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

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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)
 (206) 282-5170
(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, $.0001 par value per share
 
The NASDAQ Capital Market
Rights to Purchase Series RA Junior Participating Preferred Stock
 
The NASDAQ Capital Market
     
Securities Registered Pursuant to Section 12(g) of the Act:
None 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  o    
 
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).       Yes x    No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark 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  o    Accelerated filer  o    Non-accelerated filer  o     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 o    No  x
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the closing price on June 30, 2014, as reported on the NASDAQ Capital Market, was $23,204,091.
 
The number of shares of the registrant’s common stock outstanding at March 1, 2015 was 7,400,653.
 


 
 

 
ONVIA, INC.
 
FORM 10-K
For the Year Ended December 31, 2014
 
TABLE OF CONTENTS
   
PAGE
PART 1.
   
PART II.
   
 
 
 
 
 
PART III.
   
PART IV.
   



 
2

 
PART I
 
CAUTIONARY STATEMENT
 
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 revenue, clients, contracts and contract value, cash flow, profitability and stockholder value.  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” and elsewhere in this report.  Except as required by law, 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 included in this report.

In this report, we rely on and refer to information and statistics regarding the markets for various products.  We obtained this information from third-party sources, discussions with our clients and our own estimates.  We believe that these third-party sources are reliable, but we have not independently verified them and there can be no assurance that they are accurate.
 

ITEM 1.                      BUSINESS
 
In this report, the words “we,” “our,” “us,” “Onvia,” or the “Company” refer to Onvia, Inc. and its wholly owned subsidiary.  The wholly owned subsidiary was dissolved effective December 19, 2014.

Company Overview
 
Onvia is a leading provider of business information and research solutions that help companies plan, market and sell to government agencies throughout the United States (or U.S.).  Onvia’s business solutions provide clients online access to proprietary information about government procurement activity across local, state, and federal government agencies.  The business intelligence derived from our solutions allows clients to identify and research new market opportunities, analyze market trends, and obtain valuable insights about their competitors and channel partners.  We believe our business solutions provide clients with a distinct competitive advantage, increased revenue opportunities, and strategic insight into the public sector market.

Onvia’s target client prospects operate regionally or nationally, have a long-term strategic interest in the public sector and focus primarily on the decentralized State, Local and Education (SLED) market.  We believe this model will produce higher margins, providing the flexibility to price products based upon the value that we create for clients, not based upon the cost of fulfillment.

In 2011, we began executing a business transformation plan intended to leverage the Company’s investment in a rich public sector procurement database.  Over the last four years we have repositioned Onvia’s value proposition from an aggregator of public procurement documents to a provider of comprehensive public sector business. We believe the business is now positioned to generate accelerating subscription revenue and Adjusted EBITDA (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for more information regarding Adjusted EBITDA).

The Onvia solution includes access to the Onvia Database, Spending Forecast Center, Term Contract Center, Vendor Center, Purchase Order Analytics and the Onvia Guide.  These services are sometimes bundled with management information reports in multiple element arrangements. We allocate revenue from these bundled sales ratably between the subscription services and the management reports based on established list prices for those offerings. Subscriptions to the Onvia Database are typically prepaid, have a minimum term of one year and revenues are recognized ratably over the term of the subscription.  Subscriptions are generally priced based upon the geographic range, nature of content purchased, and the number of users accessing the database.

 
3

 
Most of Onvia’s revenues are generated from sales to companies that leverage our information for their own internal use, and to businesses that license our content for redistribution.  Revenue from businesses who license our content for resale to their own clients is classified as Content License revenue.  Content license contracts are generally multi-year arrangements 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.

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.

Industry Background
 
Selling to the public sector is highly competitive and insight into this market is extremely valuable.  The variety, volume and unstructured nature of public sector procurement information make it difficult for businesses to analyze, evaluate and target the market for their goods and services.   The agency self- reporting process provides short term visibility into specific government contracting information and events, but does not provide businesses the value added  business  intelligence to strategically align and execute their public sector initiatives.  There is a strong need for a strategic business partner that provides deep market intelligence as a key resource for decision making.   This ideal partner will provide impactful insight that drives companies to select the right target market, allocate internal resources toward the most profitable segments, maximize public sector margins through intelligent pricing and develop strategic public sector relationships all with the long term objective of winning more government business.

The procurement capture process is complicated and comprised of multiple elements and information types.   Businesses must evaluate a variety of different sources of procurement information and activities to understand their individual markets and to make strategic decisions.  These data types include:
 
  Annual Budgets Plan holders Lists
  Capital Improvement Plans Bidders Lists
  Technology Improvement Plans Bid Results
  Bids Awards and Award Details
  Requests for Quotes (RFQ) Advance Notices
  Requests for Proposals (RFP) Subcontractor Solicitations
  Amendments Purchase Orders
  Term Contracts (Reoccurring Contracts) Other trigger events, such as City Council Minutes
 
The aggregation of these public procurement events provides limited value.  This data must be normalized, enhanced, structured and classified to become business intelligence to help companies approach the public sector market strategically with the goal of winning more government business.

We believe the combination of this database and the analytical tools we continue to release to the market as we execute the strategic transition will position Onvia as the preferred business intelligence provider for those companies that have a strategic long-term interest in the public sector market.

Strategy
 
Our mission is to deliver essential, actionable business intelligence that our clients rely upon to win more government business.  We intend to achieve this mission by delivering exceptional solutions that offer our clients significant value in defining and targeting their public sector market, identifying current and future public sector business opportunities, intelligently pricing their products in the competitive public sector market, and developing strategic relationships and partners required of a successful public sector strategy.  If we are able to effectively achieve this mission, we believe we should see increased retention rates and, ultimately, increased stockholder value.  Key elements of our strategy include:

·
Target the right customers for Onvia: those companies with long- term strategic interest in the public sector.  We focus sales and marketing efforts on the prospects that fit the profile of our most valuable clients with the highest contract value and retention rates.  We believe that companies in high-growth industries that do business across a complex and geographically diverse marketplace derive the most value from Onvia’s solutions.  We believe these companies have the greatest need for the new market intelligence solutions we planned as part of our future product roadmap.  Using our own proprietary data we identified 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.  If we are effective in targeting these companies, we expect that retention rates and the long-term profitability of our clients will improve.

 
4

Our business solutions support companies that operate regionally or nationally in the largest, high-growth industry verticals:
 
o
Infrastructure
 
Architectural and Engineering Services
 
Building Supplies
 
Energy
 
Operations and Maintenance Services
 
Transportation Equipment
 
Water and Energy/Alternative Energy
o
Technology
 
IT
 
Telecommunications
o
Business and Consulting Services
 
Financial Services and Insurance
 
Healthcare and Medical Equipment
 
Office Supplies
 
·
Enhance our value proposition to our target customer:  Historically, our clients have used Onvia for public sector sales lead notification.  Over the past few years we strengthened our content capture processes which improved the timeliness and completeness of our data.  We shrank the gaps in the editorial policy and clients now have a clearer expectation of the coverage they can expect from Onvia.  Onvia 6, our previous product version, improved the usability of our leads solutions to connect clients with the right content more effectively.   The introduction of Term Contract Center (July 2012) and Project Previews to Spending Forecast Center (December 2012) expanded our sales lead notification from current leads (bids and RFPs) to near term leads (term contracts) to longer term leads (project previews) giving our clients a more comprehensive public sector lead offering. In December 2013, we launched Vendor Center, which provides strategic intelligence on companies that do business with state and local governments.  As of December 2014, clients now have the opportunity to access agency purchase orders as an additional module on the Onvia platform for an additional fee.  Agency purchase orders help clients understand agency spending patterns, evaluate competitors and analyze historical pricing for specific products and services.
 
Leads will continue to be a major part of our value proposition, but our product roadmap is designed to transform Onvia into a technology enabled business intelligence provider that helps clients win more government business.  Our content and technology platform are key assets that can be leveraged to deliver additional, more strategic applications for our clients.  These future applications include competitive analysis, channel partner selection and evaluation, market sizing, allocation of marketing spend, and pricing analyses.  We solicit feedback from clients on strategic product prototypes before they are launched.  By focusing on the right target market and by forming a closer connection with our clients, we believe we can deliver strategic products that offer our clients significant value in maximizing their business in the public sector market.

·
Use consultative selling as our “go to market” strategy: We primarily market to a targeted universe of companies that have a strategic, long term interest in the public sector.  Our sales organization is organized around three high growth industry market sectors: Infrastructure, Information Technology, and Business Services.  A central part of our value proposition is the knowledge our sales people have of their clients and their clients’ industries.  We strive to become “trusted partners” who help clients leverage business intelligence to secure more public sector business.  We identify our clients’ key business objectives, quantify and prioritize them, offer optimal solutions and finally measure our ability to deliver on these solutions during the clients’ subscription term.  Our strategy is to stay focused on these key objectives throughout our engagement with the client.  Every major investment (product, content, technology and marketing) is evaluated and prioritized against our clients’ key objectives and our current and future value proposition in meeting and exceeding these objectives.

 
5

 
Products and Services
 
Onvia’s solution includes tools to access a database of proprietary public sector information which has been built over more than a decade, and includes comprehensive, historical and real-time information on public sector activities unavailable elsewhere in the marketplace.  Our solution provides access to information on over 5.0 million procurement-related records connected to over 400,000 companies from across approximately 86,000 procurement entities nationwide.  Thousands of records are standardized, added, formatted and classified within our database each day.   We implemented content production improvements in 2014, and we now deliver 90% of our bid and RFP content on the same day we capture it from the original source.

Onvia’s solution is tailored to the business objectives of each client, and support both strategic planning and sales and marketing activities.  We offer our clients public sector business intelligence through specialized self-service analytical tools that help our clients aggregate, analyze, identify and quality, evaluate  and influence historical, real-time, and future spending information within local, state, and federal government agencies across the United States.  Over time, we expect to continue to enhance our existing information, marketing and analytic services and develop additional services that make use of our comprehensive database to meet the needs of our existing clients as well as potential new categories of clients.  Our key offerings are described below.

Onvia Database provides rich search functionality on our proprietary analytics platform of local, state and federal government agency purchasing information.  Our solution provides public sector business intelligence to customers across agencies, vendors, projects, and term contracts over a historical, real-time and future spending timeline.

Project Center provides our clients with a complete view of individual public sector procurement projects at each stage of the purchasing cycle.  Project Center makes it easier for clients to identify and qualify opportunities to sell their goods and services into the public sector.  Project Center is designed to help our clients:

·
Analyze purchasing trends to refine existing target markets and identify new geographic markets
·
Identify and qualify projects or purchases for specific goods and services nationwide
·
Identify and monitor potential competitors using plan holders lists and bidder lists
·
Identify potential subcontracting opportunities on major projects
·
Evaluate awards for pricing analyses
·
Identify and build relationships with the agency buyers of specific goods and services
·
Understand agency relationships with existing vendors
·
Build marketing lists of agency buyers and potential vendor partners
·
Obtain bid documents, plans and specification documents to qualify projects

Agency Center provides users with agencies’ procurement histories, current projects, and spending forecasts in a single application.  Agency Center helps businesses identify and qualify government agencies, agency buyers and procurement opportunities within their target markets.  By developing agency relationships, users can identify government purchases that never go out to formal bid.  Four out of five government purchases never go out to formal bid, because they fall below agencies’ purchasing thresholds.  Agency Center is included with standard access to the Onvia Database.
 
Vendor Center provides strategic intelligence on companies that do business with state and local governments.  Clients can identify, track and benchmark competitors and potential partners to inform strategic decision making.  Vendor Center represents an important step in our strategy to move from lead distribution into public sector market intelligence and analysis.

Spending Forecast Center provides insight into budgets and capital improvement plans of agencies within the top 366 Metropolitan Statistical Areas in the United States.  Spending Forecast Center provides valuable, strategic information on future capital spending used by larger corporations to execute their public sector strategies.  Most governmental bodies, such as departments of transportation, city and county governments, and boards of education publish a plan that maps out their major initiatives and forecasts spending over the next 3-6 years.  These spending forecasts generally include the name of the initiative or type of expense, project timing, the funding source and the budget amount. Businesses can use spending forecasts to inform business development, evaluate and target markets, 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 December 2012, we launched the first update to Spending Forecast Center with Project Previews, which summarize individual projects extracted from the vast library of budgets and capital improvement plans.  The project summaries are delivered directly to the end user, providing significant time savings to clients, enabling them to allocate resources to higher value activities.

 
6

 
Term Contract Center helps Onvia’s clients take advantage of the growing trend by government agencies to make purchases using term contracts, or recurring contracts.  We significantly increased our coverage and collection of term contracts and awards to provide clients with a single source they can rely on to grow revenues.  Term Contract Center is designed to help clients identify and prioritize which contracts to pursue, including the competitor and partner information needed to qualify these opportunities.

Using Term Contract Center, our clients can:

·
Search over 150,000 active state and local term contracts to create a pipeline of upcoming renewal opportunities;
·
Analyze term-contract buying trends to identify the right agencies to build relationships with;
·
Track competitors by searching for vendors who currently hold these contracts; and
·
Locate potential teaming and subcontracting partners by accessing information about vendor representatives on term contracts and how to contact them.

Purchase Order Analytics helps Onvia’s clients identify new agency buyers, inform pricing strategies and understand the competitive landscape for its goods and services.  Purchase orders often include transactional information that is below the threshold for public disclosure which can provide clients with a competitive advantage.  As of December 2014, clients now have the opportunity to access agency purchase orders as an additional module on the Onvia platform for an additional fee.  Transactional spending information, combined with the qualifying information within the Onvia Database, provides clients with a comprehensive view of an agency’s spending history.  This complete view is used to inform a strategic approach to targeting agencies, projects and people.

The Onvia Guide provides clients with frequent information about procurement activity of agencies, industries and markets customized for each client.  Clients receive their tailored Onvia Guide delivered to their inbox every day.  Daily use of the Onvia Guide provides clients with next day notification of key events and updates within their public sector market.  The Onvia Guide can be purchased separately or comes bundled with a subscription to the Onvia Database.

Management Reports provide our clients with customized management reports to help target upcoming contract renewals, identify agency buyers, and inform the proposal development process.  These solutions include contact lists, which 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.

 Clients
 
Our primary clients are businesses that are strategically focused on selling their goods and services into the public sector.  As discussed above, we sell into 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).

Prior to 2011, our target market was extremely broad, and we acquired a large number of non-strategic clients that were not adequately profitable.  We have reduced our investment in acquiring non-strategic clients, and our client base has declined as a result of this decision to transition to our more profitable target market.

We manage the business using the following key client metrics:

Annual Contract Value, or ACV
Annual contract value 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 (ACVC) 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.

 
7

 
ACV at December 31, 2014 increased by 6% to $21.5 million compared to $20.3 million at December 31, 2013.  Growth in ACV indicates that new client acquisitions, contract expansions and improving client retention rates have more than offset the impact of client attrition.  The growth rate in ACV can fluctuate from year to year based on timing of the amount of ACV available for renewal.

Dollar Retention
Since the first quarter of 2014 we have reported dollar retention which measures the dollars renewed on the available base of expiring contracts over the preceding twelve months. 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 December 31, 2014, dollar retention was 88% compared to 85% in the twelve months ended December 31, 2013.  Dollar retention can fluctuate from period to period due to the mix of first year and tenured clients expiring in each period, and timing of contract growth.  Dollar retention, in conjunction with ACV, provides insight into our subscription retention rate and ability to generate future subscription revenue.

Number of Clients
Number of clients represents the number of individual businesses subscribing to our products.

At the end of the fourth quarter, Onvia’s total client base decreased 10% to 3,300 clients compared to 3,650 clients in the same year-ago period.  Onvia’s strategy is to continue to improve profitability by acquiring and managing fewer, more strategic, clients at higher ACVCs.  Onvia’s management believes that ACV is a better measure of sales effectiveness than the number of clients.

Annual Contract Value per Client, or 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.

ACVC at December 31, 2014 grew 17% to $6,500 from $5,572 one year ago.  The continued growth in ACVC demonstrates our success in acquiring clients with strategic interest in the public sector at a regional or national level.  Companies within this target market typically have higher ACVCs and renew at higher rates, which are key attributes of a profitable long-term client.

 Sales and Marketing Strategy
 
As of December 31, 2014, we had 70 inside sales, marketing and customer support employees with the majority of our sales force located at our headquarters in Seattle, Washington.  This headcount compares to 69 as of December 31, 2013.

We believe we have transformed the Onvia sales force into a professional consultative selling organization.  Under this business model, the Business Development Team is responsible for identifying the business objectives of a prospect, and designing a solution to meet these business objectives.  As part of the new client onboarding process, the Business Development Manager ensures that the client is smoothly transitioned to the Client Success organization throughout the initial contract term.  The Client Success team is responsible for training existing clients, executing our client contact strategy, providing as needed support, renewing client contracts and identifying cross sell and upsell opportunities.   As part of the client contact strategy, the Client Success manager is responsible for understanding the client’s business objectives, setting up profiles and saved searches, and product training.  The partnership between the client and its Onvia support team is an important part of the value proposition included in the Onvia business solution.

 Our marketing programs communicate a strong strategic message that conveys who we are today and more importantly who we will be in one or two years from now.  We must deliver this message consistently and clearly across all of our marketing and communication channels to reposition and build our brand, improve sales effectiveness and drive revenue growth. Our strategic message is an important part of our transition from sales leads to analytics and market intelligence derived from a database of proprietary content with normalized data.  Our primary marketing methods include web-based marketing, direct marketing, publication of industry content, communication with our website, webinars, participation in trade shows and industry events, client referrals and educational tools.  Client retention and nurture marketing campaigns are also an integral part of our strategy. 
 
 
8

 
Technology
 
We support our operations and business solutions using an advanced technology platform designed to serve a large and rapidly increasing volume of web traffic in a reliable and efficient manner without critical failures.  Our systems are designed to:

·
Provide fast, secure and highly available visitor access to our websites;
 
·
Validate and process client requests promptly and accurately;
 
·
Provide timely, comprehensive and accurate management-reporting capabilities;
 
·
Accommodate upgrades to features on our websites;
 
·
Scale to accommodate growth in users and content; and
 
·
Provide basic redundancy in case of component failures.
 
 Our systems use a combination of proprietary technologies and commercially available licensed technologies.  The backbone of our technology infrastructure consists of Microsoft SQL Server based database servers running on enterprise grade server hardware.  The front end consists of multiple, redundant web servers that are scalable as operations grow.
 
Our web servers, database servers, transaction-processing servers and other core systems that conduct essential business operations are housed at a third-party offsite co-location facility.  Our co-location vendor provides 24x7 monitoring and engineering support in a climate-controlled and physically secure environment and our on-call operations personnel have 24x7 access to the facility.  Our data center has redundant communication lines from multiple Internet Service Providers and has its own emergency power and backup systems.  We house some non-critical systems such as development servers, quality assurance servers, and internal application servers at our headquarters in Seattle.  All our production platform related servers are in the Seattle area and we are currently in the process of building out a second production site outside this geographical area for redundancy in case of some natural calamity.  Onvia has a redundant disaster recovery site located outside the Seattle geographical area for the Company mail system which provides full functionality in the event of disaster.  The onvia.com website and the CRM systems are not hosted by us: they are both remotely hosted solutions.

In addition to maintaining responsibility for the technical architecture, security and uptime of our business solutions, our technology department works closely with the sales and marketing departments to ensure that client feedback for new features is incorporated into new products and services and that our investment in new product development is aligned with our clients’ needs and expectations.
 
Competition
 
The market for comprehensive intelligence on the government procurement marketplace is underserved.  Competitors include, to a limited extent, bid aggregators, industry analysts and government e-procurement platforms.

Our current and potential competitors include, but are not limited to, the following:
 
·
Information companies that target specific industry verticals that are covered by our services, such as Dodge Data & Analytics, CMD, BidClerk, Contractors Register and Deltek.
 
·
Lead generation and bid matching companies such as FedMarket.com, BidNet, BidSync and GovernmentBids.com.
 
We may face additional competition in the future as well-funded companies pursue new government procurement and private sector database products and services.  We must differentiate ourselves by expanding our database, enhancing and normalizing our data, developing solutions with high switching costs, and maintaining a loyal base of repeat clients.  To achieve this we must continually invest in content and software applications to provide our clients with business insight and intelligence on the government procurement market.

We believe that the principal competitive factors affecting our market include, but are not limited to, breadth, depth and timeliness of content, content quality, base of existing clients, and client service.  In order to excel at these principal competitive factors, we strive to achieve a superior understanding of our clients, offer valuable solutions to maximize the return on our clients’ investment in the public sector market, and sustain an efficient operating model in delivering these solutions.  We believe that our current solutions compare favorably to competitive offerings available in the marketplace today based on the depth and breadth of content, daily updates, a comprehensive archive of procurement intelligence and a structured and disciplined customer care program designed to provide sustainable value to our clients during the course of their subscriptions.
 
 
9

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

Intellectual Property Rights
 
Our future success depends in part on intellectual property rights, proprietary rights, and technology.  We rely on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect our proprietary rights.  We seek to protect our internally developed products, documentation, and other written materials under trade secret and copyright laws, which afford only limited protection.  We cannot ensure that any of our proprietary rights will be viable or of value in the future since the validity, enforceability and type of protection of proprietary rights in Internet-related industries is uncertain and still evolving.
 
We license and will continue to license certain products integral to services from third parties, including products that are integrated with internally developed products and used jointly to provide key content and services.  These third-party product licenses may not continue to be available on commercially reasonable terms and we may not be able to successfully integrate such third-party products into our solutions.
 
We presently have no issued U.S. patents.  It is possible that we may not develop future proprietary products or technologies that are patentable and that the patents of others will seriously harm our ability to do business.

 We own the following registered trademarks in the U.S. Patent and Trademark Office:  ONVIA, ONVIA and Design (current logo with orange circular design), DEMANDSTAR, QUOTEWIRE and BIDWIRE. We also own the following registered trademarks in Canada: ONVIA, ONVIA.COM, and ONVIA.COM and Design.

Employees
 
As of March 1, 2015, we had 136 employees with the majority located at our headquarters in Seattle, Washington.
 
None of our employees are represented by a union or collective bargaining agreement. We have never had a work stoppage and consider relations with our employees to be good.

Geographic Financial Information

During the years ended December 31, 2014 and 2013, substantially all of our revenues were generated from clients located in the United States or Canada, and all sales are denominated in U.S. currency.  All of our long lived assets are located in the United States.

Available Information
 
We file with and furnish to the Securities and Exchange Commission, or SEC, periodic reports, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements, and other information, along with amendments to such reports. Our SEC filings are posted on the SEC’s Web site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Materials that we file with the SEC are also available at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our annual report on Form 10-K, all other reports and amendments filed with or furnished to the SEC, and our Code of Business Ethics and Conduct are available on the “Investor Relations” section of our website at www.onvia.com as soon as reasonably practicable after we have filed them with, or furnished them to, the SEC.
 
10

 
ITEM 1A.
RISK FACTORS
 
In addition to other information in this Report, the following risk factors should be carefully considered in evaluating our business, because such factors may have a significant impact on our business, results of operations and financial condition, and could cause our stock price to decline. The following sections discuss many, but not all, of the risks and uncertainties that may affect our future performance, but is not intended to be all-inclusive. As a result of the risk factors set forth below and elsewhere in this Report, and the risks discussed in our other Securities and Exchange Commission filings, actual future results could differ materially from historical results or those projected in any forward-looking statements.

Risks related to our growth strategy

We began a transformation of our business model in early 2011. Due to the complexity of this turnaround, our quarterly financial results may be subject to fluctuations that may cause material variations in our quarterly operating results and make it difficult to forecast future performance.
 
We are currently in the second phase of our transformation plan initiated in 2011 and focused on leveraging the foundation we have built to accelerate growth.  Based upon the number of variables within our turnaround plan, our business is subject to execution risk and it may be difficult to project results.  Our operating plan considers our ability to execute these initiatives and generate results within a specific timeframe.  If we are unable to execute our initiatives as planned, our quarterly financial results may fluctuate and future quarterly results will be affected.  A significant portion of our subscription revenue for a particular quarter is derived from transactions that are initiated in previous quarters, because revenue is generally recognized ratably over the subscription term.
 
Our current and future levels of operating expenses and capital expenditures are based largely on our growth plans and estimates of future revenue. These expenditure levels are, to a large extent, fixed in the short term. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenue relative to planned expenditures could harm our business and results of operations.

Our consultative selling approach may not scale business as planned.

We are transitioning our sales organization from a transactional sales process to a consultative sales process.  The consultative selling process focuses on fewer, more targeted prospects, which we expect to renew at higher rates with higher ACVC.  The consultative sales process requires a longer sales cycle than a transactional model and requires the development of a substantial pipeline of qualified prospects to achieve consistent and predictable results.  Due to the complexity of a consultative sale, our sales people may not be able to scale their individual results to maximize profitability.  As a result of these risks, our business may not scale as planned.

Our target market of companies with a strategic, long term interest in the public sector organized around three high growth industry market sectors may not be adequate to scale our business as planned.

We are transitioning our sales effort to target companies with a strategic, long term interest in conducting business with the national and regional public sector organized around three high growth industry market sectors: Infrastructure, Information Technology, and Business Services.  As a result, we are focusing on fewer prospects.  By focusing on target companies in these industry market sectors, we may not identify qualified prospects in other industry market sectors and we may not have adequate industry knowledge to identify prospects within the targeted market sectors.  As a result, our business may not scale as planned.

We may fail to attract, hire and retain sales professionals who can effectively communicate the value of our products to our clients and prospects, and they may be unable to achieve expected sales targets.

In order to achieve growth targets, our sales teams must be able to effectively communicate the value of our products to existing and potential clients.  We expect to see increases in client retention rates and in new client acquisition revenue.  However, our sales goals are aggressive and may not be achieved.
 
 
11

Our competitors may develop similar technologies that are more broadly accepted in the marketplace.

The functionality in Onvia’s products provides business intelligence across industry verticals and geographic regions.  If competitors introduce products with similar functionality or are able to more effectively market and price their products for broad client acceptance, new client acquisition and existing client retention would be adversely impacted.  If we are unable to enhance functionality or increase marketing efforts to offset challenges from competitors, we may lose market share.

Rapid advances in technology and new mediums for distributing information may diminish the value of our service offerings.

Our business model is predicated on providing access to and analysis of hard to find public and private sector information.  Information in general is quickly becoming more accessible at a low cost as new distribution mediums, such as blogs, and new search technologies are developed.  We may be unable to keep up with the rapid advances in information collection, and new technologies and mediums may be developed that commoditize the value of our services.  If this were to occur, our revenues would suffer.

Risks related to our new product strategy

We may fail to introduce new content and products that are broadly accepted by clients and prospects, and there may be delays in the introduction of these tools and products.
 
We may not adequately identify and capture content that is valuable to new and existing clients.  In addition, introducing new content and products is complex and we may not be successful in developing such new offerings on a timely basis, or at all.  If client acceptance and adoption of our new products is below our expectations, projected growth rates and client acquisition and retention goals may not be achieved, and financial results would be harmed.  We expect to utilize internally developed technology and technology licensed from third parties for the development of new content and products.  If we are unable to develop or acquire the required technology on time, or at all, or if the launch of these new products is delayed for any other reason beyond our anticipated launch dates, projected growth rates may not be achieved.

We may be unable to control the cost of ongoing content collection or the cost of collecting new content types to support new product offerings.

We will need to identify cost effective sources and develop efficient collection processes for new content types required to support new product development plans.  If we are unable to find new ways to collect content efficiently, and aggregate new content types in a cost effective manner, gross margins may decline.

We may improperly price new product offerings for broad client acceptance.

We have developed pricing strategies for our existing products, and will be required to develop new pricing strategies for planned new product launches.  If clients and prospects do not perceive that the pricing of our products is commensurate with the value they receive from the products, or if our sales force is unable to communicate the value of the products, particularly in light of the current economic climate, new client adoption and existing client retention would be adversely impacted.

We may overestimate the value to our clients of sales and marketing intelligence.

We believe there is a large unmet market need for robust public sector sales and marketing information because information that is highly fragmented across different levels of agencies.  Our business model assumes that clients will continue to pay recurring subscriptions for our content and delivery solutions and we expect increases in the annual value of these contracts as a result of this.  If we have overestimated the value of this information, we will not achieve our forecasted revenue goals.

Financial, economic and market risks
  
Utilization of our net operating loss carryforwards may be subject to annual limitations under the Internal Revenue Code, or may not be usable at all in the future.

We have substantial net operating loss carryforwards (“NOLs”) that could be used to offset future tax liabilities arising from future taxable income.  In 2011, we conducted a study and determined that an “ownership change” occurred in 2001, as defined under Section 382 of the Internal Revenue Code of 1986, as amended (which is generally a greater than a 50 percentage point increase by certain “5% shareholders” over a rolling three-year period).  Section 382 imposes an annual limitation on the utilization of net deferred tax assets, such as NOLs and other tax attributes, once an ownership change has occurred.  The ownership change which occurred in 2001 resulted in a permanent loss of $180.0 million of our U.S. federal NOLs.  After this impairment, we had $76.0 million in NOLs as of December 31, 2014 available to offset future taxable net income.
 
 
12

 
It is possible that we could have an additional “ownership change” under Section 382 of the Code in the future and lose a significant portion of our net deferred tax assets, which could have a material adverse effect on our future results of operations and financial condition.  As discussed in the following risk factor, we adopted a tax benefits preservation plan in early 2011, which was amended and restated in 2014, to mitigate the risk of future ownership changes.

We had approximately $24.8 million in net deferred tax assets, excluding valuation allowance, as of December 31, 2014.  Realization of net deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income.  We regularly review our net deferred tax assets for usability based on a history of earnings, expectations for future earnings and expected timing of reversals of temporary differences.  In particular, we consider our three-year earnings trend to determine if we have generated cumulative net income or net losses over that period, which the accounting guidance considers significant evidence to evaluate in determining the existence and amount of any valuation allowance.  Prior to 2011, we maintained a 100% valuation allowance against our net deferred tax assets because based upon our history of net operating losses, we were uncertain about our ability to generate future net income.  Since the end of 2011 through September 30, 2013, we believed, based on evaluation of all available objective positive and negative evidence related to the creation of future taxable net income, that a partial release of our valuation allowance was appropriate.  As of December 31, 2012 and through September 30, 2013, we believed that $2.2 million of net deferred tax assets reflected the amount that was more-likely-than-not to be realized in the future.

We continue to evaluate all relevant evidence to estimate the value of our net deferred tax assets.  Beginning in the fourth quarter of 2012, we have invested to accelerate top line revenue growth, but revenues have not accelerated as planned.  In 2014, we invested in accelerating growth and incurred net losses in each of the last nine quarters ending December 31, 2014.  If projections under our 2015 operating plan are realized, we expect to be in a cumulative three-year net loss position at the end of 2015.  Although the 2015 operating plan projects higher revenue, operating cash flow and Adjusted EBITDA compared to 2014, as a result of the projected cumulative three-year net loss, it is our best judgment that we should conclude that our net deferred tax assets are not more-likely-than-not to be utilized.   Accordingly we have maintained the valuation allowance as of December 31, 2014 to be 100% of our net deferred tax assets. We may reverse all or a portion of our valuation allowance in the future if it is determined that realization of these benefits is more likely than not.

We adopted a tax benefits preservation plan, designed to preserve the value of our net deferred tax assets, primarily related to net operating loss carryforwards (“NOLs”), which may discourage acquisition and sale of large blocks of our stock and may result in significant dilution for certain stockholders.

In April 2014, our Board of Directors (the “Board”) approved and adopted a tax benefits preservation plan in the form of the Amended and Restated Section 382 Rights Agreement (the “Amended Rights Agreement”), which amends and restates the previously approved Section 382 Rights Agreement, dated May 4, 2011.  The Amended Rights Agreement is designed to preserve stockholder value and the value of certain income tax assets primarily associated with NOLs 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.  Ownership changes of greater than 5% could create an ownership change which could limit the realizable value of our NOLs.

Under the Amended Rights 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.  Pursuant to the Amended Rights Agreement and at the discretion of our Board, if any person or group becomes the beneficial owner (subject to certain restrictions) of 4.9% or more of the outstanding shares of Common Stock the Rights may become exercisable.  Upon exercise of a Right and payment of the purchase price of $20.00 (the “Purchase Price”), the holder will be entitled to receive a number of shares of Common Stock having a market value equal to two times the Purchase Price.

The Amended Rights Agreement may discourage existing 5% stockholders from selling their interest in a single block which may impact the liquidity of Onvia common stock, may deter institutional investors from investing in Onvia stock, and may deter potential acquirers from making premium offers to acquire Onvia, all factors which may depress the market price of our stock or prevent stockholders from receiving a premium in a change in control transaction.

Our Board has formed an independent Rights Plan Committee to establish a process for evaluating indications of interest from shareholders interested in purchasing more than 4.9% of Onvia stock.
 
 
13

 
Provisions of our charter documents and Delaware law may discourage takeover attempts and depress the market price of our stock.
 
Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, the state of our incorporation, can have the effect of making it difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders.  These provisions include:
 
 
the classification of our Board of Directors into three classes so that the directors serve staggered three-year terms, which may make it difficult for a potential acquirer to gain control of our Board;
 
 
authorizing the issuance of shares of undesignated preferred stock without a vote of stockholders; and
 
 
non-cumulative voting for the election of directors.

We may require additional financial resources which may not be available on favorable terms or at all.

We believe that our existing cash and investment balances, and projected cash flow from operations, will be sufficient to fund our plans for the next 12 months and the foreseeable future. However, we may require additional financial resources due to changed business conditions, implementation of our strategy or to pursue future business opportunities requiring investments of additional capital. If our existing financial resources are insufficient to satisfy our requirements, we may seek additional borrowings. Credit market conditions may negatively affect debt availability and cost, and, as a result, financing may not be available in amounts or on terms acceptable to us, if at all. In addition, the incurrence of indebtedness would result in debt service obligations and could require us to agree to operating and financial covenants that would further restrict our operations.

Political pressure as a result of deficits and budget shortfalls, including recent developments around the federal budget and the sequester, may lead to reduced spending by federal, state and local government agencies.

Should agencies reduce spending, there may be fewer revenue opportunities to deliver to our clients.  Existing clients that leverage our products primarily for new sales leads may perceive a drop in opportunities as a reduction in their return on investment, which could lead to reduced retention rates.  In addition, prospects considering an investment in our products may perceive a decline in government spending as a signal that there will be fewer opportunities and they may decide against purchasing a business intelligence solution, or may decide against pursuing public sector opportunities all together, which would negatively impact new client acquisition.

Operational risks
 
We may not effectively implement new technologies, and new product functionality could fail to perform as designed.

We periodically release products that employ new search technologies and complex database architecture in new and innovative ways.  These technologies are usually built in house, or purchased from third party vendors and reengineered to meet our operational needs.  If the creative application of these technologies does not work as planned or if we implement these new technologies poorly or in incompatible ways, our new products and services may not function properly, delivery of our products could be disrupted or delayed and our client retention and new client acquisition may suffer.

System failures could cause an interruption in the services of our network and impact our ability to compile information and deliver our products to clients.
 
Any system failure that causes an interruption in the service of our suite of products, disrupts our ability to aggregate, organize and publish new content, or reduces timely access to and delivery of our content could result in client dissatisfaction, which would impact client acquisition and retention rates.  Further, prolonged or ongoing performance problems on our web sites or our application servers, which support bid creation and distribution, could damage our reputation and result in the permanent loss of clients. In the past, system interruptions have made our web sites and application servers totally unavailable, slowed their response time or prevented us from making service available to clients.  These problems may occur again in the future.

 We may not have sufficient business interruption insurance to cover losses from major interruptions. We deployed our primary business application servers to a secure offsite facility with backup utility power and redundant Internet connectivity in 2008.  Our current physical and virtual tape drive based disaster recovery systems are not capable of recovering core business functionality in less than a period of several days depending on severity in the event of a disaster scenario at the offsite facility.  Production Information Technology and Research department functions will be operational in the event of a local building disaster so that delivery of our products will not be significantly interrupted as long as the offsite facility is still operational.  Our disaster recovery plan does not yet include automated failover of product distribution-related systems, requiring extensive manual intervention to complete the recovery process which could result in prolonged service interruptions and ultimately lower client satisfaction.
 
14

 
Our current technology infrastructure and network software systems may be unable to accommodate our anticipated growth, and we may require a significant investment in these systems to accommodate performance and storage requirements of new and planned products.

Expansion of the historical content contained in our products and future product offerings to clients have and will place significant additional demands on our enterprise-grade technology infrastructure.  We add thousands of records to our database each day, which has required us to expand the storage capacity of the database and clients access to this information requires significant computing power based on usage.  If new content types or product introductions change current network and computing requirements or if growth in our client base exceeds our expectations, we may be required to make significant investments to upgrade our systems to accommodate such changes, which could negatively impact our cash flows and results of operations.  We may not be successful in our efforts to upgrade our systems, or if we do successfully upgrade our systems, we may not do so on time and within budget. Failure to achieve a stable technological platform in time to handle increasing network usage may discourage potential clients from using our network.

We may not be able to attract and retain the services of our executive officers, directors, senior managers and other key employees, which could harm our business.
 
Our business and operations are substantially dependent on the performance of senior management, directors and key employees.  We face competition for the limited pool of these qualified professionals from other companies, some of which have a greater ability to attract and compensate these professionals.  Our process for succession planning across all levels of the organization to provide business continuity includes developing, coaching and rewarding high performing employees.  The loss and inability to replace any of these employees or directors, including any of Onvia’s executive officers, would likely harm our business. In addition, a failure to retain key personnel or hire and train additional qualified personnel as required to support our business, could adversely affect the quality of our products and services, as well as future business and operating results.

We could incur substantial costs in the future as a result of cyber incidents. 
 
As our dependence on digital technologies to conduct operations increases, so does the risk associated with cyber security.  We may be unable to prevent targeted, random or accidental breaches of our security and could incur significant costs associated with lost or stolen information, including increased cyber security protection costs, lost revenues, reputational damage or increased litigation.

Political, social or environmental conditions in off-shore locations may impact the collection and delivery of our content and/or development of new products.
 
Portions of our content are aggregated and/or formatted by off-shore vendors.  Delivery of that content may be impacted by local political, social or environmental conditions, which may result in delayed delivery to clients resulting in client dissatisfaction.  We also outsource portions of the development of new products to off-shore vendors.  Political, social or environmental conditions in those locations may result in delays of new product introductions.

We may be unable to effectively monitor and prevent unauthorized redistribution of our published information.
 
In the past we have identified a number of entities that have redistributed proprietary information without authorization and against our terms of use.  We have been and will continue to be aggressive about monitoring and combating such unauthorized use, and are considering technological avenues for blocking such users from our database.  However, if we fail to effectively combat such unauthorized use, our business could be harmed.

 Our services and products depend upon the continued availability of licensed technology from third parties, and we may not be able to obtain those licenses on commercially reasonable terms, or at all.

We license, and will continue to license, technology integral to our services and products from third parties.  If we are unable to acquire or retain key third-party product licenses or integrate the related third-party products into our network services, our service and product development may be delayed.  We also expect to acquire new licenses in the future as our business grows and technology evolves.  We may not be able to obtain these licenses on commercially reasonable terms, or at all.
 
 
15

 
  Regulatory, judicial or legislative risks

If we are unable to enforce and protect our intellectual property rights ourcompetitive position may be harmed. 

We rely on a combination of copyright, trademark, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized third parties may obtain and use technology or other information that we regard as proprietary. Our intellectual property rights may not survive a legal challenge to their validity or provide significant protection for us. The laws of certain countries, particularly in emerging markets, do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, we may not be able to protect our intellectual property against unauthorized third-party copying or use, which could adversely affect our competitive position. Additionally, there can be no assurance that another party will not assert that we have infringed its intellectual property rights.

Future regulations could be enacted that either directly restrict our business or indirectly impact our business by limiting the growth of e-commerce.
 
We are subject to laws and regulations governing the Internet and e-commerce.  These laws and regulations may cover privacy, content, taxation, data protection, copyrights, electronic contracts and other communications, consumer protection, unencumbered Internet access to our services, the design and operations of websites, and the characteristics and quality of products and services.  If enacted, unfavorable laws and regulations could limit the market for our services and offerings. Although many regulations might not apply to the business directly, we expect that laws regulating the collection or processing of personal or consumer information could indirectly affect our business.  It is possible that legislation could expose companies involved in e-commerce to restrictions or liability, which could limit the growth of e-commerce generally. Legislation could hinder the growth in Internet use and decrease our acceptance as a medium for communication and commerce.  If laws were enacted that made our products taxable at the state level, we may be required to pass those additional taxes along to our clients, which would increase the overall cost of our product to our end users and could impact the buying decisions of existing and potential new clients.
 
Our access to new content from governmental entities and other third parties may be restricted.
 
We aggregate new information from various public data sources and other third parties and do not have exclusive access to this content.  We cannot ensure that these data sources will continue to be available in the future.  Moreover, public disclosure laws, which require governmental entities to produce bid information directly to members of the public, may negatively impact our business and reduce the value of our services to clients.  The loss or the unavailability of data sources in the future, or the loss of right to distribute some of the data sources, would harm our business.

Our proprietary content aggregation technology and processes are integral to our success.  The content we collect primarily consists of facts related to specific public sector opportunities, transactions, and contacts.  Although we endeavor to comply with all laws, rules and regulations applicable to the collection and distribution of our content, it’s possible that our collection and distribution activities may subject us to claims, including breach of contract and intellectual property infringement.  We may also be subject to claims that the collection or provision of certain information breached laws and regulations relating to privacy and data security.  Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against any claims.

If the process of content aggregation becomes regulated in the future and our process for acquiring government bids is no longer cost-effective, our business will be significantly harmed.  If new regulations restricting our ability to charge a fee for public bid information are enacted, our business will be significantly harmed.


ITEM 1B.
UNRESOLVED STAFF COMMENTS

Not applicable.
 
 
16

 
ITEM 2.
PROPERTIES
 
Our headquarters are located in Seattle, Washington.  Since January, 2008, we leased approximately 35,000 square feet in two floors of a sixteen-story office complex located at 509 Olive Way, Seattle, Washington.

During the first quarter of 2013, we entered into the first amendment to the lease agreement for our corporate offices.  The amendment, among other things, extends the lease term for an additional sixty-five (65) months with a new expiration date of April 30, 2021.  In addition, the Amendment reduces the rental area of the premises to approximately 29,606 square feet, after surrender of 5,394 square feet after the execution of the Amendment.  We have an additional right to surrender up to 8,898 square feet on or after November 30, 2015 in exchange for reimbursement of unamortized landlord incentives.  In addition to base rent, we will be responsible for our proportionate share of annual incremental increases in the building’s operating expenses, insurance, and real estate taxes over the 2013 base year.  We have a one-time right to terminate the amended lease in its entirety on or after December 1, 2017 in exchange for payment of a termination fee.
 
ITEM 3.
LEGAL PROCEEDINGS
 
For a discussion regarding our legal proceedings, please refer to the “Legal Proceedings” section of Note 10, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements in this Report, which is incorporated herein by reference.
 
ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:
 
Name
Age
Position
Henry G. Riner
64
Chief Executive Officer and President
Irvine N. Alpert
63
Executive Vice President
Naveen Rajkumar
37
Senior Vice President and Chief Information Officer
Cameron S. Way
43
Senior Vice President and Chief Financial Officer

 Henry G. Riner was appointed President and Chief Executive Officer in October 2010.  Mr. Riner has served as a Director of the Company since November 2010.  From March 2009 until September 2010, Mr. Riner served as President and Chief Executive Officer of OSG Billing Services, an electronic bill presentment and payment company.  From 2006 through 2008, Mr. Riner was President and Chief Executive Officer of CoAMS, a trade promotion information services company.  From 1997 through 2005, Mr. Riner was President and Chief Executive Officer of SourceLink, a direct marketing information services company.  Mr. Riner was President of UMI, a division of the Bell & Howell Company from 1994 through 1997.

Irvine N. Alpert has served as Executive Vice President of the Company since July 2001. From February 1995 to July 2001, Mr. Alpert was the founder and Chief Executive Officer of ProjectGuides, Inc., an architecture, engineering, and construction market information service, which was acquired by Onvia in June 2001.  From 1993 to 1995, Mr. Alpert served as President of RCI Environmental, Inc., a regional construction company.
 
Naveen Rajkumar has served as Senior Vice President and Chief Information Officer of the Company since August 2010.  Prior to becoming Senior Vice President and Chief Information Officer, Mr. Rajkumar served as Chief Information Officer of the Company from January 2010 to July 2010. From July 1999 to December 2009, Mr.Rajkumar served at Aditi Technologies in various positions, most recently as General Manager.

Cameron S. Way has served as Senior Vice President since August 2012 and Chief Financial Officer of the Company since April 2008. Mr. Way served as Chief Accounting Officer of the Company from June 2005 to April 2008, and as Controller from September 2001 to June 2005.  Mr. Way held various other positions within the company prior to 2001.  Mr. Way was an Assurance Manager with PricewaterhouseCoopers LLP from January 1994 to August 1999 prior to joining the Company.
 
 
17

 
PART II
 
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock currently trades on the NASDAQ Capital Market under the symbol “ONVI.”  The table below lists the high and low sale prices per share of our common stock for each quarterly period during the past two fiscal years as reported on the NASDAQ Capital Market.
 
   
Price Range
of Common Stock
   
   
High
   
Low
   
Year ended December 31, 2013
             
First Quarter
  $ 3.84     $ 3.35    
Second Quarter
    4.69       3.59    
Third Quarter
    5.58       4.49    
Fourth Quarter
    5.19       4.42    
                   
Year ended December 31, 2014
                 
First Quarter
  $ 5.55     $ 4.72    
Second Quarter
    5.40       4.29    
Third Quarter
    4.97       4.28    
Fourth Quarter
    5.49       4.15    
 
Holders
 
As of March 1, 2015, there were approximately 273 holders of record of Onvia common stock.  The number of record holders was determined from the records of the Company’s transfer agent and does not include the number of persons whose stock is held in nominee or “street name” accounts through brokers.
 
Dividends
 
No cash dividends were declared for the years ended December 31, 2014 and 2013 nor does the Company have the intention to pay cash dividends in the foreseeable future.

Stock Price Performance Graph

The registrant is a Smaller Reporting Company and, therefore, is not required to provide the information under this item.

ITEM 6.                 SELECTED CONSOLIDATED FINANCIAL DATA
 
The registrant is a Smaller Reporting Company and, therefore, is not required to provide the information under this item.

 
18

 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying Notes hereto.

Management Overview – 2014 Results and 2015 Priorities
 
Subscription revenue for the year ended December 31, 2014 grew 5%, over the same period in 2013.  The growth in subscription revenue is primarily a result of improved client retention and contract expansions throughout the year. Our annual operating initiatives are designed to drive growth in subscription revenue and Adjusted EBITDA.

Total revenue for the years ended December 31, 2014 and 2013 was $22.6 million and $22.0 million, respectively, an annual growth rate of 3%.

Annual Contract Value, or ACV, increased by 6% to $21.5 million as of December 31, 2014 from $20.3 million one year ago.  Growth in ACV indicates that new client acquisitions, contract expansions and improving client retention rates have more than offset the impact of client attrition.  ACV represents the aggregate annual value of our subscription contracts and we believe is a leading indicator of future revenue growth.

Annual Contract Value per Client, ACVC, increased 17% to $6,500 per client as of December 31, 2014 compared to $5,572 as of December 31, 2013.  We believe, growth in ACVC demonstrates success in acquiring clients with a strategic interest in the public sector at a regional or national level.  Companies within this target market typically have higher ACVC and renew at higher rates, which are key attributes of a profitable long-term client.

 As of December 31, 2014, Onvia had 3,300 clients, down 10% from 3,650 clients during the same period one year ago. Our decline in client count is anticipated as a result of the decision to transition to a more strategic target market.  We believe that ACV is a better measure of quarterly sales activity than number of clients.

2014 operating expenses increased 4% to $19.6 million compared to $18.8 million in 2013 primarily due to investments in sales and marketing to drive future revenue growth.  We expense 100% of variable sales cost upon sale, but recognize revenue ratably over the term of subscription.  Until we achieve scale, variable sales costs may exceed the incremental revenue generated each period, which negatively impacts short term Adjusted EBITDA and net income.

Adjusted EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization, and non-cash stock-based compensation) for the year ended December 31, 2014 was $2.5 million down 9% from $2.8 million in 2013.  See “Non-GAAP Financial Measures” below for more information regarding Adjusted EBITDA.

Annual net loss was $727,000, or $0.10 cents per diluted share for the year ended December 31, 2014 compared to the loss of $2.7 million, or $0.36 cents per diluted share in 2013.  During the year ended December 31, 2013, we increased its valuation allowance to be 100% of its net deferred tax assets which resulted in $2.2 million being recognized as a provision for income taxes in 2013.

We had $24.8 million and $24.9 million of net deferred tax assets, excluding valuation allowance, related to $76.0 million and $73.0 million in net operating loss carryforwards, respectively, available to offset future taxable net income at December 31, 2014 and December 31, 2013.  At December 31, 2014 and December 31, 2013 we have recorded a full valuation allowance against our net deferred tax assets, resulting $-0- net deferred tax assets due to the uncertainty of future taxable income available to utilized these tax benefits, including accumulated net operating loss carryforwards, before expiration.

As of December 31, 2014 we held cash and investments of $8.0 million compared to $7.5 million at the end of last year, representing an increase of $477,000 during 2014 primarily due to reduced investment in capitalized property and equipment in 2014 compared to 2013.

 
19

 
2014 Results

In 2014, Onvia management focused on four new initiatives intended to accelerate subscription revenue and Adjusted EBITDA by leveraging the solid foundation built over the preceding three years.

·
Our first 2014 initiative was to accelerate the acquisition of the new clients within the defined verticals of the new target market.  2014 was our first full year selling into its new target market of companies with a national or regional geographic focus.  Total acquisition bookings declined in 2014 compared to 2013, however, the volume of national and regional acquisition bookings increased compared to the same period last year.  In addition, the ACVC for new clients grew 41% to $15,272 in 2014 from $10,834 in 2013.  We believe the growth in national and regional acquisition bookings and corresponding improvement in ACVC continues to validate our adoption of a new target market strategy implemented in the fourth quarter of 2013.

·
Our second initiative was to improve first year client retention and renew tenured, long term clients within the target market.  During 2014 our Client Success team was reorganized to focus on three specific objectives: client retention, first year client on-boarding and contract upgrades.  Dollar retention is a measurement of how effectively the Client Success team achieves these three short and long-term objectives.  For the twelve months ended December 31, 2014, dollar retention increased to 88%, up from 85% in the same period last.  Dollar retention can fluctuate from period to period due to the mix of first year and tenured clients expiring in each period.

·
Our third initiative was to maximize growth within the existing client base.  During 2014 we formed a team dedicated to increasing clients’ investment in the Onvia solution.  Contract upgrades are the primary measure of the results of this initiative. In 2014 contract upgrades increased 43% compared to 2013.  This growth provides further evidence that there is significant opportunity to expand the adoption of Onvia’s solutions deeper into its client organizations. Management continues to believe that by meeting more business objectives, the partnership with clients is strengthened which should drive improvements in ACVC and increase the lifetime value of each client.

·
Our fourth and final initiative was to continue to drive enhancements to our existing platform and to provide innovative new solutions that make Onvia a strategic business partner with our clients.  In October 2014 the software and platform enhancements were completed for Onvia 7.  Through machine learning and natural language processing we are now creating the ontologies for each of our markets served.  These ontologies are the foundation of the Onvia 7 search paradigm.  The ontologies add structured tags to all procurement documents. When completed they drive more precise search results and higher recall of relevant opportunities from the Onvia database.  We anticipate it will take us all of 2015 to both create these ontologies and migrate our clients from the old search paradigm to Onvia 7.  Our proprietary ontologies are designed to provide Onvia, and our clients, with a significant competitive advantage.

Once the migration to Onvia 7 is completed our clients will have a significantly better search experience.  There will be three benefits to the client.  One, the platform will be easier to use because constructing a search will be intuitive.  Two, search results will be more relevant eliminating most of the noise in the current platform.  Three, the findability of our platform will be improved.  Clients will be able to mine and recall opportunities that could not be identified under the old search paradigm.

As of December 2014, clients now have the opportunity to access agency purchase orders as an additional module on the Onvia platform for an additional fee.  This gives our clients access to actual purchase orders of their customers and prospects so they have greater visibility into actual spending by the agencies.

2015 Initiatives

In 2015, Onvia management is focused on three new initiatives intended to build on the results achieved in 2014 and further accelerate growth in subscription revenue and Adjusted EBTIDA.

·
Our first 2015 initiative is to further accelerate year over year bookings growth.  This growth is planned in three key areas; sales to new customers, contract enhancements with existing customers and improved retention of our existing customers.  The measure of success for this initiative includes the overall growth in new client bookings, growth in ACV and improvement in dollar retention.

 
20

 
·
Our second 2015 initiative is to enhance the existing Onvia platform and provide improved content which further aligns to customer needs. This initiative includes the continued rollout of Onvia 7 search features to our target market clients.  This rollout will take most of 2015 to complete. In addition, we intend to invest in new content with an emphasis on forward-looking intelligence and pre-bid notifications, which has been identified as the number one customer need. We measure success of this initiative through the effectiveness of product releases and the impact on new client ACVC and dollar retention.

·
Our third and final 2015 initiative is to improve the existing information technology infrastructure as a means to reduce complexity, accelerate product development and reduce costs long-term.  We will focus on three major areas.  The first focus will be moving to an open source search technology which will increase our capacity for search and improve search speed.  Secondly, we’ll be changing database structures to allow for faster more agile product enhancements in the future.  Finally, we’ll further automate data capture to allow us to scale content without adding cost in the future.  We plan on no additional capital expenditures beyond our current annual level of investment to make these technology improvements.

Application of Critical Accounting Policies and Management Estimates
 
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of commitments and contingencies.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ significantly from our estimates.  In addition, any significant unanticipated changes in any of our assumptions could have a material adverse effect on our business, financial condition, and results of operations.  We believe the following are our most significant accounting policies and estimates.

 Revenue Recognition
 
Our revenues are primarily generated from subscriptions, content licenses and management reports.  Our subscriptions are generally annual contracts; however, we also offer extended multi-year contracts to our subscription clients, and content licenses are generally multi-year agreements.  Subscription and content licenses are recognized ratably over the term of the agreement.  We also generate revenue from fees charged for management reports, document download services, and other services, and revenue from these types of services is recognized upon delivery, or, if report refreshes are included, ratably over the service period.

Our subscription services and management information reports are also sold together as a bundled offering.  Pursuant to the provisions of Accounting Standard Codification, or ASC, 605-25 Revenue Recognition, we allocate revenue from these bundled sales ratably between the subscription services and the management reports based on their relative fair values, which are consistent with established list prices for those offerings.  We measure and allocate arrangement consideration to one or more units of accounting for separate deliverables.  We also establish a selling price hierarchy for determining the selling price of a deliverable.

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

Internal Use Software

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.”  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.

Pursuant to ASC 360, Property, Plant, and Equipment, we periodically evaluate the remaining useful lives of internal use software and will record an abandonment if management determine that all or a portion of the asset will no longer be used, or will adjust the remaining useful life to reflect revised estimates for impairment.  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 years ended December 31, 2014 or 2013.

 
21

 
Stock-Based Compensation
 
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.  Such value is recognized as expense over the service period, net of estimated forfeitures.  The estimate of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.  We consider many factors when estimating expected forfeitures, including employee class and historical experience.  There is also significant judgment required in the estimation of the valuation assumptions used to determine the fair value of options granted.  Please refer to the discussion of valuation assumptions in Note 2 of the “Notes to 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.

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 basis, 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.  The deferred tax asset has been reduced by a valuation allowance that reduces the amount of our deferred tax asset to a level that is more-than-likely-than-not to be recognized.  In determining the amount of the valuation allowance we consider whether it is more likely that some portion or all of the net deferred tax assets will not be realized.  In particular, we consider our three-year earnings trend to determine if we have generated cumulative net income or net losses over that period, which the accounting guidance considers significant evidence to evaluate in determining the existence and amount of any valuation allowance.  We also consider positive evidence, such as the improving trends in the leading indicators of revenue growth to evaluate the likelihood of generating taxable net income in the future.  The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to be deductible.  We will continue to review the estimate of future taxable income and will adjust the valuation allowance accordingly as new information becomes available.

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

In 2011, we performed a Section 382 analysis and identified an ownership change that occurred in September 2001.  Section 382 imposes an annual limitation on the utilization of net deferred tax assets, such as NOLs and other tax attributes, once an ownership change has occurred.  The ownership change resulted in a permanent loss of $180.0 million of our U.S. federal net deferred tax assets.   We believe that, as a result of the annual Section 382 limitation, we will permanently be unable to use a significant portion of our NOL carryforwards that arose before the change in control to offset future taxable income.  As such, we reduced our NOL gross deferred tax asset by the amount of NOLs that we will permanently be unable to utilize, which in turn resulted in a reduction to our valuation allowance.

In April 2014, our Board approved and adopted a tax benefits preservation plan in the form of the Amended Rights Agreement, which amends and restates the previously approved Section 382 Rights Agreement, dated May 4, 2011.  The Amended Rights Agreement is designed to preserve stockholder value and the value of certain income tax assets primarily associated with NOLs 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.  Ownership changes of greater than 5% could create an ownership change which could limit the realizable value of our NOLs.

 
22

 
Non-GAAP Financial Measures

We prepare and publicly release quarterly financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP).  The non-GAAP financial measures we may disclose include Adjusted EBITDA and client metrics such as ACV and ACVC.  For a discussion regarding our client metrics, please refer the “Clients” section of Item 1 “Business”.  We typically disclose Adjusted EBITDA measures in earnings releases, investor conference calls and filings with the Securities and Exchange Commission.  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 or as a measure of the company’s liquidity.  We define Adjusted EBITDA as net income / (loss) before interest and other non-cash financing costs; taxes; depreciation; amortization; and non-cash stock-based compensation.  Other companies (including our competitors) may define Adjusted EBITDA differently.  We present Adjusted EBITDA because we believe 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 our historical operating results 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 reconciliation of GAAP Net Loss to Adjusted EBITDA for the indicated periods (in thousands):

   
Twelve Months Ended December 31,
   
   
2014
   
2013
   
GAAP net loss
  $ (727 )   $ (2,725 )  
Reconciling items from GAAP to adjusted EBITDA
                 
Interest and other income, net
    (11 )     (22 )  
Depreciation and amortization
    3,091       3,051    
Amortization of stock-based compensation
    152       278    
Provision for income tax
    -       2,175    
Adjusted EBITDA
  $ 2,505     $ 2,757    
 
 
 
 
 
 
23

 
Consolidated Results of Operations

The following table provides our selected consolidated results of operations for the indicated periods (in thousands of dollars and as a percentage of total revenue):
 
   
Years Ended December 31,
   
2014
 
2013
Revenue:
                       
Subscription
  $ 20,338       89.9 %   $ 19,356       87.9 %
Content license
    1,906       8.4 %     1,942       8.8 %
Management information reports
    154       0.7 %     435       2.0 %
Other
    227       1.0 %     287       1.3 %
Total revenue
    22,625       100.0 %     22,020       100.0 %
                                 
Cost of revenue (exclusive of depreciation and amortization included below)
    3,732       16.5 %     3,749       17.0 %
                                 
Gross margin
    18,893       83.5 %     18,271       83.0 %
                                 
Operating expenses:
                               
Sales and marketing expenses
    11,902       52.6 %     11,429       51.9 %
Technology and development expenses
    4,129       18.2 %     4,055       18.4 %
General and administrative expenses
    3,600       15.9 %     3,359       15.3 %
Total operating expenses
    19,631       86.7 %     18,843       85.6 %
Loss from operations
    (738 )     (3.2 %)     (572 )     (2.6 %)
Interest and other income, net
    11       0.0 %     22       0.1 %
Loss before income tax
    (727 )     (3.2 %)     (550 )     (2.5 %)
Provision for income taxes
    -       0.0 %     2,175       9.9 %
Net loss
  $ (727 )     (3.2 %)   $ (2,725 )     (12.4 %)


Comparison of Years Ended December 31, 2014 and 2013
 
Revenue
Total revenue for the years ended December 31, 2014 and 2013 was $22.6 million and $22.0 million, respectively.  Subscription revenue for the year ended December 31, 2014 grew 5% over the same periods in 2013.  Our annual operating initiatives are designed to drive subscription revenue growth as discussed in the Management Overview section above.

Cost of Revenue
Cost of revenues for the years ended December 31, 2014 and 2013 were as follows (in thousands):
 
               
Increase / (Decrease)
 
   
2014
   
2013
   
Amount
   
Percent
 
Twelve months ended December 31,
  $ 3,732     $ 3,749     $ (17 )     (0 %)
Percentage of Revenue
     16      17                

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 periods was due to individually immaterial changes.
 
 
24

 
Sales and Marketing
Sales and marketing expenses for the years ended December 31, 2014 and 2013 were as follows (in thousands):
 
               
Increase / (Decrease)
 
   
2014
   
2013
   
Amount
   
Percent
 
Twelve months ended December 31,
  $ 11,902     $ 11,429     $ 473       4 %
Percentage of Revenue
    53 %     52 %                

The increase in expenses for the comparable periods is primarily related to a $366,000 increase in commission expenses as a result of higher bookings, and a $105,000 increase due to a reduction in costs capitalized as internal software costs attributable to the nature of development efforts during 2014.

Technology and Development
Technology and development expenses for the years ended December 31, 2014 and 2013 were as follows (in thousands):
 
               
Increase / (Decrease)
 
   
2014
   
2013
   
Amount
   
Percent
 
Twelve months ended December 31,
  $ 4,129     $ 4,055     $ 74       2 %
Percentage of Revenue
    18 %     18 %                

The increase in expenses for the comparable periods is primarily attributed to a $115,000 increase in amortization of licensed software offset by a $49,000 decrease in facilities cost due to elimination of long-distance calls upon installation of new phone system and other individually immaterial changes.

General and Administrative
General and administrative expenses for the years ended December 31, 2014 and 2013 were as follows (in thousands):

               
Increase / (Decrease)
 
   
2014
   
2013
   
Amount
   
Percent
 
Twelve months ended December 31,
  $ 3,600     $ 3,359     $ 241       7 %
Percentage of Revenue
    16 %     15 %                
 
The increase in expenses for the comparable periods is related to a $172,000 increase in payroll related costs primarily a result of filling positions in 2014 that were open in 2013 and other individually immaterial changes.

Other Income, Net
Other income, net consists of interest earned on our investment accounts, interest expense associated with capital leases and other miscellaneous income or expense.  Other income, net was $11,000, and $22,000 for the years ended December 31, 2014 and 2013, respectively.

Provision for Income Taxes
We had approximately $24.8 million and $24.9 million in net deferred tax assets, excluding valuation allowance, as of December 31, 2014 and December 31, 2013, respectively.  We consider our three-year earnings trend to determine if we have generated cumulative net taxable income or net taxable losses over that period, which the accounting guidance considers significant evidence to evaluate in determining existence and amount of any valuation allowance.  Beginning in the fourth quarter of 2012, we have invested to accelerate top line revenue growth, but revenues did not accelerate as planned in 2013.  As a result, we incurred net losses in each of the last nine quarters ended December 31, 2014.  If projections under our 2015 operating plan are realized, we expect to be in a cumulative three-year net loss position at the end of 2015.  Although the 2015 operating plan projects higher revenue, operating cash flow and Adjusted EBITDA compared to 2014, as a result of the projected cumulative three-year net loss, it is our best judgment that we should conclude that our net deferred tax assets are not more-likely-than-not to be utilized.  Accordingly we have maintained the valuation allowance as of December 31, 2014 at 100% of our net deferred tax assets. In December 2013, we increased our valuation allowance to 100% of our net deferred tax assets, which resulted in $2.2 million being recognized as a provision for income taxes in 2013. We have maintained our valuation allowance at 100% of net deferred tax assets as of December 31, 2014.
 
 
25

 
 Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents and short-term investments.  Our combined cash and cash equivalents and short term investments were $8.0 million at December 31, 2014.  At December 31, 2014 we held $6.4 million in FDIC insured or U.S. government backed short-term investments.

On April 2, 2013, we repurchased 1.2 million shares of our outstanding common stock from a third party at $3.50 per share for a total purchase price of approximately $4.3 million, excluding transaction fees of approximately $48,000.  We believe that our remaining cash, cash equivalents and short term investments balance is adequate to fund operations until free cash flow accelerates in the future.

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, 2013 to December 31, 2014, cash and cash equivalents decreased by $0.5 million for the reasons described below.

Operating Activities
 
Net cash provided by operating activities was $2.7 million and $3.0 million for the years ended December 31, 2014 and 2013, respectively.  The decrease in operating cash flow is primarily due to lower cash receipts from our customers net of cash payments to vendors.

Investing Activities
 
Net cash used by investing activities was $3.3 million and $187,000 for the years ended December 31, 2014, and 2013, respectively.

Purchases of property and equipment and investments in internal use software decreased by $611,000 in the twelve months of 2014 compared to the same period in 2013.  We purchased $11.7 million and $10.5 million in short term investments during the twelve months of 2014 and 2013, respectively.  During the twelve months of 2014 we received $10.8 million from the sale and maturity of investments, compared to $13.5 million during the same period of 2013.  In addition, pursuant to our new lease agreement, we have established a stand by letter of credit during 2013 which required a security deposit of $150,000.

Financing Activities
 
Net cash provided by financing activities was $53,000 for the year ended December 31, 2014, compared to $4.7 million of net cash used in financing activities for the year ended December 31, 2013.  The increase in cash provided by financing activities is due to $4.4 million of stock repurchase (including transaction fees) included in the year ended December 31, 2013, a $121,000 increase in proceeds from stock options exercises and purchases under employee stock purchase plan, and a $186,000 decrease in principal payments on capital leases.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2014.


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The registrant is a Smaller Reporting Company and, therefore, is not required to provide the information under this item.
 
 
26

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
Onvia, Inc.

We have audited the accompanying consolidated balance sheet of Onvia, Inc. (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, comprehensive (loss)/income, stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the Index and appearing in Item 15. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position Onvia, Inc. as of December 31, 2014, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 
/s/ Moss Adams LLP
 
Seattle, Washington
March 17, 2015
 
27

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Onvia, Inc.
Seattle, Washington

We have audited the accompanying consolidated balance sheets of Onvia, Inc. and subsidiary (the ''Company'') as of December 31, 2013, and the related consolidated statements of operations and comprehensive (loss)I income, stockholders' equity, and cash flows for the year ended December 31, 2013. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013, and the results of their operations and their cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
 
/s/ DELOITTE & TOUCHE LLP
 
Seattle, Washington
March 28, 2014
 
 
 
 
28

 
ITEM 8.                      CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
ONVIA, INC.
 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
  

   
December 31,
2014
   
December 31,
2013
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 1,576,799     $ 2,072,865  
Short-term investments, available-for-sale
    6,436,289       5,463,406  
Accounts receivable, net of allowance for doubtful accounts of $42,491 and $24,751
    1,735,009       1,332,509  
Prepaid expenses and other current assets
    682,240       570,098  
Total current assets
    10,430,337       9,438,878  
                 
LONG TERM ASSETS:
               
Property and equipment, net of accumulated depreciation
    1,357,683       1,773,012  
Internal use software, net of accumulated amortization
    5,059,365       5,432,808  
Long-term investments
    -       90,444  
Other long-term assets
    180,980       173,824  
Total long term assets
    6,598,028       7,470,088  
                 
TOTAL ASSETS
  $ 17,028,365     $ 16,908,966  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 873,433     $ 834,215  
Accrued expenses
    1,097,570       959,652  
Unearned revenue, current portion
    8,478,327       7,770,502  
Other current liabilities
    81,594       244,060  
Total current liabilities
    10,530,924       9,808,429  
                 
LONG TERM LIABILITIES:
               
Unearned revenue, net of current portion
    404,980       649,681  
Deferred rent, net of current portion
    590,346       586,071  
Other long-term liabilities
    68,605       97,704  
Total long term liabilities
    1,063,931       1,333,456  
                 
TOTAL LIABILITIES
    11,594,855       11,141,885  
                 
COMMITMENTS AND CONTINGENCIES (Note 10)
               
                 
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; 8,643,460 and 8,577,732 shares issued; and 7,400,653 and 7,345,189 shares outstanding
    740       735  
Treasury stock, at cost: 1,242,807 and 1,242,807 shares
    (4,397,803 )     (4,397,803 )
Additional paid in capital
    353,852,218       353,458,109  
Accumulated other comprehensive loss
    (562 )     (156 )
Accumulated deficit
    (344,021,083 )     (343,293,804 )
Total stockholders’ equity
    5,433,510       5,767,081  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 17,028,365     $ 16,908,966  
 
 
See notes to consolidated financial statements.  
 
 
29

 
ONVIA, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2014 AND 2013
 
   
2014
   
2013
 
Revenue
           
Subscription
  $ 20,338,249     $ 19,356,245  
Content license
    1,905,431       1,941,864  
Management information reports
    154,067       434,411  
Other
    226,981       287,251  
Total revenue
    22,624,728       22,019,771  
                 
Cost of revenue (exclusive of depreciation and amortization included below)
    3,731,608       3,749,178  
                 
Gross margin
    18,893,120       18,270,593  
                 
Operating expenses:
               
Sales and marketing
    11,902,667       11,429,045  
Technology and development
    4,128,838       4,054,399  
General and administrative
    3,600,064       3,359,214  
 Total operating expenses
    19,631,569       18,842,658  
                 
Loss from operations
    (738,449 )     (572,065 )
                 
Interest and other income, net
    11,170       22,490  
                 
Loss before income tax
    (727,279 )     (549,575 )
                 
Provision for income taxes
    -       2,175,000  
                 
Net loss
  $ (727,279 )   $ (2,724,575 )
                 
Unrealized loss on available-for-sale securities
    (406 )     (1,437 )
                 
Comprehensive loss
  $ (727,685 )   $ (2,726,012 )
                 
Basic and diluted net loss per common share
  $ (0.10 )   $ (0.36 )
                 
Basic and diluted weighted average shares outstanding
    7,385,740       7,638,452  
 

See notes to consolidated financial statements.
 
 
30

 
ONVIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2014 AND 2013
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net loss
  $ (727,279 )   $ (2,724,575 )
Adjustments to reconcile net loss to net cash provided by operating activities:
 
Depreciation and amortization
    3,091,441       3,051,283  
Idle lease accrual
    -       (73,571 )
Stock-based compensation
    151,778       277,596  
Deferred taxes
    -       2,175,000  
Change in operating assets and liabilities:
               
Accounts receivable
    (402,500 )     (54,947 )
Prepaid expenses and other assets
    (119,688 )     (10,967 )
Accounts payable
    109,449       2,335  
Accrued expenses
    137,918       168,632  
Unearned revenue
    463,124       156,517  
Deferred rent
    24,629       55,038  
                 
Net cash provided by operating activities
    2,728,872       3,022,341  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
         
Additions to property and equipment
    (302,220 )     (847,378 )
Additions to internal use software
    (2,093,085 )     (2,158,906 )
Purchases of investments
    (11,731,313 )     (10,495,645 )
Sales of investments
    1,570,016       3,255,517  
Maturities of investments
    9,278,860       10,210,229  
Security deposits
    (19 )     (150,369 )
                 
Net cash used in investing activities
    (3,277,761 )     (186,552 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
         
Principal payments on capital lease obligations
    (189,513 )     (375,348 )
Repurchase of stock
    -       (4,397,674 )
Proceeds from exercise of stock options and purchases under employee stock purchase plan
    242,336       121,698  
                 
Net cash provided by / (used in) financing activities
    52,823       (4,651,324 )
                 
Net decrease in cash and cash equivalents
    (496,066 )     (1,815,535 )
                 
Cash and cash equivalents, beginning of period
    2,072,865       3,888,400  
                 
Cash and cash equivalents, end of period
  $ 1,576,799     $ 2,072,865  
                 
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
Unrealized loss on available-for-sale investments
  $ (406 )   $ (1,437 )
Purchases under capital lease obligations
    (6,134 )     (117,354 )
Property and equipment additions in accounts payable
    (48,995 )     (28,978 )
Internal use software additions in accounts payable
    (135,916 )     (225,809 )
 

See notes to consolidated financial statements.
 
 
31

 
ONVIA, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2014 AND 2013
 
   
Common stock
   
Treasury stock
   
Additional
   
Accumulated other
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
paid in capital
   
comprehensive loss
   
deficit
   
Total
 
                                                 
BALANCE, January 1, 2013
    8,528,281       853       26       (129 )     353,077,517       1,281       (340,569,229 )     12,510,293  
Exercise of stock options
    56,495       6                       145,723                       145,729  
Stock options held for taxes
    (15,847 )     (2 )                     (56,098 )                     (56,100 )
Purchases under Employee Stock Purchase Plan
    8,777       1                       32,191                       32,192  
Stock repurchase
    (1,242,781 )     (124 )     1,242,781       (4,397,674 )                             (4,397,798 )
Stock-based compensation
                                    277,596                       277,596  
Restricted stock units released
    13,954       1                                               1  
Restricted stock units held for taxes
    (3,690 )                             (18,820 )                     (18,820 )
Unrealized loss on available-for-sale investments
                                      (1,437 )             (1,437 )
Net loss
    -       -       -       -       -       -       (2,724,575 )     (2,724,575 )
BALANCE, December 31, 2013
    7,345,189     $ 735       1,242,807     $ (4,397,803 )   $ 353,458,109     $ (156 )   $ (343,293,804 )   $ 5,767,081  
                                                                 
Exercise of stock options
    45,791       5                       204,580                       204,585  
Purchases under Employee Stock Purchase Plan
    9,673                               37,751                       37,751  
Stock-based compensation
                                    151,778                       151,778  
Unrealized loss on available-for-sale investments
                                      (406 )             (406 )
Net loss
    -       -       -       -       -       -       (727,279 )     (727,279 )
BALANCE, December 31, 2014
    7,400,653     $ 740       1,242,807     $ (4,397,803 )   $ 353,852,218     $ (562 )   $ (344,021,083 )   $ 5,433,510  


See notes to consolidated financial statements.
 
 
32

 
ONVIA, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
 
Note 1:
Summary of Significant Accounting Policies
 
Description of business
Onvia (“Onvia” or the “Company”) is a leading provider of business information and research solutions that help companies plan, market and sell to government agencies throughout the United States, or U.S.  Onvia’s business solution provides clients online access to a proprietary database of government procurement opportunities across the federal, state, local, and education sectors.  The business intelligence derived from our database allows clients to identify new market opportunities, analyze market trends, and obtain insights about their competitors and channel partners.  The Company believes its business solutions provide clients with a distinct competitive advantage, increased revenue opportunities, and strategic insight into the public sector market.

Basis of consolidation
Onvia had a wholly-owned subsidiary in Canada that was dissolved effective December 19, 2014; however, there was no business activity in this subsidiary in the fiscal years ended December 31, 2014 or 2013.  The wholly-owned subsidiary owned no assets or liabilities as of the date of dissolution.

Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires the Company’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include the fair value of stock-based compensation, allowance for doubtful accounts, recoverability of long-lived assets, and the valuation allowance for 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.

Revenue recognition
Onvia’s revenues are primarily generated from client subscriptions, content licenses and management reports.  Onvia’s subscriptions are generally annual contracts; however, the Company also offers extended multi-year contracts to its subscription clients, and content licenses are generally multi-year agreements.  Subscription fees and content licenses are recognized ratably over the term of the agreement.  Onvia also generates revenue from fees charged for management reports, document download services, and other services; revenue from these types of services is recognized upon delivery, or, if report refreshes are included, ratably over the service period.

Onvia’s subscription services and management reports are also sold together as a bundled offering.  The Company allocates revenue from these bundled sales ratably between the subscription services and the management reports based on established list prices for those offerings. The Company measures and allocates arrangement consideration to one or more units of accounting for separate deliverables.  The Company also establishes a selling price hierarchy for determining the selling price of a deliverable.

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

Fair value of financial instruments
Onvia’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, security deposits, accounts payable, and accrued liabilities.  The carrying amounts of the current portion of the financial instruments approximate fair value due to their short maturities.  The carrying value of the long-term portion of security deposits approximates fair value as the interest rate is at market value.  All investments, when held, are classified as available-for-sale and are reported at fair value based on market quotes, and unrealized gains or losses on these investments are recorded in stockholders’ equity and reported in comprehensive income.


 
33

 
Cash, cash equivalents and investments
Onvia considers all highly liquid instruments with remaining maturities at purchase of 90 days or less to be cash equivalents.  The fair value of the money market funds, included in cash equivalents, at December 31, 2014 and 2013, was classified as Level 1, as amounts were based on quoted prices available in active markets for identical investments as of the reporting date.  Investments with original maturities of greater than 90 days, but with remaining maturities of less than one year are classified as short-term, and investments with remaining maturities of 365 days or greater are classified as long-term.  All investments are classified as available-for-sale and reported at fair value based on market quotes, and unrealized gains or losses on these investments are recorded in stockholders’ equity and reported in comprehensive income.

Management of credit risk
Onvia is subject to concentration of credit risk, primarily from its investments and customer contracts.  Onvia manages its credit risk for investments by purchasing investment-grade securities and diversifying its investment portfolio among issuers and maturities.  Currently, the Company invests primarily in FDIC insured or government backed funds and securities to mitigate the credit risk associated with its investment portfolio.  The Company manages credit risks on customer contracts by adhering to common underwriting practices.
 
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 remaining term of the underlying lease.

The Company periodically evaluates its long-lived assets for impairment.  An impairment loss would 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 the Company’s long-lived assets might be impaired, the Company analyzes the estimated undiscounted future cash flows to be generated from the applicable asset.  In addition, the Company records an impairment loss to the extent that the carrying value of the asset exceeds the fair value of the asset.  Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.  No assets were impaired during the years ended December 31, 2014 or 2013.
 
Internal use software
All qualifying costs related to the development of internal use software, other than those incurred during the application development stage, are expensed as incurred.  Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software.  Capitalized software costs are amortized on a straight-line basis over their expected economic lives, 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 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 for impairment as described above under “Property and equipment.”  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 years ended December 31, 2014 or 2013.

Income taxes
Onvia accounts 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 basis, 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.  The deferred tax asset has been reduced by a valuation allowance that reduces the amount of our deferred tax asset to a level that is more-than-likely-than-not to be recognized.  In determining the amount of the valuation allowance the Company considers whether it is more likely that some portion or all of the net deferred tax assets will not be realized.  In particular, the Company considers its three-year earnings trend to determine if it has generated cumulative net income or net losses over that period, which the accounting guidance considers significant evidence to evaluate in determining the existence and amount of any valuation allowance.  Onvia also considers positive evidence, such as improving trends in the leading indicators of revenue growth to evaluate the likelihood of generating taxable net income in the future.  The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to be deductible.  The Company will continue to review the estimate of future taxable income and will adjust the valuation allowance accordingly as new information becomes available.
 
 
34

 
Treasury stock
Onvia accounts for treasury stock using the cost method.  In April 2013, Onvia repurchased 1,242,781 shares of common stock as discussed in Note 13. As of December 31, 2014, the Company held 1,242,807 shares of treasury stock with a cost basis of $4,397,803.  The Company holds the treasury shares to fund matching contributions to its 401K retirement plan for employee contributions.  As discussed in Note 11, no treasury shares were used to fund matching contributions for 2014 or 2013 employee contributions.
 
Other comprehensive income or loss
Comprehensive income or loss is the change in equity from transactions and other events and circumstances other than those resulting from investments by and distributions to owners.  Other comprehensive income or loss for Onvia consists of unrealized gains and losses on available-for-sale investments.
 
Net income or loss per share
Basic income or loss per share is calculated by dividing net income or loss for the period by the weighted average shares of common stock outstanding for the period.  Diluted earnings per share is calculated by dividing 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 antidilutive.

For the year ended December 31, 2014, options to purchase 1,075,924 shares of common stock were not included in the calculation because the effect would have been anti-dilutive.  For the year ended December 31, 2013, options to purchase 454,684 shares of common stock were not included in the calculation because the effect would have been anti-dilutive. 

Recent 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 2017 and early adoption is not permitted. The Company is currently assessing the impact the guidance will have upon adoption.

Note 2:
Stock-Based Compensation and Stock Option Activity

Onvia measures compensation cost for all stock-based awards at fair value on the date of grant.  The fair value of stock options is determined using the Black-Scholes valuation model.  Such value is recognized as expense over the service period, net of estimated forfeitures.  The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.  Management considers many factors when estimating expected forfeitures, including employee class, historical experience and expected future activity.  Actual results, and future changes in estimates, may differ substantially from management’s estimates.

Stock-Based Benefit Plans

Onvia, Inc. 2008 Equity Incentive Plan
The Onvia, Inc. 2008 Equity Incentive Plan, or the 2008 Plan, was adopted in September 2008 and it amended and restated the previous 1999 Stock Option Plan, or the 1999 Plan.  Shares that were outstanding from the 1999 Plan will continue to be outstanding under that plan until forfeited, at which time they would be added back to the 2008 Plan.  The 2008 Plan provides for the issuance of incentive and nonqualified common stock options, stock awards, restricted stock, restricted stock units and stock appreciation rights.  Awards under this plan can be granted for ten years after the adoption date.  The 2008 Plan requires that the exercise price for all options to be at least 100% of the fair market value of the underlying shares on the date of grant.  The 2008 Plan contains specific provisions that govern awards in the event of a change in control and provides for compliance with the requirements of Section 409A of the Internal Revenue Code to the extent that awards are treated as deferred compensation.  All employees, officers, directors and consultants of Onvia are eligible to participate in the 2008 Plan, although it is not anticipated that every eligible employee or consultant will receive awards.  Options under this plan vest in increments over time, but typically have either a four or five year vesting schedule, normally with 25% or 20%, respectively, vesting one year from the grant date and ratable monthly vesting thereafter.  As of December 31, 2014 the total number of options outstanding and the number of shares available for issuance under the 2008 Plan were 725,175 and 875,126 respectively.
 
 
35

 
2000 Directors’ Stock Option Plan
In March 2000, Onvia adopted a Directors’ Stock Option Plan or the Directors’ Plan.  This plan expired on February 28, 2010.  Options granted under this plan will remain active and will continue to vest according to the original grant provisions.  Grants were made under this plan to each eligible board member on the date such person was first elected or appointed as a board member.  At each annual stockholders’ meeting, each non-employee director was granted an additional option to purchase 1,000 shares of common stock under the Directors’ Plan, provided such person had been a board member of Onvia for at least the prior six months.  The initial option grants under the Directors’ Plan vested 25% each year for four years on the anniversary of the date of grant had a term of ten years, and an exercise price equal to the closing price of Onvia’s stock on the grant date.  The annual grants vest in full one year from the date of grant, have a ten year life, and an exercise price equal to the closing price on the date of grant.  As of December 31, 2008, all shares available for issuance under the Directors’ Plan had been granted.  Accordingly, on October 23, 2008, the Board of Directors approved the stock option grants with the same terms described above (historically made under our Directors’ Plan) under the Company’s 2008 Equity Incentive Plan.          

Employee Stock Purchase Plan
In May 2000, Onvia adopted the 2000 Employee Stock Purchase Plan, or ESPP, and initially authorized 60,000 shares of common stock for issuance under the ESPP.  Each year, the number of shares authorized for issuance under the ESPP is increased by the lesser of: 1% of the total number of shares of common stock then outstanding; 60,000 shares; or a lesser number of shares as determined by the Board of Directors.  Under the ESPP, an eligible employee may purchase shares of Onvia common stock, based on certain limitations, at a price equal to the lesser of 85% of the fair market value of the common stock at the beginning or end of the respective offering period.  This plan is compensatory under the provisions of ASC 718 and the fair value of purchases under the ESPP is recognized as compensation expense over the term of the awards. The ESPP purchases shares on a semi-annual basis.  The total number of shares authorized for future issuance under the ESPP as of December 31, 2014 was 472,624 shares.

Impact on Results of Operations

The impact on Onvia’s results of operations of recording stock-based compensation for the years ended December 31 was as follows:

   
2014
   
2013
   
Cost of sales
  $ 5,119     $ 7,719    
Sales and marketing
    3,759       50,916    
Technology and development
    20,248       40,950    
General and administrative
    122,652       178,011    
Total stock-based compensation
  $ 151,778     $ 277,596    
 
 
 
 
36

 
Valuation Assumptions

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 the years ending December 31:

   
2014
   
2013
   
Risk-free interest rate
    1.67 %     1.29 %  
Expected volatility
    48 %     53 %  
Expected dividends
    0 %     0 %  
Expected life (in years)
    5.0       5.1    
 
The fair value of each employee purchase under the 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 purchase periods beginning during the years ended December 31 under the ESPP:

   
2014
   
2013
   
Risk-free interest rate
    0.05 %     0.08 %  
Expected volatility
    36 %     32 %  
Expected dividends
    0 %     0 %  
Expected life (in years)
    0.5       0.5    

Risk-Free Interest Rate
The average risk free interest rate was determined based on the market yield for U.S. Treasury securities for the expected term of the grant at the time of grant.

Expected Volatility
Management used the historical volatility of Onvia’s common stock to estimate the future volatility of its common stock over the expected term of the options granted for purposes of estimating the fair value of options granted during 2014 and 2013.

Expected Dividends
Management does not currently intend to pay dividends; therefore, this assumption is set at 0%.

Expected Life
Onvia’s computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting schedules and expectations of future employee behavior.  Management estimated future exercise and cancellation behavior, generally by assuming that remaining shares would be exercised or cancelled ratably over their remaining contractual term, adjusted for certain expectations of future employee behavior.  Management examined the behavior patterns separately for distinct groups of employees that have similar historical experience.
 
 
37

 
Stock Option Activity

The following table summarizes activity under Onvia’s equity incentive plans for the year ended December 31, 2014:
 
   
Options
Outstanding
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term (in years)
   
Aggregate
Intrinsic
Value (1)
 
                         
Total options outstanding at January 1, 2014
    1,133,744     $ 4.68              
Options granted
    56,000       4.64              
Options exercised
    (45,791 )     4.47              
Options forfeited and cancelled
    (254,361 )     6.36              
Total options outstanding at December 31, 2014
    889,592     $ 4.20              
                             
Options exercisable at December 31, 2014
    670,737     $ 4.38       4.76     $ 849,986  
Options vested and expected to vest at December 31, 2014
    874,787     $ 4.21       5.44     $ 1,134,222  
 
(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 $5.02 at December 31, 2014 for options that were in-the-money at December 31, 2014.  The number of in-the-money options outstanding and exercisable at December 31, 2014 was 689,875 and 482,142 respectively.

The weighted average grant date fair value of options granted during the years ended December 31, 2014 and 2013 was $2.01 and $1.91 per share, respectively.  The total intrinsic value of options exercised during the years ended December 31, 2014 and 2013 was $36,567 and $59,646, respectively.

As of December 31, 2014, there was approximately $136,000 of unrecognized compensation costs related to unvested stock options and estimated purchases under the ESPP.  That cost is expected to be recognized over a weighted average period of 1.16 years.

During the years ended December 31, 2014 and 2013, respectively, approximately $242,000 and $122,000 was received for exercises of stock options and purchases under Onvia’s ESPP.

Restricted Stock Units

The following table summarizes changes in non-vested restricted stock units (“RSUs”) for the year ended December 31, 2013:

   
Number of
shares
   
Weighted Average
 Grant Date Fair
Value
   
Non-vested balance at January 1, 2013
    13,954     $ 4.12    
Granted
    -       -    
Vested
    (13,954 )     4.12    
Forfeited / Expired
    -       -    
Non-vested balance at December 31, 2013
    -     $ -    

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 and were subject to accelerated vesting based upon achievement of 2011 financial targets.  The 2011 financial targets were not achieved and these RSU’s were fully vested on December 31, 2013. Net shares released on December 31, 2013 were 10,264 and 3,690 shares were withheld to cover taxes. Closing price per share on release date was $4.96.  No RSUs were granted during 2014.

 
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 Note 3:
Short-Term and Long-Term Investments

Onvia classifies short-term and long-term investments in debt securities as available-for-sale, stated at fair value as summarized in the following table:

   
December 31, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
                         
U.S. Government backed securities
  $ 157,790     $ 58     $ -     $ 157,848  
Certificates of Deposit  (1)
    6,278,988       -       (547 )     6,278,441  
    $ 6,436,778     $ 58     $ (547 )   $ 6,436,289  

(1) We evaluated certificates of deposits held as of December 31, 2014 and concluded that they meet the definition of securities.

   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Short-Term Investments
                       
U.S. Government backed securities
  $ 2,251,972     $ 438     $ (234 )   $ 2,252,176  
Certificates of Deposit  (1)
    3,211,546       229       (545 )     3,211,230  
Total Short-Term Investments
    5,463,518       667       (779 )     5,463,406  
Long-Term Investments
                               
Certificates of Deposit  (1)
    90,444       -       -       90,444  
Total Long-Term Investments
    90,444       -       -       90,444  
Total Investments
  $ 5,553,962     $ 667     $ (779 )   $ 5,553,850  

(1) We evaluated certificates of deposits held as of December 31, 2013 and concluded that they meet the definition of securities.

Onvia accounts for short-term investments at fair value 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.  Onvia applies a fair value hierarchy to its investments, 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; and

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.
 
 
39

 
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 tables summarize, by major security type, short-term and long-term investments classified as available-for-sale at December 31, 2014 and 2013, stated at fair value:

   
Fair Value Measurements as of December 31, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Balance as of
December 31, 2014
 
                         
U.S. Government backed securities
  $ -     $ 157,848     $ -     $ 157,848  
Certificate of Deposit
    -       6,278,441       -       6,278,441  
    $ -     $ 6,436,289     $ -     $ 6,436,289  
 
   
Fair Value Measurements as of December 31, 2013
 
   
Level 1
   
Level 2
   
Level 3
   
Balance as of
December 31, 2013
 
                         
U.S. Government backed securities
  $ -     $ 2,252,176     $ -     $ 2,252,176  
Certificate of Deposit
    -       3,301,674       -       3,301,674  
    $ -     $ 5,553,850     $ -     $ 5,553,850  

There were no transfers in or out of Level 1 or Level 2 investments during the year ended December 31, 2014 or the fourth quarter of 2013, and there was no activity in Level 3 fair value measurements during that period.

Note 4:
Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following at December 31:
 
   
2014
   
2013
   
Prepaid expenses
  $ 672,957     $ 525,739    
Interest receivable
    4,351       14,027    
Other receivables
    4,932       30,332    
    $ 682,240     $ 570,098    

Note 5:
Security Deposits

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 increasing from $100,000 in April 2013, to $125,000 in January 2014 and to $150,000 on January 2015.  The letter of credit will be returned at lease termination in April 2021 or earlier as discussed above, subject to standard office lease conditions. As of December 31, 2014, the stand by letter of credit is secured by a security deposit of $150,000.
 
 
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Note 6:
Property and Equipment
 
Property and equipment consists of the following at December 31:
 
   
2014
   
2013
   
               
Computer equipment
  $ 3,675,759     $ 3,575,819    
Software
    1,855,785       1,837,536    
Furniture and fixtures
    108,539       107,113    
Leasehold improvements
    882,602       882,602    
 
                 
Total cost basis
    6,522,685       6,403,070    
                   
Less accumulated depreciation and amortization
    (5,165,002 )     (4,630,058 )  
                   
Net book value
  $ 1,357,683     $ 1,773,012    

During the year ended December 31, 2014, Onvia disposed of fully depreciated computer equipment valued at $180,000 compared to disposal of $1,051,000 of fully depreciated computer equipment for the same period in 2013.

Depreciation expense was $715,000 and $746,000 for the years ended December 31, 2014 and 2013, respectively.
 
Note 7:
Internal Use Software
 
Onvia capitalizes qualifying computer software costs incurred during the “application development stage” and other costs as permitted.  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 years ended December 31, 2014:

   
Balance at
December 31, 2013
     
Additions
    Balance at
December 31, 2014
   
Capitalized Internal Use Software
  $ 15,103,914     $ 2,003,192     $ 17,107,106    
Accumulated amortization
    (9,671,106 )     (2,376,635 )     (12,047,741 )  
    $ 5,432,808     $ (373,443 )   $ 5,059,365    

Amortization expense related to capitalized software was $2.4 million and $2.3 million for the years ended December 31, 2014 and 2013, respectively.

Note 8:
Accrued Expenses
 
Accrued expenses consist of the following at December 31:

   
2014
   
2013
   
Payroll and related liabilities
  $ 965,558     $ 714,481    
Taxes payable and other
    132,012       245,171    
    $ 1,097,570     $ 959,652    

 
 
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  Other current liabilities consist of the following at December 31:

   
2014
   
2013
   
Obligations under capital leases, current portion
  $ 24,039     $ 17,701    
Deferred rent, current portion
    57,555       37,201    
Other current liabilities
    -       189,158    
    $ 81,594     $ 244,060    
 
Note 9:                      Income Taxes
 
The amount of current and deferred income tax expense included in the financial statements for the years ended December 31 was as follows:
 
   
2014
   
2013
   
Deferred Tax Expense
  $ -     $ 2,175,000    
Total Income Tax Expense
  $ -     $ 2,175,000    

The following table provides reconciliation between the statutory income tax rate and the Company’s effective tax rate for the years ended December 31:

   
2014
   
2013
   
Tax expense at statutory rate
    -34.0 %     34.0 %  
Stock-based compensation
    56.2 %     -9.1 %  
Amortization of goodwill
    -2.3 %     3.1 %  
Meals and entertainment
    2.5 %     -2.6 %  
Deferred tax asset adjustment
    2.1 %     0.0 %  
Valuation allowance