Xiao-I Corporation Form 20-F Summary
Business context and reporting period
Xiao-I Corporation is a Cayman Islands holding company whose operations are conducted primarily in China through Shanghai Xiao-i Robot Technology Co., Ltd., a variable interest entity (VIE), and its subsidiaries. The company provides cognitive artificial intelligence solutions, including cloud platform products, technology development services, software, maintenance and support, smart-city solutions, contact-center solutions, architectural design AI and related products.
This Form 20-F reports the fiscal year ended December 31, 2022. The filing does not provide a separate fourth-quarter 2022 income statement or cash-flow presentation; the figures below are annual figures.
The consolidated financial statements are prepared under U.S. GAAP and presented in U.S. dollars. Xiao-I’s ADSs trade on Nasdaq under the symbol AIXI; each ADS represents one-third of an ordinary share.
Financial performance and key metrics
| Metric | 2021 | 2022 | Change |
|---|---|---|---|
| Revenue | $32.52 million | $48.18 million | +48.1% |
| Gross profit | $21.64 million | $30.81 million | +42.4% |
| Gross margin | 66.5% | 63.9% | Down 2.6 percentage points |
| Operating income/(loss) | $5.00 million | $(3.14) million | Turned to loss |
| Net income/(loss) | $3.37 million | $(6.01) million | Turned to loss |
| Net loss attributable to Xiao-I shareholders | $3.68 million income | $(5.90) million loss | Turned to loss |
| Operating cash flow | $(11.89) million | $(10.92) million | Still negative |
| Investing cash flow | $0.08 million | $(2.86) million | Primarily equity investment |
| Financing cash flow | $12.19 million | $13.51 million | Supported liquidity |
| Cash and cash equivalents | $1.31 million | $1.03 million | Down 21.8% |
Revenue growth was led by cloud platform products, which increased from $5.55 million in 2021 to $25.74 million in 2022 and represented 53.4% of revenue. Technology development services increased 77.6% to $16.42 million and represented 34.1% of revenue. Software product revenue fell 76.2% to $3.55 million after a significant 2021 drawing-review license was recognized. Maintenance and support revenue declined 12.4% to $2.43 million.
Cost of revenue increased 59.7% to $17.38 million. Materials costs increased 509.4% to $8.25 million, and staff costs increased 33.1% to $7.50 million. Cloud-hosting fees declined 64.2% to $1.31 million. Selling expense decreased 15.3% to $3.91 million, and general and administrative expense decreased 9.4% to $6.03 million.
Research and development expense increased sharply from $5.36 million to $24.00 million, primarily because of approximately $18.8 million of additional professional service expense related to industrial internet and cloud-platform research. R&D represented 49.8% of revenue and 70.7% of operating expenses in 2022.
Other loss increased to $2.21 million from $1.08 million, reflecting lower government grants and higher interest expense. Interest expense increased to $2.44 million from $1.87 million. The company also recorded a $1.72 million increase in the valuation allowance against deferred tax assets.
Liquidity, debt and capital resources
- Cash and cash equivalents were $1.03 million at December 31, 2022, while accounts receivable increased to $41.36 million from $31.18 million. The increase in receivables was a major use of operating cash.
- Total liabilities increased to $69.57 million from $50.57 million, while total shareholders’ deficit increased to $8.98 million from $3.38 million.
- Short-term borrowings increased to $18.78 million from $9.12 million. The weighted-average interest rate on short-term borrowings was 4.73% at year-end 2022.
- Convertible loans totaled $3.75 million at December 31, 2022. The loans carried annual interest rates of approximately 12% to 15% and were subsequently extended or repaid in 2023, generally without conversion rights.
- Loans from related parties and third parties totaled $18.94 million under the contractual-obligation schedule, including $7.05 million due within one year and $11.89 million due within one to three years.
- The company had operating lease payment obligations of approximately $0.79 million, including $0.53 million due within one year.
- The company pledged patents in 2022 to obtain bank credit limits of approximately $28.6 million and pledged additional patents in connection with third-party loans.
- Operating cash flow remained negative because of increases in accounts receivable and inventories. Financing inflows, including bank, related-party and third-party borrowings, were necessary to support operations.
Material changes versus the prior comparable period
- Revenue grew substantially, but profitability deteriorated as R&D spending rose by $18.64 million and interest expense increased.
- Gross margin declined despite higher gross profit, primarily because certain education technology-development projects had high materials costs and lower margins.
- The revenue mix shifted from customized software products toward cloud platform products and technology development services.
- Customer concentration remained significant. The largest customer contributed 20.4% of 2022 revenue, and the five largest customers contributed 58.4%.
- Supplier concentration also remained high. The three largest suppliers represented 66.8% of 2022 purchases, including one supplier at 34.6%.
- Accounts receivable increased 32.6% to $41.36 million, and the allowance for doubtful accounts increased to $4.46 million.
- The company made a $2.75 million equity-method investment in Zhizhen Guorui, increasing long-term investments to $2.85 million.
- Management identified two material weaknesses in internal control over financial reporting: insufficient qualified U.S. GAAP and SEC-reporting personnel, and inadequate document-management and timely revenue and cost-recognition procedures.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide numerical revenue, earnings or cash-flow guidance. Management stated that it intends to continue investing in cognitive AI, cloud platforms, industrial internet, intelligent construction, metaverse-related products and international expansion. An intelligent industrial platform project initiated in 2022 was expected to be completed in early 2024.
Management expects to retain future earnings and does not anticipate paying dividends in the foreseeable future. The March 2023 IPO generated approximately $35.44 million of net proceeds, but the company disclosed that most IPO proceeds could not then be transferred to the PRC operating entities because certain shareholders had not completed required SAFE Circular 37 registrations and the WFOE could not open a new capital account.
- VIE structure: Investors hold equity in the Cayman Islands parent, not the PRC operating entity. The VIE agreements have not been tested in court and could be challenged or disallowed by PRC authorities.
- Cash-transfer restrictions: PRC foreign-exchange controls, dividend restrictions, statutory reserves and SAFE requirements may restrict transfers of cash from the PRC operating entities to the offshore parent.
- Liquidity and going-concern pressure: The company has recurring losses, negative operating cash flow, substantial short-term debt and limited year-end cash. The financial statements state that realization of assets and repayment of liabilities depend on profitable operations, cash generation, financing and investor support.
- Customer and supplier concentration: Loss of major customers or disruption involving concentrated cloud, data-center or hardware suppliers could materially affect results.
- Internal controls: Disclosure controls were not effective as of December 31, 2022 because of the two material weaknesses. The company planned remediation through additional accounting personnel, training and improved document and revenue-recognition procedures.
- Litigation: Shanghai Xiao-i’s patent-infringement lawsuit against Apple remains pending in the Shanghai High People’s Court. The asserted claim amount is RMB10 billion, and approximately $3.6 million of related case-acceptance fees were recorded as a non-current prepaid expense.
- Regulatory and listing risks: The company faces risks related to PRC data, cybersecurity, foreign-investment, CSRC and VIE regulation, as well as possible future PCAOB inspection limitations and HFCAA-related trading or delisting consequences.
- COVID-19 and macroeconomic conditions: Shanghai restrictions affected operations in 2022, although management considered the pandemic impact temporary after China relaxed major restrictions in December 2022.
Facts investors should verify
- Whether the company can convert strong revenue growth into sustainable positive operating cash flow and profitability.
- The collectability and aging of the $41.36 million accounts receivable balance and the adequacy of the $4.46 million allowance.
- Near-term maturities, refinancing terms and repayment capacity for short-term borrowings, third-party loans and convertible loans.
- Whether the two material weaknesses have been remediated and whether subsequent filings report effective disclosure and financial controls.
- Whether IPO proceeds can be transferred to and used by the PRC operating entities after SAFE-related registration issues are resolved.
- The enforceability and regulatory status of the VIE agreements and any developments under PRC foreign-investment, data-security and overseas-listing rules.
- The status and potential financial impact of the Apple patent litigation, including recovery of prepaid litigation fees or any related liabilities.
- The terms and use of the March 2023 IPO proceeds, post-IPO share count and potential dilution from the 2023 share incentive plan.
- Whether PCAOB access to audit work papers remains sufficient to avoid future HFCAA or Nasdaq listing consequences.