By Brian Lantier, CFA

NASDAQ:AIXI

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Xiao-I (NASDAQ:AIXI) continues to launch new products and announce new corporate relationships at a furious rate totaling more than a dozen press releases in the past 2 months. While the details of these relationships and products remain limited at this time, we anticipate that we will learn more about the way corporations are utilizing the HUA ZANG LLM platform in their business. As the real-world applications of AI become more apparent, we anticipate that market awareness and demand for Xiao-I’s solutions will continue to grow. We do think that the company runs some risk of diluting its message with investors by issuing too many press releases without details like the customer’s name or the size and term of the contracts, but for the moment we think investors appreciate having a broader understanding of the ways that AI solutions from Xiao-I are being used by customers.

The company has also introduced a number of new products recently that are best described as demonstration tools that are designed to show the many ways that Xiao-I’s AI platform can be used. We are particularly intrigued by the company’s Hearview glasses which will be on display at the National Association of the Deaf convention in Chicago next week and the potential uses for the company’s virtual try-on tool.

Separately, the company issued a small amount of convertible debt last week which resulted in net proceeds to the company of around $2.4 million. We will review the details of this agreement below but we think investors are concerned about Xiao-I seeking a fairly expensive convertible financing just 15 months after its IPO.

As we noted in our last update, given the company’s cash burn rate the focus for investors is likely to remain centered on how much dilution will be required to get the company to cash flow positive operations. Based on the terms of this convertible financing we do think the risk of additional dilution remains extremely high for ADS holders.

It appears that there is a bit of segregation occurring in the AI market with valuations actually increasing for many of the Tier 1 companies over the last three months while smaller companies like Xiao-I have seen their valuations tumble. In May we indicated that if “the company seeks additional equity financing to fund operations in 2024 our target valuation would likely have to be adjusted lower.” As a result of the latest financing, the discount applied to smaller AI companies by the market, and the likelihood of other financing over the balance of 2024, we are adjusting our valuation target to $2.00.

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