Onfolio Holdings, Inc 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following selected financial information is derived from our historical financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere within this Report on Form 10-K and the “Forward-Looking Statements” explanation included elsewhere herein. Overview Onfolio Holdings Inc. acquires controlling interests in and actively manages online businesses that we believe (i) operate in sectors with long-term growth opportunities, (ii) have positive and stable cash flows, (iii) face minimal threats of technological or competitive obsolescence and (iv) can be managed by our existing team or have strong management teams largely in place. Through the acquisition and growth of a diversified group of websites with these characteristics, we believe we offer investors in our shares an opportunity to diversify their own portfolio risk. Onfolio Holdings Inc. was incorporated on July 20, 2020 under the laws of Delaware to acquire and develop high-growth and profitable websites. Unless the context otherwise requires, all references to “our Company,” “we,” “our” or “us” and other similar terms means Onfolio Holdings Inc., a Delaware corporation, and our wholly owned subsidiaries. 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. With the money raised in our IPO, we acquired SEOButler.com (An SEO service agency), Proofreadanywhere.com (An online course) and two Wordpress security plugins collectively known as BWPS (Preventdirectaccess.com and Passwordprotectwp.com). These types of businesses are favorable for the following reasons: 1.) They are less subject to the google algorithm and other matters outside our control 2.) They are larger businesses, with sufficient profitability to hire dedicated operators 3.) A larger percentage of their revenues are recurring. We believe recurring revenue is one of the most crucial forms of revenue for our Company. Currently, the percentage of our revenue which is recurring is minimal, but we aim to increase recurring revenue substantially, both with additional offerings to our existing businesses (where possible), and with our future acquisition strategy. The funds raised in our IPO facilitated the three aforementioned (and the one mentioned below) acquisitions in October 2022, which is why we believe Q4 was the dawn of Onfolio 2.0. As a result of these acquisitions, revenue in Q4 was more than the previous quarters combined, while cost of revenue only increased marginally. There is still some expense bloat in Q4 as a result of these one-time acquisition costs, IPO related expenses, deferred expenses that were paid lump-sum in Q4, and SG&A did have some ongoing increases as well, but we believe that moving forward into 2023, our Company is in a strong financial position. 44 Table of Contents Recent Developments Asset Purchase Agreement - Contentellect Limited 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. Asset Purchase Agreement - Hoang Huu Thinh On October 3, 2022, Onfolio, LLC, our Company’s wholly owned subsidiary, entered into an Asset Purchase Agreement (“Hoang Asset Purchase Agreement”) with Hoang Huu Thinh, an individual (“Hoang”). Pursuant to the Hoang Asset Purchase Agreement, Onfolio LLC purchased from Hoang, substantially all of the assets utilized in the operation of the business of providing a suite of optimization, customization, privacy and security products and services for WordPress websites (“WordPress Business”), with the core WordPress Business offerings consisting of (i) the WordPress plugin known as PREVENT DIRECT ACCESS available via the website preventdirectaccess.com, and (ii) the WordPress plugin known as PASSWORD PROTECT WORDPRESS available via the website passwordprotectwp.com. The Hoang Asset Purchase Agreement closed on October 25 2022. The aggregate purchase price for the WordPress Business was as follows: (i) One Million Two Hundred Ninety Thousand US Dollars ($1,290,000.00) was paid in cash at the closing and Forty Thousand US Dollars ($40,000.00) will paid via a promissory made by Onfolio LLC payable to Hoang after the performance of certain obligations by Hoang and others as provided for in the Hoang Asset Purchase Agreement; and (ii) up to One Hundred Fifty Nine Thousand Five Hundred US Dollars ($159,500.00) in cash pursuant to the earn-out provisions of the Hoang Asset Purchase Agreement. See Note 4 of our accompanying audited financial statements. Our acquisition of the two WordPress plugins, passwordprotectwp.com and previdentdirectaccess.com mark our first of what we hope to be many acquisitions in the WordPress plugin ecosystem. WordPress plugins appeal to us because of the following: 1.) Their ability to produce recurring revenue, 2.) Our familiarity with the WordPress ecosystem which continues to grow its active user base, 3.) Most WP plugins are B2B tools, which comprise an integral part of our investment strategy, 4.) Wordpress plugins can be acquired for reasonable multiples because they are not growing as fast as other comparables, such as Shopify apps, and therefore have fewer buyers. 45 Table of Contents Share Purchase Agreement - i2W Ltd On October 6, 2022, our Company entered into a Share Purchase Agreement (“Share Purchase Agreement”) with i2W Ltd, a company incorporated and registered in England and Wales (“Seller”), and Jonathan Kiekbusch, Ezekiel Daldy, and Lyndsay Kiekbusch, shareholders of the Seller (collectively, the “Guarantors”), for the purchase of all of the issued share capital (“Sale Shares”) of SEO Butler Limited, a company incorporated and registered in England and Wales(“SEO Butler”) . SEO Butler operates as a productised service business operated via the seobutler.com website and the custom build order management system on orders.seobutler.com and under the SEOButler and PBNButler names. Pursuant to the Share Purchase Agreement, the Company will purchase the Sale Shares from the Seller, all as more fully described in the Share Purchase Agreement. The aggregate purchase price the Company paid for the Sale Shares was Nine Hundred and Fifty Thousand and 00/100 US Dollars ($950,000.00). See Note 4 of our accompanying audited financial statements. As with Contentellect.com, we acquired SEOButler because we already operated similar businesses (Getmelinks.com and Outreachmama.com), and we understand the business model. Asset Sale and Purchase Agreement - BCP MEDIA, Inc. On October 13, 2022, we and Onfolio, LLC, our Company’s wholly owned subsidiary, entered into an Asset Sale and Purchase Agreement (“BCP Asset Purchase Agreement”) with BCP Media, Inc., a Florida corporation(“BCP Media”) , and Caitlin Pyle and Cody Lister, principals of BCP Media. The transaction closed on October 14, 2022. Pursuant to the BCP Asset Purchase Agreement, the Company purchased from BCP Media, substantially all the Proofreading Business assets of BCP Media and assigned the acquired assets to Onfolio LLC, which, pursuant to the BCP Asset Purchase Agreement and certain ancillary agreements, will operate the business of online proofreading training via the following websites: ProofreadAnywhere.com, WorkAtHomeSchool.com, and WorkYourWay2020.com. The purchase price was paid as follows: Four Million Four Hundred Ninety Nine Thousand US Dollars ($4,499,000.00) plus a warrant to purchase up to 20,000 shares of the Company’s common stock at the price of $4.75 per share (the “Warrant”), with Two Million One Hundred Thousand US Dollars ($2,100,000.00) paid in cash at the closing and Two Million Three Hundred Ninety Nine Thousand US Dollars ($2,399,000.00) paid via a secured promissory note(the “BCP Note”). The BCP Note was made by Onfolio, LLC to BCP Media and guaranteed by our Company. The BCP Note has the principal sum of Two Million Three Hundred Ninety-Nine Thousand and 00/100 US Dollars ($2,399,000.00) (the “Loan Amount”) and it matures on the one-year anniversary from the date of the BCP Note(the “Maturity Date”) . Interest on the outstanding principal balance of, and all other sums owing under the Loan Amount, is three percent (3%) (the “Interest Rate”) , compounded annually. Upon the occurrence of an Event of Default (as defined in the BCP Note), the Interest Rate automatically increases to the rate of eight percent (8%) per annum, compounded annually. The Loan Amount is payable as follows: (i) commencing on the date that is thirty (30) days from the date of the BCP Note, and continuing monthly on such same day thereafter, Onfolio, LLC shall make an interest only payment to BCP Media equal to Five Thousand Nine Hundred Ninety- Seven and 50/100 Dollars ($5,997.50) per month; and (ii) the entire Loan Amount, together with all accrued but unpaid interest thereon, shall be due and payable by Onfolio, LLC to BCP Media on the Maturity Date. See Note 4 of our accompanying audited financial statements. We acquired Proofreadanywhere.com because we are familiar with its business model. Digital courses, or education businesses are attractive acquisitions to us because: 1.) They can scale with email marketing and paid advertising, 2.) They can have recurring sales (though not currently present in proofreadanywhere), 3.) They typically have high gross margins, and 4.) There can be synergies between brands. 46 Table of Contents As with agencies, Wordpress plugins, and productized services, we anticipate making more acquisitions in the digital course space, particularly if they are “biz op” or related to building an income online Emerging Growth Company We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to: · have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; · comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); · submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” · disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our total annual gross revenues are $1.07 billion or more, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. Principal Factors Affecting Our Financial Performance Our operating results are primarily affected by the following factors at a portfolio company level: ● our ability to acquire new customers or retain existing customers; ● our ability to offer competitive product pricing; ● our ability to broaden product offerings; ● industry demand and competition; ● our ability to leverage technology and use and develop efficient processes; ● our ability to attract and retain talented employees; and ● market conditions and our market position. 47 Table of Contents Components of Results of Operations The Company reported a net loss of $4,234,357 for the year ended December 31, 2022 compared to a net loss of $1,900,149 for the year ended December 31, 2022. The components of the increase in net loss for the current period are as follows: Revenues For the Year Ended December 31, $ Change from prior % Change from prior 2022 2021 year year Revenue, services $ 544,822 $ 507,532 $ 37,290 7 % Revenue, product sales 1,674,993 1,301,011 373,982 29 % Total Revenue 2,219,815 1,808,543 411,272 23 % Revenue increased by $411,272, or 23% for the year ended December 31, 2022 compared to 2021. The increase is primarily due to revenue from our three acquisitions completed during the fourth quarter of fiscal 2022, which increased revenue by approximately $845,000, including approximately $708,000 in digital product sales. This increase was offset by a decline in product sales and advertising revenue. Cost of Revenue For the Year Ended December 31, $ Change from % Change from 2022 2021 prior year prior year Cost of revenue, services $ 356,957 $ 447,325 $ (90,368 ) (20 )% Cost of revenue, product sales 664,405 626,185 38,220 6 % Total Cost of Revenue 1,021,362 1,073,510 (52,148 ) (5 )% Cost of revenue decreased by $52,148, or 20%, primarily due to lower service revenue costs of $903,000, primarily from a decrease of $131,000 in labor costs related to the Company’s service revenue. Costs associated with product revenue increased by approximately $38,000 during the year ended December 31, 2022, driven by the increase costs from the Company’s new businesses acquired, offset by better inventory management in its physical product sale businesses. The components most significant to the Company’s cost of revenue are the costs of acquiring new inventory products, the costs of labor for content creation and website hosting and maintenance costs. Operating Expenses Selling, General and Administrative 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. 48 Table of Contents Professional Fees and Acquisition Costs Professional fees increased by $301,748, or 145% during the year ended December 31, 2022 compared to 2021 primarily due to increased due diligence, legal and accounting costs associated with the Company’s initial public offering process. The Company also incurred $527,792 in acquisition costs directly related to the three acquisitions completed during the fourth quarter of 2022, including audit, legal and other professional fees. We expect acquisition costs to remain significant as we continue to grow based on acquisitions. Other Income and expense Total other expense was $123,212 for the year ended December 31, 2022 compared to other income of $50,849 for the year ended December 31, 2021. The decrease in other income was driven by a decline of $16,252 in equity method income from the Company’s equity method joint venture investment due to lower performance in that entity, a $34,306 loss on the sale of a website during the year ended December 31, 2022, and an impairment loss of $51,894 related to the Company’s investment in JV II and JV III as a result of lower performance in those entities. Provision for Income Taxes Income tax benefit was $0 for the year ended December 31, 2022 compared to benefit of $1,314, for the fiscal 2022 compared to 2022 primarily due to increased losses in the current year. Liquidity and Capital Resources As of December 31, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $6,701,122 which was mainly on account of raising capital from sale of common stock and warrants in our IPO of $12,255,470 and the sale of preferred and common stock to the extent of $1,736,500 and $2,824,500, respectively, since inception. The Company’s recurring losses from operations and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Accordingly, our auditor has concluded that substantial doubt exists regarding our ability to continue as a going concern. Our audited financial statements appearing at the end of this annual report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties related to our ability to operate on a going concern basis. In its report on our financial statements for the years ended December 31, 2022 and 2021, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations and negative cash flows since inception and our need to raise additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. We believe that our cash and cash equivalents as of December 31, 2022, and the future operating cash flows of the entity may not provide adequate resources to fund ongoing cash requirements for the next twelve months. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. Operating Activities Net cash used in operating activities was $2,870,893 and $1,140,481 for the years ended December 31, 2022, and 2021. The increase was primarily from the increase general and administrative costs as the Company expanded its operations. 49 Table of Contents Investing Activities Net cash used in investing activities was $4,283,219 and $767,927 for the years ended December 31, 2022 and 2021. For the year ended December 31, 2022, the Company used $4,261,413 to acquire three businesses during the fourth quarter, $67,500 in additional investments in the JVs which, offset by $45,694 of proceeds from the sale of a website. During the comparable period, the Company paid $784,000 for asset acquisitions completed, paid $49,401 for additional investments in joint ventures and received $75,000 in proceeds from the sale of a website. Financing Activities Cash flows from financing activities was $12,109,373 and $3,097,017 for the years ended December 31, 2022 and 2021. During the year 2022, we raised $12,104,667 in net proceeds from our initial public offering, $321,500 from sales of preferred stock in a private exempted offering, and $44,000 of proceeds from notes payable, which were partially offset by dividend payments of $142,239, payments on notes payable of $3,555 and payment of the contribution towards its investment in JV IV of $215,000. During the year 2021, we raised the aggregate amount of $1,415,000 by issuing preferred stock to various investors in a private exempted offering, $2,010,000 from the sale of common stock in a private exempted offering, and $108,000 from the issuance of short term notes payable. The Company made payments on various notes payable of $270,656 and paid $60,000 towards its investment in JV IV Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes as defined by Item 303(a)(4) of SEC Regulation S-K, as of June 30, 2022. Contractual Obligations See Notes 4 and 9 of our accompanying audited financial statements for information on our contractual obligations. Critical Accounting Policies The following are the Company’s critical accounting policies: “Investment in Unconsolidated Entities – Equity and Cost Method Investments” We account for our interests in entities in which we are able to exercise significant influence over operating and financial policies, generally 50% or less ownership interest, under the equity method of accounting. In such cases, our original investments are recorded at cost and adjusted for our share of earnings, losses and distributions. We account for our interests in entities where we have virtually no influence over operating and financial policies under the cost method of accounting. In such cases, our original investments are recorded at cost and any distributions received are recorded as income. Our investments in OnFolio JV I, LLC (“JV I”), OnFolio JVII, LLC (“JVII”) and OnFolio JVIII, LLC (“JVIII”) are accounted for under the cost method. All investments are subject to our impairment review policy. The current investment in unconsolidated affiliates accounted for under the equity method consists of a 35.8% interest in OnFolio JV IV, LLC (“JV IV”), which is involved in the acquisition, development and operation of websites to produce adverting revenue. “Variable Interest Entities” Variable interest entities (“VIEs”) are consolidated when the investor is the primary beneficiary. A primary beneficiary is the variable interest holder in a VIE with both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE. Management concluded that the joint ventures do not qualify as variable interest entities under the requirements of ASC 810. The Company accounts for its investments in the joint ventures under either the cost or equity method based on the equity ownership in each entity. 50 Table of Contents Revenue Recognition The Company primarily earns revenue through website management, digital services, advertising and content placement on its websites, product sales, and digital product sales. Management services revenue is earned and recognized on a monthly basis as the services are provided. Advertising and content revenue is earned and recognized once the content is presented on the Company's sites in accordance with the customer requirements. Product sales are recognized at the time the product is shipped to the customer. In certain circumstances, products are shipped directly by a supplier to the end customer at the Company's request. The Company determined that it is the primary obligor in these contracts due to being responsible for fulfilling the customer contract, establishing pricing with the customer, and taking on credit risk from the customer. The Company recognizes revenue from these contracts with customers on a gross basis. Digital product sales represent electronic content that is transferred to the customer at time of purchase. The Company also earns revenue from online course subscriptions that may have monthly or annual subscriptions. In circumstances when a customer purchases an annual subscription upfront, the Company defers the revenue until the performance obligation has been satisfied. Revenue is recognized based on the following five step model: - Identification of the contract with a customer - Identification of the performance obligations in the contract - Determination of the transaction price - Allocation of the transaction price to the performance obligations in the contract - Recognition of revenue when, or as, the Company satisfies a performance obligation The Company amortizes acquired definite-lived intangible assets over their estimated useful lives. Other indefinite-lived intangible assets are not amortized but subject to annual impairment tests. Long-lived Assets Property and equipment are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Major renewals and improvements are capitalized, while minor replacements, maintenance and repairs are charged to current operations. In accordance with ASC 360 “Property Plant and Equipment,” the Company reviews the carrying value of intangibles subject to amortization and long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.