Update on Onfolio (NASDAQ: ONFO)

This post serves as an update to my post on Onfolio from a couple of weeks ago. A link to the original can be found here.

The first section of this post is from an email exchange I had with the CEO. He reached out and mentioned that Onfolio is no longer represented by Gateway and that I could send my questions to him directly.

The second section is a collection of notes from the 10-K which was posted last week. You can find a link to the filing here.

Email Q&A With CEO Dom Wells

Question: I noticed that the business issued stock-based compensation in its first quarterly filing. Is this something that management plans to keep doing as a form of compensation going forward or were these issuances related to the IPO or a previously agreed upon form of compensation with certain employees?

Answer: We didn't issue any new SBC. This is just previously issued SBC that is vesting. In August 2020 I gave shares to existing team members with a 3 year vesting period, so every quarter we have to report the new shares which have vested, but it doesn't increase the fully diluted total number of shares outstanding. If anyone leaves early, the share count will go down as they'll have stopped vesting. Some people who have joined since that date are given stock options, but most of them are underwater so won't be exercised any time soon either. It's unlikely we'll issue shares to any new team members anytime soon, instead going for options. We use them lightly, as we feel everybody on the team should have some sense of ownership, but we don't want to unnecessarily dilute shareholders.

Question: The business realized a loss on the purchase of NFTs in Q3 of 2022. Does management plan to keep buying NFTs going forward?

Answer: The NFT purchase in Q1 2022 was based around content we created for one of our Youtube channels. We aren't in the business of "investing" or trying to flip/profit from NFTs. Also, our IPO funds are for buying already profitable businesses, which NFTs are far from.

Question: Can you provide any insight into what your share count is? I saw two different amounts. Share count for the three month period ended 9/30/2022 was 3,284,339 and for the nine month period ended 9/30/2022 the average share count was 2,675,634. However, I received a comment on my Substack stating that the OTC Markets site states that Onfolio has 5,110,195 shares outstanding which I confirmed to be true. I'm just a little confused as to what the actual share count is, so any commentary on that would be most appreciated.

Answer: The share count as of March 31, 2023, is 5,110,195. There are also about 6m warrants, so the fully diluted number is around 12m shares. The difference in numbers is due to above mentioned vesting, plus some shareholders from an earlier raise we did pre-IPO were locked up, and weren't included in the initial float. They are no longer locked up so the float has increased. There aren't any more shareholders waiting to be unlocked, so any new increase in the float is going to be due to a few more months of employee vesting and the aforementioned warrants.

Question: What do you think about how AI will affect any of the sites Onfolio has acquired? Do you think it's a threat in terms of competition or can/will it be a tool that helps improve them?

Answer: It's going to vary. Some of the hype is hype, some of it is legitimate advances. For the most part, AI is going to augment our businesses either by allowing us to offer new services, or reduce costs on the back end. Some of it is down to people not fully understanding nuances. For example, there are people who think proofread anywhere might suffer headwinds because chatGPT can do proofreading now. On the surface, sure, that makes sense. The reality though is that the types of proofreading jobs people who graduate from that course are landing are very technical proofreading jobs where you need specific understanding of the technicalities, and AI isn't' going to be allowed anywhere near that type of content anytime soon.

As another example, for our content businesses like Contentellect, the CEO Jason is actually working with some clients to offer "AI assisted content", where we are using AI to create content cheaper and passing those savings on to the clients.

It's obviously hard to say what AI is going to evolve into in the future, and we are actively following developments, but AI is likely to be a net positive rather than a negative.

Question: I received another comment about serial acquirers/rollups in the media space and how they haven't really worked out for a couple of reasons. The first is that these businesses are cheap for a reason and may not be as easy to run as they look. The second is that there just doesn't seem to be a straightforward path to making money. The same comment mentioned publicly traded serial acquirers/rollups EGLX, SLGG and WE.V which all haven't done great over the years. So, I guess my ultimate question here is, why won't Onfolio end up like these other companies that haven't figured out how to acquire businesses profitably? I've seen some of your interviews where you state that Onfolio only buys already profitable, cash-flowing businesses, but would you add anything else to this?

Answer: I agree with the first comment.

These businesses are cheap because they're not easy to run, and they're not a passive investment. We never claimed they were easy.

The fact they're hard to run is where the opportunity arises, otherwise everyone would succeed. Just look at how much difficulty the FBA aggregators are having. They threw money around in 2020 and 2021 and the wheels started falling off in 2022 as they realised they have no idea how to run the businesses they bought indiscriminately. One issue many companies have is running their business in a centralized fashion. I recently published a long blog post talking about the issues with this, and our learnings: https://onfolio.com/operational-update-the-move-to-decentralize/

We move at a slower pace and make our acquisitions more strategically. Will we make mistakes? Probably. But we learn and evolve and are confident we'll succeed.

For the second part, I obviously don't know EGLX, SGG or Wecommerce that intimately, but I think WE.V will do better after the Tiny acquisition. EGLX and SGG aren't really that related to what we do. They're essentially media companies as you mentioned, and we aren't, and they're centralized, and we aren't. They're trying to go for synergies and create a flywheel with their properties, and we aren't. So, I'm not trying to say "We're different, we do things better", but I would definitely say it's not a reasonable comparison.

The challenge most smaller serial acquirers make is escaping the platform costs, the things like Nasdaq listing fees, D+O insurance, audit fees, board compensation, that are associated with public companies and are a burden to companies of our size until we can grow our revenues. For us, the plan is to simply acquire past those costs, which are generally fixed, and we've been executing on that plan well since the IPO. It's just a function of time and making the right moves. I can't speak to other company struggles as I'm not sure what specifically they struggle with.

10-K Notes

On how Onfolio is evolving - From p. 44, “We believe that Q4 2022 marked the end of Onfolio 1.0, and the beginning of Onfolio 2.0. Prior to our IPO in August 2022, we operated smaller “legacy” businesses, primarily focused around content and media publishing. Throughout 2021 and 2022 we evolved our thesis and responded to changes in the Google search ranking algorithm, and started moving away from smaller content websites and towards more service businesses, agencies, online courses, and digital products.”

Onfolio has acquired another business since the start of the new year - From the Recent Developments section on p. 45, “On January 13, 2023, our Company’s wholly owned subsidiary, Onfolio Assets LLC, entered into an Asset Purchase Agreement (“Contentellect Asset Purchase Agreement”) with Contentellect Limited (“Contentellect”), a Guernsey limited liability company, and Mark Whitman, the sole owner of Contentellect. Pursuant to the Contentellect Asset Purchase Agreement, Onfolio Assets LLC purchased from Contentellect substantially all of Contentellect’s assets utilized in the operation of the business of providing online (i) content writing services (including white label content creation, eBook writing and eCommerce product description writing), (ii) website link building services (including white label link building, HARO link building and SEO outreach services), (iii) social media marketing services, and (iv) virtual assistant services to individuals, businesses and agencies through the website that the domain name www.contentellect.com points at.

The Contentellect Asset Purchase Agreement closed on February 1, 2023. Pursuant to the Contentellect Asset Purchase Agreement, and on the terms and conditions contained therein, at the closing, the Company purchased the Contentellect assets from Contentellect, all as more fully described in the Contentellect Asset Purchase Agreement. The aggregate purchase price for the Contentellect assets of Eight Hundred and Fifty Thousand US Dollars ($850,000) was paid in cash at the closing. See Note 11 of our accompanying audited financial statements.

We acquired Contentellect because we already operated three similar businesses (Getmelinks.com, Outreachmama.com and SEOButler.com), and we understand the business model. We also believe that Contentellect adds a more B2B, enterprise clientele that Getmelinks.com, Outreachmama.com and SEOButler.com three lacks.

Productized-service businesses such as Contentellect are a large part of our current acquisition strategy, as well as in parallel industries or with parallel offerings, such as marketing services.”

Selling, General and Administrative costs have skyrocketed - Per p. 48, “General and Administrative expenses increased by $1,792,713, or 72% during the year ended December 31, 2022 as compared to 2021. The increase was primarily due to an increase of $1,181,000 in labor costs, as the Company filled out required roles for the business, amortization expense of $125,000 associated with the acquired intangible assets, an increase of $178,000 in stock-based compensation, an increase in advertising costs of $188,000, and an increase in audit costs of $49,500.

Our general and administrative expenses consist primarily of consulting related expenses paid to contractors, stock-based compensation, advertising and marketing costs, and other expenses. In the nearest future, we expect our general and administrative expenses to continue to increase to support business growth. Over the long term, we expect general and administrative expenses to decrease as a percentage of revenue.”

Material Weakness on p. 52 - “Material Weakness in Internal Controls Over Financial Reporting

We identified a material weakness in our internal control over financial reporting that exists as of December 31, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We determined that we had a material weakness because, due to our small size, and our limited number of personnel, we did not have in place an effective internal control environment with formal processes and procedures, including journal entry processing and review, to allow for a detailed review of accounting transactions that would identify errors in a timely manner.

Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the audited financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

Management’s Plan to Remediate the Material Weakness – “With the oversight of senior management, management is working towards remediation of these weaknesses in 2023 including addition of accounting personnel and to evaluate and implement procedures that will strengthen our internal controls. While we believe these measures will remediate the material weakness identified and strengthen our internal control over financial reporting, there is no assurance that we will demonstrate sufficient improvement that the material weakness will be remediated. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial reporting controls and procedures.”

2022 Summary Compensation Table from p. 56 is shown in the screencap below.

Insider Ownership from p. 59 is shown in the screencap below. It’s nice seeing insiders own more than 30% of the business.

Going Concern commentary from F-11 - “These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At December 31, 2022 the Company had not yet achieved consistent profitable operations and expects to incur further losses in the development of its business, all of which raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity or debt financing and/or related party advances. However there is no assurance of additional funding being available.”

Related Party Transactions from F-19 - “From time to time, the Company pays expenses directly on behalf of the Joint Ventures that it manages and receives funds on behalf of the joint ventures. As of December 31, 2022 the balances due from related parties were $54,858 included in current liabilities. During the year ended December 31, 2022, the Company paid the $215,000 related to the Company’s capital contribution for its equity interest in JV IV.

From time to time, the Company’s CEO paid expenses on behalf of the Company, and the Company funded certain expenses to the CEO. Additionally, the Company received its investments in JV I, JV II and JV III from the CEO. As of December 31, 2022, the Company was owed $36,854 by the entities controlled by the Company’s CEO, and the Company owed the CEO $0 and $480 as of December 31, 2022 and 2021, respectively.

No member of management has benefited from the transactions with related parties.”

One Final Note

I highly recommend reading Mr. Wells’ post about why Onfolio decided to pivot towards a decentralized operating model. It’ll take 10 minutes or so to get through. A link to it can be found here.

In it, Mr. Wells writes about centralization vs. decentralization, the importance of focus, the impact of “cost synergies” on human-scale business units and how the CEOs of Onfolio’s operating businesses may be compensated.

There is also a linked video about its recent pivot to decentralization in the post which can be found here.

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That’s all I’ve got for today.

Thanks again as always for reading. If you liked this writeup, please feel free to share it and subscribe!

Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.

*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***

Disclosure: I do not own shares in Onfolio.