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.”
Before moving forward, I want to mention that this post will be similar in style to the one I did on Mader Group a few months back. Why am I doing this again? One, the business is tiny. Its current market cap is just over $8 million and went public less than a year ago. Two, I came across a couple of writeups that did most of the heavy lifting and are fairly comprehensive. Like I mentioned in the Mader writeup, doing my own would run the risk of repeating what the previous authors wrote about the business. Also, there just isn’t a lot of information out there on Onfolio that I could dive in to. My value added came from interviews that I’ve listened to and information I picked up on in its December 2022 Investor Presentation, Q3 2022 10-Q and its S-1 filing. There will not be any financials or financial metrics mentioned because the business has not posted its full-year 2022 results as of the publishing date of this writeup.
You may be wondering why I’m even writing about the business, but I urge you to keep reading for a few reasons. First, the business is interesting and pulls at my heart strings. Second, like I said, the business is tiny, but its valuation is compelling, and I think could already be punching above its weight in terms of its operating performance. Third, I provide some additional information not mentioned in either of the writeups that are linked below.
What’s So Interesting About Onfolio?
My intrigue in it came about rather abruptly. I was browsing through a Discord server that I’m a member of that I hadn’t been on in almost a week and came across a link to a PDF from Jon Kingston over at Capital Employed titled “Bargain Stocks Radar”. You can find links to his Twitter account and Capital Employed’s account here and here. I clicked on the PDF and looked at each idea quickly until I stumbled upon Onfolio. It screened terribly, but he linked to his full writeup on the business, so I decided to take a flyer and read it. For full transparency, I was both skeptical and interested right off the bat because he described it as an acquirer of online, cash flow profitable businesses and yet, it only had a market cap of ~$8 million. How could this be? I thought he might be a little nuts, but then again, we’re all a little nuts. As it turned out, he was right with his initial description.
Reading the entire writeup will take 10 – 15 minutes, but it is well worth your time. The key sections I would pay extra-special attention to are:
Onfolio’s Acquisition Strategy
A Typical Purchase which describes the acquisitions of Fish Keeping World and Outreach Mama.
Opportunity to Compound
Questions for Management – Jon actually had an email conversation with the CEO where he talked about capital allocation.
A link to his full writeup on the business can be found here: https://drive.google.com/file/d/1H_dJuWEjwP_B6w72zSle2yIT1e_se0b4/view
Disclosure: Jon Kingston was long the stock as of the publishing date of his writeup.
The second writeup on the business that I found is called “A real-world example of buying $1 for $.50” by Travis Jamison. His Twitter account can be found here. Luckily, the article was linked in Jon Kingston’s writeup 😅 and provided additional information about Onfolio. It also is an easy read and should take less than 15 minutes to get through.
I would pay extra-special attention to his thoughts on the business as a net-net and his “theoretical costs” for Onfolio’s last three acquisitions.
A link to his full writeup on the business can be found here: https://travis.vc/half-off/
Disclosure: Travis owned ~6% of the business as of the publishing date of his writeup.
I mentioned above that this business pulls at my heartstrings, and I’ll tell you why. I’ve thought about doing what Onfolio does, but with newsletters. Unfortunately, I’m poor and don’t have access to capital. Learning about Onfolio and its operating strategy gave me an indirect, almost vicarious, form of fulfillment.
A Tiny Business That Packs a Punch
I made a quick list of stuff you can buy for $8 million:
This 3-bedroom, 3 bathroom residence at 20 West 53rd Street in Manhattan.
Per the Sherpa Report, you can get three pre-owned HondaJets for ~$7.5 million.
17 shares of Berkshire Hathaway A shares based on the closing price of $469,700/share on 4/3/23.
343 White Gold Rolex Perpetual 1908 watches given their reported price tag of $23,300 a pop.
1.33 Six Million Dollar Men
Or you could theoretically buy all of Onfolio. Even as someone who has no money, getting $8 million doesn’t seem impossible. I’d bet the collective net worth of all my subscribers exceeds $8 million. Enough about its market cap. We’re moving on.
If you read the two writeups that I mentioned earlier, you would know that the business was a net-net. I almost always avoid net-nets because the market is pretty efficient and there is almost always a good reason why the gap between the stock price and book value won’t be realized. Onfolio may be an exception and offer compelling value. I say that because it’s still a net-net based on its Q3 2022 10-Q filing. Its equity value at that time was $13,538,025. Included in this amount was $11,615,383 in cash. Total shares outstanding for the three-month period ended 9/30/2022 was 3,284,339 which equals a book value of $4.12/share. Its stock price closed at $1.58 on 4/3/2023 indicating an upside of 260%. If you want to use the total average shares for the nine-month period ended 9/30/2022 then the number is 2,675,634 giving you a book value of $5.06/share and an upside of 320%.
There is a caveat. The business issued warrants in addition to stock when it IPO’d. Quoting the Q3 2022 10-Q, “Pursuant to the underwriting agreement, the Company sold 2,753,750 units at a public offering price of $5.00 per unit, with each unit consisting of one share of common stock, par value $0.001 per share, and two warrants, with each warrant exercisable to purchase one share of common stock, at an exercise price of $5.00 per share. The warrants have the rights as set forth under a warrant agency agreement. The shares of common stock and the warrants were immediately separable and were issued separately.” The warrants are way out of the money for now, but if the business really executes its strategy, then there will be dilution over the next few years. They expire in August of 2027. Back to our regularly scheduled programming.
That’s quite a spread and one has to wonder how they’ll realize the upside. The answer is through Onfolio’s operating and acquisition model. The screencap below is from Slide 4 of the 2022 Investor Presentation linked above which highlights its “Strategy Overview”.
*You will have seen this slide previously if you read Jon Kingston’s writeup on the business.
The business is clearly laying out its strategy in this slide and has made at least three acquisitions since it went public. Its price discipline has remained intact as it has stuck to paying mid-single digit multiples for them. The acquisitions are shown in the screencap below, which was also taken from the 2022 Investor Presentation.
Per its Q3 2022 10-Q, Onfolio paid $950,000 for SEOButler, $4,449,000 for Proofread Anywhere and $1,250,000 in cash plus a $40,000 promissory note and up to an extra $60,000 in earn outs for BWPS which works out to operating income multiples paid of 4.75x, 6.2x and 4.2x for each business respectively. This simple, yet disciplined acquisition strategy is encouraging and almost unheard of, especially for a nanocap business. This is a very short track record, but the initial signs show that management is honest about its intentions and using its cash balance wisely. It’s also why I think it may be punching above its weight.
Additional Notes and Takeaways
Quotes from the CEO
There were some interesting quotes from the Dom Wells, the CEO of Onfolio in a couple of interviews he was a part of. The first interview I saw was with the Benzinga Youtube channel.
A link to the interview, which starts at the 22:00 mark, can be found here:
This interview was also linked in Jon Kingston’s writeup which is where I originally found it.
23:50 mark – Asked about acquisition criteria and what factors are considered.
Answer: “Great question. So, um, I mentioned already, but first of all, yeah, they’re all online businesses. Um, that’s a very broad term, right? So, it could be software, it could be e-commerce, could be an agency.
And we’re agnostic to the business model, but what we want to see is, it needs to be a business that’s growing, it’s not in an industry that’s going to come under threat. Um, it’s got either a strong product or it’s got a strong service. Ideally it has recurring revenue with low churn.
Um, it has, as I mentioned a few times, the ability for us to come in and grow it. So, a lot of the businesses we look at, they’ve been built from the ground up by a single founder or a couple of founders and those people are usually strong in one area. So, maybe they’re good at media buying, maybe they’re good at sales, maybe they’ve got operations, but they’re rarely good at everything. And, as a team, we are experienced in everything, so we have that ability to just kind of follow our best practices and grow it.
Um, in addition, I would say it’s a business with consistent revenues as well. It’s not just, uh, kind of lumpy, um, and as predictable as possible.”
25:39 mark – Asked about what happens to management or what changes are made to an acquired business. Great question IMO.
Answer: “Yeah, I mean, there’s a big “it depends on the business” answer there.
Um, again, the vast majority of the time they’re being sold by a single founder or founding team and typically they don’t want to stay.
But the management of the team, so the operations, the sales, um, whatever it is depending on the business developer and so on, they’re usually happy to stay and they’re usually quite excited about being bought by a public company as well.
So, our job really then is to replace the founder, to install our own CEO and, um, just try not to rock the boat as much as possible.”
28:22 mark – Asked about going public, what the process was like and what it means for the business going forward.
Answer from the 29:01 mark: “Um, in terms of what it means, well, we raised about $12 million net in the IPO and that’s given us a lot of capital that we can deploy. So, since the IPO we’ve deployed around $4.5 million.
So, BWS was one acquisition. We’ve also made two others, um, and so, we have, you know, maybe $5 – $6 million left to deploy depending on how much we want to keep as working capital. So, yeah. So, it’s basically the IPO has given us the capital that we needed in order to actually do our business plan.
Um, in terms of the advantages of being public, there’s a lot and I don’t think there’s any single one kind of reason a company goes public. For us, the ability to attract talent is a huge one. The ability to win deals versus other buyers is a good one. Um, as a public company, you have a few other capital-like sources of capital such as your stock. If your stock’s trading in, you know, the premium, um, you can, it’s a lot easier to do things like buybacks, which are, again, further down the road for us, but, uh, a good capital allocation decision.
And you also have the increased visibility. Since we’ve gone public, we’ve had significantly larger deal flow come our way, not in terms of the larger businesses because we want to kind of stay in that $1 – $5 million range in terms of the quality and quantity of the deal play.
And you know there’s many, many other intangible benefits that I’m struggling to think of right now. But yeah, basically we could have stayed private, but everything in our business model just works better if we’re public.”
The second interview I came across featured Dom Wells at the Planet Microcap Conference in December of 2022.
A link to the interview can be found here:
4:16 mark while describing Onfolio’s business and operating strategy – The second pillar of Onfolio’s strategy is raising capital to accelerate acquisitions. Mr. Wells’ comments regarding this, “We then raise capital to accelerate our acquisitions. We received $12.1 million in net proceeds in the August IPO. We’ve deployed, um, over $5 million since the IPO to fund the three profitable acquisitions we mentioned on the previous slide. And we plan to use the remaining proceeds to fund future acquisitions.
Then, once the IPO proceeds are fully deployed with a little bit of margin for working capital, we plan to raise non-dilutive financing; so, traditional debt, preferred shares, non-convertible preferred shares to finance and capitalize on additional opportunities because we can typically purchase these businesses at attractive prices.
Usually, we pay no more than four times EBITDA. Sometimes it is for more, but if the quality of the earnings is higher, then it justifies higher, but typically it’s around there. Sometimes it’s 3x and that means we can expect a 25% cash ROI from these businesses without even growing them and we do try and grow them as well.
So, when you’re buying businesses and earning 25%, 20%, but your cost of capital, which we anticipate to be around 10%, maybe a little but higher in 2023, maybe 12%, um, you know, there’s a pretty good margin there for financial leverage.
Um, and then how we scale it is we have a little bit of a decentralized approach. We did start out every business, but we bought, we were typically operating ourselves. Um, that doesn’t really scale very well, so, now we are, uh, a lot more decentralized. And when we buy a business, we’re thinking really of it as a standalone business. If we need to put a new CEO in place to run that businesses we will, um, but the idea is we can scale through making lots of these acquisitions, and there’s really an infinite amount of them.” —> For the record, I’m a little skeptical of the “infinite” amount of acquisitions available, but am simultaneously confident that Onfolio is operating in a target rich environment.
6:52 mark while describing Onfolio’s business and operating strategy – “Um, I think what one of our key differentiators is that we have an ability to evaluate potential acquisitions.
Um, yeah, we believe we excel at finding acquisition opportunities where the seller has not fully optimized their business, but, crucially, where we believe the business is not going to die in a year or two years or three years’ time.
Our model is not around finding a business, double it and then trying to flip that business for more money. It’s around long, sustainable revenues that we can reinvest, uh, either back in to the same company or elsewhere in our portfolio either through, uh, making additional acquisitions or through, uh, just organic growth as long as we don’t have to deploy, kind of, you know, risk capital on trying to grow a business we will. Otherwise, we’ll spend the money on just, uh, more additional acquisitions.”
17:48 mark – Asked about what the value catalysts are for 2023 and what people should be paying attention to.
Answer: “I think, you know, reaching the point where we’ve deployed the IPO proceeds is going to be pretty significant for people because there’s, you know, there’s probably some question marks about when are Onfolio going to reach profitability. And we’re targeting that when we’ve deployed the IPO proceeds, that’s where we’re going to be able to show that. So, people should look out for that.
And then, as I mentioned midway through the presentation, we’ll be then looking to raise non-dilutive capital. So, obviously there will be a press release and an announcement around that. So, that will be really, for us, that’s kind of the next stage. Stage one: deploy the IPO proceeds, get to cash flow positive. Stage two: kind of rinse and repeat.
So, those are the really the catalysts that people should look out for.”
Notes from the Q3 2022 10-Q
SBC is high relative to revenue and the net loss. Refer to p. 8 of the Q3 2022 10-Q. It’s north of $700k while reported OCF is ($2.4) million meaning RFCF is ~($3.1) million. I reached out to Gateway IR, who represents Onfolio, regarding SBC but have not heard back from them as of the publishing date of this writeup.
Its ideal acquisition criteria are shown on p. 20 of the 10-Q and in the screencap below.
Also taken from p. 20, an interesting blurb about Onfolio’s acquisition model, “Our business model is not based around success in a particular “niche”, but rather focusing on certain verticals and mediums where content has a key part to play (for example, the MightyDeals community, or the Pet vertical publishing arm).”
Per p. 24, the business experienced a loss of $29,557 related to purchases of non-fungible tokens. It’s not a lot of money, but is still kind of a red flag 🚩. I also emailed Gateway about the NFTs and if management plans on buying more of them in the future. I will do my best to update you on their answer if I ever hear back from them.
A material weakness was reported on p. 26. Onfolio’s response was to hire more accounting consultants and “… and continue to evaluate and implement procedures that will strengthen our internal controls.”
Notes from the S-1
Management Strategy from p. 2 of the S1 – “Our management strategy involves a combination of sharing resources across websites and employing dedicated managers of individual websites. We give a lot of autonomy to our individual managers, supporting them where necessary, but otherwise allowing them the freedom to grow the websites in line with their goals and responsibilities.” This sounds like something Mark Leonard would say. Will this actually happen? Only time will tell, but it’s an interesting quote.
Interesting risk mentioned in the S-1, “We will likely not obtain an opinion from an independent accounting or investment banking firm in connection with the acquisition of a target business.
We will likely not obtain an opinion from an independent accounting firm or independent investment banking firm that the price we are paying for a target business is fair to our stockholders. If no opinion is obtained, our stockholders will be relying on the judgment of our board of directors (“Board”), who will determine fair market value based on standards generally accepted by the financial community.”
The S-1 provided a list of the businesses that Onfolio owns or manages and it’s a quirky group. Some of them along with a brief description are listed below and were taken from pp. 58-51 of the S-1.
Mightydeals.com – “In January 2021, we acquired Mightydeals.com and its related domain names. Mightydeals.com is a vendor of design bundles and deals for freelance designers, agencies, hobbyists and solopreneurs. The website works with creators of design templates, fonts, software, and training (the vendors) and offers their works at steep discounts.”
Prettyneatcreative.com – “In August 2021, we acquired Prettyneatcreative.com. Prettyneatcreative.com is an eCommerce website in the diamond painting niche. It operates via a drop shipping model, avoiding the need to keep inventory. Products are shipped via air and sea from China and over overseas manufacturing locations. The website’s customers are hobbyists who buy multiple times throughout their customer lifetime.”
Wowfreestuff.co.uk – “In April 2020, we began to manage Wowfreestuff.com. Wowfreestuff.com has a large audience of hundreds of thousands of people in the UK who want to be notified when companies do freebies and giveaways. Many of these companies pay a commission to the site for helping promote their freebies.”
Backgroundhawk.com – “In October 2020, we began to manage Backgroundhawk.com. Backgroundhawk.com is a review website and sits squarely in the growing and lucrative background check and legal check industry.”
Hobbyhelp.com – “In December 2020, we began to manage HobbyHelp.com. HobbyHelp.com is a resource for a wide range of hobbies, anything from metal detecting to surfing. Content is monetized in a variety of ways, predominantly through display advertising and affiliate commissions, such as those generated by the Amazon Associates program. We believe that long term, there is a huge opportunity to build engaged audiences around various different hobbies, and a community (both tangible and intangible) is in the pipeline.”
Onthegas.org – “In May 2020, we began to manage Onthegas.org. Onthegas.org offers content related to recipes, cooking tips, and reviews of cooking equipment.”
Description of Dom Wells from p. 65 of the S-1, “Dominic Wells has served as our Chief Executive Officer since August 2020 and as a Director since July 2020, and as Chief Executive Officer of Onfolio LLC since May 2019. He is responsible for developing and implementing our Company’s long term business strategy and direction. From August 2013 to April 2019, Mr. Wells was the founder and director of Digital Wells Limited (Hong Kong), where he grew the Company and the Human Proof Designs (Humanproofdesigns.com) website. Human Proof Designs is an internet marketing agency offering website creation, search engine optimization services, content marketing and content creation services, and affiliate marketing training. After founding Digital Wells Limited (Hong Kong) and growing it for 5 years, Mr. Wells exited the company in 2019. Mr. Wells’ qualifications to serve on our Board include his knowledge of our Company and his leadership at our Company. Mr. Wells completed a BA (Hons) in Media Practice & Theory from the University of Sussex, UK in 2006.”
That’s all I’ve got for today. I’m going to hold off on issuing a judgement on Onfolio’s prospects until I read its first 10-K. Said document will be filed late. Per the late notification document which was filed on 3/31/23, “The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 cannot be filed within the prescribed time period because the Company requires additional time to prepare and review its financial statements to insure adequate disclosure of the financial information required to be included in the Form 10-K. The Company’s Annual Report on Form 10-K will be filed on or before the 15th calendar day following the prescribed due date.” This wasn’t super encouraging and has been noted, but I’m not invested in the shares, so I won’t stress about it.
I can say that I’m more interested in this business than most, but the most prudent thing to do is wait and see what the full-year 2022 results look like.
Thanks again as always for reading. If you liked this writeup then 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.
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.