Concerns of a GenesisAI Investor
Updated: August 3, 2023
In February 2020, I invested in GenesisAI believing the CEO when he stated the company was weeks away from launching and on track to reach $500k of revenue by April. More than three years later, it appears the company is still not generating revenue from its software and is now raising yet another round of funding, this time at an unfathomable $204 million valuation.
While I want and wish GenesisAI would grow into and exceed its valuation, the company has done little to squash the appearance of having a business model that only raises money from unsophisticated investors so the CEO can pay himself a generous salary.
I want to point out, what are in my opinion, so many red flags that this cannot be anything but a major scam, so investors can make a more informed decision before losing their money in the company’s current fundraising campaign.
In addition, I detail using simple math, why investing in pre-revenue companies valued at $204 million is a sure way to lose money.
tl;dr
- $204 million valuation is nothing short of insane and predatory
- 100% of marketing dollars spent on acquiring investors (0% acquiring customers)
- Excessive founder compensation
- $65,000 loan to the founder
- Founder selling his personal shares while preventing early investors from selling
- Track record of misleading statements regarding revenue and projections
- Over $51,000 in “business travel/entertainment” expenses during the pandemic and lockdowns
- Audits now hide line item expenses since I began my reporting
- Founder’s stock has 10:1 voting rights
- Founder is the lead investor in his wife’s company that also raised money via a crowdfunding platform
- Investors who raise valid concerns are removed from the Discord channel, in violation of SEC Crowdfunding regulations
What is GenesisAI’s Real Business?
It appears GenesisAI’s sole focus in its 40+ months of existence is raising capital in ever-increasing valuations, despite generating no revenue from its software and making zero marketing efforts to acquire customers. With that capital, the CEO pays has paid himself as if he was leading a publicly traded Fortune 500 company.
Archil, the CEO, says the company is generating revenue; while technically true, it is a highly misleading statement. The company generated several thousand dollars by selling tickets to a small conference on AI.
I question the ethics of a CEO who states that their company is generating revenue, leading potential investors to believe that revenue is being generated from the software in which they are investing.
Fundraising History
The current Offering is GenesisAI’s 6th fundraising campaign in under four years.
January - March 2020: GenesisAI raises $625,390 on WeFunder
June 2020 - March 2021: GenesisAI raises $1,314,074 on NetCapital
April 2021 - GenesisAI's second fundraising campaign on NetCapital begins
June 2021: NetCapital’s compliance department appears to have required GenesisAI to amend its offering statement. These material changes to the offering gave investors the opportunity to cancel their investments.
July 2021: GenesisAI's NetCapital fundraising campaign ends. Raised $2,573,949.
October 2021: GenesisAI's $1,400,000 offering on StartEngine is canceled by StartEngine weeks after launching.
February 1, 2022: GenesisAI's $75,000,000 offering by Dalmore Group is filed at a $189,000,000 valuation.
February 9, 2022: Destiny Robotics launches a $125,000 fundraising campaign on WeFunder. This is notable because Archil’s wife is the CEO.
July 14, 2022: GenesisAI's current fundraising campaign on NetCapital begins at a valuation of $204,000,000
CEO Compensation
GenesisAI’s CEO, Archil Cheishvili, has repeatedly increased his compensation via salary raises, annual bonus eligibility, and selling his own personal shares.
Salary
2018: $80,000 per year
2019: $80,000 per year
2020: $200,000 per year
2021: $350,000 per year
2022: $350,000 per year
2023: $350,000 per year (accurate as of the 6/30/2023 SEC filing doc titled otherfinancial.pdf on page 13)
Bonuses
2020: $70,000 (later canceled in exchange for Class B common stock)
2021: $2,900,000 which was later amended to $200,000 after investor backlash
On page 21, paragraph 28 of the 2021 NetCapital Offering Statement it reads, “Our CEO is eligible for a bonus award of up to $70,000 for 2020...” This bonus was challenged repeatedly by commenters in the NetCapital discussion board and was never paid to Archil in cash. The February 2022 offering statement states “He agreed to waive his bonus as partial consideration for the cancellation and exchange of all of his Class A Common Stock for the same number of shares of Class B Common Stock.”
The very same paragraph also reads, “Our CEO is eligible for a bonus award of….up to $2,900,000 for 2021." This was met with opposition from the NetCapital investor community.
After a previous version of this article was published, NetCapital required GenesisAI to amend its offering statement due to major material changes. The amended offering statement reduced the 2021 bonus to $200,000 conditional on the following metrics: "(i) reaches a market valuation of $100,000,000, (ii) adds ten more artificial intelligence supplier partners, (iii) finishes a technology that will easily allow companies to deploy their artificial intelligence tools on the Company’s GenesisAI platform, and (iv) adds five more artificial intelligence models on the Company’s GenesisAI platform."
Note that these are metrics the company's CEO should be striving for anyway, and should not require a $200,000 bonus on top of a $350,000 salary to be achieved.
This bonus remains unpaid and technically not yet approved by the Board. However, the two board members were hand-picked by Archil.
Archil is Sold his Own Personal Shares in a Secondary Offering
The Dalmore Group offering statement states, “The selling stockholders in this Offering may make offers and sales of their shares of up to 30% of the gross proceeds from this Offering, or up to $22.5 million, whichever is less…Mr. Cheishvili may sell up to 5,035,235 shares ($21,399,748).”
The remaining $1,100,251 are able to be sold by other company insiders, Giorgi Basadzishvili and co-founder Mena Gadalla.
To be clear, this was a $75 million offering but only $52.5 million was eligible to go to GenesisAI Corp while $22.5 million was eligible to Archil's and his insiders' pockets.
In the GenesisAI Discord channel, investors asked if they could also sell their shares. Archil replied, "Liquidity event can potentially be (if any) IPO or acquisition."
Rules for thee but not for me.
Revenue Projections
GenesisAI's February 2020 Form C on page 13 states, "We estimate to reach a revenue of $500k by April" (2020). I believe this was an egregious material misstatement.
This statement is one of the main reasons why I invested. GenesisAI was representing, to non-accredited investors, in a Reg CF offering, that within 90 days the company was projected to reach $500k in revenues. This statement implied that the company was on the cusp of launching, ready to ramp up revenues at an extremely high rate.
Well, here we are in August of 2023, three and half years later, and the company has yet to generate meaningful revenue outside of conference ticket sales.
To my knowledge, SEC regulations require the issuer (GenesisAI) to correct material misstatements in subsequent filings. However, I cannot find any such corrections in the company's subsequent filings.
This raises questions like; why did GenesisAI believe it would generate $500k of revenues between February 10 and April 30 in the year 2020, why did the company represent this material misstatement to non-accredited investors, and why has the company not corrected this misstatement in subsequent filings?
During the first NetCapital fundraising campaign, Archil was asked repeatedly about revenue projections. Here are some of Archil’s statements:
“We expect to start generating revenue by the beginning of 2021”
“We are B2C, B2C companies generate revenue 5+ years after founding”
“Our revenue target for 2024 is $100M and $200M for 2025.”
Misleading Statements Regarding Corporate Governance
The 2021 offering statement’s language regarding Archil’s $2,900,000 bonus was met with fierce opposition by investors in the NetCapital community. Archil was asked how this bonus is determined and who determines the award on the NetCapital discussion board. Archil replied, “The board will determine the bonus based on CEO's performance.”
Three investors then asked follow-up questions about who specifically sits on the Board of Directors, to which Archil never replied. Investors wanted to know who the specific people were determining if the CEO (Archil) was to be awarded a $2,900,000 bonus.
Incredibly, on April 30, 2021, GenesisAI filed its 2020 Annual Report with the SEC, disclosing Archil as the "Sole Director". This means Archil would be determining his bonus.
In my opinion, Archil was inexcusably misleading (at best) to reply to these potential investors by saying “The board will determine the bonus based on CEO's performance” when Archil was the sole board member. Archil’s statement implied board members, other than himself, were making the decision on behalf of the shareholders - when in fact he was the only member of the board.
Loose Financial Controls
Archil's high amount of travel at the company's expense calls into question the CEO's commitment/focus on building the company and calls into question his judgment about what should be billed to the company when the company has generated $0 of revenue.
Company Travel Expenses
Below are figures sourced from GenesisAI Corp's 2018 Audited Financial Statement, 2019 Audited Financial Statement, and 2020 Financial Statement (unaudited). Financials for 2021 aggregate line items so we do not know how much has been spent on travel.
This is probably a good time to remind you that Archil was GenesisAI's only employee during these periods and we were in a global pandemic most of 2020 when everyone including CEOs used Zoom and stopped traveling.
2020 (pandemic year)
Business Travel:.......................$38,338
Business Meals:.......................$6,188
Local/ground Transportation:...$6,700
2019
Business Travel:.......................$8,745
Business Meals:.......................$2,839
Local/ground Transportation:...$4,000
Business Entertainment:..........$2,000
2018
Business Travel:........................$10,632
Business Meals:........................$6,838
Local/ground Transportation:....$5,000
Business Entertainment:...........$4,000
TOTAL:.................................... $95,280
Marketing Expenses
GenesisAI’s Facebook Ad Library disclosed 38 active advertisements during the NetCapital fundraising campaigns. 100% of the ads are linked to the NetCapital crowdfunding campaign.
100% of the Facebook marketing dollars are being used to raise more money, as opposed to marketing for sales. Simply put, GenesisAI is raising money from investors to spend on marketing to raise more money from investors.
The recently filed 2020 Annual Report discloses "Marketing & Advertising'' expenses of $326,787 for the year 2020. Given the company has generated $0 of revenue, I believe I can safely assume that these are not marketing dollars spent on customer acquisition and/or sales. This figure amounts to 45% of GenesisAI's total expenses for 2020.
It appears that 45% of investor dollars spent in 2020 were spent on marketing to raise more money from investors.
Raise money, spend on marketing the next fundraising campaign at a higher valuation, rinse and repeat.
Since We Began Reporting, Audits Now Hide Line-Item Expenses
Since the first version of our reporting was published, GenesisAI stopped reporting expenses broken into line items.
Now all operating expenses are broken into two categories:
- Selling/General/Administrative
- Research & Development
Are you going to trust a company that responded to the above questions by hiding these entertainment/travel and marketing expenses in subsequent filings with the SEC?
Overpayment to Palatine Analytics
Between 2018-2019, Archil’s other company Palatine Analytics was being paid for “CEO services” in the amount of $80,000 per year.
According to the audits, GenesisAI overpaid Palatine Analytics by $14,500 and “expects to be reimbursed.” It is unclear if the $14,500 overpayment was reimbursed because I cannot find any mention of this overpayment or reimbursement in subsequent filings or financial statements.
$65,000 Loan to the CEO
The unaudited 2020 financial statement state, "[t]he Company made an overpayment to Archil Cheishvili of $65,000 in 2020, and both parties did not have knowledge of such overpayment until or around April 2, 2021, the date of the promissory note, and wished to rectify such overpayment in accordance with the terms of this promissory note."
A question that still has not been answered: why is the company being compensated interest at well-below market rates?
Destiny Robotics
Archil is the lead investor in a similar, recently formed company named Destiny Robotics. The Founder and CEO of this company, Megi Kavtaradze, just so happens to be Archil’s wife.
If you think Destiny Robotics’ website looks eerily similar to GenesisAI’s, wait until you look at the Terms of Service page. I assume Archil will fix the links after this article is published, so please refer to this historical snapshot of the page on the Wayback Machine and click on the links.
As you can see, the Terms of Service are identical, down to the word, as GenesisAI’s Terms of Service page. Someone forgot to change the links, and every link on this page navigates to GenesisAI’s website. If you click the links in the historical snapshot link, you will be redirected to GenesisAI.
It would be interesting if an existing stockholder demanded the inspection of GenesisAI’s books and records to see if company funds were paid to the website developer to build Destiny Robotics, pay their employees, or build their website. Delaware Section 220 allows for any stockholder to inspect the corporation’s books and records.
As of February 9, 2022, Destiny Robotics is raising a funding round on WeFunder.
A curious addition to GenesisAI’s use of proceeds section is “for mergers and acquisitions (although no specific candidates or type of candidates have been identified and no acquisition negotiations have occurred)...” Investors should press Archil to answer if there is a possibility of GenesisAI acquiring Destiny Robotics, which would effectively be another vehicle to route investor money into his household.
Silencing GenesisAI’s Critics
Legal Threats
Archil has a repeated history of threatening critics with litigation. In America, you can sue anyone for anything, and win by drowning your opponent in legal bills.
On May 17, 2020, a pseudonymous author named Carla Benvenutti published an article on Medium titled, “Three Issues with GenesisAI.” Medium has since removed this article. I received correspondence from Carla, and she believes Medium removed the article after receiving legal threats from GenesisAI.
On June 6, 2021, Nanalyze published a factual article titled, “A Review of NetCapital and a Look at GenesisAI”. On August 26, 2021, Nanalyze received a cease and desist letter which threatened legal action if they did not remove the article. According to Nanalyze, they removed the article not because it was inaccurate, but because “it was the easiest way forward.” You can see the redacted article here and the reference to the legal threat.
In October 2021, a YouTube video by HelloSharky analyzing GenesisAI’s StartEngine campaign was published. This video was critical of GenesisAI and the campaign. This video no longer exists and one can only assume HelloSharky was met with legal threats.
In May 2021, Archil replied to me on the NetCapital discussion board in response to my previous article saying, “You should expect an email this week. You are spreading lies and rumors about Genesis and are actively trying to defame us. Actions have consequences.” I did not immediately take down the article, instead choosing to wait until the end of the fundraising campaign.
I wonder how many people are out there who have been intimidated into silence and whose voices we will never hear because they fear threats of litigation.
Publicly Insulting GenesisAI’s own Investors
A recurring theme on the NetCapital discussion board has been investors being insulted by Archil. Here is a sample of Archil’s replies to investors who ask critical yet reasonable questions:
“Thomas, it is a shame that you can see all the updates here https://netcapital.com/companies/genesisai/updates and still want me to give you detailed updates. You are a shame.”
“You are the biggest liar, Joe. This will be my last response to you here.”
“This is FUD. I will be ignoring intentionally ill-posed type questions”
“Lawrence, everyone in this group knows that you are here just to bring FUD.”
“You should be ashamed of yourself for claiming that I disappeared. This is a joke.”
“Looks like you know very little about Genesis.”
“What an absolute disgrace you are.”
Removing Critics from the Official Discord Channel
In at least one instance, an investor with a Discord username of Ben Z asked Archil tough questions about Archil selling his own shares. Ben Z was promptly booted from the Discord channel and fellow investors were quick to notice:
Many investors have been removed, which I believe is in violation of SEC Crowdfunding laws.
Math: $204 Million Valuation is Predatory
Only an unsophisticated investor who does not understand startup math would give this company money. Let's break down the math for the unsophisticated:
Let’s assume you have $10,000 to invest in ten startups valued at $204 million. So you invest $1,000 into each.
Archil has stated dozens of times on the NetCapital discussion page, “There can be at least two possible IPOs (if any). This might take years if it ever happens. (A) Typical IPO on Nasdaq or NY stock exchange at the valuation of $1B+ High-profile IPO… (B) IPO on a smaller exchange possibly in Europe or at Nasdaq ~$500M valuation.” (emphasis added)
Now let’s throw in an outrageously unrealistic assumption that GenesisAI has a 4.5% chance of achieving an exit of $1 billion dollars.
4.5% of Y Combinator companies have achieved a valuation of at least $1 billion, which is the most successful accelerator program in history. GenesisAI is not a Y Combinator company but let’s use the unrealistically high 4.5% figure to illustrate how absurd this valuation is.
Your return on investment if GenesisAI has a $1 billion IPO is calculated as follows:
Final valuation × Ownership stake − Initial investment
Now let’s add our numbers from our unrealistically optimistic assumptions:
$1 billion IPO x 0.000488% - $1,000 = $3,882 return on investment
This means that if GenesisAI reaches an IPO of $1 billion, your initial investment of $1,000 would yield a return of $3,882.
Now let’s calculate the return on a portfolio of 10 similar investments valued at $204 million with a 4.5% chance of reaching a valuation of $1 billion:
Number of successful startups = Total number of investments × Success rate:
10 × 4.5% = 0.45 successful startups per 10 investments
The number of failed startups is calculated based on the failure rate of 95.5% (which is 1 minus the success rate of 4.5%):
Number of failed startups = Total number of investments × Failure rate:
10 × 95.5% = 9.55 failed startups per 10 investments
The expected return on the portfolio is calculated as follows:
Expected return = Number of successful startups × Return per successful startup − Number of failed startups × Investment per startup
Substituting the calculated and given values:
Expected return = 0.45 × $3,882 − 9.55 × $1,000 = −$7,803
So, considering a portfolio of 10 similar investments, each of $1,000 in different startups, each with a valuation of $204,837,084, and a success rate of 4.5%, the expected return on this portfolio would be approximately -$7,803.
This means you would be expected to lose around 78% of your total investment of $10,000.
It doesn’t take a Harvard graduate to clearly see this valuation is predatory.