Earnings Call Transcript - GNS Q4 2022

Operator, Operator

Greetings, welcome to the Genius Group Full-Year 2022 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the conference over to your host, Flora Hewitt, Vice President of Investor Relations, Mergers and Acquisitions. You may begin.

Flora Hewitt, Vice President of Investor Relations

Hi, everyone, and thank you for joining our full-year 2022 earnings conference call. With me today is Roger Hamilton, Genius Group’s Chief Executive Officer; and Erez Simha, our Chief Financial Officer. Following the prepared remarks, we will open the call for questions. Our press release, including financial tables, was issued post-market closing and is posted on our investor relations website, located on investorrelations.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 gross percentages refer to year-on-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 relationship, 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 James Hamilton, CEO

Thank you, Flora, and good morning, everyone – or good evening, wherever you are. First, I’d like to apologize for the delay in releasing our full-year results. Due to the complexity of accounting treatment to write down the value of our recent acquisitions, to align with our low share price and market cap in December 2022, our order took longer than planned, and this is the reason for the delay. However, our CFO, Erez Simha, will provide more details on this following my business summary. Genius Group has had a great year and we’re excited to share the results with you today. I’m going to start with a quick recap of the year. We have come a long way since the IPO in April 2022. We have established a strong leadership team with Erez Simha as our Chief Financial Officer; and Rav Karwal as our Chief Revenue Officer. We’ve also got Richard Berman and Tim Murphy joining as new Directors. These individuals bring a wide range of diversified corporate experience, which helped drive the growth of our business last year and this continues in 2023. We have completed five acquisitions: the University of Antelope Valley, Property Investor’s Network, Education Angels, E-Squared, and Revealed Films. We are in the process of integrating them into the Genius Group family and will add their curriculum onto GeniusU. In 2022, GeniusU was named a top 10 emerging giant in one of KPMG’s reports, and we signed a partnership with NASA as a sister with UAB. We have shared details about each of these milestones in our previous earnings calls, so I invite you all to listen to our archive recordings for more information. Our achievements translate directly into the growth of students and partners that are joining our platform. First, let’s focus on GeniusU. GeniusU increased in total numbers of students from 2.7 million in 2021 to 3.1 million in 2022, which represents a 70% growth year-on-year and an average of 8,500 students joining the GeniusU platform each week in 2022. We are seeing growth in the number of students on GeniusU in the range of 10% to 20% per year. This growth is primarily due to three factors: organic growth through word of mouth and referrals, partners in our acquisitions attracting new students, and direct growth from paid digital advertising. We have historically spent a lower amount on advertising, as we have relied on word of mouth referrals and partners, but we plan on increasing our marketing spend in the next few years to accelerate growth. GeniusU operates on a freemium model, where the majority of students receive free education, from which a percent opt in to upgrade to paying students. Of our 3.1 million students on GeniusU in 2022, 3.06 million were free students and 43,000 were paying students. In comparison, GeniusU had 37,000 paying students in 2021, which implies a 15% growth in paying students year-on-year. It also means that in 2022, GeniusU attracted 444,290 new students and 5,755 new paying students, representing a 1.3% conversion rate. In comparison, the conversion rate from 2019 to 2021 was closer to 1%. This increase in conversion rate reflects improved marketing services and the growing strength of our sales team. We expect the improvement in the conversion rate to be an important factor in the growth of paying students in the years to come. Overall, pro forma numbers for the group, including the acquisitions, reflected a 58% growth in total students and users in 2022 compared to 2021, with paying students and users growing by 137% in 2022 to 171,919 paying students. As we integrate the acquisitions, we’re introducing our GeniusU freemium model into their student pathways, as we introduce free courses and our student conversion model to the three acquisitions that have a more traditional education model. These are UAV, Education Angels, and E-Squared. Currently, these three companies rely on enrollment directly into a full-time paid service, which results in a much lower student number at present. With this integration, we expect great potential for student and revenue growth. The number of partners in GeniusU grew from 10,200 in 2021 to 13,000 in 2022, which represents a 27% growth year-on-year. Pro forma numbers for the group, including the acquisitions, grew from 11,400 in 2021 to 14,700 in 2022, which represents a 29% growth in total partners. We see the number of partners as a key measure for the scalability and delivery of the Genius curriculum, as each partner attracts their own students to GeniusU. As partners are joining from all parts of the world, we’re able to overcome the two largest bottlenecks to the growth of most education companies, which are location and teachers. Going forward, we expect a growth of 10% to 20% in partners each year, maintaining a balance between growth and quality. As the five acquisitions this year are instrumental to our strategy and the integration process is currently ongoing, I believe that providing more color to this topic may be beneficial for all of you to understand the potential synergies in more detail. I’ll use the integration of Entrepreneur Institute into Genius Group as an example. Prior to its acquisition, Entrepreneur Institute was delivering in-person events and mentoring to entrepreneurs. Student attendance was limited to where events and courses were held, as course sizes were limited to the available venue space, and the number of courses was constrained by the number of faculty members who could teach. Following the acquisition, Entrepreneur Institute courses and products were fully integrated into GeniusU. Students were able to join from anywhere, at any time; courses were digitized to be delivered as a combination of recorded and facilitated content, and faculty could join and get certified to deliver the courses from anywhere around the world. The conversion of Entrepreneur Institute from an event-based training company to a freemium ed-tech model has resulted in increased student intake from an average of less than 50 new students per week to over 2,000 students per week as of December 31, 2022. Also, event registrations increased from less than 1,000 attendees per year to over 20,000 attendees per year as of December 31, 2022. We attracted over 1,000 faculty members who became full consultants and performance consultants globally, in addition to country partners translating and delivering the courses in various languages, along with over 50 city leaders hosting regular events and online communities, marketing Entrepreneur Institute products and courses in their cities. The model that we used to acquire, integrate, digitize, and distribute the courses and certification for Entrepreneur Institute is a model we’re now repeating for the five acquisitions made in 2022, with the aim of reducing the average marketing cost per student, increasing student and partner intake, and enhancing the average revenue per student and partner. Before the completion of the four IPO acquisitions, each of the companies had been delivering certification and degree programs to students in their respective locations. Since completing the acquisitions of these four companies, we’re in the process of integrating each company’s varied certification and degree programs onto GeniusU. This will enable us to provide an education offering from early childhood students all the way to adult learners, while linking our GeniusU conversion model to their products and courses. We believe that this integration model will result in multiple benefits, including growth of our global student, partner, and faculty community, and distribution of each company’s courses around the world. It will also enable our faculty to teach courses to students of all ages, online or in person, in a small group or at any of our campus venues with a large group. This flexibility in delivery for both faculty and students is an important component of our vision for our Genius curriculum. Moreover, UAB is our global center for curriculum development, and our long-term aspiration is to expand the campus to include innovation labs, accelerated camps, and courses delivered across all education stages of our lifelong learning curriculum. Regarding our fifth acquisition, Revealed Films, this acquisition exemplifies our strategy to target media companies that strengthen our freemium model, along with education companies that enhance our accreditations, products, and course offerings. Prior to the acquisition, Revealed Films was focused on producing documentaries and docuseries that were initially free to view, leading to upgrades to low-cost products and courses. This resulted in a viewer database in the millions, with a low revenue per viewer. We intend to integrate the Revealed Films film format model as a front-end pathway into GeniusU’s lifelong learning pathways, converting viewers into students and increasing the lifetime value of each upcoming Revealed Films documentary, such as AI Revolution. This will demonstrate the power of linking media, entertainment, and education. In terms of corporate actions, we announced in November 2022 that we had hired law firms to investigate market activity on our stock. The initial results of the investigation indicated that certain individuals and companies appear to be part of a market manipulation scheme, which artificially depressed the price of Genius Group’s shares. Subsequently, we decided to establish, in January 2023, an illegal trading task force and launched legal action against those involved, seeking to recover liquidated damages and costs to preserve shareholder value. This action is ongoing. We also implemented several corporate actions to address this issue. We organized an extraordinary general meeting in February 2023, where resolutions for a share buyback and share consolidation were passed by shareholders. The company will only implement such resolutions if necessary and if it increases shareholder value. As an initiative to increase visibility of our shares and shareholders and to give shareholders the option of having their shares on the blockchain, where they cannot be shorted, we issued a $10 digital discount coupon per share to all shareholders in March 2023 and dual-listed Genius Group in April 2023 on Upstream Exchange, a fully regulated global stock exchange for digital securities and NFTs. We also settled litigation with our lenders, which included an applicable settlement, canceling $36 million convertible note conversions and reaching an agreement between Genius Group and the lending party to invest in our next offering. Finally, the Board approved a spin-off of Entrepreneur Resource Limited, which will provide all of Genius Group’s shareholders an account date with shares in Genius Group’s subsidiary, Entrepreneur Resource Limited, listed on the MERJ Stock Exchange in the Seychelles. This spin-off was approved by shareholders during the ordinary general meeting held on May 16, 2023. The spin-off of Entrepreneur Resource will help streamline and rationalize the group’s operations, focusing Genius Group on its ed-tech initiatives while allowing Entrepreneur Resource Limited to manage its hospitality focus under new ownership, enabling each management team to grow their respective businesses more effectively. It will also result in a full share count of bona fide Genius Group shares on the count date. Looking ahead, our theme for 2023 is the AI Revolution. From the launch of Genius Group, we have anticipated a period when education will be transformed by AI, with every mentor and student having a personalized learning path with an AI assistant. The launch of GPT-3, GPT-4, and now AutoGPT, along with AI platforms from major technology companies, has accelerated our AI plans. While there are schools and universities banning students from using ChatGPT and other AI tools, we believe that new educational methods will arise and expect all students to use AI. We believe the future of learning—and the skills, jobs, and tasks we are preparing for—require a high-tech, high-touch approach, relying not only on AI growth but also on our human intelligence to harness and complement artificial intelligence. This combination of AI and human intelligence can potentially create super-human intelligence. We believe there is a significant opportunity for education companies to meet the growing demand for global platforms for super-human learning. Our plan this year is to combine the AI capabilities of GPT-4 with Salesforce’s Einstein AI to power Genius Group’s Genie AI virtual system on GeniusU. Our Genie AI provides personalized pathways for students based on their talents, passions, purpose, and interests, linked to their assessment results and course progress. It will also enable educators to continually generate an updated curriculum. We launched the alpha version of our Genie AI in Q1 this year, with a beta version made available to all GeniusU students last week at our AI Investor Summit. We plan to release new versions of our Genie AI regularly to continuously improve our users' experience. Additionally, we aim to make the use of artificial intelligence a requirement as part of our curriculum to ensure that all students learn and embrace this new technology. We intend to integrate artificial intelligence within our curriculum and make learning with an AI assistant compulsory, expecting successful ed-tech companies to follow suit. Our second strategic project continues to focus on our Genius Metaversity. You have heard some details in previous earnings calls about our plans to create a Metaversity, combining gamified learning, a digital credit system, and augmented reality within a virtual engaging environment. This project is core to our vision, as we believe that Web3 and the Metaverse will enhance how students and teachers interact and learn in a global classroom. We hosted an Impact Investor Summit last week, where we launched the beta version of our Genius Metaversity with a large audience. The experience was a great success, attracting over 1,700 participants who joined our virtual reality event, interacting with each other, summit speakers, and our partners from around the world. We will continue to provide updates on this project as we finalize our official launch plan. Our M&A strategy in 2022 focused on acquiring smaller education and ed-tech companies with revenues ranging from $5 million to $20 million. This approach has evolved into targeting fewer companies with values between $50 million and $100 million. We have also identified companies within the media industry as potential acquisition targets, recognizing the potential to combine media and education expertise and create efficiencies. Each acquisition, regardless of size, requires a similar level of time and resources, so making larger acquisitions will allow us to grow faster and more efficiently. Regarding our other M&A criteria, we’re still looking at the same regions—U.S., Europe, Asia, and Australia. We want to ensure that each acquisition we make is not only complementary in services but also accretive for our shareholders. The global education, entertainment, and media markets are highly fragmented, and we believe there is a wide range of players that could be an exceptional fit for Genius Group. In summary, several key factors have contributed to our positive growth and operational performance in 2022, including the growth in our student and partner numbers, global adoption of our Genius curriculum, the improvement and development of new technology on our GeniusU platform, and the ongoing integration of our acquisitions. Considering that 2022 was a challenging year globally due to a broad-based economic slowdown, high inflation, multiple interest rate hikes, the war in Ukraine, and a crypto crash, among other factors, we are extremely pleased with the growth of Genius Group and its subsidiaries in 2022. Education remains a defensive sector and continues to be a top-performing industry during economic slowdowns. We plan to leverage this environment to attract new students and grow our platform. We will coordinate with high-profile companies implementing strategic projects, such as our Genie AI and Genius Metaversity, further integrate our past acquisitions, and realize synergies to continue on this growth trajectory in 2023. 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 evening, everyone. I can only echo Roger's message about the company’s great results this year. We have had strong growth in 2022, which can be seen in the revenue growth, student growth, and partner growth that Roger presented earlier. The growth is even more impressive in our financial results. During Q1 2023, we updated our revenue recognition policy memo and uncovered an error in the implementation of the accounting treatment for certain revenue contribution transactions with a third-party sales partner. We, therefore, believe that a restatement was necessary for our 2021 results. In accordance with IFRS, the restatement recorded revenue and expenses net for 2021 sales transactions where the company was not declared the principal in the transaction. Consequently, the restatement decreased revenue in 2021 by $4.5 million and decreased our cost of revenue by the same amount. Our revenue in 2021 has been restated from $12.8 million to $8.3 million, and our 2021 cost of revenue has been restated from $10 million to $5.5 million. Our 2021 gross profit, EBITDA, cash flow, and net profit remained the same as Roger previously presented. The decrease in revenue in this period represents higher year-over-year revenue growth in 2022. Now, onto our 2022 results. The audited revenue increased from $8.3 million in 2021 to $18.2 million in 2022, representing a 118% growth year-over-year. This is a much higher growth rate than the education industry growth rate of 4.3% and the ed-tech industry growth rate of 16.3%. This tremendous growth this year reflects stable and robust student and user growth on our platform and the acquisition of new customers through acquisitions concluded this year. This growth was driven by a 161% increase in education revenue, rising from $5.2 million to $30.6 million, and campus revenue increasing by 50%, from $3.1 million in 2021 to $4.6 million in 2022. The large increase in education revenue is divided into two sections: a 66% increase in digitized education revenue, driven by growth in our student and user base, and the revival of in-person education following the completion of acquisitions. The increase in campus revenue is mainly driven by the reopening of our core campus venues, in line with the easing of pandemic restrictions, with customers more willing to travel. On a pro forma basis, Genius Group achieved revenue of $28.1 million in 2022. Our $28.1 million revenue combines $9.5 million from the pre-IPO group and $18.6 million from the five acquisitions. As explained earlier, we have had to restate our revenue for 2021. However, the 2022 guidance provided to the market was based on the old 2021 revenue accounting treatment, which had expected a similar amount of revenue from that third-party sales partner. Our 2022 pro forma revenue guidance included around $5 million of revenue from this specific partner. Our original 2022 pro forma revenue guidance was $35 million to $38 million, so we believe it would be more accurate to compare our 2022 results with a revised pro forma revenue guidance of $30 million to $33 million after eliminating those $5 million. Regarding margins, our gross profit margin increased from 33% in 2021 to 47% in 2022. This increase is the result of including higher gross margin acquisitions within the group and cost synergies from those acquisitions. Most of the cost synergies arose from integrating the courses from the acquisition companies onto GeniusU and utilizing GeniusU’s more efficient technology and sales formula. Pro forma, our gross margin remained stable at 53%. As we own the majority of the curriculum and courses across all companies, we focus on maintaining a low cost of content and a high gross margin. Our current cost of revenue mainly comprises customer acquisition costs and faculty costs. In 2022, the majority of the acquisitions were still implementing the gross strategies utilized by the pre-IPO group. As we continue to integrate the acquisitions into the Genius Group family and apply the same customer acquisition strategy to each company, we expect the cost of revenue to decrease and gross margin to expand in 2023. The group had operating expenses of $50.5 million for the fiscal year ended December 31, 2022, compared to $7.3 million in 2021. Approximately 56% of our operating expenses were attributable to a goodwill impairment loss of $28.2 million, with the remaining 44% due to general and administrative expenses. The internal goodwill impairment calculation is closely tied to the company’s market capitalization as of December 31, 2022. As Genius’ share price decreased to less than $0.50 in December 2022, this negatively impacted the impairment loss and goodwill recorded by the company, totaling $28.2 million. The company had administrative expenses of $21.1 million, which included the costs of staff, professional fees, consulting fees, development costs, share-based compensation, marketing, rent, and general expenses. The increase in our operating expenses from 2021 primarily results from the growth in our operations, increased costs associated with pandemic recovery, and the expansion of our curriculum. On a pro forma basis, the group had operating expenses of $57 million in 2022. As we continue the integration of the acquired companies within the Genius Group family, we expect cost reductions across the group in each of the acquired companies. Such reductions will primarily stem from synchronizing certain organizational processes and functions. The group recorded additional income of $0.4 million in 2022 and $1.2 million on a pro forma basis. This additional income resulted from a $0.8 million benefit from the write-off of a loan from the pre-acquisition owner, compared to $1.2 million in additional income from forgiveness of a note payable through the Paycheck Protection Program under the CARES Act in 2021. The group also incurred $50.2 million in expenses in 2022, compared to $0.5 million in 2021. This increase was largely due to a change in sales value consideration of $13.8 million and interest expenses associated with convertible loans amounting to $1.3 million. On a pro forma basis, we had $15.2 million in other expenses. This resulted in a net loss after tax of $55.3 million in 2022, compared to a loss of $4.5 million in 2021. On a pro forma basis, the loss was $54.9 million in 2022. These results, of course, should be adjusted for one-time irregularities and non-recurring items, including the revaluation adjustment of contingent liability, goodwill impairment, and other expenses that need to be excluded when calculating adjusted EBITDA. Based on those adjustments, our adjusted EBITDA reflects a loss of $7.8 million on our audited accounts and a $7.3 million loss on a pro forma basis. In 2023, we expect to improve our EBITDA as we recalibrate our costs for the post-pandemic environment while realizing cost synergies from integrating the acquired companies. I will now discuss our balance sheet and cash performance. The group’s current assets increased to $24.3 million, with cash and cash equivalents comprising $5.7 million, restricted cash of $11.1 million, and accounts receivable of $4.9 million. The group’s pro forma non-current assets grew from $11.1 million in 2021 to $67 million in 2022, mainly due to the five acquisitions. These assets largely consist of goodwill, intangible assets, and write-offs related to the acquisitions. The group’s pro forma current liabilities increased from $7.1 million in 2021 to $23.4 million in 2022, with the largest items being deferred revenue of $6.4 million, convertible debt obligations of $5.8 million, and accrued expenses of $3.8 million. The group’s pro forma non-current liabilities increased by $2.5 million to $53.9 million, due to an increase in operating leasing liabilities and derivative liabilities associated with call options and contingent liabilities resulting from multiple acquisitions. Shareholders’ equity grew from $8 million to $14 million. Our primary sources of liquidity are cash and cash equivalents, short-term investments, and cash generated from operations. We have funded our operations primarily through cash flows from operations while raising capital for business acquisitions and technology platform development. In 2022, the company completed its IPO and listing on the New York Stock Exchange, generating total proceeds of $22.5 million, which were allocated to pay IPO expenses, acquisition payouts, and business growth initiatives. Additionally, in September 2022, the company closed on a convertible round totaling $70 million, with gross proceeds of $5.8 million received as cash and cash equivalents during fiscal year 2022. Should current and anticipated future sources of liquidity prove insufficient to fund our future business activities and requirements, we may need to raise additional equity or debt financing. We released our 2023 financial guidance in January 2023, estimating a student and user base of 5.7 million to 6 million, annual revenue between $48 million and $52 million, and adjusted EBITDA of $0.521 million. Our 2023 financial guidance is heavily weighted towards the latter half of the year as we accelerate the integration of the acquired companies and expect to experience growing operating leverage driven by top-line synergies from our ed-tech platform and digitization of our product portfolio. Looking ahead, the short-term and long-term drivers for our business remain unchanged. Individuals are increasingly turning to online learning to complement their education and supply themselves with digital skills needed in today’s economy. We expect the current trends in the economy, job market, and investment landscape to drive increased demand for the entrepreneurial and skill-based education that we provide. In 2023, Genius Group aims to sustain its strong growth trajectory while managing costs and achieving positive EBITDA. We have a strong management team in place, our integration process for the five acquisitions made in 2022 is underway, and we look forward to a successful 2023. With that, we thank you for joining the call and I will now open it up for questions.

Operator, Operator

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Hunter Diamond with Diamond Equity. Please proceed with your question.

Hunter Diamond, Analyst

Hi, everyone, congratulations on the strong results. My question relates to why the shift to larger acquisitions; could you describe why you’re focused on larger deals and the impetus behind that change?

Roger James Hamilton, CEO

Hi, Hunter, thanks very much for the question. It’s been very interesting seeing the number of companies on the market at the moment, especially with the depressed prices of companies in general. We’ve noticed a significant change this year; earlier this year, I began conversations with several CEOs of public companies. These companies are not limited to those listed in the U.S.; they include companies globally. Engaging in due diligence and detailed discussions with public companies also requires a larger focus. This shift does not mean that we will ignore good opportunities with smaller companies, but the current market health allows us to look at larger targets as well. Hope that answers the question.

Hunter Diamond, Analyst

No, that makes perfect sense. My second question, and it was a fairly comprehensive call, so just two today. Regarding AI, what opportunities do you see in education? The results have been mixed for different companies; for instance, CHGG has had a negative impact, while others like Microsoft and NVIDIA have seen positives. Where do you see your investments regarding R&D for AI versus leveraging existing software?

Roger James Hamilton, CEO

Yes, that’s a great question, and I’ll answer that in two parts. You are absolutely right; in ed-tech, there are companies providing courses or programs that have mixed results. Some platforms will find challenges as AI continues to advance, especially with more personalized AI solutions becoming available. However, I also see opportunities for companies focusing on personalized learning. For instance, when I met with Salman Khan from Khan Academy, which has over 100 million students, their investment in customized tutoring solutions is impressive. What we offer aligns very closely with personalized learning. Students join us because they value the individual attention they receive from tools like Genie AI, which can provide tailored assistance based on user data. This represents a significant advantage over generic AI solutions. On the second part of your question, we are leveraging both our own developments and existing platforms. We aim to seamlessly integrate widely used AI platforms with our GeniusU ecosystem to provide students with the best experience possible. This has been part of our vision since we launched Genius Group.

Hunter Diamond, Analyst

Absolutely. No, it seems like you’re moving towards where educational technology is heading. You’re positioning the company favorably for the evolution of education. Thank you for the clarity, and I look forward to observing your continued progress.

Roger James Hamilton, CEO

Yes, that’s fantastic. Thanks a lot, Hunter.

Operator, Operator

We have reached the end of the question-and-answer session. This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.