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, 2016
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-35164
ONVIA, INC.
(Exact name of registrant as specified in its charter)
| Delaware | | 91-1859172 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
509 Olive Way, Suite 400, Seattle, Washington 98101
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (206) 282-5170
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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: 7,131,956 shares outstanding as of October 31, 2016.
ONVIA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Onvia, Inc.
Condensed Consolidated Balance Sheets
| | | September 30,
2016 | | December 31,
2015 |
| | | (Unaudited) |
| | | (In thousands, except share data) |
| ASSETS | | | | |
| | | | | |
| CURRENT ASSETS: | | | | | | | | |
| Cash and cash equivalents | | $ | 2,082 | | | $ | 1,483 | |
| Short-term investments, available-for-sale | | | 5,564 | | | | 5,275 | |
| Accounts receivable, net of allowance for doubtful accounts of $36 and $32 | | | 1,293 | | | | 1,298 | |
| Prepaid expenses and other current assets | | | 682 | | | | 1,075 | |
| | | | | | | | | |
| Total current assets | | | 9,621 | | | | 9,131 | |
| | | | | | | | | |
| LONG TERM ASSETS: | | | | | | | | |
| Property and equipment, net of accumulated depreciation | | | 871 | | | | 1,036 | |
| Internal use software, net of accumulated amortization | | | 5,438 | | | | 5,091 | |
| Other long-term assets | | | 233 | | | | 260 | |
| | | | | | | | | |
| Total long term assets | | | 6,542 | | | | 6,387 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 16,163 | | | $ | 15,518 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable | | $ | 933 | | | $ | 499 | |
| Accrued expenses | | | 1,206 | | | | 937 | |
| Unearned revenue, current portion | | | 9,432 | | | | 9,040 | |
| Other current liabilities | | | 128 | | | | 103 | |
| | | | | | | | | |
| Total current liabilities | | | 11,699 | | | | 10,579 | |
| | | | | | | | | |
| LONG TERM LIABILITIES: | | | | | | | | |
| Unearned revenue, net of current portion | | | 48 | | | | 64 | |
| Deferred rent, net of current portion | | | 556 | | | | 575 | |
| Other long-term liabilities | | | 23 | | | | 43 | |
| | | | | | | | | |
| Total long term liabilities | | | 627 | | | | 682 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 12,326 | | | | 11,261 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 9) | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | |
| | | | | | | | | |
| Preferred stock; $.0001 par value: 2,000,000 shares authorized; no shares issued or outstanding | | | - | | | | - | |
| Common stock; $.0001 par value: 11,000,000 shares authorized; 8,724,260 and 8,717,788 shares issued; and 7,131,956 and 7,125,484 shares outstanding | | | 1 | | | | 1 | |
| Treasury stock, at cost: 1,592,304 and 1,592,304 shares | | | (5,446 | ) | | | (5,446 | ) |
| Additional paid in capital | | | 354,386 | | | | 354,212 | |
| Accumulated other comprehensive gain/(loss) | | | 1 | | | | (3 | ) |
| Accumulated deficit | | | (345,105 | ) | | | (344,507 | ) |
| | | | | | | | | |
| Total stockholders’ equity | | | 3,837 | | | | 4,257 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 16,163 | | | $ | 15,518 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Onvia, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| | | (Unaudited) | | (Unaudited) |
| | | (In thousands, except per share data) | | (In thousands, except per share data) |
| | | | | | | | | |
| Revenue | | | | | | | | | | | | | | | | |
| Subscription | | $ | 5,762 | | | $ | 5,417 | | | $ | 16,977 | | | $ | 16,048 | |
| Content license | | | 328 | | | | 403 | | | | 1,050 | | | | 1,295 | |
| Management information reports | | | 43 | | | | 20 | | | | 96 | | | | 109 | |
| Other | | | 40 | | | | 47 | | | | 132 | | | | 174 | |
| | | | | | | | | | | | | | | | | |
| Total revenue | | | 6,173 | | | | 5,887 | | | | 18,255 | | | | 17,626 | |
| | | | | | | | | | | | | | | | | |
| Cost of revenue (exclusive of depreciation and amortization included below) | | | 689 | | | | 783 | | | | 2,195 | | | | 2,414 | |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 5,484 | | | | 5,104 | | | | 16,060 | | | | 15,212 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 3,207 | | | | 2,735 | | | | 9,058 | | | | 8,252 | |
| Technology and development | | | 1,732 | | | | 1,578 | | | | 4,636 | | | | 4,363 | |
| General and administrative | | | 1,050 | | | | 788 | | | | 2,992 | | | | 3,015 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 5,989 | | | | 5,101 | | | | 16,686 | | | | 15,630 | |
| | | | | | | | | | | | | | | | | |
| Income/(loss) from operations | | | (505 | ) | | | 3 | | | | (626 | ) | | | (418 | ) |
| | | | | | | | | | | | | | | | | |
| Interest and other income, net | | | 13 | | | | 6 | | | | 28 | | | | 30 | |
| | | | | | | | | | | | | | | | | |
| Net income/( loss) | | $ | (492 | ) | | $ | 9 | | | $ | (598 | ) | | $ | (388 | ) |
| | | | | | | | | | | | | | | | | |
| Unrealized gain/( loss) on available-for-sale securities | | | 1 | | | | 1 | | | | 4 | | | | 1 | |
| | | | | | | | | | | | | | | | | |
| Comprehensive income/(loss) | | $ | (491 | ) | | $ | 10 | | | $ | (594 | ) | | $ | (387 | ) |
| | | | | | | | | | | | | | | | | |
| Basic net income/(loss) per common share | | $ | (0.07 | ) | | $ | 0.00 | | | $ | (0.08 | ) | | $ | (0.05 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted net income/(loss) per common share | | $ | (0.07 | ) | | $ | 0.00 | | | $ | (0.08 | ) | | $ | (0.05 | ) |
| | | | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | | | 7,131 | | | | 7,449 | | | | 7,129 | | | | 7,421 | |
| | | | | | | | | | | | | | | | | |
| Diluted weighted average shares outstanding | | | 7,131 | | | | 7,561 | | | | 7,129 | | | | 7,421 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Onvia, Inc.
Condensed Consolidated Statements of Cash Flows
| | | Nine Months Ended September 30, |
| | | 2016 | | 2015 |
| | | (Unaudited) |
| | | (In thousands) |
| | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net loss | | $ | (598 | ) | | $ | (388 | ) |
| | | | | | | | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 1,754 | | | | 1,766 | |
| Stock-based compensation | | | 153 | | | | 78 | |
| Gain/Loss on sale of property and equipment | | | (4 | ) | | | 2 | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 5 | | | | 435 | |
| Prepaid expenses and other assets | | | 420 | | | | (84 | ) |
| Accounts payable | | | 128 | | | | (124 | ) |
| Accrued expenses | | | 269 | | | | (244 | ) |
| Unearned revenue | | | 377 | | | | 176 | |
| Deferred rent | | | 6 | | | | 20 | |
| | | | | | | | | |
| Net cash provided by operating activities | | | 2,510 | | | | 1,637 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Additions to property and equipment | | | (138 | ) | | | (296 | ) |
| Additions to internal use software | | | (1,510 | ) | | | (1,403 | ) |
| Purchases of investments | | | (5,756 | ) | | | (6,803 | ) |
| Sales of investments | | | 252 | | | | 340 | |
| Maturities of investments | | | 5,217 | | | | 6,511 | |
| Proceeds from sale of equipment | | | 4 | | | | 8 | |
| | | | | | | | | |
| Net cash used in investing activities | | | (1,931 | ) | | | (1,643 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from exercise of stock options | | | 20 | | | | 223 | |
| | | | | | | | | |
| Net cash provided by financing activities | | | 20 | | | | 223 | |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 599 | | | | 217 | |
| | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 1,483 | | | | 1,577 | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 2,082 | | | $ | 1,794 | |
| | | | | | | | | |
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
| Property and equipment additions in accounts payable | | | (114 | ) | | | (38 | ) |
| Internal use software additions in accounts payable | | | (251 | ) | | | (122 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
Onvia, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Basis of Presentation
The unaudited interim Condensed Consolidated Financial Statements and related notes thereto have been prepared pursuant to generally accepted accounting principles in the United States of America, (“GAAP”), and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations.
The accompanying unaudited interim Condensed Consolidated Financial Statements and related notes thereto should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“2015 Annual Report”).
The information furnished is unaudited, but reflects, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for a fair presentation of the results for the interim periods presented.
Interim results are not necessarily indicative of results for a full year.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Sales and marketing operating expenses of $511,000 and $1.2 million for the three and nine month periods ended September 30, 2015, respectively, have been reclassified as technology and development operating expenses to conform to current period presentation. The reclassification has no impact on net income/(loss) as presented on the unaudited Condensed Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of stock-based compensation, allowance for doubtful accounts, capitalization of costs for internally developed software, recoverability of long-lived assets, including internally developed software, and the valuation allowance for Onvia’s net deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ significantly from the Company’s estimates. In addition, any significant unanticipated changes in any of the Company’s assumptions could have a material adverse effect on its business, financial condition, and results of operations.
During the third quarter of 2016, the Company determined it was appropriate to reduce the remaining estimated useful lives of certain internally developed software costs. See Note 7 below for further discussion of this reduction in remaining estimated useful lives and the corresponding impact to the results of operations.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for revenue from contracts with customers, which provides a single comprehensive revenue recognition model to apply in determining how and when to recognize revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When applying the new revenue model to contracts with customers the guidance requires five steps to be applied, which include: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures, which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow. This guidance will be effective for Onvia in the first quarter of 2018 and early adoption is permitted beginning in the first quarter of 2017. The Company is currently assessing the impact the guidance will have upon adoption.
In November 2015, the FASB issued authoritative guidance amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the balance sheet. The objective of the guidance is to simplify the presentation as current GAAP requires the Company to separate the deferred tax assets into current and noncurrent amounts. The FASB concluded that the current presentation does not benefit financial statement users because the classification does not align with the time period in which the deferred tax amounts are expected to be recovered. The guidance will be effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The guidance may be adopted either prospectively or retrospectively. The Company does not expect it to have a material impact on its consolidated financial statements upon adoption.
In February 2016, the FASB issued authoritative guidance which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new guidance will require both types of leases to be recognized on the balance sheet. The guidance will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This guidance shall be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes a number of practical expedients that an entity may elect to apply. Early application of the guidance is permitted. The Company is evaluating the adoption of this guidance and the potential effects on its consolidated financial statements.
In March 2016, the FASB issued authoritative guidance on accounting for share-based payment transactions. The guidance makes several modifications related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies and clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is currently assessing how the adoption of this standard may impact its consolidated financial statements.
| 2. | Stock-Based Compensation |
The impact to Onvia’s interim unaudited Condensed Consolidated Statements of Operations for recording stock-based compensation was as follows for the periods presented (in thousands):
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| Sales and marketing | | $ | 20 | | | $ | (5 | ) | | $ | 52 | | | $ | 1 | |
| Technology and development | | | 9 | | | | 14 | | | | 35 | | | | 13 | |
| General and administrative | | | 21 | | | | 25 | | | | 66 | | | | 64 | |
| | | | | | | | | | | | | | | | | |
| Total stock-based compensation | | $ | 50 | | | $ | 34 | | | $ | 153 | | | $ | 78 | |
Basic net income/(loss) per share is calculated by dividing the net income/(loss) for the period by the weighted average shares of common stock outstanding for the period. Diluted net income/(loss) per share is calculated by dividing the net income/(loss) per share by the weighted average common stock outstanding for the period, plus dilutive potential common shares using the treasury stock method. In periods with a net loss, basic and diluted net loss per share are identical because inclusion of potentially dilutive common shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income/(loss) per share for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| Net income/(loss) | | $ | (492 | ) | | $ | 9 | | | $ | (598 | ) | | $ | (388 | ) |
| | | | | | | | | | | | | | | | | |
| Shares used to compute basic net income/(loss) per share | | | 7,131 | | | | 7,449 | | | | 7,129 | | | | 7,421 | |
| Dilutive potential common shares: | | | | | | | | | | | | | | | | |
| Stock options | | | | | | | 112 | | | | | | | | | |
| Shares used to compute diluted net income/(loss) per share | | | 7,131 | | | | 7,561 | | | | 7,129 | | | | 7,421 | |
| Basic net income/(loss) per share | | $ | (0.07 | ) | | $ | 0.00 | | | $ | (0.08 | ) | | $ | (0.05 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted net income/(loss) per share | | $ | (0.07 | ) | | $ | 0.00 | | | $ | (0.08 | ) | | $ | (0.05 | ) |
For the three and nine months ended September 30, 2016, the weighted average effect of stock options to purchase approximately 885,000 and 864,000 shares of common stock, respectively, were excluded from the computation of diluted net loss per share because the exercise price is greater than the average market price of common stock for the respective period.
For the three and nine months ended September 30, 2015, the weighted average effect of stock options to purchase approximately 314,000 and 853,000 shares of common stock, respectively, were excluded from the computation of diluted net loss per share because the exercise price is greater than the average market price of common stock for the respective period.
Onvia classifies investments in debt securities as available-for-sale, stated at fair value as summarized in the following table (in thousands):
| | | September 30, 2016 |
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| | | | | | | | | |
| U.S. Government backed securities | | $ | 110 | | | $ | - | | | $ | - | | | $ | 110 | |
| Certificates of Deposit (1) | | | 5,453 | | | | 1 | | | | - | | | | 5,454 | |
| Total Investments | | $ | 5,563 | | | $ | 1 | | | $ | - | | | $ | 5,564 | |
| | | December 31, 2015 |
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| | | | | | | | | |
| U.S. Government backed securities | | $ | 902 | | | $ | - | | | $ | - | | | $ | 902 | |
| Certificates of Deposit (1) | | | 4,375 | | | | - | | | | (2 | ) | | | 4,373 | |
| Total Investments | | $ | 5,277 | | | $ | - | | | $ | (2 | ) | | $ | 5,275 | |
(1) The Company evaluated certificates of deposits held as of September 30, 2016 and December 31, 2015 and concluded that they meet the definition of securities as available for sale.
Onvia accounts for investments held as available for sale according to their fair values, which is defined as the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following are the three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Onvia uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The following table summarizes, by major security type, investments classified as available-for-sale at September 30, 2016 and at December 31, 2015, stated at fair value (in thousands):
| | | Fair Value Measurements as of September 30, 2016 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | |
| U.S. Government backed securities | | $ | - | | | $ | 110 | | | $ | - | | | $ | 110 | |
| Certificates of Deposit | | | - | | | | 5,454 | | | | - | | | | 5,454 | |
| Total Investments | | $ | - | | | $ | 5,564 | | | $ | - | | | $ | 5,564 | |
| | | Fair Value Measurements as of December 31, 2015 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | |
| U.S. Government backed securities | | $ | - | | | $ | 902 | | | $ | - | | | $ | 902 | |
| Certificates of Deposit | | | - | | | | 4,373 | | | | - | | | | 4,373 | |
| Total Investments | | $ | - | | | $ | 5,275 | | | $ | - | | | $ | 5,275 | |
There were no transfers in or out of Level 2 investments during the first nine months of 2016 and fourth quarter of 2015, and there was no activity in Level 1 or Level 3 fair value measurements during those periods.
| 5. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following (in thousands):
| | | September 30, | | December 31, |
| | | 2016 | | 2015 |
| Prepaid software licenses and maintenance | | $ | 241 | | | $ | 690 | |
| Prepaid insurance | | | 168 | | | | 108 | |
| Other prepaid expenses | | | 99 | | | | 175 | |
| Other receivables | | | 88 | | | | 94 | |
| Prepaid rent | | | 73 | | | | - | |
| Interest receivable | | | 13 | | | | 8 | |
| Total prepaid expenses and other current assets | | $ | 682 | | | $ | 1,075 | |
Property and equipment, net of accumulated depreciation, consist of the following (in thousands):
| | | September 30, | | December 31, |
| | | 2016 | | 2015 |
| Computer equipment | | $ | 3,722 | | | $ | 3,932 | |
| Software | | | 1,805 | | | | 1,856 | |
| Furniture and fixtures | | | 120 | | | | 117 | |
| Leasehold improvements | | | 815 | | | | 815 | |
| | | | | | | | | |
| Total cost basis | | | 6,462 | | | | 6,720 | |
| | | | | | | | | |
| Less accumulated depreciation | | | (5,591 | ) | | | (5,684 | ) |
| | | | | | | | | |
| Net book value | | $ | 871 | | | $ | 1,036 | |
Depreciation expense was $122,000 and $398,000 for the three and nine months ended September 30, 2016, respectively, compared to $156,000 and $473,000, respectively, for the same periods in
2015.
Onvia capitalizes qualifying computer software costs incurred during the “application development stage” and other costs. Amortization of these costs begins once the product is ready for its intended use. These costs are amortized on a straight-line basis over the estimated useful life of the product, typically 3 to 5 years. The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period.
Onvia periodically evaluates the remaining useful lives and carrying values of internal use software. If management determines that all or a portion of the asset will no longer be used, or the estimated remaining useful life differs from existing estimates, an abandonment will be recorded to reduce the carrying value or adjust the remaining useful life to reflect revised estimates. In addition, if the carrying value of the software exceeds the estimated future cash flows, an impairment will be recorded to reduce the carrying value to the expected realizable value. No impairment has been recorded for the nine months ended September 30, 2016 and 2015.
During the third quarter of 2016 the Company determined that ongoing product development would replace the functionality of certain internal use software costs and evaluated the then current estimates of remaining useful lives of the affected internal use software. The Company determined that unamortized internal software costs of approximately $892,000 are subject to a reduced estimated remaining useful life. The Company will recognize expense related to the reduced estimated useful lives of these assets over the next year. The expense related to the reduced estimated useful lives of these assets was $205,000 in the third quarter of 2016 and is reflected in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations as additional amortization expense.
The following table presents a roll-forward of capitalized internal use software for the nine months ended September 30, 2016 (in thousands):
| | | Balance at
December 31,
2015 | | Additions | | Balance at
September 30,
2016 |
| | | | | |
| Capitalized internal use software | | $ | 18,812 | | | $ | 1,703 | | | $ | 20,515 | |
| Accumulated amortization | | | (13,721 | ) | | | (1,356 | ) | | | (15,077 | ) |
| Internal use software, net | | $ | 5,091 | | | $ | 347 | | | $ | 5,438 | |
Amortization expense was $616,000 and $1.4 million for the three and nine months ended September 30, 2016, respectively, compared to $388,000 and $1.3 million, respectively, for the same periods of 2015. Amortization expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
| 8. | Accrued Expenses and Other Current Liabilities |
Accrued expenses consist of the following (in thousands):
| | | September 30, | | December 31, |
| | | 2016 | | 2015 |
| Payroll and related liabilities | | $ | 1,134 | | | $ | 855 | |
| Taxes payable and other | | | 72 | | | | 82 | |
| Total accrued expenses | | $ | 1,206 | | | $ | 937 | |
Other current liabilities consist of the following (in thousands):
| | | September 30, | | December 31, |
| | | 2016 | | 2015 |
| Deferred rent, current portion | | $ | 102 | | | $ | 78 | |
| Obligations under capital leases, current portion | | | 26 | | | | 25 | |
| Total other current liabilities | | $ | 128 | | | $ | 103 | |
| 9. | Commitments and Contingencies |
Operating Leases
Onvia has a lease agreement for its corporate offices located in Seattle, Washington that expires in April 2021. Onvia also has a non-cancellable operating lease for office equipment, which expires in June 2019.
The office lease contains rent escalation clauses and rent holidays. Rent expense is recorded on a straight-line basis over the lease term with the difference between the rent paid and the straight-line rent expense recorded as a deferred rent liability. Total rent expense associated with real estate operating leases was $193,000 and $578,000 for the three and nine months ended September 30, 2016, respectively, compared to $192,000 and $576,000 for the same periods in 2015. Rent expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
As of September 30, 2016, 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 |
| | | | | | | |
| 2016 | | | 213 | | | | 4 | | | | 217 | |
| 2017 | | | 873 | | | | 20 | | | | 893 | |
| 2018 | | | 896 | | | | 20 | | | | 916 | |
| 2019 | | | 918 | | | | 10 | | | | 928 | |
| 2020 | | | 940 | | | | - | | | | 940 | |
| 2021 and thereafter | | | 320 | | | | - | | | | 320 | |
| Total | | $ | 4,160 | | | $ | 54 | | | $ | 4,214 | |
Purchase Obligations
Onvia has non-cancellable purchase obligations for software development and license agreements, co-location hosting arrangements, telecom agreements, marketing agreements and third-party content agreements. The agreements expire in dates ranging from April 2017 to October 2019. Future required payments under these non-cancellable agreements are as follows for the years ending December 31 (in thousands):
| | | Purchase |
| | | Obligations |
| | | |
| 2016 | | $ | 490 | |
| 2017 | | | 417 | |
| 2018 | | | 337 | |
| Total | | $ | 1,244 | |
CEO Transition Agreement
On March 28, 2016, the Company and its current President and Chief Executive Officer (“Riner”) entered into a Transition and Release Agreement (the “Transition Agreement”).
Under the terms of the Transition Agreement, Riner will transition into planned retirement and a 12-month consulting relationship with the Company effective no later than June 30, 2017, or such earlier date that Onvia selects and announces a new Chief Executive Officer (“CEO”) (the “Transition Date”). Riner will continue to serve as the Company’s President and CEO on a full-time basis through the Transition Date.
In exchange for Riner’s entry into the Transition Agreement, his covenants and promises described therein, and his entry into an additional Release of Claims Agreement on his last of date of employment with the Company, the Company has agreed to pay Riner a lump sum cash payment of $362,000 on July 8, 2017.
Costs related to the Transition Agreement are being accrued over the requisite service period and the expense is included in operating expenses in the interim unaudited Condensed Consolidated Statements of Operations.
Legal Proceedings
From time to time, legal proceedings may arise in the ordinary course of business. Although the outcomes of legal proceedings are inherently difficult to predict, the Company is not currently involved in any legal proceeding in which the outcome, in its judgment based on information currently available, is likely to have a material adverse effect on its business or financial position.
As of September 30, 2016 and December 31, 2015, Onvia has recorded a full valuation allowance against its net deferred tax assets because the Company has determined it is not more likely than not that the asset will be realized. Onvia will continue to evaluate the likelihood that these tax benefits may be realized, and may reverse all or a portion of its valuation allowance in the future if it is determined that realization of these benefits is more likely than not.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), utilization of net operating loss (NOL) carryforwards to offset future taxable income are subject to substantial annual limitations if we experience a cumulative change in ownership as defined by the Code. In general, an ownership change, as defined by the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.
As of September 30, 2016 and December 31, 2015, Onvia’s Federal NOL carryforwards for income tax purposes were approximately $76.8 million. The Federal NOL carryforwards are subject to limitations under Section 382 of the Internal Revenue Code. If not utilized, the Federal NOL carryforwards will begin to expire in 2021. The latest date available for a portion of the Federal NOL carryforwards to be utilized to offset future income is 2033.
Pursuant to Onvia’s lease for its current corporate office space, Onvia has established a stand by letter of credit as security to the lease in the amount of $150,000. The letter of credit will be returned at lease termination in April 2021, or earlier, subject to certain office lease conditions. As of September 30, 2016, the stand by letter of credit is secured by a security deposit of $150,000 and included within other long-term assets on the unaudited Condensed Consolidated Balance Sheets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
In addition to historical information, the discussion and analysis in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “anticipates,” “should,” “expects,” “plans,” “intends,” “indicates” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about our future results of operations, the progress to be made on the 2016 initiatives, Onvia’s future financial flexibility and future cash flows and Onvia’s future product and content offerings. Such statements are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors, which may cause actual events to be materially different from those expressed or implied by such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements.
The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: Onvia fails to increase and retain contract value of its customers; Onvia fails to execute properly on new products, or customers fail to adopt these products or services; Onvia’s investment in technology and new content fails to improve sales penetration and client retention rates; and changes made to Onvia’s technology infrastructure fails to handle the increased demands caused by increasing network traffic and the volume of aggregated data.
Additional information on factors that may impact these forward-looking statements can be found under “Risk Factors,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as applicable, in this report and in our 2015 Annual Report on Form 10-K for the year ended December 31, 2015. Onvia assumes no obligation to update forward-looking statements as a result of new information or future events or developments, except as may be required by law. The following discussion should also be read in conjunction with the interim unaudited Condensed Consolidated Financial Statements and accompanying Notes thereto.
In this Report, the words “we,” “our,” “us,” “Onvia,” or the “Company” refer to Onvia, Inc.
Company Overview
Onvia is a leading source of insight and intelligence on government procurement with a primary focus on the State, Local and Education (“SLED”) market. We maintain a proprietary database of detailed procurement activity from the market of 94,000 federal and SLED government agencies across the entire United States. When available, we capture and connect the entire procurement lifecycle of a SLED procurement from the initial budget to the awarded contract. We compile and enhance more than 1.8 million procurement records representing 95% of SLED procurement spending, to provide a comprehensive view of this market by government agency, vendor, and procurement type. Onvia intelligence is used by both SLED agencies and businesses that sell (directly or indirectly) to SLED agencies. Government agencies can use our insight to make informed and defensible purchasing decisions, identify potential vendors and meet their fiduciary responsibilities to their constituents. Businesses use our procurement intelligence to qualify short-term revenue opportunities and to obtain early insight into future potential spending for their goods and services, evaluate agency procurement trends, and identify competitor activity and potential teaming partners. Onvia intelligence helps companies identify emerging markets, allocate resources and build their long term SLED strategy.
Onvia maintains a database of proprietary public sector procurement information which includes comprehensive historical and real-time information on procurement activities unavailable elsewhere in the marketplace. These records are standardized, formatted and classified within our database each day. We deliver approximately 90% of our bid and RFP content on the same day we capture it from the original source.
Onvia’s solution is used by clients for long-term strategic planning and near-term sales and marketing activities, tailored to their unique business objectives. We help our clients build specialized searches to identify relevant content and establish workflows to help the client consume the content most effectively. Over time, we expect to continue to enhance our content coverage of valuable data types to meet the business development needs of our strategic clients. Our key offerings include access to the Onvia Database, Project Center, Agency Center, Vendor Center, Spending Forecast Center, Term Contract Center, Purchase Order Analytics and Onvia Guide.
We have a diverse client base ranging from large Fortune 500 companies to small businesses that have been Onvia clients for many years. Onvia’s strategic account client has a long-term strategic interest in the SLED market and does business on a regional or national level. As companies expand geographically, their market becomes less transparent, and they have a greater need for business intelligence. We continue to serve a number of small businesses (legacy accounts) that have been clients since before we changed our target client profile.
Over the last two years we have developed Onvia 7, a set of proprietary ontologies and business rules used to automate the classification and tagging of our content across all of our business verticals. Our tagging process is designed to allow clients to more effectively search for projects using intuitive tags and receive more relevant data and less extraneous data as part of their research Onvia 7 is also designed to allow us to efficiently scale our data collection by leveraging automation instead of manual categorization. The migration of all clients to our Onvia 7 platform was completed in September 2016.
Onvia 7 also allows us to test a self-serve, ecommerce solution for the small business market, which we were unable to serve profitably in the past. We believe that our new Small Business solution can create significant value for this market at a competitive price. We officially launched this solution at the beginning of 2016.
Our product development is currently focused on user experience and client workflow solutions that will be released as Onvia 8. We expect that Onvia 8 will improve product adoption by our clients who have difficulty incorporating our solution into their existing workflows. The initial release of Onvia 8 is expected to be in early 2017 and further releases are expected to follow throughout 2017.
Most of Onvia’s revenues are generated from sales to companies that leverage our information for their own internal use, and to businesses that license our content for redistribution. Revenue from businesses which license our content for resale is classified as Content License revenue. Content license contracts are generally multi-year arrangements and typically have higher annual contract values than our subscription-based services. Revenue from content license agreements is recognized over the term of the agreement. With the launch of our ecommerce sales channel, we now approach the small business market directly, and, therefore, have reduced our emphasis on content license relationships to serve that market. As a result, we anticipate Content License revenue to decline in future periods as existing contracts may not be renewed.
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.
Executive Summary of Operations and Financial Position
Our primary clients are businesses that are strategically focused on selling their goods and services into the public sector. As discussed above, we sell to this target market through two sales channels: businesses that leverage our information for their own internal use and businesses that license our content for redistribution (i.e. content license).
We measure our Strategic and Small Business (legacy accounts) clients with the following key metrics:
Annual Contract Value (“ACV”)
ACV represents the annualized aggregate revenue value of all subscription contracts as of the end of the quarter. ACV is driven by annual contract value per client and the number of clients. Most of Onvia’s revenues are generated from subscription contracts, which are typically prepaid and have a minimum term of one year, with revenues recognized ratably over the term of the subscription. Onvia also receives revenue from multi-year content distribution partnerships, stand-alone management reports, document download services, and list rental services, which are not included in the calculation of ACV. Content license contracts are excluded from ACV. ACV excludes subscribers to the self-serve Small Business solution.
Total ACV increased 3% to $22.9 million in the third quarter of 2016 from $22.2 million for the same period one year ago. The ACV for Strategic Accounts grew 6% to $18.2 million at September 30, 2016 compared to $17.1 million at September 30, 2015. Continued growth in ACV indicates that new client acquisitions, contract expansions and improving client retention rates have more than offset the impact of client attrition. Growth rate in ACV can fluctuate from year to year based on timing in the amount of ACV available for renewal in addition to the mix of tenured and first year clients expiring in each period as tenured clients tend to renew at a higher rate than first year clients.
Number of Clients
Number of clients represents the number of individual businesses subscribing to our products.
As of the end of the third quarter, our total client base had decreased 6% to 2,920 clients compared to 3,100 clients as of the end of the same period one year ago. The total number of strategic clients increased 5% to 1,400 compared to 1,330 at the end of the same period one year ago. Onvia’s strategy is to continue to improve profitability by acquiring and managing fewer, but more strategic clients at higher ACVC. We believe that ACV is a better measure of sales effectiveness than the number of clients.
Annual Contract Value per Client (“ACVC”)
Annual contract value per client is the ACV divided by the number of clients and indicates the average value of each of our subscriptions.
Total ACVC increased 10% to $7,824 in the third quarter of 2016 compared to $7,116 in the same period one year ago. The ACVC for Strategic Accounts grew 1% to $12,947 as of September 30, 2016, compared to $12,781 in the same period one year ago. Management anticipates new client ACVC will fluctuate from period to period based on the mix of product levels included in acquisition bookings for a particular period. Growth in overall ACVC demonstrates that strategic clients account for an increasing percentage or our total client base. Companies within this target market typically have higher ACVC and renew at higher rates, which are key attributes of a profitable long-term client.
Dollar Retention
Dollar retention is calculated on a percentage basis by dividing the contract value of subscription contracts renewed, including the value of contract upgrades, during the most recent twelve-month period by the total value of subscription contracts expiring over the same period. Dollar retention measures the percentage of dollars retained from the population of expiring contracts over a twelve month period.
In the twelve months ended September 30, 2016, dollar retention was 88% compared to 88% in the twelve months ended September 30, 2015. Dollar retention can fluctuate from period to period due to the client mix (first year and tenured clients) expiring in each period, list price achievement and contract expansions in the corresponding periods. Dollar retention, in conjunction with ACV, provides insight in to our subscription retention rate and ability to generate future subscription revenue.
Adjusted EBITDA
Adjusted EBITDA is not a financial measure calculated and presented in accordance with GAAP and should not be considered as an alternative to net income, operating income or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of the company’s liquidity. Onvia defines Adjusted EBITDA as net income/(loss) before interest expense and other non-cash financing costs; other income; taxes; depreciation; amortization; and non-cash stock-based compensation. Other companies (including Onvia’s competitors) may define Adjusted EBITDA differently. Onvia presents Adjusted EBITDA because it believes Adjusted EBITDA to be an important supplemental measure of performance that is commonly used by securities analysts, investors and other interested parties in the evaluation of companies in similar industries and size. Management also uses this information internally for forecasting and budgeting. It may not be indicative of the historical operating results of Onvia nor is it intended to be predictive of potential future results. Investors should not consider Adjusted EBITDA in isolation or as a substitute for analysis of results as reported under GAAP.
The following table provides a reconciliation of GAAP net income/(loss) to Adjusted EBITDA for the periods indicated (in thousands of dollars):
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| GAAP net income/(loss) | | $ | (492 | ) | | $ | 9 | | | $ | (598 | ) | | $ | (388 | ) |
| | | | | | | | | | | | | | | | | |
| Reconciling items from GAAP to adjusted EBITDA | | | | | | | | | | | | | | | | |
| Interest and other income, net | | | (13 | ) | | | (6 | ) | | | (28 | ) | | | (30 | ) |
| Depreciation and amortization | | | 737 | | | | 544 | | | | 1,754 | | | | 1,766 | |
| Amortization of stock-based compensation | | | 49 | | | | 34 | | | | 153 | | | | 78 | |
| | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | 281 | | | $ | 581 | | | $ | 1,281 | | | $ | 1,426 | |
Seasonality
Our client acquisition business is subject to some seasonal fluctuations. The second and third quarters are generally slower than the first and fourth quarters for client acquisition. Infrastructure is our single largest market and these prospects are typically engaged on projects during the spring and summer months, not prospecting for new work, which causes new client acquisition to decline compared to the first and fourth quarters in the year. For this reason, comparisons of the performance of our business quarter to consecutive quarter may not provide the most relevant information, and so in addition to sequential quarter comparisons, our quarterly results and metrics should be considered on the basis of results for the whole year or by comparing results in a quarter with the results in the same quarter of the previous year.
Results of Operations for the Three and Nine Months Ended September 30, 2016 Compared to the Three and Nine Months Ended September 30, 2015
Revenue and Cost of Revenue
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, |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| Revenue | | $ | 6,173 | | | $ | 5,887 | | | $ | 18,255 | | | $ | 17,626 | |
| | | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | |
| Subscription | | | 93 | % | | | 92 | % | | | 93 | % | | | 91 | % |
| Content license | | | 5 | % | | | 7 | % | | | 6 | % | | | 7 | % |
| Management information reports | | | 1 | % | | | 0 | % | | | 0 | % | | | 1 | % |
| Other | | | 1 | % | | | 1 | % | | | 1 | % | | | 1 | % |
| Total revenue | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Subscription revenue for the three and nine months ended September 30, 2016 grew 6% in both periods to $5.8 million and $17 million, respectively, over the same periods in 2015. Subscription revenue includes revenue earned from our target market of Strategic Accounts, our Small Business channel (legacy accounts) as well as revenue generated from the recently launched ecommerce sales channel. The Small Business ecommerce solution, which launched in early 2016, is a self-serve solution for small businesses offering a limited geography Onvia service. The growth in subscription revenue is reflective of growth in ACV and an increase in Small Business revenue. ACV is a leading indicator of subscription revenue and excludes subscribers to the self-serve Small Business solution.
Content License revenue has declined in the three and nine month periods ending September 30, 2016 compared to the same periods last year. With the launch of our ecommerce sales channel, we now approach the small business market directly, and, therefore, have reduced our emphasis on content license relationships to serve that market. As a result, we anticipate Content License revenue will continue to decline in future periods as existing contracts may not be renewed.
Total revenue for the three and nine months ended September 30, 2016 was $6.2 million and $18.3 million, up by 5% and 4%, respectively, compared to the same periods last year. In addition to subscription revenue, total revenue includes content license and report revenue.
Cost of revenue for the three and nine months ended September 30, 2016 and 2015 was as follows (in thousands of dollars):
| | | Three Months Ended September 30, | | Increase / (Decrease) | | Nine Months Ended September 30, | | Increase / (Decrease) |
| | | 2016 | | 2015 | | Amount | | Percent | | 2016 | | 2015 | | Amount | | Percent |
| Total | | $ | 689 | | | $ | 783 | | | $ | (94 | ) | | | (12 | %) | | $ | 2,195 | | | $ | 2,414 | | | $ | (219 | ) | | | (9 | %) |
| Percentage of revenue | | | 11 | % | | | 13 | % | | | | | | | | | | | 12 | % | | | 14 | % | | | | | | | | |
Our cost of revenue primarily represents payroll-related expenses associated with the research, capture and curation 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 related to improvements in process automation, including the benefits of Onvia 7, which contributed to lower headcount and salary expenses within the department.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands of dollars):
| | | Three Months Ended September 30, | | Increase / (Decrease) | | Nine Months Ended September 30, | | Increase / (Decrease) |
| | | 2016 | | 2015 | | Amount | | Percent | | 2016 | | 2015 | | Amount | | Percent |
| Current period expenses | | $ | 2,835 | | | $ | 2,478 | | | $ | 357 | | | | 14 | % | | $ | 8,170 | | | $ | 7,393 | | | $ | 777 | | | | 11 | % |
| Depreciation and amortization | | | 352 | | | | 262 | | | | 90 | | | | 34 | % | | | 836 | | | | 858 | | | | (22 | ) | | | (3 | %) |
| Stock based compensation | | | 20 | | | | (5 | ) | | | 25 | | | | (500 | %) | | | 52 | | | | 1 | | | | 51 | | | | 5100 | % |
| Total | | $ | 3,207 | | | $ | 2,735 | | | $ | 472 | | | | 17 | % | | $ | 9,058 | | | $ | 8,252 | | | $ | 806 | | | | 10 | % |
| Percentage of Revenue | | | 52 | % | | | 46 | % | | | | | | | | | | | 50 | % | | | 47 | % | | | | | | | | |
The increase in expenses for the comparable three and nine month periods is primarily due to the addition of sales and marketing leadership necessary to support our growth initiatives, an increase in contract labor to migrate clients to our new Onvia 7 platform and accelerated amortization of $98,000 related to the reduced estimated useful lives of certain internal software costs, partially offset by recruiting fees incurred in the third quarter of 2015 for sales leadership that did not recur 2016.
Technology and Development
Technology and development expenses for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands of dollars):
| | | Three Months Ended September 30, | | Increase / (Decrease) | | Nine Months Ended September 30, | | Increase / (Decrease) |
| | | 2016 | | 2015 | | Amount | | Percent | | 2016 | | 2015 | | Amount | | Percent |
| Current period expenses | | $ | 1,407 | | | $ | 1,333 | | | $ | 74 | | | | 6 | % | | $ | 3,855 | | | $ | 3,604 | | | $ | 251 | | | | 7 | % |
| Depreciation and amortization | | | 316 | | | | 231 | | | $ | 85 | | | | 37 | % | | | 746 | | | | 746 | | | | (0 | ) | | | (0 | %) |
| Stock based compensation | | | 9 | | | | 14 | | | | (5 | ) | | | (36 | %) | | | 35 | | | | 13 | | | | 22 | | | | 169 | % |
| Total | | $ | 1,732 | | | $ | 1,578 | | | $ | 154 | | | | 10 | % | | $ | 4,636 | | | $ | 4,363 | | | $ | 273 | | | | 6 | % |
| Percentage of Revenue | | | 28 | % | | | 27 | % | | | | | | | | | | | 25 | % | | | 25 | % | | | | | | | | |
The increase in expenses for the comparable three and nine month periods is primarily due to an increase in compensation costs from investing in new technology leadership necessary to support our product development plans and $88,000 in accelerated amortization expense related to the reduced estimated useful lives of certain internal software costs, partially offset by consulting fees in 2015 that were not re-incurred in 2016.
General and Administrative
General and administrative expenses for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands of dollars):
| | | Three Months Ended September 30, | | Increase / (Decrease) | | Nine Months Ended September 30, | | Increase / (Decrease) |
| | | 2016 | | 2015 | | Amount | | Percent | | 2016 | | 2015 | | Amount | | Percent |
| Current period expenses | | $ | 960 | | | $ | 713 | | | $ | 247 | | | | 35 | % | | $ | 2,754 | | | $ | 2,790 | | | $ | (36 | ) | | | (1 | %) |
| Depreciation and amortization | | | 69 | | | | 50 | | | | 19 | | | | 38 | % | | | 172 | | | | 161 | | | | 11 | | | | 7 | % |
| Stock based compensation | | | 21 | | | | 25 | | | | (4 | ) | | | (16 | %) | | | 66 | | | | 64 | | | | 2 | | | | 3 | % |
| Total | | $ | 1,050 | | | $ | 788 | | | $ | 262 | | | | 33 | % | | $ | 2,992 | | | $ | 3,015 | | | $ | (23 | ) | | | (1 | %) |
| Percentage of Revenue | | | 17 | % | | | 13 | % | | | | | | | | | | | 16 | % | | | 17 | % | | | | | | | | |
The increase in expenses for the comparable three month periods was primarily due to $155,000 of CEO transition costs in 2016 along with an accrual of executive bonus pay at expected achievement.
The decrease in expenses for the comparable nine month period is primarily due to $435,000 of special project legal and consulting fees authorized by our Board of Directors in the first quarter of 2015 which were not incurred in 2016, partially offset by approximately $284,000 of CEO transition costs and an accrual for executive bonus pay at projected achievement.
Interest and Other Income, Net
Net interest and other income was $13,000 and $28,000 for the three and nine month periods ended September 30, 2016, compared to $6,000 and $30,000 for the same periods one year ago.
Net Income/(Loss) and Net Income/(Loss) per Share
We reported net losses of $492,000 and $598,000 for the three and nine month periods ended September 30, 2016, compared to net income of $9,000 and net loss of $388,000 for the same periods one year ago. On a diluted per share basis, net losses were $0.07 and $0.08 for the three and nine month periods ended September 30, 2016, compared to $0.00 and a net loss of $0.05 for the comparable periods ended September 30, 2015, respectively.
Critical Accounting Policies and Management Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including, but not limited to, those affecting the fair value of stock-based compensation, allowance for doubtful accounts, capitalization of costs for internally developed software, recoverability of long-lived assets, including internally developed software, and the valuation allowance for net deferred tax assets. The brief discussion below is intended to highlight some of the judgments and uncertainties that can impact the application of these policies and the specific dollar amounts reported on our financial statements.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates. Many of our estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 and elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise required by law, we do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances.
With the exception to our update on certain estimated useful lives of internal use software costs discussed below, there have been no material changes in the application of our critical accounting policies and estimates subsequent to that report.
For a detailed discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2015.
See Note 1 to the accompanying unaudited Consolidated Financial Statements for the issuance of recent accounting pronouncements.
Internal Use Software
We capitalize qualifying computer software costs incurred during the “application development stage.” Amortization of these costs begins once the product is ready for its intended use. These capitalized software costs are amortized on a straight-line basis over the estimated useful life of the product, typically 3 to 5 years. The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period.
We periodically evaluate the remaining useful lives of internal use software and will record an abandonment if management determines that all or a portion of the asset will no longer be used, or will adjust the remaining useful life to reflect revised estimates. As development work is completed on updated client workflows and user experience in the Onvia platform, the estimated useful life of certain previously capitalized costs may be shortened due to the planned release of replacement features and functions. We have evaluated the costs of certain internal use software potentially impacted, the impact to the corresponding estimated useful lives and the amount of related periodic amortization. We determined that unamortized internal software costs of $892,000 should be subject to reduced estimated useful lives. This reduction in estimated useful lives is a result of the ongoing product development work discussed above which will, upon release, replace the current features of the affected software assets. During the third quarter of 2016 we recorded a $205,000 expense related to the reduced useful lives of these certain assets which is reflected in operating expenses as amortization expense. The impact of these reduced estimated useful lives may be recognized over the next year with the release of these replacement features and functions, and may result in additional accelerated amortization of certain internal software cost in our financials.
In addition, if the carrying value of the software exceeds the estimated future cash flows, an impairment will be recorded to reduce the carrying value to the expected realizable value. No assets were impaired during the year ended December 31, 2015.
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents and available for sale investments. Our combined cash, cash equivalents and available for sale investments were $7.6 million at September 30, 2016. At September 30, 2016, we held $5.6 million in available for sale investments, primarily in FDIC insured or U.S. government backed securities.
If we engage in merger or acquisition transactions or our overall operating plans change, we may require additional equity or debt financing to meet future working capital needs, which may have a dilutive effect on existing stockholders or may include securities that have rights, preferences or privileges senior to those of the rights of our common stock. We cannot make assurances that if additional financing is required, it will be available, or that such financing can be obtained on satisfactory terms.
From December 31, 2015 to September 30, 2016, cash, cash equivalents and available for sale investments increased by $888,000 for the reasons described below.
Operating Activities
Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 2016 compared to $1.6 million in the same period in 2015. The increase of $900,000 in net cash provided by operating activities is attributable to a decrease in vendor disbursements partially offset by an increase of customer receipts and a greater net loss.
Investing Activities
Net cash used in investing activities was $1.9 million in the nine months ended September 30, 2016, compared to $1.6 million in the same period in 2015. The increase of $300,000 in cash used in investing activities is attributable to a $1.3 million decrease in sales and maturities of investments, partially offset by a $1.0 million decrease in purchases of investments.
Financing Activities
Net cash provided by financing activities was $20,000 for the nine months ended September 30, 2016, compared to $223,000 in the same period in the prior year. The decrease in cash provided by financing activities is due to a $203,000 decrease in proceeds from stock option exercises.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The disclosures under this Item are not required for smaller reporting companies.
Item 4. Controls and Procedures
The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act")), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)) as of September 30, 2016. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2016.
We made no change in our internal control over financial reporting during the fiscal quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to refine our internal control over financial reporting on an ongoing basis, as we deem appropriate with a view towards continuous improvement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, legal proceedings may arise in the ordinary course of business. Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any legal proceeding in which the outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business or financial position.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
Item 6. Exhibits
| | Number | Description |
| | | |
| | 31.1++ | Certification of Henry G. Riner, Chief Executive Officer and President of Onvia, Inc., Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 31.2++ | Certification of Cameron S. Way, Chief Financial Officer and Principal Accounting Officer of Onvia, Inc., Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32.1++ | Certification of Henry G. Riner, Chief Executive Officer and President of Onvia, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32.2++ | Certification of Cameron S. Way, Senior Vice President and Chief Financial Officer of Onvia, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 101++ | 101.INS | XBRL Instance Document |
| | | 101.SCH | XBRL Taxonomy Extension Schema |
| | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| | | 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
++ Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ONVIA, INC. | |
| | | |
| | By: | /s/ Henry G. Riner | |
| | | Henry G. Riner | |
| | | President and Chief Executive Officer | |
| | | | |
| | By: | /s/ Cameron S. Way | |
| | | Cameron S. Way | |
| | | Chief Financial Officer and Principal Accounting Officer | |
| | | | |
| | | | |
| Date: November 8, 2016 | | |
| | | |
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