement, if any person or group (an “Acquiring Person”) becomes the beneficial owner (other than as a result of repurchases of stock by Onvia, dividends or distributions by Onvia or certain inadvertent actions by stockholders) of  4.9% or more of the outstanding shares of Common Stock (including any ownership interest held by that person’s affiliates and associates as defined under the 382 Agreement) without the approval of the Board of Directors, their ownership interest could be subject to significant dilution. Stockholders who beneficially owned 4.9% or more of Onvia's outstanding common stock as of the close of business on May 4, 2011 will not trigger any penalties under the 382 Agreement so long as they do not acquire any additional shares of common stock (other than pursuant to a dividend or distribution paid or made by Onvia on the outstanding shares of common stock, or pursuant to a split or subdivision of the outstanding shares of common stock) representing one percent (1%) or more of the shares of Onvia’s outstanding common stock at a time when they still beneficially own 4.9% or more of such common stock. The Board also retains the sole discretion to exempt any person or group from the penalties imposed by the 382 Agreement. 

The Rights will not be exercisable until the earlier of (i) ten business days after a public announcement that a person has become an Acquiring Person and (ii) ten business days (or such later date as may be specified by the Board prior to such time as any person becomes an Acquiring Person) after the commencement of a tender or exchange offer by or on behalf of a person that, if completed, would result in such person becoming an Acquiring Person.

In the event that a person or group becomes an Acquiring Person, each holder of a Right, other than Rights that were beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of a Right and payment of the Purchase Price, a number of shares of the Common Stock having a market value of two times the Purchase Price. However, Rights are not exercisable following the occurrence of a person becoming an Acquiring Person until such time as the Rights are no longer redeemable by the Company (as described below).

At any time after a person becomes an Acquiring Person, the Board may, at its option, exchange the Rights, in whole or in part, at an exchange ratio of one share of common stock, or a fractional share of Series RA Preferred Stock of equivalent value, per Right.  Immediately upon an exchange of any Rights, the right to exercise such Rights will terminate, and the only right of the holders is to receive the shares determined by the exchange ratio. Until the earlier of the May 4, 2014 and ten calendar days following an announcement that a person or group has become an Acquiring Person, the Board may redeem the Rights in whole, but not in part, at a price of $.001 per right.

The Rights will expire on May 4, 2014.  The Rights may also expire on an earlier date if other events occur, including if the Board determines that the 382 Agreement is no longer necessary to preserve material valuable tax benefits, if the Board determines that no tax benefits may be carried forward at the beginning of a taxable year, and if the Board determines that the 382 Agreement is no longer in the best interests of Onvia and its stockholders.
 
 
17

 

 
In addition to the historical information contained herein, the discussion and analysis in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding expected increases in clients, contracts and contract value, cash flow, profitability and stockholder value and expected stabilization of ACV. When used in this discussion, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “plans,” “estimates,” “predicts,” “potential,” “continue,” “intends”, “indicates” or the negative of these and similar expressions are intended to identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not a forward-looking statement. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and are subject to risks and uncertainties that could cause actual results to differ materially from those expected or implied by these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the factors described under “Risk Factors,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as applicable, in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010. Onvia undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated events. Readers are urged, however, to review the factors and risks described in reports Onvia files from time to time with the Securities and Exchange Commission. The following discussion should also be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto.

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


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Most of our revenues are generated from sales to two customer types: end users, such as business development and sales and marketing executives, and businesses that license our content for redistribution.

 
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Onvia’s solutions for end users include access to the Onvia Online Database, Spending Forecast Center, and the Onvia Guide.  These services are sometimes bundled with management information reports in multiple-deliverable arrangements.  Refer to the discussions below under “Products and Services” for a description of these products and services, and under “Critical Accounting Policies and Management Estimates” for a discussion of how sales price is allocated between the elements in a multi-deliverable arrangement and how revenue is recognized on each element.  Subscriptions to the Onvia Online Database are typically prepaid, have a minimum term of one year and revenues are recognized ratably over the term of the subscription.  Subscriptions are priced based upon the geographic range, nature of content purchased, and the number of users accessing the database.

Revenue from businesses who license our content for resale to their own customers is classified as content license revenue.  Content license contracts are generally multi-year arrangements that are invoiced on a monthly or quarterly basis, and these agreements typically have a higher annual contract value than our subscription-based services.  Revenue from content license agreements is recognized ratably over the term of the agreement.
 
Onvia was incorporated in January 2000 in the state of Delaware.  Our principal corporate office is located in Seattle, Washington.  Our securities trade on The NASDAQ Capital Market under the symbol ONVI.
 
 
With the passage of the American Recovery and Reinvestment Act (“ARRA”) in 2009, government spending on goods and services accelerated dramatically and represented more than 40% of the gross domestic product of the United States.  Two years later government spending is at crossroads. The remaining ARRA funding is being spent and federal, state and local agencies face looming budget deficits, which may result in freezes or cuts to some agencies’ budgets.  Smaller budgets and deficit reduction initiatives may lead to increased competition for contracts, and public sector vendors will be looking for a competitive advantage.  Also, existing budgets may be reallocated to investments in emerging technologies, such as health care, clean water and renewable energy.  Progressive enterprises are recognizing the substantial opportunity and the significant challenges presented by the government-to-business market and are developing their own strategies to penetrate this sector.  A successful government-to-business strategy will require businesses to proactively identify new opportunities and changes in government spending behavior in this current landscape.  Businesses may find that they are disadvantaged if they do not have insight about this market and their competitors.
 
The government-to-business marketplace is highly competitive.  Identifying relevant projects and partners can be difficult and companies spend a substantial amount of time and effort to locate and research new partners and opportunities to grow in this sector.  The Internet provides short-term visibility into government contracting information for both government agencies and businesses alike, but does not provide the on-demand intelligence or context required to guide strategic decisions.  When an opportunity is identified, more research must be performed to qualify the opportunity, including research on the agency, the decision maker, historical purchasing practices and pricing, and incumbent vendor relationships to name a few.  A comprehensive view of the marketplace and of specific opportunities is necessary to prequalify opportunities, improve win rates, increase contract size and support a public sector strategic plan.
 
Our comprehensive government procurement database contains much of the relevant decision making information required by businesses on both a historical and real-time basis.  Through our solutions, we provide the market intelligence a business needs to design and manage a public sector strategy, build relationships with agency buyers and private sector contractors, and target more qualified revenue opportunities.  The confluence of these activities should help clients create more winning proposals, increase close rates, increase contract size and, ultimately, increase public sector revenues.


Onvia’s business solutions are tailored to the business objectives of each client, and support both strategic planning and sales and marketing activities.
 
 
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Strategic Planning>
Core to our business solution is the Onvia Online Database, which provides rich search functionality on our proprietary database of local, state and federal government agency purchasing information.  Strategic users of the database can analyze purchasing trends to refine existing target markets, identify new geographic markets, and identify potential new agency buyers.   Based upon the client’s business objectives, we can help provide market intelligence needed for strategic planning 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.

To further enhance the value of our planning content, Onvia launched Spending Forecast Center in June 2010, which provides insight into budgets and capital improvement plans by agencies within the top 366 Metropolitan Statistical Areas in the United States.  Spending Forecast Center provides valuable, strategic information on future capital spending used by larger corporations to execute their gBusiness strategies.

Most governmental bodies, such as departments of transportation, city and county governments, and boards of education publish a plan that maps out their major initiatives and forecasts spending over the next 3-6 years.  These spending forecasts generally include the name of the initiative or type of expense, project timing, the funding source and the budget amount.

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

In September 2010, Onvia launched Agency Center, the newest module in the Onvia Online Database, which helps strategic users get a past, present and future view of potential agency targets.  Agency Center provides users with agencies’ procurements histories, current projects, and spending forecasts in a single application.  This gives businesses an unprecedented view of agency buying patterns and plans, as well as the markets where their competitors are. Agency Center is included with standard access to the Onvia Online Database.

In June 2011, we launched functionality to help clients analyze their search results more effectively.  This new data visualization feature helps showcase the power of our database beyond just sales lead generation and notification.  Our next product release is slated for early 2012 and is focused on improving and enhancing the client experience through an improved user interface intended to help clients unlock greater value from our database.  The data visualization features are included with standard access to the Onvia Online Database. 

Access to comprehensive and timely agency and procurement information helps sales and marketing organizations effectively identify and qualify government agencies, agency buyers and procurement opportunities within their target markets.  Sales and marketing users of the Onvia Online Database can research project histories, agency buyer contact information, agency relationships with existing vendors and contract awardees, and can evaluate pricing for goods and services.  Comprehensive information on their target market helps businesses improve decision making, enhance proposal quality, and manage agency relationships, all of which should help our clients obtain new procurement awards.
 
 
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Sales and marketing users of the Agency Center application find it easier to identify and market to the government agencies that buy what they sell. Agency Center helps sales and marketing organizations to:
 
 
·
Identify government purchases that never go out to formal bid.  Four out of five government purchases never go out to formal bid, because they fall below agencies’ purchasing thresholds. Businesses can use Agency Center to identify these projects and then register with the agencies to get on  the vendor list agencies use to award informal, unpublished projects.
 
 
·
Search for projects in their industry, then display the agencies involved with those projects.
 
 
·
Search for agencies to target based on location, purchasing history, annual budget, and area of focus.
 
 
·
Create a saved search of the agencies they have targeted and their daily Onvia Guide will track those agencies’ buying activities, from pre-bid notices to bids and requests for proposal to contract awards.
 

We also can provide our sales and marketing partners with management reports to help target upcoming contract renewals, identify agency buyers, and inform the proposal development process.  These solutions include:

 
·
Term Contracts – Provide clients with actionable sales information on term or continuing service contracts pending renewal at public agencies.  These reports identify what contracts exist, when they are coming up for renewal, who the incumbent is and who the buyers are.  With this report, our clients are able to perform an early evaluation of the opportunity so they can be more competitive with their proposals to increase their public sector business.
 
 
·
Contact Lists – Provide clients a comprehensive list of decision makers, agency procurement officers and zoning officials that can be used to develop relationships and identify potential business partners.
 
 
·
Winning Proposals Library – Compare and contrast winning proposals submitted by competing firms in order to gain competitive insights.  Provides insight into how other companies position their qualifications and personnel, structure and format persuasive proposals, incorporate supporting materials, price goods and services, and differentiate themselves from their competitors.
 

Client Support>
Most clients are assigned a support team familiar with the client’s specific industry.  The support team is responsible for understanding the client’s business objectives, setting up profiles and saved searches, delivering customized management reporting, and training the client to query the database effectively.  The partnership between the client and its Onvia support team is important to deriving value from the Onvia business solution.

Industries and Verticals>
Our business solutions support the largest industry verticals, with a focus on the infrastructure verticals, which include:
 
 
·
Architecture and Engineering
 
·
Construction and Building Supplies
 
·
IT / Telecommunications
 
·
Professional Services
 
·
Operations and Maintenance Services
 
·
Transportation
 
·
Healthcare
 
·
Water and Energy / Alternative Energy
 
 
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Within these verticals we provide hard-to-find content, which supports both strategic planning and sales and marketing activities.

Comprehensive Procurement Content>
Our database presents sales and marketing with a comprehensive view of a project throughout the most critical phases of the procurement lifecycle including:
 
 
·
Advance Notices – alerts businesses of projects in the early stages of the development process, before the bid or request for proposal is released in its final form, or before final zoning and planning board approval;
 
 
·
Request for proposals, request for quotes, and related amendments;
 
 
·
Planholders and Bidders Lists – provides competitive intelligence by presenting a list of competitors that have acquired plans, specifications, bidding documents and/or proposals for specific projects in the active bid or proposal stage, and a list of competitors who submit bids for prime contracts with the owner of the project;
 
 
·
Bid Results and Awards Information – notifies businesses of awarded bids, providing information for use in their own sales and marketing activities; and
 
 
·
Grants – supplies federal grant information critical to businesses tracking or applying for publicly-funded projects.
 

 
Our mission is to deliver essential, actionable business intelligence that our clients rely upon to compete more effectively in the government business marketplace.  We intend to achieve this mission by delivering exceptional products that offer our customers significant value in maximizing their business in the public sector market.  If we are able to effectively achieve this mission, we should see increased retention rates and, ultimately, increased stockholder value.  Key elements of our strategy include:

 
·
Target prospects with high lifetime value:  We intend to focus our sales and marketing efforts on the prospects that fit the profile of our most valuable clients.  Using our own database we plan to identify companies that have a strategic, long-term interest in the public sector market based on the volume of their bidding activity and the geographical scope of their marketing program to the government.

To address our target market, we are in the process of transforming our Small and Medium Business or “SMB” sales organization from a transactional team into a consultative sales force focused on this targeted market.  The success of this transformation will be measured each quarter by our ability to increase the contract value of new customers acquired from our target market.  In July 2011, we realigned our SMB sales management to separate responsibilities for SMB acquisition and SMB retention.  We believe the new sales management structure, our maturing acquisition sales force, and the nurture marketing program we launched in July should accelerate pipeline growth through the balance of 2011 with a corresponding increase in contract value from new client acquisitions.  Due to this transition, we believe new client acquisitions will begin to scale by early 2012.

 
·
Expand the distribution of our valuable content through channel sales programs and relationships:  We intend to leverage our content and technology investment over a much wider market without losing focus on our target market.  We believe there are a large number of businesses who leverage government procurement data but are not part of our target market.  Through channel relationships, we believe we can serve this market more economically than through a direct sales model.  Potential strategic partners include trade publishers, lead generation companies, database companies, franchises and business intelligence providers.

 
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Since December 2010, we have contracted with six new partners to resell derivatives of our content through their specific channels.  We expect the contract value on these partnerships to slowly build over a six to twelve month period.  We expect to increase the number of signed contracts in the fourth quarter of this year.  We will continue to measure the success of this initiative by our ability to increase contract value with existing partners and to sign up new strategic relationships this year.

 
·
Develop and execute an enterprise sales and marketing program:  We intend to develop and execute an enterprise sales program targeting the largest companies that offer the most business potential for Onvia.  Our current enterprise clients derive the most value from our information services and this client segment has our highest retention rates.

In the third quarter, we began to invest in our enterprise program, and began building a team of experienced sales professionals.  Our new team should be productive by end of 2011. Once the team has matured and we have a reasonable basis for measurement, we intend to design success metrics for this initiative and report on these metrics each quarter.

 
·
Enhance the strategic application of our products and research tools:  Today, many clients use Onvia for lead generation.  Our target market has additional needs beyond lead generation to help them maximize their business with the public sector such as competitive analysis, market sizing and pricing analysis.  Providing these additional applications in the future will strengthen our relationship with our customers and drive additional contract value per customer for Onvia in the future.  We are building the foundation today to deliver these additional more strategic applications in the future by expanding our content and enhancing our platform.

On the content side, we strive to cover 95% of all publicly available bids and RFPs and we add new sources daily.  In the third quarter, we initiated coverage on 793 new agencies and also added 190 secondary sources to broaden coverage in existing agencies.  Concurrently, we are expanding our comprehensive coverage of these agencies to include awards, plan holders lists, advance notices, and value added documents, such as plans and specifications in key regions.  The expanding coverage and quality of our content should drive incremental value to our existing customers and power the additional new products to be launched over the next 2 years.

Our next platform release is slated for early 2012 and is focused on enhancing the client experience.  This release will provide customers with an improved user interface to improve client adoption and help clients unlock greater value from our database.  The release includes significant navigation enhancements to increase the “findability” of information in our database.  Improved information architecture will present search results in an intuitive way that supports informed decision making.   The new user interface should help us more effectively demonstrate value to prospects to accelerate new client acquisitions, and increase product adoption across our entire client base to drive client satisfaction.


We service our clients through two separate business channels:  client subscriptions and content licenses.  Client subscriptions are sold directly to businesses for internal use.  At September 30, 2011, we had approximately 4,700 subscribing clients.  Client subscriptions contributed approximately 86% of our revenue in both the three and nine months ended September 30, 2011, compared to approximately 85% and 86% of our revenue in the three and nine months ended September 30, 2010.  The annual contract value, or ACV, of client subscribers was approximately $19.0 million and $23.0 million at September 30, 2011 and 2010, respectively.  The decline in ACV was primarily due to attrition of non-strategic clients and fewer new client acquisitions.   ACV is expected to stabilize in early 2012 as first year client retention improves and client acquisitions begin to scale. ACV is defined further below.

 
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Our second business channel, content licenses, represents clients who incorporate our data into their own products, or resell our business intelligence directly to their customers.  These clients represented approximately 10% and 9% of our revenue in the three and nine months ended September 30, 2011, respectively, compared to 10% in the same periods of 2010.  The annual contract value of our content license clients increased by $114,000 from the prior quarter and was approximately $2.2 million at September 30, 2011.

We also generate revenue from fees charged for management information reports, document download services, and list rental services; these fees represented 4% and 5% of revenue in the three and nine months ended September 30, 2011, respectively, compared to 5% and 4%, respectively, in the same periods of 2010.

We manage the business using the following key operating metrics:

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

Annual Contract Value per Client, or ACVC
Annual contract value per client is the annual contract value divided by the number of clients and indicates the average value of each of our subscriptions.

Quarterly Contract Value per Client, or QCVC
Quarterly contract value per client represents the average annual contract value of all new and renewing clients transacting during the quarter, and is a leading indicator of future annual contract value per client.

Revenue for the third quarter of 2011 decreased 4% to $5.6 million from $5.8 million in the previous quarter and decreased 16% from $6.7 million in the same year-ago period.  Consistent with our previously communicated turnaround plan, Onvia is focused on a small, targeted market of prospects which are committed long-term to the public sector.  Under the previous transactional business model, our target market was extremely broad, and we acquired a large number of non-strategic clients which were not adequately profitable.  We no longer invest in acquiring non-strategic clients, and our client base has declined as expected as we transition to our more profitable target market.  Our declining year over year revenue is directly attributable to this planned decline in non-strategic clients.

At the end of the third quarter, Onvia’s total client base decreased 31% to 4,700 clients compared to 6,800 clients in the same year-ago period.  Nearly 70% of our non-renewals over the last year were non-strategic clients under our new targeted account definition.

ACVC grew 4% from the previous quarter and 19% from the same year-ago period to an average of $4,027 per client.  ACVC improved in the third quarter, in part by targeting more strategic clients and because renewals were weighted toward strategic clients with higher contract values. Our ACVC from new SMB acquisition sales increased to $7,163, up 49% from $4,802 in the third quarter of 2010.

In the third quarter of 2011, QCVC was $4,371, an increase of 8% compared to $4,030 in the third quarter of 2010.  The year over year increase in QCVC is due to price increases that took effect in the fourth quarter of 2010, the elimination of low value product offers, and the elimination of low value lead sources.

 
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Year-over-year, unearned revenue decreased by 17% to $8.5 million at September 30, 2011, compared to $10.3 million at September 30, 2010.  The year-over-year decrease is due to a decrease in sales in the last four quarters, compared to the prior year periods, primarily due to the loss of non-strategic clients as discussed above. Unearned revenue consists of payments received for prepaid subscriptions whose terms extend into periods beyond the balance sheet date, as well as the invoiced portion of contracts whose terms extend into periods beyond the balance sheet date.


Our customer acquisition business is subject to some seasonal fluctuations.  The second and third quarters are generally slower than the first and fourth quarters for customer acquisition.  The construction industry is our single largest market and these prospects are typically engaged on projects during the spring and summer months, not prospecting for new work, which causes new customer acquisition to decline compared to the first and fourth quarters in the year.  For this reason, comparisons of the performance of our business quarter to consecutive quarter may not provide the most relevant information, and our quarterly results and metrics should be considered on the basis of results for the whole year or by comparing results in a quarter with the results in the same quarter of the previous year.

Results of Operations for the Three and Nine Months Ended September 30, 2011 Compared to the Three and Nine Months Ended September 30, 2010


The following table provides a breakdown of revenue for the periods presented as a percentage of total revenue:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
  $ 5,630     $ 6,705     $ 17,619     $ 20,533  
                                 
Revenue:
                               
 Subscription
    86 %     85 %     86 %     86 %
 Content license
    10 %     10 %     9 %     10 %
 Management information reports
    2 %     4 %     3 %     3 %
 Other
    2 %     1 %     2 %     1 %
 Total revenue
    100 %     100 %     100 %     100 %
 
Cost of revenue for the three and nine months ended September 30, 2011 and September 30, 2010 was as follows (in thousands of dollars):
 
               
Increase / (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 889     $ 972     $ (83 )     (9 %)
 Percentage of Revenue
    16 %     14 %                
 Nine months ended September 30,
  $ 2,685     $ 3,126     $ (441 )     (14 %)
 Percentage of Revenue
    15 %     15 %                
 
Our cost of revenue primarily represents payroll-related expenses associated with the research and aggregation of the data in our proprietary database and third-party content fees, and also includes credit card processing fees.  The decrease for the comparable three and nine month periods was primarily due to decreases of $66,000 and $375,000, respectively, in third party content costs due to a strategic change in our production model.  Weighted average headcount in our content team was 33 during the third quarter of 2011, compared to 38 in the same period of 2010.  Headcount decreased as a result of higher utilization of third-party content providers.
 
 
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Sales and marketing expenses for the three and nine months ended September 30, 2011 and September 30, 2010 were as follows (in thousands of dollars):
 
               
Increase / (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 2,600     $ 3,394     $ (794 )     (23 %)
 Percentage of Revenue
    46 %     51 %                
 Nine months ended September 30,
  $ 7,892     $ 10,860     $ (2,968 )     (27 %)
 Percentage of Revenue
    45 %     53 %                

The decrease in expenses for the comparable three month periods is primarily comprised of $624,000 in payroll-related expenses due to decreased headcount and lower commissionable sales, and $166,000 in marketing costs primarily as a result of our leveraging our proprietary database to identify prospects that align with our targeted account strategy. Weighted average headcount in our sales and marketing teams was 73 during the three months ended September 30, 2011, compared to 87 in the same period in 2010.

The decrease in expenses for the comparable nine month periods is primarily comprised of $1.8 million in payroll-related expenses due to decreased headcount and lower commissionable sales, $657,000 in marketing costs for the reasons discussed above, $177,000 in travel and entertainment due to decreased travel, $152,000 in amortization expense, $115,000 in severance due to the departure of our Senior Vice President of Sales in the first quarter of 2010, and $104,000 in allocated facilities costs due to decreased headcount. These decreases were partially offset by a $70,000 increase in stock-based compensation due to an expense reversal in connection with the forfeiture of options upon the departure of our Senior Vice President of Sales in the second quarter of 2010. Weighted average headcount in our sales and marketing teams was 72 during the nine months ended September 30, 2011, compared to 97 in the same period in 2010.


Technology and development expenses for the three and nine months ended September 30, 2011 and September 30, 2010 were as follows (in thousands of dollars):
 
               
Increase / (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 989     $ 968     $ 21       2 %
 Percentage of Revenue
    18 %     14 %                
 Nine months ended September 30,
  $ 3,028     $ 2,753     $ 275       10 %
 Percentage of Revenue
    17 %     13 %                
 
The increase in expenses for the comparable three month periods is primarily attributed to a $131,000 decrease in capitalized internal use software costs (primarily salaries and benefits) attributable to the nature of development efforts during the quarter.  A larger percentage of development efforts in third quarter of 2011 were allocated to maintenance, which is not capitalizable pursuant to ASC 350-40, Intangibles – Goodwill and Other Subtopic Internal-Use Software.  This change was offset by a $107,000 decrease in payroll related expenses due to lower headcount and lower vacation expense.  Weighted average headcount in our technology and development teams was 15 during the three and nine months ended September 30, 2011, compared to 19 in the same periods in 2010.

The increase in expenses for the comparable nine month periods is primarily attributed to a $429,000 decrease in capitalized internal use software costs and $164,000 increase in contract labor for the reasons discussed above.  These changes were offset by a $239,000 decrease in payroll related expenses primarily due to lower headcount, a $92,000 decrease in facilities related costs, and other individually immaterial changes.
 
 
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Increase / (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
 
 Three months ended September 30,
  $ 912     $ 1,272     $ (360 )     (28 %)
 Percentage of Revenue
    16 %     19 %                
 Nine months ended September 30,
  $ 3,166     $ 4,831     $ (1,665 )     (34 %)
 Percentage of Revenue
    18 %     24 %                
 
The decrease in expenses for the comparable three month periods is primarily related to a $239,000 decrease in business taxes, primarily due to an out of period adjustment as disclosed in Note 1 to the financial statements, a $133,000 decrease in contract labor and consultant expenses due in part to fees related to our CEO search, a $64,000 decrease in professional services and other individually immaterial items. These decreases were offset by a $124,000 increase in facilities costs primarily related to the idle lease accrual discussed below under “Critical Accounting Policies and Management Estimates”.  Weighted average headcount in this group was 17 during the three months ended September 30, 2011, compared to 18 in the same period in 2010.
 
The decrease in expenses for the comparable nine month periods is primarily related to a $967,000 abandonment of internal use software in the second quarter of 2010, a $272,000 decrease in severance expenses primarily related to our former CEO’s transition agreement, a $366,000 decrease in contract labor and consultant expenses in part due to fees related to the CEO search and reduced public relations costs, and a $156,000 decrease in bad debt expenses.  These decreases were offset by an increase of $116,000 in facilities costs primarily related to the idle lease accrual. Weighted average headcount in this group was 17 during the nine months ended September 30, 2011, compared to 18 in the same periods in 2010.

Interest and Other Income, Net>
Net interest and other income was $8,000 and $28,000 for the three and nine months ended September 30, 2011, respectively, compared to $10,000 and $81,000, respectively, for the same periods in 2010. Other income for the nine months ended September 30, 2010 includes a one-time refund of $39,000 from our credit card processor. The balance of the year over year decline is due to lower prevailing interest rates. We did not incur any interest expense in the three or nine months ended September 30, 2011, or in the three months ended September 30, 2011. Interest expense in the nine months ended September 30, 2010 was immaterial.

Net Income and Net Income per Share>
Net income for the three and nine months ended September 30, 2011 was $248,000 and $876,000, respectively. We reported net income of $109,000 and net losses of $1.0 million for the three and nine months ended September 30, 2010, respectively. The increase in net income was primarily due to decreases in operating expenses as discussed above, partially offset by lower revenues.  On a diluted per share basis, net income was $0.03 and $0.10 for the three and nine months ended September 30, 2011, compared to net income of $0.01 and net losses of $0.13 for the three and nine months ended September 30, 2010, respectively.
 
Critical Accounting Policies and Management Estimates

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

 
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Revenues from subscription services and content licenses are deferred and recognized over the subscription term and revenues from management information reports and onsite training is deferred and recognized as the product or service is delivered.  These products and services may be sold individually or as bundled offerings (“multiple-deliverable arrangements”).  When these products and services are bundled, we allocate revenue to each element in our multiple-deliverable arrangements based upon their relative selling prices.  We determine the selling price for each deliverable based on a selling price hierarchy.  The selling price for a deliverable is based on our vendor specific objective evidence (“VSOE”) if available,  third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.  Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.  The amount of revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements.  Changes to the elements in an arrangement could affect the timing of the revenue recognition.

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

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

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

We periodically evaluate our long-lived assets for impairment in accordance with ASC 360-40, Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets.  ASC 360-40 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable.  If events or circumstances indicate that any of our long-lived assets might be impaired, we will analyze the estimated undiscounted future cash flows to be generated from the applicable asset and will record an impairment loss to the extent that the carrying value of the asset exceeds the fair value of the asset. Fair value is generally determined using an estimate of undiscounted future net cash flows from operating activities or upon disposal of the asset.  No property and equipment was impaired during the three and nine months ended September 30, 2011 or 2010.

 
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We account for the costs to develop or obtain software for internal use in accordance with ASC 350-40, Intangibles – Goodwill and Other Subtopic Internal-Use Software.  As a result, we capitalize qualifying computer software costs incurred during the “application development stage” and other costs as permitted by ASC 350-40.  Amortization of these costs begins once the product is ready for its intended use.  These costs are amortized on a straight-line 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 $309,000 and $1.1 million in internal use software costs during the three and nine months ended September 30, 2011, respectively, compared to $677,000 and $2.4 million, respectively, during the same periods in 2010. Amortization related to capitalized software was $447,000 and $1.3 million for the three and nine months ended September 30, 2011, compared to $413,000 and $1.5 million in the same periods in 2010.

During the first nine months of 2011, assets that were nearly fully amortized related to aging search technology were replaced with a new platform.  Onvia recorded an immaterial loss on this abandonment in operating expenses under the general and administrative category in the nine months ended September 30, 2011.

During the second quarter of 2010, Onvia abandoned three internal use software projects. Pursuant with the guidance in ASC 360-35-47, Onvia recorded a loss on abandonment of approximately $967,000, representing the full unamortized balance as of September 2010 for these three assets. The loss is included in operating expenses under the general and administrative category in the nine months ended September 30, 2010.

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

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.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), utilization of NOL carryforwards to offset future taxable income are subject to substantial annual limitations if we experience a cumulative change in ownership as defined by the Code.  In general, an ownership change, as defined by the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

As of December 31, 2010, we had tax NOL carryforwards of $255.2 million.  During the first quarter of 2011, we completed a formal study (the “NOL Study”) for the period of February 25, 1999 through December 31, 2010.  The results of this study indicate that it is more likely than not that we experienced an ownership change under Section 382 on September 4, 2001.  Accordingly, the NOLs incurred prior to the ownership change are limited based on the value of the Company on the date of the ownership change under Section 382 (the “Loss Limitation”).  It is estimated that the Loss Limitation will result in the expiration of approximately $180.1 million in NOLs prior to utilization, leaving approximately $75.1 million available to offset future taxable income.  The remaining NOLs expire in dates ranging from 2021 through 2029. On May 4, 2011 Onvia adopted a tax benefits preservation plan in the form of a Section 382 Rights Agreement, designed to preserve stockholder value and the value of certain income tax assets primarily associated with NOLs.

 
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The estimate of the Loss Limitation is based upon certain conclusions in the NOL study pertaining to the date of the ownership change and the value of the Company on the date of the ownership change.  The overall determination of the Loss Limitation and the conclusions contained in the NOL Study are subject to interpretation, and therefore, the Loss Limitation could be subject to change.

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.

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

Idle Lease Accrual>
We have a non-cancellable operating lease for 35,000 square feet in our current corporate headquarters building, which expires in October 2015.  2,717 square feet has never been occupied and is still in shell condition.

During the third quarter of 2011, we completed a revised staffing forecast for the period of time that covers the remaining term on our office lease. Based on this staffing forecast, we do not foresee a need to expand into this vacant space over the remaining term of the lease and no longer expect to derive any future economic benefit from this unused space.

Pursuant to the guidance in ASC 420, Exit or Disposal Cost Obligations, a liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognized at the cease-use-date.  Management has determined that the cease-use-date is September 1, 2011, which approximates the date that the staffing forecast was completed and when management began engaging outside real estate brokers to market the space.  Accordingly, an accrual of approximately $150,000 was recorded in the three months ended September 30, 2011, representing the calculated fair value of our remaining obligation on the idle space from the cease-use-date through the lease expiration date, net of estimated future sublease income.  We currently expect that the space will not be sublet until the fourth quarter of 2012.  The accrual is recorded in the “General and administrative” category on the Consolidated Statements of Operations.

 
Our principal sources of liquidity are cash, cash equivalents and short-term investments.  Our combined cash and cash equivalents and short term investments were $10.4 million at September 30, 2011, and our working capital was $2.2 million.  At September 30, 2011 we held $7.5 million in FDIC insured or U.S. government backed short-term investments.  From December 31, 2010 to September 30, 2011, our cash, cash equivalents and short-term investments decreased by $474,000 for the reasons described below under operating, investing and financing activities.

As we continue to transition our marketing and sales efforts to a consultative selling model concentrating on a focused target market, we may experience a decrease in sales and cash flow in the near term.  However, we expect that, over the longer term, focusing on our target market will result in improved retention rates and ACV and, ultimately, increased sales, cash flow and operating income.  Until such time as we are able to generate recurring positive cash flow and earnings, we will utilize our current cash, cash equivalents, short-term investments and current revenues to fund operations.

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