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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-29609
================================================================================
ONVIA.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1859172
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1260 Mercer Street
Seattle, Washington 98109
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code: (206) 282-5170
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Common stock, par value $.0001 per share: 86,665,903 shares outstanding as
of October 31, 2000.
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ONVIA.COM, INC.
INDEX
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Page
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PART I. FINANCIAL INFORMATION
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Item 1 Financial Statements. 3
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk. 23
PART II. OTHER INFORMATION
Item 1 Legal Proceedings. 24
Item 2 Changes in Securities and Use of Proceeds. 24
Item 3 Defaults Upon Senior Securities. 24
Item 4 Submission of Matters to a Vote of Security Holders. 24
Item 5 Other Information. 24
Item 6 Exhibits and Reports on Form 8-K. 25
SIGNATURES 26
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ONVIA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- ----------------
ASSETS (In thousands)
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 120,386 $ 38,518
Short-term investments 71,207 --
Accounts receivable, net 4,405 510
Inventory 3,856 1,360
Prepaid expenses and other current assets 7,180 1,414
------------ -----------
Total current assets 207,034 41,802
Property and equipment, net 18,955 6,177
Other assets, net 9,234 2,300
Goodwill, net 41,569 --
------------ -----------
Total assets $ 276,792 $ 50,279
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,259 $ 6,719
Accrued expenses and other 31,816 7,294
Current portion of long-term debt 3,663 4,482
------------ -----------
Total current liabilities 52,738 18,495
Long-term debt 4,027 5,171
------------ -----------
Total liabilities 56,765 23,666
------------ -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock and additional paid in capital 377,446 98,984
Unearned stock compensation (8,364) (14,195)
Accumulated deficit (149,055) (58,176)
------------ -----------
Total stockholders' equity 220,027 26,613
------------ -----------
Total liabilities and stockholders' equity $ 276,792 $ 50,279
============ ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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ONVIA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
------------------ --------------- ----------------- ------------------
(In thousands, except per share data) (In thousands, except per share data)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 45,332 $ 8,128 $ 96,094 $ 13,169
Cost of goods sold 47,010 9,657 103,542 15,709
------------- ------------ ------------- ------------
Gross margin (1,678) (1,529) (7,448) (2,540)
Operating expenses:
Sales and marketing 15,630 5,152 53,597 6,520
Technology and development 8,046 2,227 18,685 2,681
General and administrative 3,433 1,019 9,395 2,422
Noncash stock-based compensation 1,986 524 6,726 1,714
Amortization of goodwill 2,695 -- 2,695 --
------------- ------------ ------------- ------------
Total operating expenses 31,790 8,922 91,098 13,337
------------- ------------ ------------- ------------
Loss from operations (33,468) (10,451) (98,546) (15,877)
Interest income (expense), net 2,948 374 (7,183) (325)
------------- ------------ ------------- ------------
Net loss (30,520) (10,825) (91,363) (16,202)
Reduction of beneficial
conversion feature on
convertible preferred stock -- -- 287 --
------------- ------------ ------------- ------------
Net loss attributable to
common stockholders $ (30,520) $ (10,825) $ (91,076) $ (16,202)
============= ============ ============= ============
Basic and diluted net loss per
common share $ (0.39) $ (0.83) $ (1.48) $ (1.42)
============= ============ ============= ============
Basic and diluted weighted average
shares outstanding 77,832 12,982 61,663 11,390
============= ============ ============= ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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ONVIA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------
2000 1999
------------------ ---------------
(In thousands)
(Unaudited)
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Cash flows from operating activities:
Net loss $ (91,363) $ (16,202)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,565 637
Noncash stock-based compensation 6,726 1,714
Amortization of goodwill 2,695 --
Amortization of debt discount 492 70
Noncash interest expense related to issuance of
common stock warrants -- 242
Change in certain assets and liabilities,
net of effects from purchase transactions:
Accounts receivable, net (3,786) (142)
Inventory (2,496) (463)
Prepaid expenses and other current assets (5,691) (1,236)
Other assets (4,347) (1,019)
Accounts payable 7,547 2,902
Accrued expenses and other 25,499 2,748
------------ -----------
Net cash used in operating activities (59,159) (10,749)
Cash flows from investing activities:
Purchase of short-term investments (71,207) --
Cash acquired in purchase transactions 3,723 --
Direct costs of purchase transactions (1,862) --
Additions to property and equipment, net (15,671) (4,133)
Additions to capitalized internally developed software (3,823) --
------------ -----------
Net cash used in investing activities (88,840) (4,133)
Cash flows from financing activities:
Proceeds from convertible debt -- 975
Proceeds from issuance of long-term debt -- 9,164
Repayments on long-term debt (3,729) (509)
Proceeds from exercise of stock options and warrants 114 --
Net proceeds from issuance of Series A preferred stock -- 10,252
Net proceeds from issuance of Series B preferred stock -- 20,970
Net proceeds from issuance of common stock 233,839 13
Repurchase of preferred stock (476) --
------------ -----------
Net cash provided by financing activities 229,748 40,865
Effect of exchange rate changes on cash 119 9
------------ -----------
Net increase in cash and cash equivalents 81,868 25,992
Cash and cash equivalents, beginning of period 38,518 45
------------ -----------
Cash and cash equivalents, end of period $ 120,386 $ 26,037
============ ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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ONVIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Onvia.com, Inc. and its wholly owned subsidiaries, collectively
referred to as the "Company". The unaudited interim condensed consolidated
financial statements and related notes thereto have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. The accompanying interim condensed
consolidated financial statements and related notes thereto should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Registration Statement on Form S-1 (No.
333-93273), ("Registration Statement"), including the related prospectus
dated March 1, 2000.
The information furnished is unaudited, but reflects, in the opinion of
management, all adjustments, consisting of only normal recurring items,
necessary for a fair presentation of the results for the interim periods
presented. Interim results are not necessarily indicative of results for a
full year.
2. Net Loss Per Share
Historical basic and diluted earnings per share are calculated using the
weighted average shares of common stock outstanding, reduced for shares
subject to repurchase by the Company. For the nine months ended September
30, 2000 and 1999, stock options, warrants and nonvested common stock
totaling 13,225,100 and 55,804,706 shares respectively, are excluded from
the calculation of diluted net loss per share as they would be anti-
dilutive.
3. Stockholders' Equity
Initial Public Offering
In March 2000, the Company completed its initial public offering (the
"Offering") and issued 9,200,000 shares of its common stock to the public
at a price of $21.00 per share. The Company received net proceeds of $177.9
million. Concurrent with this Offering, the Company issued an additional
2,666,666 shares of its Common Stock to Internet Capital Group at a price
of $21.00 for net proceeds of $56.0 million.
4. Segment Information
The operating business segments reported below are the segments of the
Company for which separate financial information is available and for which
operating profit and loss amounts are evaluated and used by the chief
operating decision maker for making operating decisions, assessing
performance and deciding on how to effectively allocate resources. The
Company evaluates its operations based on the geography of its two
operations, the United States and Canada. The operating segment information
for 1999 and 2000 has been reported in accordance with the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
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<CAPTION>
U.S. Canada Totals
------------------- ------------- --------------
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 2000
-------------------------------------
Revenue $ 41,450 $ 3,882 $ 45,332
Net loss (28,607) (1,913) (30,520)
Total assets 273,702 3,090 276,792
Property and equipment, net 18,376 579 18,955
Other assets 9,192 42 9,234
Goodwill 41,569 41,569
Depreciation and amortization 1,983 63 2,046
Amortization of goodwill 2,695 2,695
Interest income, net 2,939 9 2,948
Noncash compensation expense 1,880 106 1,986
Three months ended September 30, 1999
-------------------------------------
Revenue $ 6,576 $ 1,552 $ 8,128
Net loss (10,322) (503) (10,825)
Total assets 37,481 718 38,199
Property and equipment, net 4,606 221 4,827
Other assets 946 25 971
Depreciation and amortization 512 13 525
Interest expense, net (374) (374)
Noncash compensation expense 504 20 524
Nine months ended September 30, 2000
------------------------------------
Revenue $ 85,908 $ 10,186 $ 96,094
Net loss (86,008) (5,355) (91,363)
Total assets 273,702 3,090 276,792
Property and equipment, net 18,376 579 18,955
Other assets 9,192 42 9,234
Goodwill 41,569 41,569
Depreciation and amortization 5,411 154 5,565
Amortization of goodwill 2,695 2,695
Interest income, net 7,164 19 7,183
Noncash compensation expense 6,401 325 6,726
Nine months ended September 30, 1999
------------------------------------
Revenue $ 9,917 $ 3,252 $ 13,169
Net loss (15,216) (986) (16,202)
Total assets 37,481 718 38,199
Property and equipment, net 4,606 221 4,827
Other assets 946 25 971
Depreciation and amortization 615 22 637
Interest expense, net (322) (3) (325)
Noncash compensation expense 1,628 86 1,714
</TABLE>
5. Acquisitions
Zanova, Inc.
On July 11, 2000, the Company completed its acquisition of Zanova, Inc.
("Zanova"). Zanova provides custom e-business solutions and web-based
applications that allow businesses to build commerce enabled web sites.
Pursuant to the terms of the Agreement and Plan of Reorganization and
related Certificate of Merger, collectively the "Merger Agreements", each
share of Zanova common stock was converted into the right to receive
0.211132 shares of the Company's common stock. In addition, the Company
assumed all issued and outstanding options and warrants to purchase shares
of Zanova common stock using an exchange ratio of 0.211132.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 2,470,520 shares of the Company's common stock with a fair market
value of approximately $16.9 million and exchanged options and warrants to
purchase 281,219 shares of the Company's common stock with a fair market
value of approximately $1.1 million. The Company incurred transaction costs
consisting primarily of professional fees of approximately $627,000,
resulting in a total purchase price of approximately $18.5 million. Under
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the terms of the Merger Agreements, 247,057 shares of common stock issued
are being held in an escrow account to secure and collateralize the
obligations of Zanova shareholders to the Company. The results of
operations of Zanova have been consolidated in the Company's results of
operations since July 11, 2000, the date of acquisition.
The total purchase price paid for the Zanova acquisition was allocated as
follows (in thousands):
Zanova
------------
Assets acquired at fair value $ 738
Liabilities acquired at fair value (322)
Goodwill 18,118
--------
Total $ 18,534
========
Globe-1, Incorporated
On August 10, 2000, the Company completed its acquisition of Globe-1,
Incorporated ("Globe-1"). Globe-1 provides electronic procurement services
in a proprietary government-to-business exchange. Pursuant to the terms of
the Agreement and Plan of Merger, "Merger Agreement", each share of Globe-1
common stock was converted into the right to receive 0.15957 shares of the
Company's common stock. In addition, the Company assumed each issued and
outstanding warrant to purchase shares of Globe-1 common stock using an
exchange ratio of 0.15957.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 2,351,705 shares of the Company's common stock with a fair market
value of approximately $21.6 million and exchanged warrants to purchase
531,054 shares of the Company's common stock with a fair market value of
approximately $3.0 million. The Company incurred transaction costs
consisting primarily of professional fees of approximately $204,000,
resulting in a total purchase price of approximately $24.8 million. Under
the terms of the Merger Agreement, 285,000 shares of common stock issued
are being held in an escrow account to secure and collateralize the
obligations of Globe-1 shareholders to the Company. The results of
operations of Globe-1 have been consolidated in the Company's results of
operations since August 10, 2000, the date of acquisition.
The total purchase price paid for the Globe-1 acquisition was allocated as
follows (in thousands):
Globe-1
------------
Cash $ 3,563
Assets acquired at fair value 452
Liabilities acquired at fair value (669)
Goodwill 21,422
--------
Total $ 24,768
========
Hardware.com, Inc.
On September 15, 2000, the Company completed its acquisition of
Hardware.com, Inc. ("Hardware.com"). A total of 149,250 shares of the
Company's common stock with a fair market value of approximately $1.0
million were issued to former preferred stockholders of Hardware.com. In
connection with the acquisition, the Company recorded net liabilities of
approximately $4.5 million, resulting in a total purchase price of
approximately $5.5 million. The total consideration exceeded the fair value
of the net assets acquired by approximately $4.8 million, which has been
recorded as goodwill. Under the terms of the Agreement and Plan of Merger
and related Certificate of Merger, 44,775 shares of common stock issued are
being held in an escrow account to secure and collateralize the obligations
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of Hardware.com shareholders to the Company. The results of operations of
Hardware.com have been consolidated in the Company's results of operations
since September 15, 2000, the date of acquisition.
Michael D. Pickett, the Company's Chairman and director since February
1999, was also Hardware.com's Chairman and Chief Executive Officer. Mr.
Pickett received no payment of consideration as a result of the
acquisition. However, Mr. Pickett became the Company's President and Chief
Operating Officer in connection with the acquisition.
All Acquisitions
The acquisitions were accounted for as purchase business combinations which
means that the purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair values on the date of
acquisition.
At September 30, 2000, total goodwill and the related accumulated
amortization in the Zanova, Globe-1 and Hardware.com acquisitions totaled
$41.6 million and $2.7 million, respectively. Goodwill is amortized over
the estimated useful lives of three years.
The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the nine months ended
September 30, 2000 and 1999 assuming Zanova, Globe-1 and Hardware.com had
been acquired at the beginning of the periods presented (in thousands,
except per share data):
Nine Months Ended September 30,
2000 1999
----------------- ------------
Revenue $ 97,443 $ 13,616
Net loss (117,729) (28,835)
Basic and diluted net loss per share $ (1.77) $ (1.76)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented
and are not intended to be a projection of future results.
6. Co-Branded Site Agreement with Visa USA Inc.
In July 2000, the Company entered into a custom co-branded site agreement
with Visa USA Inc. ("Visa") to create VisaBusiness.com, a site specifically
designed to help Visa's small business cardholders earn incremental revenue
through the use of the Company's exchange services. As part of the
agreement, Visa will also promote the co-branded site to its Member Banks.
Visa has agreed to make annual fixed payments totaling approximately $7.3
million to the Company over the three year term of the agreement, not
including annual sponsorship fees or Member Bank fees. Due to the nature of
the service, the Company recognizes the license revenue on a straight-line
basis over the term of the agreement. The Company will pay Visa specified
percentages of transaction fees generated at the co-branded site and will
record expense as transactions occur. As of September 30, 2000, the Company
has recorded approximately $4.2 million in deferred revenue related to this
agreement and has recognized approximately $235,000 in revenue during the
three months ended September 30, 2000.
7. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133, which will be effective for the
Company for the fiscal quarter beginning January 1, 2001, requires the
Company to recognize all derivatives as either assets or liabilities in the
Company's balance sheet and measure those instruments at fair value. The
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Company does not expect the effect of adopting the provisions of SFAS No.
133 to have a significant impact on the balance sheet, results of
operations or cash flows.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" (Interpretation No.
44). Interpretation No. 44 became effective July 1, 2000. The
interpretation clarifies the application of APB Opinion No. 25 for certain
issues, specifically, (a) the definition of an employee, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. The
adoption of Interpretation No. 44 did not have a significant impact on its
financial position or results of operations.
In May 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-14,"Accounting for Certain Sales Incentives." This consensus
provides guidance on the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a
customer as a result of, a single exchange transaction. This consensus must
be adopted no later than October 1, 2000. The Company does not expect the
adoption of this consensus to have a material impact on its financial
position or results of operations.
In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs." This consensus requires that all
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represent revenue and should be classified as revenue.
The Company already classifies shipping charges to customers as revenue.
The EITF did not reach a consensus with respect to the classification of
costs related to shipping and handling. The Company classifies fulfillment
costs such as outbound shipping to customers and credit card fees as cost
of sales.
8. Commitments and Contingencies
In February 2000, the Company entered into a strategic relationship with
America Online (AOL), under which AOL will provide its customers with
access to the Company's services and products, through an interactive co-
branded web site. As part of this relationship, the Company will provide to
AOL a web-based buying directory to act as the engine for AOL's business-
to-business e-commerce platform. In addition, AOL will promote the co-
branded site and will pay a percentage of the advertising revenue earned
from the co-branded web site. The Company has agreed to make fixed payments
of $18.2 million to AOL under this agreement. The Company is also required
to make additional payments to AOL if the number of new customers that it
acquires from AOL exceeds a specified level. Approximately $3.1 million of
this amount was paid following the execution of the agreement. The Company
believes that performance is below anticipated levels, and accordingly the
Company has not made certain contractual payments under the agreement. As
of September 30, 2000, the Company owed AOL approximately $8.5 million,
which is included in accrued expenses and other. During the quarter ended
September 30, 2000, the Company continued to record the AOL contractual
costs on a straight-line basis over 18 months resulting in sales and
marketing expense of $2.3 million and $6.1 million for the three and nine
months ended September 30, 2000, respectively. The Company and AOL are
currently in negotiation.
In February 2000, a potential investor filed a lawsuit in the Supreme Court
of British Columbia, Canada against the Company and its chief executive
officer for 50% of the Company's assets and 50% of the executive's equity
interest in the Company. The lawsuit alleges that the potential investor
and the Company's chief executive officer planned to form a company similar
to Onvia.com. Based upon investigations to date, the Company believes that
the allegations against it are without merit and that the outcome will not
harm its business. The Company believes that it has valid defenses to this
claim and intends to vigorously defend the action.
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In July 2000, the British Columbia Securities Commission notified the
Company that its directed share program offered to certain shareholders at
the time of the Company's Offering did not meet Canadian disclosure
requirements. The Company has recorded an estimate of the settlements as of
September 30, 2000. In October 2000, the Company tendered rescission rights
to selected shareholders as a remedy to this violation. The Company
believes that its obligation under the extended rescission rights will be
approximately $850,000.
From time to time the Company is subject to various other legal proceedings
that arise in the ordinary course of its business. Although the Company
cannot predict the outcomes of these proceedings with certainty, the
Company does not believe that the disposition of these matters will have a
material adverse effect on its financial position, results of operations or
cash flows.
9. Reorganization
In September 2000, the Company implemented a reorganization plan designed
to maximize operational efficiencies and reduce operating costs. As part of
this plan, the Company reduced its workforce by 87 employees, which
represented approximately 18 percent of the Company's employee base and
included employees from all areas of the Company. The Company recorded
employee severance costs of approximately $490,000, to be paid through
December 31, 2000. These accrued severance benefits are included in accrued
expenses and other at September 30, 2000. In addition, the Company
accelerated the vesting on 162,917 stock options and shares of non-vested
common stock, which resulted in an additional noncash compensation charge
of approximately $487,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties, including statements regarding the Company's capital
needs, business strategy and expectations. Any statements contained herein that
are not statements of historical facts may be deemed to be forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "expect", "plan", "intend",
"anticipate", "believe", "estimate", "predict", "potential" or "continue", the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should consider various factors, including the risks
outlined in the Risk Factors section below, and, from time to time, in other
reports the Company files with the SEC. These factors may cause the Company's
actual results to differ materially from any forward-looking statement. The
Company disclaims any obligation to publicly update these statements, or
disclose any difference between its actual results and those reflected in these
statements. The information constitutes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
RESULTS OF OPERATIONS
Overview
Onvia.com, Inc. (the "Company") is a leading business-to-business exchange for
small business buyers and sellers. The Company provides an exchange where small
businesses can access exchange services, buy products, obtain valuable news,
product and service information and access business forms and productivity
tools.
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The Company's exchange services include web hosting, a "request for quote"
service, and a proprietary government-to-business exchange that allows small
business users the opportunity to participate in government procurement
contracts.
On July 11, 2000, August 10, 2000 and September 15, 2000, the Company acquired
Zanova, Inc. ("Zanova"), Globe-1, Incorporated ("Globe-1") and Hardware.com,
Inc. ("Hardware.com"), respectively, primarily for their product and exchange
offerings and their technology and development teams. The Company accounted for
these acquisitions as purchase business combinations. Accordingly, Zanova's,
Globe-1's and Hardware.com's results of operations are included in the Company's
combined results from the date of the acquisitions. Please see Note 5 in the
Notes to the Condensed Consolidated Financial Statements for more detailed
information.
In July 2000, the Company entered into a custom co-branded site agreement with
Visa USA Inc. ("Visa") to create VisaBusiness.com, a site specifically designed
to help Visa's small business cardholders earn incremental revenue through the
use of the Company's exchange services. As part of the agreement, Visa will also
promote the co-branded solution to its Member Banks. Please see Note 6 in the
Notes to the Condensed Consolidated Financial Statements for more detailed
information.
The Company had a third quarter 2000 net loss of $30.5 million, or a loss of
$.39 per share, compared with a loss of approximately $10.8 million, or a loss
of $.83 per share, in the comparable period of 1999. Net loss for the nine-month
period ended September 30, 2000 was $91.4 million, or a loss of $1.48 per share,
compared with a loss of $16.2 million, or a loss of $1.42 per share, in the
comparable period of 1999.
Revenue
Revenue increased to $45.3 million and $96.1 million for the three and nine
months ended September 30, 2000 from $8.1 million and $13.2 million for the
comparable periods in 1999. The increase in revenue for both periods is
primarily due to the growth of our customer base and the continued increase in
repeat orders from existing customers. Through September 30, 2000, substantially
all of the Company's revenue was derived from product sales.
International revenues were $3.9 million in the third quarter of 2000, up 150%
from $1.6 million in the third quarter of 1999. On a year to date basis,
international revenues were $10.2 million, or approximately 11% of total
revenue, for the nine months ended September 30, 2000 compared with $3.3
million, or approximately 25% of total revenue, in the comparable period of
1999. The increase in total international revenues for both periods was due to
the growth in the Company's Canadian operations.
Gross Margin
Gross margin improved to a negative 3.7% and negative 7.8% for the three and
nine months ended September 30, 2000 from negative 18.8% and negative 19.3% for
the comparable periods of 1999. On a quarter over quarter basis, gross margin
improved from a negative 10.0% in the second quarter of 2000 to a negative 3.7%
in the third quarter of 2000. The improvement in gross margin for all periods is
attributable to increases in product pricing, lower product costs and an
increase in advertising revenues and transaction fees.
Sales and Marketing
Sales and marketing expenses were approximately $15.6 million and $53.6 million
for the three and nine months ended September 30, 2000, compared to $5.2 million
and $6.5 million for the comparable periods of 1999. The increase in sales and
marketing expenses in both periods is due to personnel and payroll related
expenses resulting from the growth in sales and marketing personnel and higher
advertising and marketing expenses associated with the Company's advertising and
marketing campaigns initiated during fiscal 2000.
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Technology and Development
Technology and development expenses were $8.0 million and $18.7 million for the
three and nine months ended September 30, 2000, compared to $2.2 million and
$2.7 million for the comparable periods of 1999. The increase in both periods is
attributable to contract engineering expenses related to contractors and
consultants and personnel and payroll related expenses resulting from
significant increases in technology and development personnel.
General and Administrative
General and administrative expenses were $3.4 million and $9.4 million for the
three and nine months ended September 30, 2000, compared to $1.0 million and
$2.4 million for the comparable periods of 1999. The increase in general and
administrative expenses in both periods is primarily attributable to personnel
and payroll related expenses resulting from increases in administrative
personnel and in legal, professional and recruiting fees.
Interest Income (Expense), Net
Interest income (expense), net, was $2.9 million and $7.2 million for the three
and nine months ended September 30, 2000, compared to $(374,000) and $(325,000)
for the comparable periods of 1999. This increase in both periods is due to
interest income earned on proceeds from the Company's initial public offering
held in money market funds and other short-term investments.
Noncash Stock-based Compensation
The Company records unearned stock compensation in the equity section of the
balance sheet. For employees, unearned stock compensation is the difference
between the fair market value of its common stock options for accounting
purposes and the exercise price of the options. For non-employees, unearned
stock compensation is the fair market value of the options using the Black
Scholes option-pricing model. These amounts are amortized on an accelerated
basis over the vesting period of the option, typically four years. At September
30, 2000, unearned stock compensation was $8.4 million, and the Company had
amortized $2.0 million and $6.7 million of noncash stock-based compensation
expense for the three and nine months ended September 30, 2000 compared to
$524,000 and $1.7 million in the comparable periods of 1999.
Amortization of Goodwill
Amortization of goodwill was $2.7 million for the three and nine months ended
September 30, 2000. The Company acquired Zanova, Inc., Globe-1, Incorporated and
Hardware.com, Inc. in the quarter ended September 30, 2000 and accounted for the
acquisitions as purchase business combinations. As a result of these
transactions the Company recorded goodwill on its balance sheet of $44.3
million, which the Company will amortize on a straight-line basis over the next
three years. See Note 5 in the Notes to the Condensed Consolidated Financial
Statements for a more detailed discussion of the Company's goodwill relating to
these acquisitions.
Provision for Income Taxes
The Company incurred net operating losses from March 25, 1997 (inception)
through September 30, 2000. Therefore, the Company has not recorded a provision
for income taxes. The Company has recorded a valuation allowance for the full
amount of the net deferred tax assets.
FINANCIAL CONDITION
Liquidity and Capital Resources
Prior to its initial public offering ("the Offering"), the Company financed its
operations primarily through the issuance of equity and debt securities. In
March 2000, the Company completed its Offering and issued 9,200,000 shares of
its Common Stock to the public at a price of $21.00 per share, raising net
proceeds of $177.9
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million. In addition, in March 2000, the Company sold to Internet Capital Group,
or ICG, 2,666,666 shares of its common stock at the initial public offering
price of $21.00 per share in a private placement transaction, which generated
net proceeds of $56.0 million.
The Company's combined cash, cash equivalents and short-term investments were
$191.6 million at September 30, 2000 compared to $38.5 million at December 31,
1999. The increase is due to proceeds received upon completion of the Company's
Offering and private placement in March 2000, less the net loss incurred for the
nine months ended September 30, 2000. The short-term investment portfolio is
invested in money market funds, commercial paper and corporate debt securities
with maturities of one year or less. The portfolio is diversified among security
types and issuers and does not include any derivative products. At September 30,
2000, the Company's working capital was $154.3 million compared to $23.3 million
at December 31, 1999.
Net cash used in operating activities was $59.2 million for the nine months
ended September 30, 2000 and $10.7 million for the comparable period of 1999.
The increase is primarily attributable to increases in net operating losses,
accounts receivable, prepaid expenses and other current assets, offset by
increases in depreciation and amortization, noncash stock-based compensation,
accounts payable and accrued expenses and other.
Net cash used in investing activities was $88.8 million for the nine months
ended September 30, 2000 and $4.1 million for the comparable period of 1999. The
increase is primarily attributable to increases in purchases of short-term
investments, purchases of property and equipment and increases in capitalized
internally developed software costs. These cash flows used were partially offset
by cash acquired in purchase transactions, net of direct costs of the purchase
transactions.
Net cash provided by financing activities was $229.7 million for the nine months
ended September 30, 2000 and $40.9 million for the comparable period of 1999.
The increase is primarily attributable to the sale of equity securities in the
Company's Offering offset by repayments on long-term debt.
In February 2000, the Company signed an amended lease agreement for new
corporate office facilities. Monthly lease payments range from $218,000 to
$257,000 over the ten-year term of the lease. Total obligations over the ten-
year term of the agreement are $28.2 million. Minimum lease payments on all of
the Company's non-cancelable operating leases range from $2.6 million to $3.3
million over the next five years.
In February 2000, the Company signed an agreement with America Online, or AOL,
that requires the Company to make fixed payments totaling $18.2 million to AOL.
The Company is also required to make additional payments to AOL if the number of
new customers that it acquires from AOL exceeds a specified level. Approximately
$3.1 million of this amount was paid immediately following the execution of the
agreement. The Company believes that performance is below anticipated levels,
and accordingly the Company has not made certain contractual payments under the
agreement. As of September 30, 2000, the Company owed AOL approximately $8.5
million, which is included in accrued expenses and other. The Company and AOL
are currently in negotiation.
The Company's future liquidity and capital requirements will depend on numerous
factors. For example, the Company's pace of expansion will affect its future
capital requirements, as will the Company's decision to acquire or invest in
complementary businesses and technologies. However, the Company believes that
the net proceeds from issuances of its common stock, and additional debt
financing together with existing cash, cash equivalents and short-term
investments, will be sufficient to satisfy its cash requirements under existing
operating plans for the foreseeable future. If the Company acquires additional
entities or its overall operating plans change, the Company may require
additional equity or debt financing to meet future working capital needs, which
may have a dilutive effect on existing stockholders. The Company cannot make
assurances that if additional financing is required, it will be available or,
that such financing can be obtained on satisfactory terms.
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RISK FACTORS
In addition to other information in this Form 10-Q, the following risk factors
should be carefully considered in evaluating the Company and its business
because such factors currently may have a significant impact on the Company's
business, results of operations and financial condition. As a result of the risk
factors set forth below and elsewhere in this Form 10-Q, and the risks discussed
in the Company's other Securities and Exchange Commission filings, actual
results could differ materially from those projected in any forward-looking
statements.
The Company has a limited operating history, making it difficult to evaluate its
future prospects
The Company was incorporated in March 1997. In July 1997, it launched the
initial version of its emarketplace, targeted at the Canadian market. In July
1998, it introduced its emarketplace for U.S. small businesses. The Company has
a limited operating history upon which an investor may evaluate its business and
prospects. The Company's potential for future profitability must be considered
in light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, such as emarketplaces in general
and those catering to small businesses in particular. The Company may not
successfully address any of these risks. If the Company does not successfully
address these risks, its business will be seriously harmed.
The Company has incurred negative cash flows in each quarter since inception,
and it expects to incur significant negative cash flows in the future
The Company has incurred negative cash flows from operations in each quarter
since inception. Under the Company's current operating plan, it expects to
continue to incur negative cash flows until 2002 or 2003. In order to achieve
the operating plan, the Company must increase revenue substantially and achieve
and maintain positive gross margins. To increase revenue, the Company will need
to continue to attract customers and suppliers to its emarketplace and expand
its service and product offerings. To improve its gross margins, the Company
will need to increase the proportion of revenue generated from higher-margin
services, reduce service and product discounts and lower service and product
costs. The Company may not be able to increase revenue and gross margins and
control operating costs sufficiently to achieve positive cash flows from
operations.
The Company's quarterly financial results are subject to fluctuations which may
make it difficult to forecast its future performance
The Company expects its revenue and operating results to vary significantly from
quarter to quarter making it difficult to formulate meaningful comparisons of
its results between quarters. The Company's limited operating history and new
and unproven business model further contribute to the difficulty of making
meaningful quarterly comparisons. Factors that may affect its quarterly results
include those discussed throughout this section. Substantially all of the
Company's revenue for a particular quarter is derived from transactions that are
initiated and completed during that quarter.
The Company's current and future levels of operating expenses and capital
expenditures are based largely on its growth plans and estimates of future
revenue. These expenditure levels are, to a large extent, fixed in the short
term. The Company 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 its business and results
of operations. In addition, the Company's quarterly results will be affected by
the mix of revenue generated from the sale of services and products. If the
percentage of revenue from products increases and the percentage of revenue from
services decreases, the Company's gross margin will likely be negatively
impacted.
The Company's limited operating history and rapid growth make it difficult to
assess the seasonal factors in its business. Nevertheless, the Company expects
there to be seasonal fluctuations in its business, reflecting a combination of
seasonal trends for the services and products it offers, seasonal trends in the
buying habits of its target small business customers and seasonal trends
reflecting Internet usage. For example, Internet use generally declines during
the summer months.
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The Company's network and software are vulnerable to security breaches and
similar threats that could result in its liability for damages and harm its
reputation
The Company's network infrastructure is vulnerable to computer viruses,
break-ins, network attacks and similar disruptive problems. This could result in
the Company's liability for damages, and its reputation could suffer, thus
deterring potential customers from transacting with the Company. Security
problems caused by third parties could lead to interruptions and delays or to
the cessation of service to its customers. Furthermore, inappropriate use of the
network by third parties could also jeopardize the security of confidential
information stored in its computer systems.
The Company intends to continue to implement industry-standard security
measures, but it cannot assure you that the measures it implements will not be
circumvented. The costs and resources required to alleviate security problems
may result in interruptions, delays or cessation of service to its customers,
which could harm its business.
Success by John Meier in his action against the Company could negatively impact
its operating results and result in dilution to its stockholders
In February 2000, John Meier filed an action in the Supreme Court of British
Columbia, Canada against the Company and Glenn Ballman, its founder, President
and Chief Executive Officer. Mr. Meier's claim is based upon allegations that he
and Mr. Ballman had intentions to form a company similar to the Company's and
that Mr. Ballman's role in founding the Company breached an alleged partnership
with Mr. Meier and fiduciary duties owed to him. In this action, Mr. Meier
asserts that he is entitled to 50% of Mr. Ballman's interest in Onvia.com, as
well as 50% of the assets and business of Onvia.com. Based upon its
investigation to date, the Company believes that the allegations against it are
wholly without merit and that the outcome of this action will not harm its
business. The Company believes that it has valid defenses to this claim and
intends to vigorously defend the action. The results of litigation proceedings
are inherently unpredictable, however, the Company is unable to provide
assurance regarding the outcome of this action or possible damages that may be
incurred. Although the Company believes that it is unlikely, if Mr. Meier were
to prevail on his claim against the Company in its entirety, this would severely
harm its business, operating results and financial condition. Any cash award or
settlement paid by the Company to Mr. Meier could have a material negative
impact on its operating results and financial condition. Any shares of common
stock awarded or issued to Mr. Meier by the Company would be dilutive to its
stockholders. It is also possible that defense of this claim will result in a
significant diversion of management attention. In the event that Mr. Meier is
successful in his claim against Mr. Ballman, it is possible that Mr. Meier could
become one of the Company's principal stockholders and have an ability to exert
influence over matters submitted to its stockholders.
The development of the Company's brand is essential to its future success and
requires significant expenditures
The Company believes that development of the Onvia.com brand is crucial to its
future success. The importance of brand recognition will increase as more
companies engage in commerce over the Internet. Because the online commerce
aspects of its business model has limited legal, technological and financial
barriers to entry, if the Company is unable to establish a trusted brand name,
the Company's business will suffer. The Company currently intends to invest
significant capital resources to develop its brand, including spending
significant amounts of money on advertising and promotions. Furthermore, the
cost of advertising and promotions is growing rapidly. In addition, if the
Company's competitors significantly increase their advertising and promotions
spending, the Company may be forced to increase its expenditures accordingly.
The Company cannot be certain that its efforts to promote its brand will be
successful or that the Company will have adequate financial resources to
continue to promote its brand.
Business-to-business exchange service platforms are at an early stage of
development and market acceptance and may not prove to be viable in the long run
Broad and timely acceptance of the Company's exchange services, which is
critical to the Company's future success, is subject to a number of significant
risks. These risks include:
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. operating resource management and procurement on the Internet is a new
market;
. the Company's need to significantly enhance the features and services of
the exchange model to achieve acceptance and scalability of its model;
. that a significant number of small businesses will be willing to purchase
their business services and products online;
. that a significant number of small businesses and small business service
providers will use the Company's exchange model to buy and sell services
and products;
. that a significant number of government agencies will adopt the use of the
Company's procurement exchange; and
. small business customers will provide the Company data about themselves.
Although the Company expects to derive a significant portion of its future
revenue from exchange services, the Company has not yet fully evolved its
revenue model for services associated with the exchange model. The revenues
associated may be a combination of transaction and/or annual subscription fees.
Examples of such services might include electronic payment, bid/quote and
sourcing, among others. However, the Company cannot predict whether these
services and other functionality will be commercially successful or whether they
will adversely impact revenues. The Company would be seriously harmed if its
exchange model is not commercially successful.
The Company depends on government agencies and small businesses for the success
of its exchange service model
The Company depends on government agencies and small businesses joining its
exchange model. Any failure of government agencies and small businesses to join
the exchange model in sufficient and increasing numbers would make the model
less attractive to buyers and consequently other sellers. In order to provide
buyers on the exchange model an organized method for accessing operating
resources, the Company relies on sellers to maintain web-based catalogs,
indexing services and other content aggregation tools. The Company's inability
to access and index these catalogs and services would result in its customers
having fewer products and services available to them through the Company's
exchange solution, which would adversely affect the perceived usefulness of the
exchange model.
If the Company fails to increase traffic to its web site and the proportion of
visitors who purchase services or products, its business will not grow as it
expects
To generate revenue, the Company must drive traffic to its web site and convert
visitors into purchasers of services and products. The Company uses a number of
techniques to increase traffic to its web site, including developing
relationships with third parties, advertising, e-mail and contests. Currently,
the Company is using a variety of techniques to increase customer conversion
rates, including using discounts on selected items and other incentives. Many of
these techniques are new and unproven, and the Company cannot be certain that
any of them will be successful in helping the Company increase traffic or
conversion rates. If the Company is unable to draw significantly higher traffic
to its web site and convert a significant number of web site visitors into
customers, its business will not grow as expected.
Intense competition could impede the Company's ability to gain market share and
harm its financial results
Emarketplaces are new, rapidly evolving and intensely competitive. In addition,
the traditional non-Internet-based markets for business products such as
computer hardware and software, office furniture, office equipment and office
supplies are also intensely competitive. The Company competes with both
traditional distribution channels as well as other online services. The
Company's current and potential competitors include:
. companies such as America Online, Microsoft, NBCi and Yahoo! that offer a
broad array of Internet-related services and either offer
business-to-business e-commerce services presently or have announced plans
to introduce such services in the future;
. companies such as Ariba, PurchasePro.com, CommerceOne, BizBuyer.com,
Digitalwork.com and Works.com that offer business-to-business exchange
services;
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. Internet sites that provide customized computing solutions through the
direct marketing of computer products including hardware, software,
peripherals, networking and accessories;
. companies such as Bigstep.com, eCongo, Network Commerce, Inc., Innuity,
Inc. and InfoSpace's HyperMart that enable the creation and hosting
capability of customized ebusinesses;
. online auction services, including eBay Business Exchange, Yahoo! Auctions,
TradeOut.com, DoveBid and uBid; and
. traditional non-internet-based retailers that sell or resell business
service and products such as AT&T Wireless, Staples and CompUSA.
There are minimal barriers to entry to this market, and new competitors could
launch a competitive web site offering services and products targeted to the
small business market. To compete successfully and to gain market share, the
Company must significantly increase awareness of its brand name and its web
site. In addition, the Company must increase its customer base and the volume of
service and product transactions initiated through its web site. The Company's
failure to achieve these objectives could cause its revenue to decline and limit
its ability to achieve profitability.
The Company may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than the Company does. These
competitors may also be more successful than the Company in engaging in more
extensive development of their technologies, adopting more aggressive pricing
policies and establishing more comprehensive marketing and advertising
campaigns. The Company's competitors may develop web sites that are more
sophisticated than the Company's with better online tools, and that have service
and product offerings superior to the Company's. For these or other reasons, the
Company's competitors' web sites may achieve greater acceptance than the
Company's, limiting its ability to gain market share and customer loyalty and to
generate sufficient revenue to achieve profitability.
The Company's business model is new, unproven and evolving and may not prove to
be viable in the long run
The Company's business model is new, unproven and continues to evolve. In
particular, its business model is based on several assumptions, any one of which
may not prove to be true, including the following:
. a significant number of small businesses will be willing to purchase their
business services and products online;
. a significant number of small businesses and small business service
providers will use the Company's emarketplace to buy and sell services and
products; or
. small business customers will provide the Company data about themselves.
If any of these assumptions does not prove to be true, the Company's business
may not be viable in the long run.
In addition, to date the Company has sold many of its products at or below its
cost, causing the Company to incur negative gross margins. The Company cannot
assure you that as the Company increases the prices at which it sells products,
the Company will be able to retain existing customers and attract new customers.
If the Company is unable to retain and grow its existing customer base, its
business model may not prove to be viable.
If the Company fails to increase the proportion of revenue derived from service
fees, its gross margins will not improve
In general, the Company derives higher gross margins from advertising fees and
transaction fees from the use of exchange services than from the sale of
products. If the Company is to improve gross margins significantly, it must
increase the proportion of revenue generated from advertising and transaction
fees. To date, the Company's advertising and transaction fees have been minimal.
Additionally, the sale of advertising on the Internet is very competitive and
the use of exchange services over the Internet has not yet achieved broad market
acceptance. The use of exchange services through the Internet may not achieve
broad market acceptance, and, even if it does, the Company may not achieve
significant sales of services.
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If the Company does not develop additional and maintain existing relationships
with third parties, it may be unable to increase traffic to its web site
The Company depends on relationships with third parties to direct traffic to its
web site. Most of these agreements call for the third party to be paid a monthly
or quarterly fee. Some of these relationships require the Company to pay the
third party a percentage of revenue generated from customers who make a purchase
after linking through from the third party's web site. Some of these
relationships are cancelable by either party without cause upon limited notice.
The Company must maintain its existing relationships and develop new
relationships on terms acceptable to the Company to continue to increase traffic
to its web site. The termination of any of these existing agreements, or the
failure to secure similar relationships with new third parties would limit the
growth in traffic to the Company's web site or cause it to decline, and would
likely impede its ability to attract a large enough customer base to make its
business viable.
Even if the Company maintains its existing relationships, because many of them
have been formed recently and have not yet been fully established, the Company
does not have sufficient historical data to assess accurately whether the
relationships will be successful in drawing sufficient traffic to its web site.
Any unexpected decline in traffic to the web sites of the third parties with
whom the Company has relationships could have a negative impact on the traffic
to the Company's web site.
If the Company is unable to maintain its relationships on commercially favorable
terms with the small number of suppliers of the products it sells, its business
will suffer
The Company purchases substantially all of its products from only five major
vendors: Ingram Micro, TechData, Merisel, ANBI and United Stationers, with the
majority of the Company's revenue being derived from sales of products supplied
by Ingram Micro.
The Company does not typically maintain physical inventory and the Company's
relationships with its suppliers are in the form of standard agreements. The
Company does not have minimum commitments or guaranteed pricing with any of its
suppliers and individual transactions become contracts by way of issuing
purchase orders. The Company's agreements with its suppliers are cancelable at
any time by either party. Consequently, the Company's suppliers could:
. discontinue service to the Company at any time with little or no notice, in
which case it may be unable to obtain alternate supply sources on
comparable or acceptable terms;
. raise prices above the level at which the Company can profitably sell
products to its customers; or
. establish more favorable pricing structures for its competitors;
Any unfavorable action or event concerning its supplier relationships that
hinders the Company's ability to fulfill orders quickly, accurately and on
competitive terms would harm its business.
The Company has grown very quickly and if it fails to manage this growth, its
ability to increase revenue and achieve profitability will be harmed
The Company has rapidly and significantly expanded its operations, and the
Company needs to grow quickly in the future. This growth has placed a
significant strain on the Company's employees, management systems and other
resources and will continue to do so. If the Company does not manage its growth
effectively, its revenue may not grow as expected, and the Company may never
achieve profitability.
Effectively managing its expected future growth will require, among other
things, that the Company successfully upgrade its operating systems, improve its
management reporting capabilities and strengthen internal controls. The Company
will also need to attract, hire and retain highly skilled and motivated officers
and employees. The Company must also maintain close coordination among its
marketing, operations, engineering and accounting departments. The Company may
not succeed in achieving any of these objectives.
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The Company's business will suffer if it is unable to hire and retain highly
qualified employees
The Company's future success depends on its ability to identify, hire, train and
retain highly qualified sales and marketing, technical, managerial and
administrative personnel. As the Company continues to introduce new services,
products and features on its web site, and as its customer base and revenue
continue to grow, the Company will need to hire a significant number of
qualified personnel. Competition for qualified personnel, especially those with
Internet experience, is intense, and the Company may not be able to attract,
train, assimilate or retain qualified personnel in the future. The Company's
failure to attract, train, assimilate and retain qualified personnel could
seriously disrupt its operations and could increase its costs as the Company
would be required to use more expensive outside consultants.
The Company's executive officers and key employees are critical to its business,
and these officers and key employees may not remain with the Company in the
future
The Company's business and operations are substantially dependent on the
performance of its key employees, all of whom are employed on an at-will basis.
The Company does not maintain "key person" life insurance on any of its
executives other than Glenn Ballman, its founder, President and Chief Executive
Officer. The loss of Mr. Ballman or other key employees would likely harm the
Company's business.
The Company may require significant additional capital in the future, which may
not be available on suitable terms, or at all
The expansion and development of its business may require significant additional
capital, which the Company may be unable to obtain on suitable terms, or at all.
If the Company is unable to obtain adequate funding on suitable terms, or at
all, it may have to delay, reduce or eliminate some or all of its advertising,
marketing, co-branding relationships, engineering efforts, general operations or
any other initiatives. The Company may require substantial additional funds to
expand its advertising and marketing activities, to continue to develop and
upgrade its technology and to acquire entities. If the Company issues
convertible debt or equity securities to raise additional funds, the Company's
existing stockholders will be diluted.
If the Company fails to expand its current technology infrastructure, it will be
unable to accommodate its anticipated growth
To be successful, the Company must continue to increase substantially traffic to
its web site and convert web site visitors into customers. Accommodating this
potential growth in web site traffic and customer transactions will require the
Company to continue to develop its technology infrastructure. To maintain the
necessary technological platform in the future, the Company must continue to
expand and stabilize the performance of its web servers, improve its transaction
processing system, optimize the performance of its network servers and ensure
the stable performance of its entire network. The Company may not be successful
in its ongoing efforts to upgrade its systems, or if it does successfully
upgrade its systems, the Company may not do so on time and within budget. If the
Company fails to achieve a stable technological platform in time to handle
increasing web site traffic or customer order volume, potential customers could
be discouraged from using the Company's emarketplace, its reputation could be
damaged and its business could be harmed.
The performance of its web site is critical to the Company's business and its
reputation
Any system failure that causes an interruption in the service of the Company's
web site or a decrease in its responsiveness could result in reduced user
traffic and reduced revenue. Further, prolonged or ongoing performance problems
on its web site could damage the Company's reputation and result in the
permanent loss of customers to its competitors' web sites. The Company has
occasionally experienced system interruptions that have made its web site
totally unavailable, slowed its response time or prevented the Company from
efficiently fulfilling orders, and these problems may occur again in the future.
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In April 1999, the Company entered into an agreement with Exodus Communications
to maintain all of its web servers and database servers at Exodus's Seattle
location. The Company's operations depend on Exodus's ability to protect its
systems against damage from fire, power loss, water damage, telecommunications
failures, vandalism and similar unexpected adverse events. Any disruption in the
services provided by Exodus could severely disrupt the Company's operations. The
Company's backup systems may not be sufficient to prevent major interruptions to
its operations, and it has not finalized and tested its disaster recovery plan.
The Company may not have sufficient business interruption insurance to cover
losses from major interruptions.
The Company's customers and visitors to its web site depend on their own
Internet service providers, online service providers and other web site
operators for access to the Onvia.com web site. Each of these providers has
experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to the Company's
systems.
The Company has completed acquisitions and expects to engage in future
acquisitions or investments, which may harm its operating results
The Company has completed acquisitions and expects to continue making
acquisitions or investments designed to increase its customer base, broaden its
offerings and expand its technology platform. The Company's ability to integrate
its acquisitions and investments is unproven. If the Company fails to evaluate
and to execute successfully acquisitions or investments, the acquisitions may
seriously harm the Company's business. To complete successfully an acquisition,
the Company must:
. properly evaluate the technology;
. accurately forecast the financial impact of the transaction, including
accounting charges and transaction and professional expenses;
. integrate and retain personnel;
. combine potentially different corporate cultures; and
. effectively integrate services and products and technology, sales,
marketing and support operations.
If the Company fails to do any of these, it may suffer losses or its management
may be distracted from its day-to-day operations. In addition, if the Company
conducts acquisitions using convertible debt or equity securities, existing
stockholders may be diluted, which could affect the market price of the
Company's stock. Further, financing for future acquisitions may not be available
on favorable terms, or at all. In connection with our current acquisitions and
possibly with future acquisitions we will be required to amortize significant
amounts of goodwill, which will negatively affect our operating income.
The Company's services and products depend upon the continued availability of
licensed technology from third parties
The Company licenses and will continue to license technology integral to its
services and products from third parties. If the Company is unable to acquire or
retain key third-party product licenses or integrate the related third-party
products into its exchange services and products, the Company's service and
product development may be delayed. The Company also expects to require new
licenses in the future as its business grows and technology evolves. The Company
may not be able to obtain these licenses on commercially reasonable terms, if at
all.
If the Company expands its international sales and marketing activities, its
business will be susceptible to numerous risks associated with international
operations
The Company currently has Canadian operations and may elect to further expand
its international operations in the future. Therefore, in the future the Company
may commit significant resources to expand its international sales and marketing
activities. If successful, the Company will be subject to a number of risks
associated with international business activities. These risks generally
include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. tariffs, export controls and other trade barriers;
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. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. burdens of complying with a wide variety of foreign laws;
. risks related to the recent global economic turbulence; and
. political instability.
If revenues from international activities do not offset the expense of
establishing and maintaining foreign operations, our business, prospects,
financial condition and operating results will suffer.
The Company will not be able to grow its business unless small businesses
increase their use of the Internet to conduct commerce and the Internet is able
to support the demands of this growth
The Company's success depends on the increasing use of the Internet by small
businesses. If use of the Internet as a medium for consumer and business
communications and commerce does not continue to increase, demand for the
Company's services and products will be limited and its financial results will
suffer.
Even if small businesses increase their use of the Internet, the Internet
infrastructure may not be able to support the demands of this growth. The
Internet infrastructure must be continually improved and expanded in order to
alleviate overloading and congestion. If the Internet's infrastructure is not
improved or expanded, the Internet's performance and reliability will be
degraded. Internet users may experience service interruptions as a result of
outages and other delays occurring throughout the Internet. Frequent outages or
delays may cause consumers and businesses to slow or stop their use of the
Internet as a transaction-based medium.
The Company faces risks related to auction services
The Company may be unable to prevent users of its auction services from selling
unlawful goods, or from selling goods in an unlawful manner. The Company may
face civil or criminal liability for unlawful activities by its online auction
users. Any costs the Company incurs as a result of liability relating to the
sale of unlawful goods or the unlawful sale of goods could harm its business.
In running its auction services, the Company relies on sellers of goods to make
accurate representations and provide reliable delivery and on buyers to pay the
agreed purchase price. The Company does not take responsibility for delivery of
payment or goods to any users of its services. While the Company can suspend or
terminate the accounts of users who fail to fulfill their delivery obligations
to other users, it cannot require users to make payments or deliver goods. The
Company does not compensate users who believe they have been defrauded by other
users.
The Company may not be able to keep up with rapid technological and industry
changes
The Internet and online commerce markets are characterized by rapid
technological change, frequent introductions of new or enhanced hardware and
software products, evolving industry standards and changes in customer
preferences and requirements. The Company may not be able to keep up with any of
these or other rapid technological changes, and if it does not, its business
will be harmed. These changes and the emergence of new industry standards and
practices could render the Company's existing web site and operational
infrastructure obsolete. The widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require the
Company to incur substantial expenditures to modify or adapt its operating
practices or infrastructure. To be successful, the Company must enhance its web
site responsiveness, functionality and features, acquire and license leading
technologies, enhance its existing service and product offerings, and respond to
technological advances and emerging industry standards and practices in a timely
and cost effective manner.
Future regulations could be enacted that either directly restrict the Company's
business or indirectly impact its business by limiting the growth of e-commerce
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As e-commerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as privacy, content and taxation of services
and products. If enacted, government regulations could limit the market for the
Company's services and products. Although many regulations might not apply to
its business directly, the Company expects that laws regulating the collection
or processing of personal or consumer information could indirectly affect its
business. It is possible that legislation could expose companies involved in
e-commerce to liability, which could limit the growth of e-commerce generally.
Legislation could hinder the growth in Internet use and decrease its acceptance
as a medium for communication and commerce.
The Company may face risks associated with domain names
The Company holds rights to various web domain names. Governmental agencies
typically regulate domain names. These regulations are subject to change and the
Company may not be able to acquire or maintain appropriate domain names in all
countries in which it does business or plans to do business. Furthermore,
regulations governing domain names may not protect its trademarks and similar
proprietary rights. The Company may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or diminish the value
of its trademarks and other proprietary rights.
The Company's stock price may continue to be volatile
The stock market and specifically the stock prices of Internet-related companies
have been very volatile. This broad market and industry volatility may reduce
the price of the Company's common stock, without regard to its operating
performance. Due to this continued volatility, the market price of the Company's
common stock could continue to be affected.
The Company's principal stockholders, officers and directors own a controlling
interest in its voting stock
The Company's officers, directors and stockholders with greater than 5% holdings
beneficially own a majority of its outstanding common stock. As a result, these
stockholders, acting together, will have the ability to control substantially
all matters submitted to its stockholders for approval, including:
. election of the Company's board of directors;
. removal of any of the Company's directors;
. amendment of the Company's certificate of incorporation or bylaws; and
. adoption of measures that could delay or prevent a change in control or
impede a merger, takeover or other business combination involving the
Company.
These stockholders have substantial influence over the Company's management and
its affairs.
The Company has implemented anti-takeover provisions that may discourage
takeover attempts and depress the market price of its stock
Provisions of the Company's amended and restated certificate of incorporation
and bylaws as well as provisions of Delaware law, can have the effect of making
it difficult for a third party to acquire the Company, even if doing so would be
beneficial to its stockholders.
The Company does not intend to pay dividends
The Company has never declared or paid any cash dividends on its capital stock
and does not intend to pay dividends in the foreseeable future. The Company
intends to invest its future earnings, if any, to fund its growth.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Currency Exchange Rate Risk
Due to the operations of the Company's wholly-owned subsidiary in Canada, its
results of operations, financial position and cash flows can be materially
affected by changes in the relative values of the Canadian dollar to the U.S.
dollar.
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However, due to the relative stability of these two currencies in relation to
one another, the Company's past results of operations have not been materially
affected by fluctuations in exchange rates. The Company does not use derivative
financial instruments to limit its foreign currency risk exposure.
Interest Rate Risk
The Company's investment portfolio consists of money market funds, commercial
paper and corporate debt securities with maturities of one year or less. As of
September 30, 2000, the Company considers the reported amounts of these
investments to be reasonable approximations of their fair values. Therefore,
changes in the market interest rates have not had a material impact on the
Company's financial position. Historically, the Company's interest expense was
not sensitive to the general level of U.S. interest rates because all of its
debt arrangements were based on fixed interest rates.
Equity Price Risk
The Company does not own any significant equity investments. Therefore, it
believes it is not currently exposed to any direct equity price risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In February 2000, a potential investor filed a lawsuit in the Supreme Court of
British Columbia, Canada against the Company and its chief executive officer for
50% of the Company's assets and 50% of the executive's equity interest in the
Company. The lawsuit is based upon the allegation that the potential investor
and the Company's chief executive officer planned to form a company similar to
Onvia.com. Based upon investigations to date, the Company believes that the
allegations against it are without merit and that the outcome of this action
will not harm its business. The Company believes that it has valid defenses to
this claim and intends to vigorously defend the action.
In July 2000, the British Columbia Securities Commission notified the Company
that its directed share program offered to certain shareholders as part of the
Company's Offering did not meet Canadian disclosure requirements. The Company
has recorded an estimate of the settlements as of September 30, 2000. In October
2000, the Company tendered rescission rights to selected shareholders as a
remedy to this violation. The Company believes that its obligation under the
extended rescission rights will be approximately $850,000.
In addition, from time to time the Company is subject to various other legal
proceedings that arise in the ordinary course of its business. Although the
Company cannot predict the outcomes of these proceedings with certainty, the
Company does not believe that the disposition of these matters will have a
material adverse effect on its financial position, results of operations or cash
flows.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Title
Number
2.1 Agreement and Plan of Merger dated July 25, 2000 among the Company,
Globe-1, Incorporated and Griffin Acquisition Corporation
(Incorporated by reference to Exhibit 99.1 to the Form 8-K filed by
the Company on August 18, 2000)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following reports were filed on Form 8-K during the three months ended
September 30, 2000:
On July 26, 2000, the Company filed a Form 8-K announcing the acquisition of
Zanova Inc.
On July 28, 2000, the Company filed a Form 8-K announcing the signing of a
definitive agreement for the acquisition of Globe-1, Incorporated.
On August 18, 2000, the Company filed a Form 8-K announcing the acquisition of
Globe-1, Incorporated.
On September 15, 2000, the Company filed a Form 8-K/A amending the Form 8-K
filed by the Company on July 26, 2000, solely to add the financial statements of
Zanova Inc. and the pro forma financial information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONVIA.COM, INC.
By: /s/ Mark Calvert
------------------------------
Mark Calvert
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2000
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INDEX TO EXHIBITS
Exhibit
Number
2.1 Agreement and Plan of Merger dated July 25, 2000 among the Company,
Globe-1, Incorporated and Griffin Acquisition Corporation
(Incorporated by reference to Exhibit 99.1 to the Form 8-K filed by
the Company on August 18, 2000)
27.1 Financial Data Schedule
27
