Onfolio Holdings, Inc. (ONFO) Earnings Call Transcript & Summary

Good morning, and welcome to the Onfolio Holdings Second Quarter 2026 Earnings Conference Call. Joining us today are Dominic Wells, Chief Executive Officer; and Adam Trainor, Chief Operating Officer and Interim Chief Financial Officer. Before we begin, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Act -- Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied. Forward-looking statements are based on management's current expectations as of today's date, and the company undertakes no obligation to update or revise any such statements. For a detailed description of risks and uncertainties, please refer to the Risk Factors section of the company's most recent Form 10-Q filed with the SEC. Additionally, during this call, management may reference certain non-GAAP financial measures and supplemental operating metrics as indicators of performance. These measures should not be considered in isolation or as substitutes for GAAP results. A reconciliation of non-GAAP measures to the most comparable GAAP measures is available in the company's SEC filings, which can be found on the company's website at investors.onfolio.com/filings. With that, I'll turn the call over to Dom. Please go ahead, sir.

Thank you, and good morning, everyone. We appreciate you joining us today. For anyone newer to the Onfolio story, we are an owner-operator of cash-generating digital businesses, primarily in B2B marketing agencies and B2C online education. Since our IPO in 2022, we have grown revenues from approximately $2 million to $10.7 million in full year 2025, roughly a 5x increase, entirely through acquiring and operating real businesses that generate real cash flow. We remain at an important inflection point. We are not yet self-funding at the parent level. But once we get there, our options for capital allocation open up significantly, more acquisitions, paying down remaining obligations, or longer term, potentially returning capital to shareholders. I'll come back to that later in the call. First, I want to touch directly on where things stand with our Nasdaq listing since I know that's front of mind for a lot of you, and then I'll walk through the quarter. So, Nasdaq compliance update. The first issue is a stockholders' equity deficiency. Nasdaq requires companies listed to maintain stockholders' equity of at least $2.5 million, and we fell below that threshold. We submitted our plan to regain compliance to Nasdaq in July. Since then, our senior secured convertible note holder has converted the entirety of the note into equity. And as described in our August 4 blog post, those conversions add back more equity than the size of the deficit. So we believe this deficiency is more or less addressed, and we expect to have official confirmation from Nasdaq soon. The second issue is the minimum bid price requirement. On August 10, we executed a 1-for-50 reverse stock split, which reduced our outstanding shares from approximately 42 million to approximately 850,000 and was specifically designed to bring our closing bid price back above the $1 minimum Nasdaq requires. This is actually the second time this year we've had to address this requirement. We regained compliance briefly back in May, but it didn't hold, which is part of why we moved to do a reverse split this time rather than simply waiting for the bid price to recover organically. Reflecting the note conversions Adam will walk through in a few minutes, we had approximately 2.45 million shares outstanding as of August 18. Ultimately, we believe we've now taken the actions needed to address both deficiencies. With our listing secure, we can put our full attention back on returning to revenue growth through both our existing portfolio and acquisitions. Now, turning to the quarter itself. I want to be direct. Our portfolio did not turn the corner in the second quarter the way we originally expected. Revenue was down both year-over-year and sequentially, and the core issue is cash. The parent company remains cash constrained, and that is directly tied to softer cash generation from the portfolio than we have planned for. To some extent, it is a circle where lack of cash being sent up to the parent by the portfolio leads to less cash to spend on portfolio growth. While we try to address this with organic growth and portfolio and parent level expense reduction, we believe the solution is bringing additional funding to the company and completing new cash positive acquisitions. Let me walk through the Q2 performance of both segments. Starting with B2B. Eastern Standard, our largest agency, is facing real disruption from AI in a way that's affecting how we sell. Clients are increasingly hesitant to commit to full project fees in a world where AI tools make parts of agency work look replaceable, even where our actual delivery still requires real expertise. That's made new sales harder to close, and it's the single biggest driver of the year-over-year decline in our B2B segment this quarter. We're responding on two fronts. First, our own AI services line, where we sell AI-powered marketing, content and analytics services directly to clients, is one answer to that hesitation. Instead of asking clients to pay for manual project work, we can offer them the AI-inclusive alternative ourselves. Second, we're leaning further into the RevenueZen playbook I'll describe in a moment so that even as deal sizes or timelines shift, our cost structure keeps pace. That AI services line is live, and we are seeing real engagement. But I want to be careful not to overstate where it is today. We have single-digit client engagement. It's a genuine proof point for the model, not yet a meaningful driver of revenue, and we won't treat it as one until it is. The RevenueZen consolidation under Eastern Standard, which I introduced last quarter, continues. Execution has been a bit slower than we'd hoped, but there are real green shoots. New sales hires are ramping, and we're continuing to see AI-driven traction on both the cost and revenue sides of that business. RevenueZen was a standout performer again this quarter, building on the operational turnaround we described publicly back in May. Both RevenueZen and Eastern Standard management have reported seeing green shoots of growth in the last few weeks. So we believe organic growth will return later in the year. In B2C, Proofread Anywhere remains profitable but is not growing. We further pulled back paid acquisition spend during the quarter to protect unit economics rather than chase revenue we didn't believe would hold up. Vital Reaction continued to be modestly profitable. I said on our last call that we believe the first quarter would be the trough for B2C revenue. I'd rather revise that call than repeat it. We're not going to put a specific quarter on the trough again. What I can tell you is what we're doing. Media buying, ad creative and e-mail are consolidated across both B2C properties. We're applying AI to these workflows the same way we have in B2B, and we will redeploy spend only as we see the unit economics hold. Growth here follows discipline. Before I hand it to Adam, I want to explicitly reset expectations on three things we've talked about before: gross margin, acquisition pacing and profitability timing. On gross margin, we said last quarter we expected to trend into the mid-60% range in 2026. That hasn't happened, and Adam will walk through why when he covers the P&L. In short, our margin is highly sensitive to the mix between B2B and B2C revenue. And as B2C has contracted faster than B2B, margin has stayed close to flat rather than expanding. As a result, we now expect gross margin to remain near current levels until B2C revenue stabilizes. On acquisition pacing and profitability timing, I'll go through both in detail in the strategic priorities section after Adam's remarks, including the specific pipeline update from our August 4 blog post. We continue to believe that closing the remaining gap to parent-level profitability depends primarily on the acquisitions in our pipeline, more than on organic portfolio improvement alone, and I'll walk through that in a few minutes. With that, I'll turn the call over to Adam to walk through our financial results for the second quarter. Adam, over to you.

Thanks, Dom. Good morning, everyone. Unless otherwise noted, all comparisons are second quarter 2026 versus second quarter 2025. Total revenue for the second quarter was $1.5 million, a decrease of 52% from $3.15 million in the second quarter of 2025 and down approximately 20% from $1.87 million in the first quarter of 2026. Revenue from services, primarily our B2B segment, was $1.22 million, down 41% from $2.06 million a year ago. As Dom described, this primarily reflects the slowdown in new sales of Eastern Standard that began late in the first quarter, along with lower revenue across several of our other agency subsidiaries, partially offset by new revenue from our Pace Generative subsidiary, which had no comparable revenue in last year's period. Revenue from product sales, primarily our B2C segment, was $279,000, down 74% from $1.09 million a year ago. The decline reflects the deliberate advertising pullback at Proofread Anywhere that Dom described and the absence of revenue from businesses divested during 2026. At the segment level, B2B revenue declined 41% year-over-year to $1.22 million and B2B swung to an operating loss of approximately $103,000 for the quarter compared to an operating income of $70,000 in the prior year period, primarily reflecting the Eastern Standard revenue decline, partially offset by improved results at RevenueZen. B2C generated operating income of approximately $43,000 for the quarter, down from $150,000 a year ago on the lower Proofread Anywhere revenue. Gross profit for the quarter was $732,000 and gross margin was approximately 49%, essentially flat compared to roughly 49% in Q1 this year. I want to address the mid-60% margin trajectory we flagged last quarter directly because it hasn't materialized to date. Our B2C product revenue carries meaningfully higher gross margins than our B2B services revenue. As B2C has contracted faster than B2B this year, our revenue mix has shifted towards lower-margin segment, and that has offset any efficiency gains within B2B itself. To put the mix shift in perspective, product revenue was roughly 35% of total revenue in the second quarter of last year. This quarter, it was under 19%. Because product revenue carries substantially higher gross margins than services revenue, that shift alone offsets the efficiency gains we have made within the agencies. Consistent with what Dom said earlier, we expect gross margin to stay near current levels until that mix stabilizes. This is a revenue mix story, not a cost of delivery problem. Total operating expenses were $1.7 million for the quarter, down 31% from $2.44 million in the prior year period. SG&A expenses decreased $924,000 or 45%, driven primarily by $577,000 of lower advertising and marketing spend, lower amortization of approximately $141,000 as certain intangibles reached the end of their expected life and the remainder was spread across compensation and other G&A categories following the integration of our agency businesses. Professional fees increased $209,000 or 60%, primarily reflecting higher legal and audit costs tied to our financing arrangements, Nasdaq compliance matters and strategic transaction activity during the quarter. Loss from operations was $966,000 compared to $507,000 in the prior year period. Net loss for the second quarter was $4.6 million compared to a net loss of $534,000 in the second quarter of 2025 and a net loss of approximately $2.6 million in the first quarter of 2026. I want to be precise about what is in that number because most of it is noncash and tied to our convertible notes. Total other expenses was $3.6 million, driven primarily by a $2.95 million noncash loss in the change in fair value of derivative liability associated with the senior secured notes, a $281,000 noncash loss in the change in fair value of digital assets and approximately $336,000 of higher interest expense on the notes. With the notes fully extinguished subsequent to quarter end, the derivative liability that drove most of this quarter's loss goes away with them. We expect our third quarter results to reflect the unwind of that liability rather than further losses against it. Turning to the balance sheet. As of June 30, 2026, we had cash of $251,000, down from $842,000 at the end of the first quarter and $2.17 million at year-end 2025. I want to address this directly because the cash balance of $251,000 speaks for itself. The parent company was operating under severe liquidity constraint at quarter end, and our 10-Q includes going concern disclosures reflecting that. I would encourage everyone to read it. Since quarter end, the picture has changed in specific and disclosed ways. The senior secured notes have been fully settled and extinguished, which removes our senior secured debt service and the conversion overhang. We completed the sale of our All Things Dogs business. And with the noteholder's consent, we sold approximately $400,000 of digital assets to fund operations. Discussions regarding additional funding are ongoing, and we will announce definitive agreements when they are executed. While I am not going to tell you that the liquidity issue is fully solved, I will tell you that the balance sheet at September 30 will look structurally improved from the one we filed this week. Our digital assets holdings had a total fair value of approximately $1.33 million at quarter end, down from $1.6 million at the end of the first quarter, driven by mark-to-market price movements. Our holdings consist of 5.32 Bitcoin, approximately 322 Ethereum with approximately 288 that are staked and approximately 6,972 Solana, all of which are staked. Total liabilities were $9.61 million, up from $7.46 million at year-end 2025. Total Onfolio Holdings stockholder equity was a deficit of approximately $3.11 million as of June 30, which is the specific balance that triggers the Nasdaq stockholders' equity deficiency that Dom referenced earlier. Now, the convertible note update Dom flagged earlier because it connects directly to the Nasdaq equity picture. At June 30, the senior secured notes remained outstanding and the balance sheet reflects both the notes and a $5.6 million derivative liability associated with them. Subsequent to quarter end, the holder converted $5.5 million in principal and approximately $30,000 of accrued interest into approximately 721,000 shares of common stock. We then settled everything that remained under the notes, including the final $10,000 of principal, $412,000 in liquidated damages and approximately $8.2 million of floor penalty amounts through the issuance of approximately 1.58 million additional shares. As of today, nothing remains outstanding under the senior secured notes, no principal, no accrued interest and no damages. These issuances did have a dilutive effect, but this was intentional, and we believe it was in the best interest of shareholders as the conversions eliminated our senior secured debt, eliminated the derivative liability and the ongoing conversion overhang and added directly to stockholders' equity, which is the mechanism behind the equity compliance plan we submitted to Nasdaq in July. Lastly, our Series A preferred stock, 169,460 shares remain outstanding, carrying a 12% cumulative annual dividend. We paid approximately $253,000 cash dividends to preferred stockholders during the first half of the year, with approximately $127,000 of dividends accrued and unpaid as of quarter end. With that, I'll hand the call back to Dom to talk through our priorities for the rest of the year.

Thanks, Adam. Our priorities haven't changed: grow cash flow from the existing portfolio, control parent company costs and resume accretive acquisitions. Closing the gap between what the portfolio distributes and what it costs to run the parent company is still the goal. And when those two numbers cross, we are self-funding. Back in July, after we terminated the Paramount Helium transaction, I published a letter laying out specifically what I wanted shareholders to be able to see from us by late October: progress on Nasdaq compliance, a stronger balance sheet and lower parent overhead, and portfolio cash starting to flow up to the parent again. On Nasdaq, you just heard where we stand. We believe the equity deficiency is more or less addressed pending Nasdaq's formal confirmation, and we fully addressed the minimum bid price requirement ahead of the December deadline. On the balance sheet, the note conversions Adam described are a direct step toward a stronger equity position, even though our cash position this quarter was tighter than we wanted it to be. On portfolio cash flow, we are still seeing limited distributions from subsidiaries to the parent company, and we hope to be able to address this in the coming months via both organic growth of existing companies and acquisitions of new ones. I also committed to publishing a scorecard in late October reporting progress against these commitments, setbacks included, and that hasn't changed. Our October 1 acquisition target, which I'll cover next, will be one of the specific things that scorecard reports against. So turning to our acquisition strategy. Both of our financing facilities, the convertible note facility and the $100 million equity purchase facility we entered in April, remain in place. On the pipeline itself, I want to give you the same detail we shared publicly in our August 4 blog post. We still hold our previously announced letters of intent for additional acquisitions. On one of them, we've renegotiated the terms: the cash required upfront has come down from $3.5 million to $1.3 million, which is a far more achievable number given where we are today. And we may be able to fund it through our SPV structure. That target has over $1 million in trailing 12-month EBITDA. We've also signed a letter of intent on a larger and, frankly, game-changing acquisition, roughly $4 million in trailing 12-month adjusted EBITDA, structured as 100% seller-financed, meaning the seller carries a note and it's paid down over time. We're targeting an October 1 close. I can't name the specific business until the definitive agreement is signed, but we're far enough along that this is a real deal. To be clear, this is not a Helium-style transaction. It's not a reverse merger. It's a straightforward acquisition in line with our core thesis of buying cash-generative online businesses. We're also in early-stage conversations on two additional opportunities where stock would fund most or all of the purchase price. That means more share issuance, but it also means cash flow positive contribution from day 1 without first needing to raise the cash. Every deal in our pipeline has to clear the same bar: it has to be immediately accretive, adding more value per share than it costs from the moment it closes and not a bet on where a business might be in a few years. Everything I've just described serves one underlying goal, getting the parent company to cash flow positive. That gap closes from three directions at once: lower parent overhead, portfolio cash flowing up again and new acquisitions that bring earnings with them from day 1. Right now, acquisitions are the biggest and fastest-moving lever we have, which is why the pipeline update matters as much as it does. To sum up, the second quarter had its difficulties, and I've tried to be direct with you about where we fell short. What hasn't changed is the plan: control parent costs, grow portfolio cash flow and bring in acquisitions that are accretive from day 1. We believe the pipeline we described today, together with the progress on our balance sheet and Nasdaq compliance, gives us a real path forward, and we will report honestly on our progress against it. With that, I'll hand it back to the operator to open the call for questions.

[Operator Instructions] Our first question comes from the line of [ Yegor Zadoriny ], Private Investor.

I feel like a little bit back to square one, but I get it. Just maybe I missed it, just to be clear, is the total stockholder equity, is it still negative, or has that been fixed?

As of the end of Q2, it's negative. But as of right now, it's positive after the conversions that took place in Q3.

Yes. That's what I meant. Okay. Senior secured notes now fully settled. The settlement caused significant dilution. Looking back, what went wrong with financial structure, or just like if you could get more color on that? And what safeguards will you use to make sure future, we're not kind of getting to the same issue, if that's possible?

Yes. I mean it's hard to know exactly what went wrong because we don't really have any counterfactuals to compare against. I think there's a few things that meant it was definitely less exciting financing than it could have been. So one was using crypto as collateral. The timing wasn't great there. So the value of the crypto decreased after we started that transaction, which made it harder to -- harder for the noteholders to de-risk their position, harder for us to use that crypto in a way that might make it more useful. I think there was a lot of downward pressure on the stock, which some of it is down to performance, some of it is down to the market, some of it's just the reality. And that meant that dilution was larger than it could have been. But I think ultimately, we worked through the facility and now the balance sheet is in better shape. So what we do in the future would be -- well, basically take financing on better terms, ones that don't leave the stock so pressured, but also we're able to utilize a lot more cash. I think one of the other things about the previous structure was when we raised the capital, 50% of it had to go into crypto collateral and then the value of that collateral went down. So it meant that the actual principal of the note was a lot higher than the actual usable cash we got out of it. So any future financing, we would want to make sure that closer to 100% of the cash is actually cash we can use rather than cash that's stuck tied up. And I think using the cash in a more constructive way that allows us to do some of these acquisitions and support the portfolio is fundamental to making sure it's worth it as well.