Onfolio Holdings, Inc. (NASDAQ: ONFO), per its Q3 2022 10-Q, is a business that, “… acquires and manages a diversified portfolio of online businesses across a broad range of verticals, each with a niche content focus and brand identity. Onfolio acquires business that meet its investment criteria, being that such businesses operate in sectors with long-term growth opportunities, have positive and stable cash flows, face minimal threats of technological or competitive obsolescence and can be managed by our existing team or have strong management teams largely in place. The Company excels at finding acquisition opportunities where the seller has not fully optimized their business, and Onfolio’s experience and skillset allows it to add increased value to these existing businesses.”
G&A being 3x (last Q) and 9x gross profits is pretty rough. Yes, they're subscale and have a lot of cash to deploy, but rolling up online businesses isn't 'easy'. Anyone can go on Empire Flippers and buy up cheap web businesses. These are cheap for a reason! IMO they're good for owner operators to buy and run, but these are far from passive investments. Can't just buy raise capital, buy a ton, use the cash flow to raise more capital because its kinda like a franchise. For the numbers to make sense owner has to put in a lot of work. Can always hire people to 'do the work', but then that 3x ebitda business becomes unprofitable because the salary of the guy you're paying to do the previous owners workload is more than the profits!
I've sold a web biz to a rollup company many years ago and they've bankrupt now. I can single handedly run a profitable web biz with a few freelancers because I can micro-manage everything. The rollup has no idea what its doing and doesn't have their focus 100% on that one asset. So they neglect things and run any individual asset poorly. Simply buying more unrelated assets just makes things more confusing. I've never seen these work out.
Several online media rollups include EGLX, SLGG (was short both, only short SLGG now). These two are in the gaming niche. WeCommerce tried rolling up a bunch of ecomm related software businesses and isn't doing so great. No one seems to be making money in this space. I know these aren't perfect comps, but no one has figured out how to make this work. The positive side here is that they have a huge net cash position.
This *could* work out with an EXTREMELY savvy owner/operator, but it's a long shot. The net cash position is nice though. Will dig a bit deeper into their assets later out of curiosity though. I've only scratched the surface here.
I think it is important to note that your share count is wrong. You're possibly over valuing net current assets per share as a result. Per OTC Markets: "Outstanding Shares: 5,110,195 as of 11/14/2022"
Not a knock on your analysis, but their filings were very confusing on detailing out how that number is reached. It requires a cross reference of the IPO documents, the S-1, and recent filings to understand final share count.
Hey Trey, looks like you're right. I totally whiffed on this. I haven't encountered this kind of situation before. Do you know they managed to not report the total outstanding shares on their 2022 Q3 10-Q? It feels like that kind of information should've been in there.
I am not sure they are required to post exact shares outstanding on the 10-Q.
I have seen some companies do so and others do not.
They are required to have the financial statements, but that allows for “average” shares outstanding. Normally that’s “close enough.” In this case, dilution was so high in the quarter that the average was meaningless.
It’s one of the dangers of highly dilutive companies.
~6.2M Warrants x ~.20 Strike (rough Ballpark could be higher, don't think could be much lower) = 1.24M
I think the story is interesting, but I alway like to come at it from what points would I have to disprove to want to buy the stock ... the 3 coming up to the forefront:
1. A variety of the businesses such as their content revenue line could be impacted as AI aggregates information more efficiently and reduces traffic to these sites. In general the businesses they run are pretty open to general technological disruption and should carry higher discount rates which past a point of diversification at the HoldCo level will not result in "re-rating" to a higher multiple.
2. A discount to book value is pertinent as it is a sub scale public company which will make it much harder to earn its cost of capital. While management thinks they can be cash flow positive sometime in 2023 that is likely referring to CFFO which is adding back SBC a financing expense. Just roughly looking at it if the took all the cash as of Q3 (I've seen that they've acquired businesses since then so this is just a rough look) if you take 11M (assuming rest as working capital) at .25 (4x EBITDA) x 21% tax rate you get a boost to NOPAT of ~2.2M (assuming no MCX needs). Based on 9M EBIT that'd put you at run rate -1.8M. From this viewpoint management really needs to grow these businesses and continue to tap capital markets to achieve sufficient scale.
3. Management is heavily untested and is incentivized to transfer any value from the discount that exists through SBC issuances. In addition to this, operating a sub scale operation will take away valuable management time.
Any comments or things I am missing are appreciated.
G&A being 3x (last Q) and 9x gross profits is pretty rough. Yes, they're subscale and have a lot of cash to deploy, but rolling up online businesses isn't 'easy'. Anyone can go on Empire Flippers and buy up cheap web businesses. These are cheap for a reason! IMO they're good for owner operators to buy and run, but these are far from passive investments. Can't just buy raise capital, buy a ton, use the cash flow to raise more capital because its kinda like a franchise. For the numbers to make sense owner has to put in a lot of work. Can always hire people to 'do the work', but then that 3x ebitda business becomes unprofitable because the salary of the guy you're paying to do the previous owners workload is more than the profits!
I've sold a web biz to a rollup company many years ago and they've bankrupt now. I can single handedly run a profitable web biz with a few freelancers because I can micro-manage everything. The rollup has no idea what its doing and doesn't have their focus 100% on that one asset. So they neglect things and run any individual asset poorly. Simply buying more unrelated assets just makes things more confusing. I've never seen these work out.
Several online media rollups include EGLX, SLGG (was short both, only short SLGG now). These two are in the gaming niche. WeCommerce tried rolling up a bunch of ecomm related software businesses and isn't doing so great. No one seems to be making money in this space. I know these aren't perfect comps, but no one has figured out how to make this work. The positive side here is that they have a huge net cash position.
This *could* work out with an EXTREMELY savvy owner/operator, but it's a long shot. The net cash position is nice though. Will dig a bit deeper into their assets later out of curiosity though. I've only scratched the surface here.
I think it is important to note that your share count is wrong. You're possibly over valuing net current assets per share as a result. Per OTC Markets: "Outstanding Shares: 5,110,195 as of 11/14/2022"
Not a knock on your analysis, but their filings were very confusing on detailing out how that number is reached. It requires a cross reference of the IPO documents, the S-1, and recent filings to understand final share count.
Hey Trey, looks like you're right. I totally whiffed on this. I haven't encountered this kind of situation before. Do you know they managed to not report the total outstanding shares on their 2022 Q3 10-Q? It feels like that kind of information should've been in there.
I am not sure they are required to post exact shares outstanding on the 10-Q.
I have seen some companies do so and others do not.
They are required to have the financial statements, but that allows for “average” shares outstanding. Normally that’s “close enough.” In this case, dilution was so high in the quarter that the average was meaningless.
It’s one of the dangers of highly dilutive companies.
Really enjoy these summary/commentary posts.
Market cap is more around ~9M
~5.1M x 1.51 = 7.70M Undiluted Market Cap
~6.2M Warrants x ~.20 Strike (rough Ballpark could be higher, don't think could be much lower) = 1.24M
I think the story is interesting, but I alway like to come at it from what points would I have to disprove to want to buy the stock ... the 3 coming up to the forefront:
1. A variety of the businesses such as their content revenue line could be impacted as AI aggregates information more efficiently and reduces traffic to these sites. In general the businesses they run are pretty open to general technological disruption and should carry higher discount rates which past a point of diversification at the HoldCo level will not result in "re-rating" to a higher multiple.
2. A discount to book value is pertinent as it is a sub scale public company which will make it much harder to earn its cost of capital. While management thinks they can be cash flow positive sometime in 2023 that is likely referring to CFFO which is adding back SBC a financing expense. Just roughly looking at it if the took all the cash as of Q3 (I've seen that they've acquired businesses since then so this is just a rough look) if you take 11M (assuming rest as working capital) at .25 (4x EBITDA) x 21% tax rate you get a boost to NOPAT of ~2.2M (assuming no MCX needs). Based on 9M EBIT that'd put you at run rate -1.8M. From this viewpoint management really needs to grow these businesses and continue to tap capital markets to achieve sufficient scale.
3. Management is heavily untested and is incentivized to transfer any value from the discount that exists through SBC issuances. In addition to this, operating a sub scale operation will take away valuable management time.
Any comments or things I am missing are appreciated.
I think you’re right on point Josue.
It doesn’t mean they can’t make their business plan work, but it is definitely high risk- high reward.