Earnings Call Transcript - GNS Q3 2022

Operator, Operator

Hello, and welcome to the Genius Group Third Quarter 2022 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Flora Hewitt. Please go ahead.

Flora Hewitt, Host

Hi, everyone, and thank you for joining our third quarter 2022 earnings conference call. With me today is Roger Hamilton, Genius Group's Chief Executive Officer and Erez Simha, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our press release, including financial table, was issued pre-market opening and is posted on our Investor Relations website located at ir.geniusgroup.net where this call is being simultaneously webcast and where versions of our prepared remarks and supplemental slides are available. During this call, we will present both IFRS and non-IFRS financial measures. Please note that all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations. These forward-looking statements include, but are not limited to, statements regarding trends and their potential impact on our industry and our business, our ecosystem, platform, content, and partner relationships, our strategy and priorities, and our business model, mission, opportunities, outlook, and long-term financial framework. Actual results and events could differ materially from projections due to a number of risks and uncertainties discussed in our press release, SEC filings, and supplemental materials. These forward-looking statements are not guarantees of future performance and plans, and investors should not place undue reliance on them. We assume no obligation to update our forward-looking statements. With that, I'd like to turn it over to Roger.

Roger Hamilton, CEO

Thank you, Flora, and good morning, everyone. First, I'd like to welcome two senior hires that we made recently. Our first appointment is Saranjit Sagar as the Chief Executive Officer for GeniusU. Saranjit was the CEO and Director of upGrad EMEA, where she led strategic business development in Africa, the UAE, and the U.K., diversifying the business by introducing new products and developing a team of 144 employees. She also has experience in other high-growth tech companies such as Grab, where she launched grab kitchens in multiple countries, and Honestbee, where she managed global cross-functional teams to drive product strategies and streamline operations. We're thrilled to have Saranjit join our global team and lead GeniusU. She has the right experience to boost the growth of our Edtech platform, improve customer experience, and increase efficiencies. Our second appointment is Dr. Tracy Lynn West as the President of our University, which is the University of Antelope Valley. Dr. West has more than 17 years of experience in the higher education field, with her most recent role being the Campus President of Concorde Career College, where she led more than 600 students and over 85 faculty and staff members. During her tenure, she helped students realize and achieve their aspirations of becoming successful healthcare professionals. Prior to this, she worked as an associate professor at DeVry University and an adjunct professor at the University of Redlands, where she taught graduate courses in the Master of Science in Organizational Leisure Programs. Dr. West is a transformational leader who helps students harness their strengths and capabilities, allowing them to advance their full professional potential. This vast leadership experience will be extremely valuable to running the University of Antelope Valley in California. Continuing on the topic of our subsidiary, the UAV, we completed the acquisition of the University in July 2022. UAV is an accredited university in California that offers career-focused on-campus and online programs at the master's, bachelor's, and associate degree levels, as well as certificate and continuing education programs in several high-demand sectors. The university has been built to date with strong community links and an excellent reputation in athletics and academics. Since the completion of the acquisition, we have undertaken multiple steps to promote growth. On August 1, 2022, we launched a $1 million scholarship contribution for UAV students. This scholarship program is designed to make entrepreneur education more accessible and affordable for prospective students and to empower students living in the Lancaster area to not only improve their socioeconomic conditions but also gain qualifications in new fields and find rewarding career paths. This scholarship program was available to students enrolling in a range of undergraduate, graduate degrees, and vocational certifications such as business administration, criminal justice, nursing, and more. As a university built for the 21st century, we wanted to welcome and support leaders of the future, regardless of their socioeconomic status, and this offering has been the first step in making that goal a reality. Our second milestone was to introduce a NASA Technology Transfer Program at UAV. We partnered with NASA to create a unique learning opportunity for engineering and business students. This program connects universities with NASA-developed technology to give students the opportunity to work with federal government research, innovations, and technology. Student entrepreneurs built case studies with NASA's patent portfolio while learning about commercialization and licensing opportunities. Also, students who want to take their ideas beyond the classroom can utilize Startup NASA, a special program designed to help early-stage startups commercialize NASA technology. This partnership is a natural fit for UAV, with the Antelope Valley being a local hub for some of the world's aeronautical leaders, including NASA, Boeing, Lockheed Martin, Northrop Grumman, and the UASF Plant 42, to name a few. Looking to the future, we plan to continue on this partnership growth strategy to keep building out our new high-tech online programs in SpaceX, FinTech, MedTech, and GreenTech, and allow our students to have highly specialized degrees. Our second growth strategy for UAV is to build a digital twin of the university online to deliver tertiary education globally in an immersive and engaging way, allowing students from all around the world to gain access to accredited U.S. curriculum and degrees. The creation of this online platform will combine with the future Metaverse, including gamified learning, a digital credit system, and virtual reality, and will include the 21st-century curriculum, faculty, campuses, and Edtech platform for university students. Our plan is to extend courses and programs to online learning environments with students and faculty connecting and learning in global classrooms and virtual environments around the world. We are building six campuses, each with a vibrant community, lead mentors, and course content to cater to six types of members and partners on GeniusU. We also plan to integrate each student's AI-based virtual system as 3D virtual systems that accompany each student on their personalized journey. Moreover, student credits earned on the platform will also be integrated into the Metaverse so that students can spend them on products and services within GeniusU, as well as counting towards their certifications. Considering our mission is to develop an entrepreneurial education system that prepares students for the 21st century, we believe that Web3 and the Metaverse will provide students and teachers with an enhanced way to interact and learn in a global classroom. The goal is to develop a blended solution of real-life online and virtual learning to gamify the learning experience and make it far more engaging, allowing students to work in real-time with others around the world. We explained in our previous earnings call that our growth model is through a four-step approach: acquisition, integration, digitization, and distribution. Since going IPO in April 2022, we have acquired five companies: Education Angel, E-Squared Education Enterprises, the University of Antelope Valley, Property Investment Networks, and Revealed Films Inc. We have now started our process of integrating our five acquisitions, focusing on product community and revenue synergies. This integration process is expected to take several months as our strategy is to ensure that each company is integrated into Genius Group while operating separately. We're redesigning our processes to ensure consistency while learning best practices from each other, implementing the most successful ones in each of our portfolio companies. For example, we developed a Genius formula as a proven customer acquisition strategy and marketing pathway that enables partners to build their global classrooms on GeniusU. We are currently implementing this Genius formula within all of the Genius Group companies to ensure we have the same marketing pathway and that the customer experience is consistent across the board. By ensuring that customer funnels and definitions of visitors, leads, and customers are consistent in each of the companies, this will simplify our reporting process, allow for consistent customer data, and, as a result, help us improve our operational metrics. However, we are centralizing certain company functions such as strategy and business development to ensure we maximize efficiencies and generate both revenue and cost synergies across the board. For example, a centralized business development function will understand the needs and growth strategies of each of the portfolio companies and will be better positioned to find synergies and partnerships that would benefit multiple portfolio companies, rather than having multiple single business development functions. Once those five companies are fully integrated into our Genius Group family and business culture, we will be combining each company's courses and products into the curriculum and GeniusU, Edtech platform tailored to the needs of our students, expanding our offering from current local communities to our global audience. We believe this will increase the lifetime value of our students and reduce student and partner acquisition costs across each level of our curriculum. By digitizing the courses and products for online delivery, we aim to scale each company's product offerings globally. The integration of these companies into GeniusU will help accelerate their speed, size, and scale, increasing enrollments and capacity to deliver courses and enhancing student retention through personalized education pathways. Our second organic growth focus is on partnerships with thought leaders and companies that align with our mission, bringing them new students and course content, which may lead to potential acquisitions in the future. During our Impact Investor Festival in November, we partnered with popular educators, including Brian Jung and Jaspreet Singh, both investor educators with over one million subscribers on YouTube. This led to us having more than 20,000 registered students in the event. We're expecting the same traction for our global entrepreneurs summit in December as we partnered with futurist Peter Diamandis, Co-Founder of Singularity University and The XPRIZE, Slim Ismail, Author of Exponential Organizations, and Founder of OpenExO, and Verne Harnish, Founder of the Young Entrepreneurs' Organization and CEO and Co-Founder of Scaling Up. We're expecting to also have more than 20,000 participants at this event. Similarly, our latest acquisition, Revealed Films, attracts viewers and students through their library of documentaries featuring well-known entrepreneur and investor educators, including New York Times bestselling authors Robert Kiyosaki, James Rickards, and Garrett Gunderson. We plan to continue this organic growth strategy by organizing multiple events in 2023 and attracting thought leaders, bestselling authors, YouTubers, and influencers into our faculty and GeniusU platform. My focus on constantly creating new partnerships and leveraging such events for organic growth is reflected in our operating statistics, as the number of students and partners on our platform has been growing steadily over time. At the end of September 2022, we had 3.01 million students on the GeniusU platform, with approximately 9,000 new students joining each week in 2022. This represents a 17.2% annualized growth rate since December 2021. Similarly, our paying students grew to 41,282 in the past nine months, a 40% annualized growth rate. These two numbers are prior to the integration of our IPO acquisition companies with GeniusU. On a pro forma basis, Genius Group now has a student base of 4.35 million at the end of September 2022. The number of partners on GeniusU grew to 10,751 since December 2021, a 7% annualized growth rate, and on a pro forma basis, we now have 12,521 partners on GeniusU. We expect both the number of students and partners to continue to grow over time as we ramp up our organic growth efforts, mainly increasing marketing spend and improving our customer experience while continuing our inorganic growth by making further acquisitions. We believe our free student community represents a significant business opportunity for us to bring them in and convert them through the personalized payment path. During this quarter, we also released a new version of one of our main products, Wealth Dynamics 5.0. This product is a stepping stone on the journey our students take when joining the Genius Group community. As soon as they join our Edtech platform, students can take the Wealth Dynamics test to discover which of the eight entrepreneurial types they are. Once they learn more about their natural talent, they unlock a whole new way of accessing flow, productivity, creating attraction, building the right team, and speeding up their results. Wealth Dynamics is already the world’s leading entrepreneurial tool for finding flow and building wealth, used by thousands of entrepreneurs worldwide, enabling them to significantly grow their business results and do the work they love. We upgraded our product with new content, new stories, and detailed definitions on how to be a 5.0 entrepreneur in the digital age based on different entrepreneur profiles. This update allows our product to resonate further with students, as all the profiles are based on some of the most successful business people and entrepreneurs of the decade, such as Elon Musk, Cathie Wood, Kevin O'Leary, and many others. With this upgrade, we aim to continue growing our student base and remain the world's leading entrepreneurial tool. In terms of achievements in Q3, I'm proud to say that GeniusU, the Edtech arm of Genius Group, has been named one of Singapore's top 10 Emerging Giants in the KPMG and HSBC Emerging Giants in Asia Pacific 2022 report. The businesses listed in the report have been identified as those that will make a lasting impact on the global business landscape over the next decade. The joint study by KPMG and HSBC covers the Asia Pacific's technology-focused startup landscape and identifies businesses that are the emerging giants in the region. GeniusU was listed as one of the top 10 in the Singapore region. We're delighted to have been recognized as an emerging giant, and this is a testament to our continued growth and global impact. I'd also like to mention that we have recently retained two law firms to investigate our recent market activity. After carefully reviewing the recent trading history of our ordinary shares, we believe we may have been the target of a market manipulation scheme that has been adversely affecting our share price. We have retained Christian Levine Law Group and Warshaw Burstein, LLP, two law firms that have successfully prosecuted and collected millions of dollars in damages on behalf of their clients from broker dealers, market makers, hedge funds, and asset-based lenders, who have engaged in market manipulation schemes. Now I would like to turn it over to Erez, so that he can give an overview of our financial performance.

Erez Simha, CFO

Thank you, Roger, and good morning, everyone. We continue to demonstrate strong growth across our platform, expanding the number of students, as well as the number of partners, and this is reflected in our financials for the nine months ended September 30, 2022. For the nine months ended September 2022, Genius Group revenues on a standalone basis grew by 16.68% year-over-year to $14.42 million. This internal growth was driven by a 24% increase in our digital education revenue and a 46% increase in campus revenue. The strong growth in campus revenue was due to an increased demand as a result of the gradual lifting of COVID-19 restrictions. Our revenue on a pro forma basis reached $24.67 million in year-to-date September '22. The group gross margin increased to 33.96% in year-to-date September '22. Our gross margin has increased due to improved results from our campus business, which has a higher gross margin. To date, we have maintained a balance between growth and a positive gross margin, in which we are not being overly aggressive in our marketing spend, and this is reflected in our current gross margin. Genius Group pro forma gross margin is 47.33% by owning the majority of our curriculum and courses. For all companies and acquisitions, we focus on maintaining low content costs and high gross margins. The cost of revenue that we incur is mainly from customer acquisition costs and our faculty costs. In the future, we will continue to focus on improving our gross margins through synergies and higher efficiency. The group had net operating expenses of $10.85 million and $17.5 million on a pro forma basis. Approximately 60% of our operating expenses are our startup costs, with the remaining being development, marketing, rental, and general expenses. The increase in our operating expenses is due to the growth in our operations, acquisition of companies, the expansion of our core offerings, and preparation for our IPO and listing. As with our cost of goods sold, we have been managing our overhead to maintain a sustainable growth rate while having additional funds to invest in acquisition. The group had a negative adjusted EBITDA of $3.89 million for year-to-date September '22, compared to a negative of $1.59 million for year-to-date September '21. On a pro forma basis, our negative adjusted EBITDA was $2.99 million for year-to-date September '22. This negative adjusted EBITDA is due to increased investments made in infrastructure, marketing, and senior leadership positions. We will continue to balance growth between infrastructure while aiming to improve our operating leverage as we grow. Now turning to cash performance and the balance sheet. The group's current assets increased to $36.23 million, with the largest current asset type being our restricted cash of $11.33 million, cash and cash equivalents of $8.97 million, and accounts receivable of $7.87 million. Our group business model is a short-term cash-generating one, with customer payments made at the time of enrollment, often in advance, which is also reflected in our deferred revenue. The exception to this is our annual membership and education programs where payment is mainly in installments. Genius Group pro forma total current asset in September '22 was $33.96 million. The group's non-current assets grew to $46.97 million, mainly due to the acquisition of PIN, Education Angels, and E-Squared, as well as the investment in the University of Antelope Valley. On a pro forma basis, Genius Group non-current assets were $57.98 million. The non-current assets are largely the result of intangible assets and goodwill related to the acquisitions. The group's current liabilities increased to $16.22 million, with the largest item being deferred revenue, which grew to $5.94 million, and the convertible note, which increased to $4.19 million. Genius Group's pro forma total liabilities in September '22 were approximately $17.8 million. The group's non-current liabilities increased to $14.16 million, with the largest items being $7.61 million in right-of-use liabilities, of which $7.2 million is an adjustment due to the GAAP to IFRS transition for the University of Antelope Valley. The additional increase was due to convertible loan issuance in August '22 of $17 million, resulting in a net increase of $3.29 million under non-current liabilities. The pro forma non-current liabilities amount to $14.3 million. The group's shareholders' equity grew to $52.83 million in September '22, reflecting management's strategy to grow through acquisitions and organic growth. During this period, the company issued a convertible note of $17 million and accounted for $8.58 million to equity for the potential conversion of debt to equity. The company also issued GeniusU Limited ordinary shares valued at $2,556,739 in exchange for cash and $3,763,636 as part of its published listing on the New York Stock Exchange, which we see total FPL net proceeds of $18.06 million. During the period ended September 30, 2022, the company closed four acquisitions and issued shares for the consideration of $27.05 million. Genius Group pro forma legacy shareholders' equity was $60.25 million, which includes the issuance of shares for the acquisition of Revealed Films of $7 million. We recently secured a senior secured convertible note at the end of August from an institutional investor for a purchase price of $17 million, of which $1.67 million was received in September '22, and the balance of $11.33 million is held in restricted cash accounts. The note carries a 30-month maturity with a conversion price of $5.17 per ordinary share for voluntary conversion of the note, and bears interest of 5%. We intend to use the net proceeds for general corporate purposes and acquisitions, to the extent permitted under the business agreement. Overall, we are very pleased with Genius Group's development year-to-date. We have grown our revenue by 16.68%, significantly faster than the global education market growth of 4.3% and the global Edtech market growth of 16.3%, demonstrating the strength of our Edtech platform and the growing interest in entrepreneurial education. We have also increased our gross margin to 33.96%, and 47.33% on a pro forma basis, showcasing our improved efficiency and operational efforts. Regarding our 2022 guidance, we are maintaining our pro forma revenue guidance between $35 million and $38 million and revising our 2022 adjusted EBITDA guidance to a loss of $4 million to $5 million due to higher planned investment in our education segment to capture short-term opportunities, particularly in recent acquisitions; we expect EBITDA to normalize in early 2023. With that, we thank you for joining the call today, and I would like to open it up for questions.

Operator, Operator

Thank you. We'll now be conducting a question-and-answer session. Our first question today is coming from Hunter Diamond from Diamond Equity. Your line is now live.

Hunter Diamond, Analyst

Hi, everyone. Congratulations on the results. I wanted to get a little color on how to think about the conversion rate of the number of students to the number of paying students and the ways the company is exploring to increase that rate?

Roger Hamilton, CEO

Hi, Hunter. Good to have you on the call. I would say that our biggest areas of focus at the moment is that first of all, when we bring people onto the platform and they step into one of our campuses, we are doing a really good job right now of taking them through a segmentation process. We know exactly what stage of their educational pathway they are on – whether they are a university student or if they already have a business, and if so, the size of that business as well. One of the big developments over the last quarter is that we have become much better at engaging each of those different segments of our student base in a way that brings them into additional programs as we go. On top of that, the pathways we are developing for those students, which is part of the Genius formula, are very effective. For example, when we look at the number of students applying at the university and the cost of acquiring these students, we recognize that the first step is often the very expensive university degree itself, which is a significant life decision. What we're doing now is applying the same pathways that we've found successful within our adult learning campuses. The first thing these students do after participating in a number of free workshops is join an entry-level workshop costing around $300 or a $1,500 membership program. By starting at that level, they can build trust in us and understand the pathway they should follow. We also recognize that for those at the higher levels, those conversations can start much earlier. We're tracking the entire process, not just the number of students joining, but looking at effective engagement levels from joining to considering additional programs and making that first purchase. We now know that it takes about 3.5 contact points with free programs or experiences before they choose to make a purchase. We are closely monitoring this and aiming to improve that first step toward a purchase significantly. Obviously, with 90% of people on our platform for free, the potential to build a premium model that increases revenues is a major focus for us in the coming year.

Hunter Diamond, Analyst

That makes perfect sense. Thank you for the additional color. Regarding marketing spend, do you think investors should expect the company to heavily invest in paid marketing to attract both paying and non-paying students? Or is it more likely to rely on word-of-mouth as it has historically?

Roger Hamilton, CEO

That's a very good point because we're currently seeing just how challenging it can be for any company with a network effect to rely solely on marketing, or to depend entirely on ads. Many companies in our industry that previously relied heavily on digital advertising are now facing challenges due to rising customer acquisition costs and shifts in digital privacy policies. We've seen many education companies that historically relied on platforms like Facebook and Google ads, now unable to do so. Our model benefits from the significant traction of both word-of-mouth and those pathways that encourage individuals to join us without traditional ad spending. There are two major areas contributing: when we bring new partners on board, their trusted communities join our platform without us incurring costs. Also, the assessments we encourage are naturally shareable. If someone takes a passion test or a genius test that identifies their talents, they are more likely to share that experience with friends or family. We observe that many people join our platform based on these shared experiences. This creates a halo effect where one person's engagement leads to others wanting to participate. While we will still invest wisely in paid advertising, it is essential to distinguish our unique advantages, including how we reduce student acquisition costs effectively.

Hunter Diamond, Analyst

That makes total sense in terms of growth for the company. That's all the questions I have. Congratulations again to the entire team on those strong results.

Roger Hamilton, CEO

Thank you very much for that, Hunter. If I could just add one more point regarding our recent acquisition of Revealed Films. This acquisition is a prime example of how we can reach large audiences through documentary-style learning. Revealed Films has an extensive library that reaches hundreds of thousands of students eager to learn through high-quality productions. This investment highlights the power of shareability and acquisition costs, as these students have already been prepared to join us. Just as we've recognized with numerous YouTubers who possess vast audiences, there's an opportunity to intertwine their learning with our curriculum. Therefore, we're excited about these new pathways to engage and attract students, allowing us not to chase after them but to have them come to us.

Operator, Operator

Thank you. Our next question is coming from Brad Sorensen from Zacks. Your line is now live.

Brad Sorensen, Analyst

Yes, thank you for taking my questions, and congratulations on the great results. I wanted to ask for your thoughts on acquisitions going forward. This has obviously been a significant strategy for you in the past year. Are you looking to fill any particular gaps aggressively, or are you more focused on integrating your current acquisitions at this point?

Roger Hamilton, CEO

That's a great question. At the time of our IPO, we had a two-pronged strategy: organic growth and growth through acquisitions. We've always set internal targets for growth in these two areas. With the way the markets have shifted recently, we find ourselves in a buyer's market for acquisitions. There are universities with existing certification programs that are currently for sale. The scenario is further complicated because the market's state might shift within six or twelve months and could affect our cash requirements for acquisitions. So, we’re taking a cautious approach. Our primary focus, given the market conditions, is to ensure we maintain positive EBITDA and not overstretch ourselves, while demonstrating synergies with our current acquisitions. Yes, we are still planning for additional acquisitions, but we are also seeing significant growth opportunities from partners who are increasingly drawn to us without the costs and complexities of acquisitions. This coming year, we are intent on providing guidance for our growth that capitalizes on three main areas: organic growth, targeted acquisitions of entities with certification programs, and partner growth. It’s worth noting that the majority of our existing organizations were partners before they became acquisitions. Revealed Films previously partnered with us for several years before transitioning into an acquisition. Consequently, we have multiple pipeline opportunities for both acquisitions and partnerships that we are excited to pursue going forward. Notably, most of our acquisitions thus far have been predominantly education-focused. With Saranjit joining us from UpGrad, a multiple billion-dollar business, we realized the potential for growth can stem not just from acquiring education entities but also tech companies that can strengthen our Edtech capabilities.

Brad Sorensen, Analyst

Thank you. That's very helpful. It's evident the market is shifting to accommodate this strategy. Thank you.

Roger Hamilton, CEO

Thank you very much, Brad.

Operator, Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Roger Hamilton, CEO

I have no further comments on my side, Flora or Erez.

Erez Simha, CFO

Yes, we just wanted to thank everyone for joining the call today.

Roger Hamilton, CEO

That's great. Same from my side as well. Thanks very much everyone. Really appreciate it.

Erez Simha, CFO

Thank you.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.