The accompanying notes are an integral part of these unaudited consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS AND ORGANIZATION
Onfolio Holdings, Inc. (“Company”) was incorporated on July 20, 2020 under the laws of Delaware to acquire and development high-growth and profitable internet businesses. The Company primarily earns revenue through website management, advertising and content placement on its websites, and product sales on certain sites. The Company owns multiple websites and manages websites on behalf of certain unconsolidated entities in which it holds equity interests.
On July 22, 2020, the Company issued 2,000,000 shares to Dominic Wells, the Company’s CEO in exchange for 100% of the membership interest of Onfolio LLC. At the time of the transaction, Dominic Wells was the sole owner of both Onfolio LLC and the Company and as such the transaction was considered a combination of entities under common control under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805. Onfolio LLC owned and operated several domain names that were recognized on the Company’s balance sheet at carryover basis in accordance with ASC 805. The results of operations and cash flows of Onfolio LLC are included in the Company’s consolidated financial statements since the incorporation date of Onfolio LLC in 2019. Onfolio LLC is a Delaware LLC and was formed on May 14, 2019 by the sole member Dominic Wells.
On April 7, 2021 and September 6, 2021, the Company created wholly-owned subsidiaries, Mighty Deals LLC and Onfolio Crafts LLC, respectively, in the state of Delaware.
On November 15, 2021, the Company created a wholly-owned subsidiary, Onfolio Assets, LLC in the state of Delaware. On December 8, 2022, the Company created wholly-owned subsidiaries WP Folio LLC and Proofread Anywhere LLC in the state of Delaware.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information an in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). The Company’s fiscal year end is December 31. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the period presented. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K as filed with the SEC on April 12, 2023. The interim results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any future periods.
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries and other controlled entities. The Company’s wholly-owned subsidiaries are Onfolio LLC, Vital Reaction, LLC, Mighty Deals LLC, Onfolio Assets, LLC, WP Folio, LLC, Proofread Anywhere, LLC, Contentellect, LLC, SEO Butler Limited and Onfolio Crafts LLC. All intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Translation Gains (Losses)
The Company, and its subsidiaries Onfolio LLC, Vital Reaction, LLC, Mighty Deals LLC, Onfolio Assets, LLC, WP Folio, LLC, Proofread Anywhere, LLC, Contentellect, LLC and Onfolio Crafts LLC, maintain their accounting records in U.S. Dollars. The Company’s operating subsidiary, SEO Butler, is located in the United Kingdom and maintains its accounting records in Great Britain Pounds, which is its functional currency. Assets and liabilities of the subsidiary are translated into U.S. dollars at exchange rates at the balance sheet date, equity accounts are translated at historical exchange rate and revenues and expenses are translated by using the average exchange rates for the period. Translation adjustments are reported as a separate component of other comprehensive income (loss) in the consolidated statements of operations and comprehensive loss. Foreign currency denominated transactions are translated at exchange rates approximating those in effect at the transaction dates.
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. Our investments in Onfolio JV I, LLC (“JV I”), Onfolio JV II, LLC (“JV II”) and Onfolio JV III, LLC (“JV III”) are accounted for under the cost method. 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% interest in Onfolio JV IV, LLC (“JV IV”), which is involved in the acquisition, development and operation of websites to produce adverting 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. Management concluded that 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. The Company uses significant judgements when making estimates related to the assessment of control over variable interest entities, valuation of deferred tax assets and impairment of long lived assets. Actual results could differ from those estimates.
Cash and Cash Equivalent
Cash and cash equivalents include cash on hand, demand deposits with banks and liquid investments with an original maturity of three months or less.
Inventories
Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the first-in, first-out (FIFO) method.
Long-lived Assets
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. 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.
Revenue Recognition
The Company follows the guidance of the FASB ASC 606, Revenue from Contracts with Customers 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, 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. As of March 31, 2023, the Company has $185,238 in deferred revenue related to unsatisfied performance obligations that are expected to be recognized during fiscal 2023.
The following table presented disaggregated revenue information for the three months ended March 31, 2023 and 2022:
| | | For the Three Months ended March 31, | |
| | | 2023 | | | 2022 | |
| Website management | | $ | 40,612 | | | $ | 66,102 | |
| Advertising and content revenue | | | 266,601 | | | | 51,886 | |
| Product sales | | | 126,711 | | | | 129,908 | |
| Digital Product Sales | | | 917,810 | | | | 138,028 | |
| Total revenue | | $ | 1,351,734 | | | $ | 385,923 | |
The Company does not have any single customer that accounted for greater than 10% of revenue during the three months ended March 31, 2023 and 2022.
Cost of Revenue
Cost of product revenue consists primarily of costs associated with the acquisition and shipment of products being sold through the Company’s online marketplaces, and the costs of its service revenue, which include website content creation costs including contract labor, service fulfillment, domain and hosting costs and certain software costs related to website operations.
Net Income (Loss) Per Share
In accordance with ASC 260 “Earnings per Share,” basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares, such as stock options and warrants, outstanding during the period. Such common equivalent shares have not been included in the computation of net loss per share as their effect would be anti-dilutive.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
| (a) | Tax benefits of uncertain tax positions are recorded only where the position is “more likely than not” to be sustained based on their technical merits. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) in such excess. The Company has no uncertain tax positions as of March 31, 2023. |
Fair Value of Financial Instruments
The carrying value of short-term instruments, including cash, accounts payable and accrued expenses, and notes payable approximate fair value due to the relatively short period to maturity for these instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value.
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
Stock-Based Compensation
| Accounting Standards Codification (“ASC”) 718, “Accounting for Stock-Based Compensation” established financial accounting and reporting standards for stock-based compensation plans. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, the Black-Scholes option pricing model is utilized to derive an estimated fair value. The Black-Scholes pricing model requires the consideration of the following six variables for purposes of estimating fair value. |
Expected Dividends. - We have never declared or paid any cash dividends on our common stock and do not expect to do so in the foreseeable future. Accordingly, we use an expected dividend yield of zero to calculate the grant-date fair value of a stock option.
Expected Volatility. - The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of options granted. We determine the expected volatility solely based upon the historical volatility of a peer group of companies of similar size and with similar operations.
Risk-Free Interest Rate. - The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term on the grant date.
Expected Term. The expected life of stock options granted is based on the actual vesting date and the end of the contractual term.
Stock Option Exercise Price and Grant Date Price of Common Stock. - Currently the Company utilizes the most recent cash sale closing price of its common stock as the most reasonable indication of fair value.
The Company accounts for compensation cost for stock option plans and for share based payments to non-employees in accordance with ASC 505, “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services“. Share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on Company’s results of operations, financial position or cash flow.
NOTE 3 – GOING CONCERN
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 March 31, 2023 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 it is currently exploring various funding options at this time. Management 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.
NOTE 4 – BUSINESS ACQUISITIONS
Contentellect Limited
On January 13, 2023, Onfolio Assets LLC, the Company’s wholly owned subsidiary, 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 Business”).
Pursuant to the Contentellect Asset Purchase Agreement, and subject to the terms and conditions contained therein, at the closing, Contentellect will sell to Onfolio Assets LLC the assets, properties and rights of every kind and nature related to the Contentellect Business all as more fully described in the Contentellect Asset Purchase Agreement. The aggregate purchase price for the Contentellect Business was $850,000 in cash. This acquisition closed on February 1, 2023. The acquisition of Contentellect is being accounted for as a business combination under ASC 805. The Company is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date. The Company assigned the preliminary fair value of the consideration paid of $850,000 to domain name intangible assets that are amortized over an estimated useful life of four years.
From the period of acquisition of the Contentellect Business through March 31, 2023, the Company generated total revenue and net income of $125,986 and $7,609, respectively.
SEO Butler Acquisition
On October 6, 2022, the 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”) (the “SEO Butler Acquisition”). Seller is the owner of the legal and beneficial title to the Sale Shares of SEO Butler, which operates as a productized 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. The Guarantors have agreed to guarantee to the Company the due and punctual performance, observance and discharge by the Seller of all the Guaranteed Obligations (as defined in the Share Purchase Agreement) if and when they become performable or due under the Share Purchase Agreement.
Pursuant to the Share Purchase Agreement, and on the terms and subject to the conditions contained therein, at the closing, the Company purchased the Sale Shares from the Seller, all as more fully described in the Share Purchase Agreement. The aggregate purchase price paid by the Company was $950,000. The transaction closed on October 13, 2022. The acquisition of SEO Butler is being accounted for as a business combination under ASC 805. The Company is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date.
The aggregate preliminary fair value of consideration for the SEO Butler Acquisition was as follows:
| Schedule of preliminary Fair value Acquisition | | | |
| | | Amount | |
| Cash paid to seller | | | 950,000 | |
| Total preliminary consideration transferred | | $ | 950,000 | |
The following information summarizes the preliminary allocation of the fair values assigned to the assets acquired at the acquisition date:
| Schedule Of Recognized Identified Assets Acquired And Liabilities | | | |
| Cash Acquired | | $ | 38,587 | |
| Other Current assets | | | 14,858 | |
| Website domains | | | 70,000 | |
| Customer relationships | | | 322,000 | |
| Trademarks and Trade Names | | | 90,000 | |
| Non-Compete agreement | | | 30,000 | |
| Goodwill | | | 407,888 | |
| Accounts payable and other accrued liabilities | | | (2,205 | ) |
| Deferred revenue | | | (21,128 | ) |
| Net assets acquired | | $ | 950,000 | |
BCP Media Acquisition
On October 13, 2022, the Company 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.
Pursuant to the BCP Asset Purchase Agreement, the Company purchased from BCP Media, substantially all the Proofreading Business (defined below) assets of BCP Media and assigned the acquired assets to the Company, which, pursuant to the BCP Asset Purchase Agreement and certain ancillary agreements, will operate the business of online proofreading training (the “Proofreading Business”) via the following websites: ProofreadAnywhere.com, WorkAtHomeSchool.com, and WorkYourWay2020.com.
Pursuant to the BCP Asset Purchase Agreement, and subject to the terms and conditions contained therein, BCP Media sold to the Company the purchased assets, all as more fully described in the BCP Asset Purchase Agreement. The purchase price was paid as follows: $4,499,000, plus a warrant to purchase up to 20,000 shares of the Company’s common stock at the price of $4.75 per share with $2,100,000 paid in cash at the closing and $2,399,000 paid via a promissory note (the “BCP Note”).
The BCP Note was made by the Company to BCP Media. The BCP Note has the principal sum of $2,399,000 (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, the Company shall make an interest only payment to BCP Media equal to $5,997.50 per month; and (ii) the entire Loan Amount, together with all accrued but unpaid interest thereon, shall be due and payable on the Maturity Date.
The acquisition of BCP Media assets is being accounted for as a business combination under ASC 805. The Company is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date.
The aggregate preliminary fair value of consideration for the BCP Media acquisition was as follows:
| Schedule of preliminary Fair value Acquisition | | | |
| | | Amount | |
| Cash paid to seller | | | 2,100,000 | |
| Notes payable issued to seller | | | 2,399,000 | |
| Warrants to purchase common shares issued to seller | | | 60,000 | |
| Total preliminary consideration transferred | | $ | 4,559,000 | |
The following information summarizes the preliminary allocation of the fair values assigned to the assets acquired at the acquisition date:
| Schedule Of Recognized Identified Assets Acquired And Liabilities | | | |
| Website domains | | $ | 220,000 | |
| Customer relationships | | | 813,000 | |
| Trademarks and Trade Names | | | 330,000 | |
| Non-Compete agreement | | | 80,000 | |
| Goodwill | | | 3,116,000 | |
| Net assets acquired | | $ | 4,559,000 | |
BWPS Acquisition
On October 3, 2022, the Company entered into an Asset Purchase Agreement (“BWPS Asset Purchase Agreement”) with Hoang Huu Thinh, an individual (“ Hoang”). Pursuant to the BWPS Asset Purchase Agreement, the Company will purchase from Hoang, substantially all of the Seller’s 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 Websites Business”), with the core 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.
Pursuant to the BWPS Asset Purchase Agreement, and subject to the terms and conditions contained therein, at the closing, Hoang agreed to sell to Onfolio, LLC the WordPress Websites Business, all as more fully described in the BWPS Asset Purchase Agreement. The aggregate purchase price for the WordPress Websites Business is as follows: (i) $1,250,000 paid in cash at the closing and $40,000 paid via a promissory note to be made by Onfolio, LLC payable to Hoang after the performance of certain obligations by Hoang and others as provided for in the BWPS Asset Purchase Agreement; and (ii) up to $60,000 in cash pursuant to the earn-out provisions of the BWPS Asset Purchase Agreement. The transaction closed on October 25, 2022. The acquisition of BWPS assets is being accounted for as a business combination under ASC 805. The Company is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date.
The aggregate preliminary fair value of consideration for the BWPS acquisition was as follows:
| Schedule of preliminary Fair value Acquisition | | | |
| | | Amount | |
| Cash paid to seller | | | 1,250,000 | |
| Notes payable issued to seller | | | 40,000 | |
| Contingent liability for earn-out provision | | | 60,000 | |
| Total preliminary consideration transferred | | $ | 1,350,000 | |
The following information summarizes the preliminary allocation of the fair values assigned to the assets acquired at the acquisition date:
| Schedule Of Recognized Identified Assets Acquired And Liabilities | | | |
| Website domains | | $ | 130,000 | |
| Customer relationships | | | 482,000 | |
| Trademarks and Trade Names | | | 50,000 | |
| Non-Compete agreement | | | 30,000 | |
| Goodwill | | | 658,000 | |
| Net assets acquired | | $ | 1,350,000 | |
Unaudited Pro Forma Financial Information
The following table sets forth the pro-forma consolidated results of operations for the three months ended March 31, 2023 and 2022 as if the Contentellect Business, BCP Media, BWPS, and SEO Butler acquisitions occurred on January 1, 2022. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisitions had taken place on the dates noted above, or of results that may occur in the future.
| | | Three Months ended March 31, | |
| | | 2023 | | | 2022 | |
| Revenue | | $ | 1,439,767 | | | $ | 1,896,375 | |
| Operating loss | | | (1,179,731 | ) | | | (161,295 | ) |
| Net loss | | | (1,112,640 | ) | | | (155,978 | ) |
| Net loss attributable to common shareholders | | | (1,163,665 | ) | | | (155,978 | ) |
| Net loss per common share | | $ | (0.23 | ) | | $ | (0.07 | ) |
| Weighted Average common shares outstanding | | | 5,110,196 | | | | 2,354,049 | |
NOTE 5 – INVESTMENTS IN JOINT VENTURES
The Company holds various investments in certain joint ventures as described below.
Cost method investments
OnFolio JV I, LLC (“JV I”) was formed on October 11, 2019 under the laws of Delaware. OnFolio LLC is the managing member of JV I and has operational and financial decision making. The manager of JV 1 can be removed by a majority vote of the equity holders of JV I. On August 1, 2020, the Company received an investment of 2.72% by assignment from Dominic Wells, the Company’s CEO, who invested $10,000 into JV I for the equity interest. As manager of JV I, the Company will receive a monthly management fee of $2,500, and 50% of net profits of JV I above the monthly minimum of $12,500. In the event of the sale of a website that JV I manages, the Company will received 50% of the excess of the sales price above the price paid for the site. During the year ended December 31, 2022, the Company purchased an additional 10.91% interest from existing owners for $52,500 in cash, bringing its total equity interest to 13.65%.
OnFolio JV II, LLC (“JV II”) was formed on November 8, 2019 under the laws of Delaware. OnFolio LLC is the managing member of JV II and has operational and financial decision making. The manager of JV II can be removed by a majority vote of the equity holders of JV II. On August 1, 2020, the Company received an investment of approximately 2.14% by assignment from Dominic Wells, the Company’s CEO, who invested $10,000 into JV II for the equity interest.. Additionally, during the year ending December 31, 2020 the CEO acquired an additional interest from an existing JV II investor and transferred it to the Company, bringing its total equity interest in JV II to 4.28%. During the year ending December 31, 2021, the company acquired additional interest from an existing JV II investor by paying $9,400 for his 2.14%, bringing its total equity interest in JV II to 6.42%. As manager of JV II, the Company will receive a monthly management fee of $1,500, and 50% of net profits of JV II above the monthly minimum of $16,500. In the event of the sale of a website that JV II manages, the Company will receive 50% of the excess of the sales price above the price paid for the site. During the year ended December 31, 2022, the Company purchased an additional 4.28% interest from an existing owner for $10,000 in cash, bringing its total equity interest to 10.70%. Based on the cash purchase price of the additional interest, the Company determined there was an implied impairment in the amount of $14,401 related to the cost basis of JV II during the year ended December 31, 2022. The management fee to the Company described above was waived for fiscal year ended December 31, 2022 due to lower operating results of JV II.
OnFolio JV III, LLC (“JV III”) was formed on January 3, 2020 under the laws of Delaware. OnFolio LLC is the managing member of JV III and has operational and financial decision making. The manager of JV 1 can be removed by a majority vote of the equity holders of JV III. On August 1, 2020, the Company received an investment of approximately 1.94% by assignment from Dominic Wells, the Company’s CEO, who invested $10,000 into JV I for the equity interest. The $10,000 owed by the Company is included in Due to related parties on the consolidated balance sheet as of December 31, 2020. During the year ending December 31, 2021, the company acquired additional interests from existing JV II investors by paying $40,000 for 7.7652%, bringing its total equity interest in JV III to 9.7052%. As manager of JV III, the Company will receive a monthly management fee of $3,000, and 50% of net profits of JV III above the monthly minimum of $16,500. In the event of the sale of a website that JV III manages, the Company will receive 50% of the excess of the sales price above the price paid for the site. During the year ended December 31, 2022, the Company purchased an additional 3.88% interest from an existing owner for $5,000 in cash, bringing its total equity interest to 13.59%. Based on the cash purchase price of the additional interest, the Company determined there was an impairment in the amount of $37,493 recognized during the year ended December 31, 2022 related to the cost basis of JV III. The management fee to the Company described above was reduced to $500 for fiscal year ended December 31, 2022 due to lower operating results of JV III.
OnFolio Groupbuild 1 LLC (“Groupbuild”) was formed on April 22, 2020 under the laws of Delaware. The Company, as manager, is entitled to 20% of the profits of Groupbuild, and an annual management fee of $15,000. The Company was assigned a 20% interest in Groupbuild by the Company’s CEO on August 1, 2020.
Equity Method Investments
OnFolio JV IV, LLC (“JV IV”) was formed on January 3, 2020 under the laws of Delaware. The Company holds an equity interest of 35.8% in JV IV, and is the manager of JV IV. The Company acquired this interest on August 1, 2020 for $290,000 through issuance of a Note payable to the joint venture. The Company paid off theote payable during the year ended December 31, 2022. The manager of JV IV can be removed by a majority vote of the equity holders of JV IV.
The balance sheet of JV IV at March 31, 2023 included total assets of $852,505 and total liabilities of $5,350. The balance sheet of JV IV at December 31, 2022 included total assets of $855,442 and total liabilities of $4,130. Additionally, the income statement for JV IV for the three months ended March 31, 2023 and 2022 included the following:
| | | For the Three Months Ended March 31, 2023 | | | For the Three Months Ended March 31, 2022 | |
| Revenue | | $ | 22,210 | | | $ | 30,561 | |
| Net Income | | $ | 19,241 | | | $ | 28,435 | |
The Company recognized equity method income of $6,888 and $10,179 during the three months ended March 31, 2023 and 2022, respectively, and received dividends from JV IV of $8,377 and $7,426, respectively, which were accounted for as returns on investment.
NOTE 6 – INTANGIBLE ASSETS
The following table represents the balances of intangible assets as of March 31, 2023 and December 31, 2022:
| | | Estimated life | | March 31, 2023 | | | December 31, 2022 | |
| Website Domains | | Indefinite | | $ | 1,308,260 | | | $ | 1,308,260 | |
| Website Domains | | 4 years | | | 1,276,455 | | | | 424,674 | |
| Customer relationships | | 4-6 years | | | 1,646,692 | | | | 1,638,502 | |
| Trademarks and Tradenames | | 10 years | | | 478,299 | | | | 476,010 | |
| Non-compete agreements | | 3 years | | | 142,767 | | | | 142,004 | |
| | | | | | 4,852,473 | | | | 3,989,450 | |
| Accumulated Amortization - Website domains | | | | | (86,015) | | | | (23,834) | |
| Accumulated Amortization - Customer Relationships | | | | | (163,927) | | | | (78,514) | |
| Accumulated Amortization - Trademarks / Tradenames | | | | | (23,499) | | | | (11,484) | |
| Accumulated Amortization - Non-Compete | | | | | (22,961) | | | | (11,000) | |
| Net Intangible | | | | $ | 4,556,071 | | | $ | 3,864,618 | |
On January 6, 2021, the Company acquired an additional domain name and related intellectual property for a purchase price of $700,000, which was paid in cash through March 1, 2021 and recognized an as indefinite lived intangible asset. The Company also paid $42,000 as a finders fee. Management evaluated the transaction under ASC 805 and determined it was an asset acquisition, as substantially all of the fair value of assets acquired was concentrated in a group of similar assets, being the domain names and related intellectual property to operate those domains.
On August 25, 2021, the Company acquired an additional domain name and related intellectual property for a purchase price of $84,000, recognized an as indefinite lived intangible asset. Management evaluated the transaction under ASC 805 and determined it was an asset acquisition, as substantially all of the fair value of assets acquired was concentrated in a group of similar assets, being the domain names and related intellectual property to operate those domains.
On May 2, 2022 the Company sold one its domain sites and related intellectual property for a purchase price of $45,694, and recognized a loss of $34,306 on the disposal. The Company also paid $7,392 in fees related to the transaction.
On October 13, 2022, the Company closed on its acquisition of the SEO Butler Acquisition. As part of the acquisition, the Company acquired assets related to the websites operated by SEO Butler. Pursuant to the purchase price allocation as further described in Note 4, the Company allocated $512,000, which is to be amortized over the estimated life of the assets ranging from 3-10 years.
On October 14, 2022, the Company closed on its acquisition of the BCP Media Acquisition. As part of the acquisition, the Company acquired assets related to the Proofreading Business. Pursuant to the purchase price allocation as further described in Note 4, the Company allocated $1,443,000, which is to be amortized over the estimated life of the assets ranging from 3-10 years.
On October 25, 2022, the Company closed on its acquisition of the BWPS Acquisition. As part of the acquisition, the Company acquired assets related to Wordpress Plugins. Pursuant to the purchase price allocation as further described in Note 4, the Company allocated $692,000, which is to be amortized over the estimated life of the assets ranging from 3-10 years.
On February 1, 2023, the Company close on its acquisition of the Contentellect Business, and allocated the entire $85,000 purchase price to domain name assets with an estimated life of 4 years.
The following is an amortization analysis of the annual amortization of intangible assets on a fiscal year basis as of March 31, 2023:
| For the year ended December 31, | | Amount | |
| 2023 (9 months remaining) | | $ | 609,565 | |
| 2024 | | | 756,419 | |
| 2025 | | | 742,728 | |
| 2026 | | | 629,571 | |
| 2027 | | | 186,562 | |
| Thereafter | | | 332,966 | |
| Total remaining intangibles amortization | | | 2,556,358 | |
NOTE 7 – STOCKHOLDERS’ DEFICIT
Preferred stock
The Company’s authorized preferred stock consists of 5,000,000 shares of preferred stock, with a par value of $0.001 per share. On November 20, 2020, the Company designated 1,000,000 shares of Series A Preferred Stock (“Series A”). The Series A has a liquidation preference to all other securities, a liquidation value of $25 per share, receives cumulative dividends payable in cash of 12% per year, payable monthly. The Series A does not have voting rights, except that the Company may not: 1) create any additional class or series of stock, nor any security convertible into stock of the Company; 2) modify the Series A designation; 3) initiate and dividend outside of without approval of at least two-thirds of the holders of the Series A. The Company has the right, but not obligation to redeem the Series A beginning January 1, 2026, at the liquidation value per share plus any unpaid dividends.
During the year ended December 31, 2022, the Company issued 12,860 Series A Preferred Stock in exchange for $321,500 of cash proceeds. During the year ended December 31, 2021, the Company issued 56,600 Series A Preferred Stock in exchange for $1,415,000 of cash proceeds.
During the three months ended March 31, 2023 and 2022, the Company recognized $51,025 and $43,120 in dividends to the Series A shareholders, respectively, and made cash dividend payments of $74,994 and $2,968, respectively. As of March 31, 2023 and December 31, 2022, the company has remaining unpaid dividends of $30,435 and $54,404, respectively.
As of March 31, 2023 and December 31, 2022, there were 69,660 Series A preferred shares outstanding, respectively.
Common stock
Company’s authorized common stock consists of 50,000,000 shares of common stock, with a par value of $0.001 per share. All shares of common stock have equal voting rights and, when validly issued and outstanding, are entitled to one non-cumulative vote per share in all matters to be voted upon by shareholders. The shares of common stock have no pre-emptive, subscription, conversion or redemption rights and may be issued only as fully paid and non-assessable shares. Holders of the common stock are entitled to equal ratable rights to dividends and distributions with respect to the common stock, as may be declared by the Board of Directors out of funds legally available. The Company has not declared any dividends on common stock to date.
On August 25, 2022, the “Company entered into an underwriting agreement with EF Hutton, division of Benchmark Investments, LLC (the “underwriter”), relating to the Company’s initial public offering of units (the “Units”) pursuant to the Company’s registration statement on Form S-1 (File No. 333-264191), under the Securities Act of 1933, as amended (the “Securities Act”). 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 Company also granted the underwriter a 45-day over-allotment option, if any, to purchase up to a) 413,063 additional shares of common stock, and/or b) 826,126 additional warrants, equivalent to 15% of the shares of common stock and warrants sold in the offering. On August 29, 2022, the underwriter partially exercised this option and purchased 609,750 additional warrants at the purchase price of $.01 per warrant for aggregate gross proceeds of $6,097.50.
The Company also issued the underwriter a warrant to purchase 82,613 shares of the Company’s common stock at an exercise price of $5.50, which is 110% of the initial public offering price. The underwriter’s warrant may be exercised in whole or in part, commencing on a date which is six months from August 25, 2022 until August 25, 2027.
The underwriting agreement includes customary representations, warranties and covenants by the Company. It also provides that the Company will indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the underwriters may be required to make because of any of those liabilities. In exchange for the underwriters’ services, the Company agreed to sell the Units to the underwriters at a purchase price of $4.60 per unit.
The Company’s officers and directors and their affiliates have agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any shares of our common stock or other securities convertible into or exercisable or exchangeable for shares of our common stock until May 27, 2023 without the prior written consent of the underwriter.
The Offering closed on August 30, 2022, and the Company sold 2,753,750 shares of common stock and 5,507,500 warrants (6,117,250 warrants including the over-allotment option warrants) to the underwriters for total gross proceeds of $13,774,848. After deducting the underwriting commissions, discounts, and offering expenses, the Company received net proceeds of $12,225,470.
Common Share Awards
During the year ended December 31, 2020, the Company granted a total of 3,233,336 shares to various employees and consultants for services rendered. The Company recognized stock-based compensation expense of $191,664 related to the vesting of the share awards during the three months ended March 31, 2023 and 2022. As of March 31, 2023, the Company expects to recognize an additional $255,584 through the end of the requisite service period for these awards, assuming all shares vest. The requisite service period for these awards is the same as the vesting period for each award. As of March 31, 2023, the awards had a remaining service period of approximately 0.3 years.
The Company also awarded a total of 2,800 shares of common stock to the Company’s four independent members of the Board of Directors, with a fair value of $16,667 based on the most recent price of common stock sold for cash recognized as part of stock-based compensation during the year ended December 31, 2022. The Company also recognized $10,000 of stock-based compensation for director compensation during the three months ended March 31, 2023. The first and second quarter shares were awarded to directors immediately, and the Company agreed to issue $2,500 worth of shares per director each quarter in the future and pay $5,000 in cash per director per quarter.
Stock Options
A summary of stock option information is as follows:
| | | Outstanding Awards | | | Weighted Average Grant Date Fair Value | | | Weighted Average Exercise price | |
| Outstanding at December 31, 2022 | | | 59,850 | | | $ | 4.15 | | | $ | 9.11 | |
| Granted | | | - | | | | - | | | | - | |
| Exercised | | | - | | | | - | | | | - | |
| Forfeited and cancelled | | | (22,661 | ) | | | (3.69 | ) | | | (13.68 | ) |
| Outstanding at March 31, 2023 | | | 37,189 | | | $ | 4.37 | | | $ | 6.33 | |
| Exercisable at March 31, 2023 | | | 23,406 | | | $ | 4.37 | | | $ | 6.27 | |
The weighted average remaining contractual life is approximately 2.12 years for stock options outstanding with no intrinsic value of as of March 31, 2023. The Company recognized stock-based compensation of $21,691 and 19,661 during the three months ended March 31, 2023 and 2022, respectively. The Company expects to recognize an additional $57,552 of compensation cost related to options that are expected to vest.
Common Stock Warrants
A summary of stock warrant information is as follows:
| | | Outstanding Awards | | | Weighted Average Grant Date Fair Value | | | Weighted Average Exercise price | |
| Outstanding at December 31, 2022 | | | 6,219,863 | | | $ | 4.21 | | | $ | 5.01 | |
| Granted | | | 6,219,863 | | | | 4.21 | | | | 5.01 | |
| Exercised | | | - | | | | - | | | | - | |
| Forfeited and cancelled | | | - | | | | - | | | | - | |
| Outstanding at March 31, 2023 | | | 6,219,863 | | | $ | 4.21 | | | $ | 5.01 | |
| Exercisable at March 31, 2023 | | | 6,137,250 | | | $ | 4.21 | | | $ | 5.00 | |
The weighted average remaining contractual life is approximately 4.4 years for stock warrants outstanding with no intrinsic value of as of March 31, 2023.
NOTE 8 – RELATED PARTY TRANSACTIONS
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 March 31, 2023 and December 31, 2022 the balances due from the joint ventures were $91,000 and $74,866 included in non-current assets.
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 March 31, 2023 and December 31, 2022, the Company was owed $36,854 by the entities controlled by the Company’s CEO.
No member of management has benefited from the transactions with related parties.
NOTE 9 – NOTES PAYABLE
On October 13, 2022, the Company entered into a short term financing agreement with a payment services provider for total principal of $82,490 and received cash proceeds of $73,000. The Company will pay 17% of its daily sales processed through the service provider until the total principal is repaid. As of March 31, 2023 and December 31, 2022 the Company owed $48,627 and $68,959, respectively.
On October 13, 2022, the Company entered in the BCP Note as part of the acquisition of BCP media. The BCP Note has the principal sum of $2,399,000 (and it matures on the one year anniversary from the date of the BCP Note. Interest on the outstanding principal balance of, and all other sums owing under the Loan Amount, is three percent (3%), 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, the Company shall make an interest only payment to BCP Media equal to $5,997.50 per month; and (ii) the entire Loan Amount, together with all accrued but unpaid interest thereon, shall be due and payable on the Maturity Date.
NOTE 10 – SUBSEQUENT EVENTS
Management has evaluated events through May 15, 2023, the date these financial statements were available for issuance, and noted the following events requiring disclosures:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on April 12, 2023.
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 Q4 2022 marked the end of Onfolio 1.0, and the beginning of Onfolio 2.0. Prior to our initial public offering (“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 education, and digital products.
With the money raised in our IPO, we acquired SEOButler.com (An SEO service agency), Proofreadanywhere.com (an online education business) 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; and |
| | | |
| | 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 SEOButler.com, Proofreadanywhere.com, and BWPS acquisitions in October 2022, along with the Contentellect.com acquisition (discussed below), 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.
In Q1 2023, we continued this transformation. Each month in Q1 earned higher revenue than the preceding month, with March being the highest month to date. We also experienced improving gross margins. Part of this increase was due to our fourth post-IPO acquisition, of Contentellect.com on Feb 1 2023 (as discussed below).
We continued to experience some higher than desired expenses, some of which are still related to IPO expenses and acquisition costs incurred in Q4. Others are expenses that we do not expect to continue (for example, we further reduced our contractor base in Q1) in the near term. Decentralization and cost control efforts in Q1 are starting to show results and these trends give us confidence that the thesis is the right thesis.
In total, there were $300,000 of expenses in Q1 that we aren’t expecting to experience in Q2 or beyond. These are a combination of acquisition costs, higher than usual legal and professional fees, one-time growth expenses for one newly acquired business, and investor relations costs.
We expect to continue controlling expenses throughout 2023 and along with increasing revenues, we anticipate further acquisitions to bring us closer to profitability.
Recent Developments
Asset Purchase Agreement - Contentellect Limited
On January 13, 2023, Onfolio Assets LLC, our Company’s wholly owned subsidiary 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 Business”).
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 $850,000 was paid in cash at the closing. See Note 4 of our accompanying unaudited consolidated 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 lack.
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. As with agencies, Wordpress plugins, and productized services, we anticipate making more acquisitions in the online education 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. |
Results of Operations
The Company reported a net loss of $1,284,075 for the three months ended March 31, 2023 compared to a net loss of $748,766 for the three months ended March 31, 2022. The components of the increase in net loss for the current period are as follows:
Revenues
| | | For the Quarter Ended March 31, | | | $ Change from prior | | | % Change from prior | |
| | | 2023 | | | 2022 | | | year | | | year | |
| Revenue, services | | $ | 392,401 | | | $ | 117,987 | | | $ | 274,414 | | | | 233 | % |
| Revenue, product sales | | | 959,333 | | | | 267,936 | | | | 691,397 | | | | 258 | % |
| Total Revenue | | $ | 1,351,734 | | | $ | 385,923 | | | | 965,811 | | | | 250 | % |
Revenue increased by $965,811, or 250% for the three months ended March 31, 2023 compared to 2022. The increase is primarily due to revenue from our three acquisitions completed during the fourth quarter of fiscal 2022 and the purchase of Contentellect in Q1 2023, which increased revenue by approximately $1,111,000, including approximately $854,000 in digital product sales. This increase was offset by a decline in website management revenue, and a decline in digital product sales within the Company’s Might Deals subsidiary.
Cost of Revenue
| | | For the Quarter Ended March 31, | | | $ Change from | | | % Change from | |
| | | 2023 | | | 2022 | | | prior year | | | prior year | |
| Cost of revenue, services | | $ | 273,313 | | | $ | 128,339 | | | $ | 144,974 | | | | 113 | % |
| Cost of revenue, product sales | | | 335,208 | | | | 96,431 | | | | 238,777 | | | | 248 | % |
| Total Cost of Revenue | | | 608,521 | | | | 224,770 | | | | 383,751 | | | | 171 | % |
Cost of revenue increased by $383,751, or 171% 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. The components most significant to the Company’s cost of revenue are the costs of acquiring new inventory products, the costs of labor for service fulfillment, content creation and website hosting and maintenance costs.
