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 small 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 online businesses 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 online businesses. 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. Revenue in 2023 was up 136% in 2023 compared to 2022, an increase of just over $3,000,000. This growth was achieved through the acquisitions we made in Q4 2022, which we held for a full year in 2023, and the additional acquisition we made in Q1 2023. Our gross profit margin in 2023 was 62%, up from 54% in 2022. This improvement was achieved through an effort by management to reduce the operating costs of our online businesses, driving them to run more efficiently. In 2023 we noticed a slowdown of lending and a rise in interest rates, and we acted to weather the more difficult capital raising environment through austerity measures, using our remaining cash to extend our working capital runway as long as possible. Despite those challenges, we closed and obtained full control on one acquisition, RevenueZen, in January 2024, which historically generated $1.4M in revenue in 2023. Towards the end of 2023, we focused more on targeting B2B agencies and productized services for acquisition. Historically, our best performing assets have been B2B marketing agencies, and the acquisition opportunities are rich in this space. In 2024, we will look for opportunities to use our growing stature and track record to raise capital on attractive terms — this is a large area of focus for management. Due to our cash constraints and desire to avoid issuing additional shares of common stock, we intend to use a mixture of debt, including seller notes, and preferred shares to close acquisitions moving forward — such as can be seen with our recent RevenueZen acquisition. We are looking to make more acquisitions over the coming months of a similar structure, allowing us to maximize our runway while reducing our burn with a mixture of accretive acquisitions, and continuous expense reduction and optimization efforts. 45 Table of Contents Organic growth is also a major area we are looking to improve, but inorganic growth through acquisitions will ultimately be necessary and will be the catalyst for our profitability. In the course of our regular financial review and in compliance with ASC350, in September 2023 we conducted a reassessment of our portfolio of subsidiaries, their performance and recent market developments. Based on this review, which considered factors such as the financial landscape, the evolving M&A dynamics in this landscape, and prevailing market conditions, we have determined that the carrying value of certain subsidiaries no longer reflects their recoverable amount. We noted lower than expected operating results for ProofreadAnywhere, WP Folio, and SEO Butler and as such performed a discounted cash flow test to determine the amount of impairment necessary. We used a higher discount rate than previous valuations due to the increased interest rates and reduced business performances. We concluded based on the recoverability test performed for Proofread Anywhere, WP Folio, and SEO Butler, that impairment related to goodwill was needed in the amounts of $2,061,763, $580,284, and $420,532, respectively, which were recognized in the Q3 2023 Form 10Q. As always, management is dedicated to continuous improvement, pursuit of growth, and commitment to our shareholders. Recent Developments In January 2024, we acquired RevenueZen.com, an online service provider that works with B2B brands to grow their organic and referral traffic. ReveueZen offers B2B marketing services such as search-engine optimization, Linkedin marketing and content marketing. RevenueZen enjoys a strong reputation in its field, specializing in working with startups, healthcare, professional services, renewable energy, and financial services businesses, among others. Our Company holds an 88% ownership stake in RevenueZen, while RevenueZen founders received a 12% roll-over equity interest and will serve in leadership roles in the Onfolio-owned RevenueZen team. 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;” and ● 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. 46 Table of Contents 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 effectively utilize a combination of cash, debt such as seller’s notes, and preferred shares when negotiating and structuring future deals; ● our ability to attract and retain talented employees; and ● market conditions and our market position. Components of Results of Operations The Company reported a net loss of $8,144,821, which includes $5,291,055 in non-cash expenses, for the year ended December 31, 2023 compared to a net loss of $4,234,357, which includes $1,155,083 in non-cash expenses, 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 2023 2022 year year Revenue, services $ 1,496,038 $ 544,822 $ 951,216 175 % Revenue, product sales 3,743,948 1,674,993 2,068,955 124 % Total Revenue 5,239,986 2,219,815 3,020,171 136 % Revenue increased by $3,020,171, or 136% for the year ended December 31, 2023 compared to 2022. The increase is primarily due to revenue from our three acquisitions completed during the fourth quarter of fiscal 2022, which increased revenue by approximately $2,500,000, including approximately $1,800,000 in digital product sales along with an increase of approximately $640,000 from Contentellect, acquired in the first quarter of fiscal 2023. This increase was offset by a decline in product sales and advertising revenue from MightyDeals and other pre-IPO assets. Cost of Revenue For the Year Ended December 31, $ Change from prior % Change from 2023 2022 year prior year Cost of revenue, services $ 837,888 $ 356,957 $ 480,931 135 % Cost of revenue, product sales 1,159,267 664,405 494,862 74 % Total Cost of Revenue 1,997,155 1,021,362 975,793 96 % 47 Table of Contents Cost of revenue increased by $975,793, or 96%, due to the increase resulting from the Company’s recent acquisitions. The Company’s gross profit margins increased in the current period compared to the prior period due to the Company’s efforts to streamline operations and create efficiencies, and due to the increased sales from digital product sales with higher margins in the new businesses. The components most significant to the Company’s cost of revenue are the costs of labor for service fulfillment, content creation, website hosting and maintenance costs and the costs of acquiring new inventory products for physical product sales. Operating Expenses Selling, General and Administrative General and Administrative expenses increased by $1,768,823 or 41% during the year ended December 31, 2023 as compared to 2022. The increase was primarily due to an increase in advertising and marketing costs of $1,200,000, which includes the impact of new businesses acquired in late 2022 and early 2023, an increase in amortization expense of $615,000 associated with the acquired intangible assets not present in the comparable period, a $90,000 increase in other general and administrative costs including stock-based compensation, travel, merchant fees, and increased costs related to being a public company of $279,000, offset by a decrease in payroll and contractor costs of $85,000 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 near future, our general and administrative expenses may continue to increase to support business growth. Over the long term, we aim to have general and administrative expenses decreasing as a percentage of revenue. Professional Fees and Acquisition Costs Professional fees increased by $650,469, or 128% during the year ended December 31, 2023 compared to 2022 primarily due to increased due to increased legal and accounting costs associated with the Company’s compliance requirements as a public company. The Company also incurred $326,899 during the year ended December 31, 2023 compared to $527,792 during the year ended December 31, 2022, including audit, legal and other professional fees related to acquisitions and potential acquisitions. We expect acquisition costs to remain significant as we continue to grow based on acquisitions. Impairment Loss During the year ended December 31, 2023, after taking into account the lower than expected performances of the following businesses and the rising interest rates, the Company recognized impairment losses of $2,061,763 related to the BCP Media Acquisition, $580,284 related to the BWPS Acquisition, and $420,532 related to the SEO Butler Acquisition, $700,000 related to Mighty Deals website domains and $84,000 related to Pretty Neat Creative, operating under Onfolio Crafts LLC, and $105,937 related to various website domains operating under Onfolio Assets LLC for total aggregate impairment expense $3,952,516. Management has a process to evaluate the viability and profitability of each business. If and when management concludes that a business has a significantly reduced future value, management will assess the asset for possible impairment in the quarter management reaches that conclusion. Other Income and Expense Total other income was $92,778 for the year ended December 31, 2023 compared to other expense of $123,212 for the year ended December 31, 2022. The increase in other income was driven by higher interest income on the Company’s increased cash balances from funds raised in the Company’s initial public offering in the third quarter of 2022, and an impairment loss on sale of assets in 2022 not seen in 2023. Liquidity and Capital Resources As of December 31, 2023, our principal sources of liquidity consisted of cash and cash equivalents of $982,261 which was mainly on account of raising capital from sale of common stock and warrants in our IPO of $12,255,470. In addition, the Company has raised $600,000 during a private offering of Preferred stock and repaid $2,439,000 on its acquisition-related notes payable. 48 Table of Contents 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, 2023 and 2022, 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, 2023, 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 $2,751,838 and $2,870,893 for the years ended December 31, 2023 and 2022. The slight decrease was primarily from Company’s efforts to streamline costs, partially offset by the increased general and administrative costs from the acquired businesses for a full year compared to partial periods in the year ended December 31, 2022. Investing Activities Net cash used in investing activities was $850,000 and $4,283,219 for the years ended December 31, 2023 and 2022. For the year ended December 31, 2023, the Company used $850,000 to acquire a single business during the first quarter. During 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. Financing Activities Cash flows from financing activities was cash used of $2,156,650 and cash provided of $12,109,373 for the years ended December 31, 2023 and 2022. During the year 2023, we raised $565,000 from the sales of preferred stock in a private exempted offering, which was offset by the repayment of the acquisition notes payable of $2,439,000, payments of preferred dividends of $213,691, and payments on note payables of $68,959 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. 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 December 31, 2023. Contractual Obligations See Notes 4 and 9 of our accompanying audited financial statements for information on our contractual obligations. 49 Table of Contents 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 the cost to acquire the interest and any distributions received are recorded as income. All investments are subject to our impairment review policy. The Company recognized the value of its investments in these joint ventures at carryover basis based on the amount paid by the CEO to the joint venture for Onfolio JV 1 LLC, and agreed to pay the joint venture the contribution for Onfolio JV II LLC and Onfolio JV III LLC at the carryover basis for the amount the interest was acquired for by the CEO. The current investment in unconsolidated affiliates accounted for under the equity method consists of a 35.8% in interest in Onfolio JV IV, LLC (“JV IV”), which is involved in the acquisition, development and operation of online businesses to produce advertising revenue. The initial value of an investment in an unconsolidated affiliate accounted for under the equity method is recorded at the fair value of the consideration paid. 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. The Company is not considered the primary beneficiary of any VIE’s as the joint ventures do not qualify as variable interest entities under the requirements of ASC 810, as the joint ventures 1) have sufficient equity to finance its activities; 2) have equity owners that as a group have the characteristics of a controlling financial interest in the business, through the ability to vote on a majority basis to change the managing member of the respective joint ventures, and 3) are structured with substantive voting rights. 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. Revenue Recognition The Company follows the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (the “new revenue standard”) to all contracts using the modified retrospective method. 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 primarily earns revenue through website management, advertising and content placement on its online businesses, and 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. 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. 50 Table of Contents 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. Item 8. Financial Statements and Supplementary Data Our Financial Statements of are attached as Appendix A (following Exhibits) and included as part of this Form 10-K Report. A list of our Financial Statements is provided in response to Item 15 of this Form 10-K Report. Item 9. Changes In And Disagreements With Accountants On Accounting and Financial Disclosure None.