{"url_path":"/sec/aixi/10-k/2026/item-19","section_key":"item-19","section_title":"Item 19 Exhibits.","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-05-15","source_url":"https://www.sec.gov/Archives/edgar/data/1935172/0001213900-26-057986-index.html","accession_number":"0001213900-26-057986","cik":"0001935172","ticker":"AIXI","issuer_name":"Xiao-I Corp","edgar_url":"https://www.sec.gov/Archives/edgar/data/1935172/0001213900-26-057986-index.html","primary_entity_key":"0001935172","primary_entity_name":"Xiao-I Corp"},"word_count":30312,"has_tables":true,"body_markdown":"Item 19. Exhibits.\n\n \n\nList all exhibits filed as part of the registration\nstatement or annual report, including exhibits incorporated by reference.\n\n \n\n \n \n \n \n**Incorporation by Reference**\n\n**Exhibit No.**\n \n**Description**\n \n**Form**\n \n**File No.**\n \n**Exhibit No.**\n \n**Filing Date**\n \n**Filed / Furnished**\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n\n1.1\n \n[Amended and Restated Memorandum and Articles of Association of the Registrant](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex1-1_xiaoicorp.htm)\n \n20-F \n \n001-41631 \n \n1.1\n \n4/28/2023 \n \n \n\n2.1\n \n[Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.4)](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex4-3_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n4.1\n \n2/13/2023\n \n \n\n2.2\n \n[Registrant’s Specimen Certificate for Ordinary Shares](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex4-2_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n4.2\n \n12/20/2022\n \n \n\n2.3\n \n[Form of Deposit Agreement, among the Registrant, the depositary and the holders and beneficial owners of American Depositary Shares issued thereunder](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex4-3_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n4.3\n \n2/13/2023\n \n \n\n2.4\n \n[Form of Amendment No. 1 to the Deposit Agreement, by and among Company, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares issued thereunder](http://www.sec.gov/Archives/edgar/data/1472033/000119380524001025/e663808_ex99-ai.htm)\n \nF-6\n \n333-269502\n \n(a)(i)\n \n8/13/2024\n \n \n\n2.5\n \n[Description of Securities](ea029033601ex2-5.htm)\n \n \n \n \n \n \n \n \n \n*\n\n4.1\n \n[2023 Share Incentive Plan](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-1_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.1\n \n12/20/2022\n \n \n\n4.2\n \n[2025 Share Incentive Plan](http://www.sec.gov/Archives/edgar/data/1935172/000121390025030788/ea023777301ex10-1_xiaoicorp.htm)\n \nS-8\n \n333-286469\n \n10.1\n \n4/11/2025\n \n \n\n4.3\n \n[Form of Indemnification Agreement between the Registrant and its directors and executive officers](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-2_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.2\n \n12/20/2022\n \n \n\n4.4\n \n[English Translation of Exclusive Business Cooperation Agreement between Zhizhen Artificial Intelligence Technology (Shanghai) Company Limited and Shanghai Xiao-I Robot Technology Co., Ltd. dated March 29, 2019](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-3_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.3\n \n12/20/2022\n \n \n\n4.5\n \n[English Translation of Exclusive Option Agreement among Zhizhen Artificial Intelligence Technology (Shanghai) Company Limited, Shanghai Xiao-I Robot Technology Co., Ltd. and Each Shareholder of Shanghai Xiao-I Robot Technology Co., Ltd. dated March 29, 2019](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-4_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.4\n \n12/20/2022\n \n \n\n4.6\n \n[English Translation of Share Interest Pledge Agreement among Zhizhen Artificial Intelligence Technology (Shanghai) Company Limited and Each Shareholder of Shanghai Xiao-I Robot Technology Co., Ltd. dated March 29, 2019](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-5_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.5 \n \n12/20/2022\n \n \n\n4.7\n \n[English Translation of Power of Attorney Agreement granted to Zhizhen Artificial Intelligence Technology (Shanghai) Company Limited by each shareholder of Shanghai Robot Technology Company Limited dated March 29, 2019](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-6_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.6\n \n12/20/2022\n \n \n\n4.8\n \n[English Translation of Form of Spousal Commitment Letters Signed by Each Spouse of the Shareholders of Shanghai Xiao-I Robot Technology Co., Ltd.](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-7_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.7\n \n12/20/2022\n \n \n\n4.9\n \n[English Translation of Form Investment Agreement Related to Convertible Loans](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-8_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.8\n \n12/20/2022\n \n \n\n \n\n142\n\n \n\n \n\n4.10\n \n[English Translation of Cloud Computing Technical Services Cooperation Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and Beijing Blanstar Technology Co., Ltd. (Supplier A)](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-10_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.10\n \n12/20/2022\n \n \n\n4.11\n \n[English Translation of AI Core Product Cloud Platform Lease Contract between Shanghai Xiao-I Robot Technology Co., Ltd. and Beijing Wanjie Data Technology Co., Ltd. (Customer B)](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-12_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.12 \n \n12/20/2022\n \n \n\n4.12\n \n[English Translation of Software Procurement Contract between Shanghai Xiao-I Robot Technology Co., Ltd. and Beijing Kaiwu Digital Intelligence Technology Co., Ltd. (Supplier B)](https://www.sec.gov/Archives/edgar/data/1935172/000121390022081122/ff12022ex10-13_xiao1corp.htm)\n \nF-1\n \n333-268889\n \n10.13 \n \n12/20/2022\n \n \n\n4.13\n \n[English Translation of Services Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and China Construction Third Bureau Installation Engineering Co., Ltd. (Customer C)](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex10-14_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n10.14\n \n2/13/2023\n \n \n\n4.14\n \n[English Translation of Supplier Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and Beijing Telecom Tongchangda Information Co., Ltd. (Supplier C)](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex10-15_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n10.15\n \n2/13/2023\n \n \n\n4.15\n \n[English Translation of Services Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and Fengzhuo Jiye Technology Innovation (Beijing) Co., Ltd. (Customer D)](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex10-16_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n10.16\n \n2/13/2023\n \n \n\n4.16\n \n[English Translation of Services Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and Shanghai Lirui Water Treatment Technology Co., Ltd. (Customer E)](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex10-17_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n10.17\n \n2/13/2023\n \n \n\n4.17\n \n[Independent Director Agreement, Dated on January 18, 2023, between H. David Sherman and Xiao-I Corporation](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex10-18_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n10.18\n \n2/13/2023\n \n \n\n4.18\n \n[English Translation of AI Cloud Platform Service Contract between Shanghai Xiao-I Robot Technology Co., Ltd. and Customer F dated June 27, 2022](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex4-19_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.19\n \n4/28/2023 \n \n \n\n4.19\n \n[English Translation of Beijing Housing Lease Contract between Shanghai Xiao-I Robot Technology Co., Ltd. and Supplier D dated September 25, 2019](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex4-20_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.20\n \n4/28/2023 \n \n \n\n4.20\n \n[English Translation of Software License Use and Development Service Contract between Shanghai Xiao-I Robot Technology Co., Ltd. and Supplier E dated November 30, 2020](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex4-21_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.21\n \n4/28/2023 \n \n \n\n4.21\n \n[English Translation of Supplemental Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and Supplier F dated December 24, 2020](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex4-22_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.22\n \n4/28/2023 \n \n \n\n4.22\n \n[English Translation of Talefull Human Resource Management Software Deployment Service Contract between Shanghai Xiao-I Robot Technology Co., Ltd. and Supplier F date August 1, 2018](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex4-23_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.23\n \n4/28/2023 \n \n \n\n4.23\n \n[Subscription Agreement, between Xiao-I Corporation and ZunTian Holding Limited, dated December 13, 2023](https://www.sec.gov/Archives/edgar/data/1935172/000121390023095679/ea190032ex99-1_xiaoicorp.htm)\n \n6-K\n \n001-41631\n \n99.1\n \n12/14/2023\n \n \n\n4.24\n \n[Amended Subscription Agreement, between Xiao-I Corporation and ZunTian Holding Limited, dated April 4, 2024.](https://www.sec.gov/Archives/edgar/data/1935172/000121390024037684/ea020401601ex4-25_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.25\n \n4/30/2024\n \n \n\n4.25\n \n[Form of Non-Qualified Share Option Award Agreement](https://www.sec.gov/Archives/edgar/data/1935172/000121390024002440/ea191435ex99-1_xiaoicorp.htm)\n \n6-K\n \n001-41631\n \n99.1\n \n1/10/2024\n \n \n\n4.26\n \n[Form of Restricted Share Unit Award Agreement](http://www.sec.gov/Archives/edgar/data/1935172/000121390024002440/ea191435ex99-2_xiaoicorp.htm)\n \n6-K\n \n001-41631\n \n99.2\n \n1/10/2024\n \n \n\n4.27\n \n[Form of Senior Convertible Note dated as of June 17, 2024](https://www.sec.gov/Archives/edgar/data/1935172/000121390024053176/ea020779301ex4-1_xiao.htm)\n \n6-K\n \n001-41631\n \n4.1\n \n6/17/2024\n \n \n\n4.28\n \n[Form of Securities Purchase Agreement, dated as of June 17, 2024 between the Company and Investor](https://www.sec.gov/Archives/edgar/data/1935172/000121390024053176/ea020779301ex10-1_xiao.htm)\n \n6-K\n \n001-41631\n \n10.1\n \n6/17/2024\n \n \n\n4.29\n \n[Placement Agency Agreement, dated as of June 17, 2024](http://www.sec.gov/Archives/edgar/data/1935172/000121390024053176/ea020779301ex10-2_xiao.htm)\n \n6-K\n \n001-41631\n \n10.2\n \n6/17/2024\n \n \n\n4.30\n \n[Form of Convertible Note](https://www.sec.gov/Archives/edgar/data/1935172/000121390024093596/ea021935101ex4-1_xiao1corp.htm)\n \n6-K\n \n001-41631\n \n4.1\n \n11/1/2024\n \n \n\n4.31\n \n[Form of Securities Purchase Agreement, dated as of October 30, 2024 between the Company and Investor](https://www.sec.gov/Archives/edgar/data/1935172/000121390024093596/ea021935101ex10-1_xiao1corp.htm)\n \n6-K\n \n001-41631\n \n10.1\n \n11/1/2024\n \n \n\n4.32\n \n[Form of Convertible Promissory Note issued to Investors, dated as of January 7, 2025](https://www.sec.gov/Archives/edgar/data/1935172/000121390025002677/ea022697802ex4-1_xiao1.htm)\n \n6-K\n \n001-41631\n \n4.1\n \n1/10/2025\n \n \n\n4.33\n \n[Form of Securities Purchase Agreement, dated as of January 6, 2025 between the Company and each Investor.](https://www.sec.gov/Archives/edgar/data/1935172/000121390025002677/ea022697802ex10-1_xiao1.htm)\n \n6-K\n \n001-41631\n \n10.1\n \n1/10/2025\n \n \n\n \n\n143\n\n \n\n \n\n4.34\n \n[The Data Services Framework Agreement between Shanghai Xiao-I Robot Technology Co., Ltd. and Beijing Kaiwu Digital Intelligence Technology Co., LTD, dated January 5, 2023](http://www.sec.gov/Archives/edgar/data/1935172/000121390024037684/ea020401601ex4-28_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.28\n \n4/30/2024\n \n \n\n4.35\n \n[The Service Supplemental Agreement between Kaiyuan Cloud (Shenzhen) Technology Co., LTD and Shanghai Xiao-I Robot Technology Co., Ltd., dated July 12, 2023](http://www.sec.gov/Archives/edgar/data/1935172/000121390024037684/ea020401601ex4-29_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.29\n \n4/30/2024\n \n \n\n4.36\n \n[The Service Supplemental Agreement between Beijing Zhiwang Huiyun Technology Co., Ltd. and Shanghai Xiao-I Robot Technology Co., Ltd., dated June 21, 2023](http://www.sec.gov/Archives/edgar/data/1935172/000121390024037684/ea020401601ex4-30_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n4.30\n \n4/30/2024\n \n \n\n8.1\n \n[List of Significant Subsidiaries and VIE of the Registrant](ea029033601ex8-1.htm)\n \n \n \n \n \n \n \n \n \n*\n\n11.1\n \n[Code of Business Conduct and Ethics of the Registrant](https://www.sec.gov/Archives/edgar/data/1935172/000121390023010711/ff12023a1ex99-8_xiaoicorp.htm)\n \nF-1/A\n \n333-268889\n \n99.8\n \n2/13/2023\n \n \n\n11.2\n \n[Insider Trading Policy](https://www.sec.gov/Archives/edgar/data/1935172/000121390023033683/f20f2022ex11-2_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n11.2\n \n4/28/2023\n \n \n\n12.1\n \n[Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.](ea029033601ex12-1.htm)\n \n \n \n \n \n \n \n \n \n*\n\n12.2\n \n[Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.](ea029033601ex12-2.htm)\n \n \n \n \n \n \n \n \n \n*\n\n13.1\n \n[Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.](ea029033601ex13-1.htm)\n \n \n \n \n \n \n \n \n \n**\n\n13.2\n \n[Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.](ea029033601ex13-2.htm)\n \n \n \n \n \n \n \n \n \n**\n\n15.1\n \n[Consent of AssentSure PAC, an independent registered public accounting firm.](ea029033601ex15-1.htm)\n \n \n \n \n \n \n \n \n \n*\n\n15.2\n \n[Consent of Marcum Asia CPAs LLP, an independent registered public accounting firm.](ea029033601ex15-2.htm)\n \n \n \n \n \n \n \n \n \n*\n\n97.1\n \n[Dodd-Frank Restatement Recoupment Policy](http://www.sec.gov/Archives/edgar/data/1935172/000121390024037684/ea020401601ex97-1_xiaoicorp.htm)\n \n20-F\n \n001-41631\n \n97.1\n \n4/30/2024\n \n \n\n101.INS\n \nInline XBRL Instance Document\n \n \n \n \n \n \n \n \n \n*\n\n101.SCH\n \nInline XBRL Taxonomy Extension Schema Document\n \n \n \n \n \n \n \n \n \n*\n\n101.CAL\n \nInline XBRL Taxonomy Extension Calculation Linkbase Document\n \n \n \n \n \n \n \n \n \n*\n\n101.DEF\n \nInline XBRL Taxonomy Extension Definition Linkbase Document\n \n \n \n \n \n \n \n \n \n*\n\n101.LAB\n \nInline XBRL Taxonomy Extension Label Linkbase Document\n \n \n \n \n \n \n \n \n \n*\n\n101.PRE\n \nInline XBRL Taxonomy Extension Presentation Linkbase Document\n \n \n \n \n \n \n \n \n \n*\n\n104\n \nCover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)\n \n \n \n \n \n \n \n \n \n*\n\n \n\n*Filed herewith.\n\n**Furnished herewith.\n\n \n\nSome agreements filed as exhibits to this annual\nreport contain representations and warranties that the parties thereto made to each other. These representations and warranties have been\nmade solely for the benefit of the other parties to such agreements and may have been qualified by specific information that has been\ndisclosed to the other parties to such agreements and that may not be reflected in such agreements. In addition, these representations\nand warranties may be intended as a way of allocating risks among parties if the statements contained therein prove to be incorrect, rather\nthan as actual statements of fact. Accordingly, there can be no reliance on any such representations and warranties as characterizations\nof the actual state of facts. Moreover, information concerning the subject matter of any such representations and warranties may have\nchanged since the date of such agreements.\n\n \n\n144\n\n \n\n \n\n**SIGNATURES**\n\n \n\nThe registrant hereby certifies that it meets\nall of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report\non its behalf.\n\n \n\nDate: May 15, 2026\n\n \n\n \n**XIAO-I CORPORATION**\n\n \n \n \n\n \nBy:\n*/s/ Mingqu Lin*\n\n \n \nMingqu Lin\n\n \n \nChief Executive Officer\n\n \n\n145\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n** **\n\nINDEX TO CONSOLIDATED FINANCIAL STATEMENTS\n\n \n\n**CONTENTS**\n \n**PAGE(S)**\n\n[REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 7320)](#f_001)\n \nF-2\n\n[REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 6783)](#F_008)\n \nF-3\n\n[CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2024 AND 2025](#f_003)\n \nF-4\n\n[CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2023, 2024 AND 2025](#f_004)\n \nF-5\n\n[CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2023, 2024 AND 2025](#f_005)\n \nF-6\n\n[CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023, 2024 AND 2025](#f_006)\n \nF-7\n\n[NOTES TO CONSOLIDATED FINANCIAL STATEMENTS](#f_007)\n \nF-8\n\n \n\nF-1\n\n \n\n \n\n**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING\nFIRM**\n\n \n\nTo the shareholders and the board of directors\nof Xiao-I Corporation\n\n \n\n**Opinion on the Financial Statements**\n\n \n\nWe have audited the accompanying consolidated\nbalance sheet of Xiao-I Corporation and its subsidiaries (the “Company”) as of December 31, 2025, the related consolidated\nstatements of operations and comprehensive loss, changes in deficit, and cash flows, for the year ended December 31, 2025, and the related\nnotes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in\nall material respects, the consolidated financial positions of the Company as of December 31, 2025, and the consolidated results of its\noperations and its cash flows for the year ended December 31, 2025, in conformity with accounting principles generally accepted in the\nUnited States of America.\n\n \n\n**Material Uncertainty Related to Going Concern**\n\n \n\nThe accompanying financial statements have been prepared assuming the\nCompany will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had net losses\nof US$101,826,419, cash outflow of US$3,688,864 from operating activities, and negative working capital of $91,361,225 for the year ended\nDecember 31, 2025. We also draw attention to Note 18 of the financial statements, which describes the uncertainty related to the outcome\nof the lawsuits filed against the Company. These conditions raise substantial doubt about the Company’s ability to continue as a\ngoing concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include\nany adjustments that might result from the outcome of this uncertainty.\n\n \n\n**Basis for Opinion**\n\n \n\nThese financial statements are the responsibility\nof the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our\naudit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)\nand are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable\nrules and regulations of the Securities and Exchange Commission and the PCAOB.\n\n \n\nWe conducted our audit in accordance with the\nstandards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial\nstatements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged\nto perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding\nof internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s\ninternal control over financial reporting. Accordingly, we express no such opinion.\n\n \n\nOur audit included performing procedures to assess\nthe risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond\nto those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.\nOur audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating\nthe overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.\n\n  \n\n*/s/ CHI-LLTC*  \n\n   \n\nWe have served as the Company’s auditor since 2026.\n\nMalaysia  \n\nMay 15, 2026  \n\nPCAOB ID Number 7320  \n\n \n\nF-2\n\n \n\n \n\n**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING\nFIRM**\n\n \n\nTo the shareholders and the board of directors\nof Xiao-I Corporation\n\n \n\n**Opinion on the Financial Statements**\n\n \n\nWe have audited the accompanying consolidated\nbalance sheet of Xiao-I Corporation and its subsidiaries (the “Company”) as of December 31, 2024, the related consolidated\nstatements of operations and comprehensive loss, changes in deficit, and cash flows, for each of the two years in the period ended December\n31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements\npresent fairly, in all material respects, the consolidated financial positions of the Company as of December 31, 2024, and the consolidated\nresults of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting\nprinciples generally accepted in the United States of America.\n\n \n\n**Material Uncertainty Related to Going Concern**\n\n \n\nThe accompanying financial statements have been\nprepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company\nhad net losses of US$14,551,328, cash outflow of US$15,138,249 from operating activities, and negative working capital of $10,111,451\nfor the year ended December 31, 2024. We also draw attention to Note 18 of the financial statements, which describes the uncertainty related\nto the outcome of the lawsuits filed against the Company. These conditions raise substantial doubt about the Company’s ability to\ncontinue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements\ndo not include any adjustments that might result from the outcome of this uncertainty.\n\n \n\n**Basis for Opinion**\n\n \n\nThese financial statements are the responsibility\nof the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our\naudit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)\nand are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable\nrules and regulations of the Securities and Exchange Commission and the PCAOB.\n\n \n\nWe conducted our audit in accordance with the\nstandards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial\nstatements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged\nto perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding\nof internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s\ninternal control over financial reporting. Accordingly, we express no such opinion.\n\n \n\nOur audit included performing procedures to assess\nthe risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond\nto those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.\nOur audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating\nthe overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.\n\n  \n\n*/s/ Assentsure PAC*\n \n\n \n \n\nWe served as the Company’s auditor from 2022 to 2025.\n\nSingapore\n \n\nMay 15, 2025\n \n\nPCAOB ID Number 6783\n \n\n \n\nF-3\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**CONSOLIDATED BALANCE SHEETS**\n\n**(In U.S. dollars, except for share and\nper share data, or otherwise noted)**\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nAssets \n   \n  \n\nCurrent assets: \n   \n  \n\nCash and cash equivalents \n$846,593  \n$2,319,453 \n\nRestricted cash \n \n-\n  \n 116,866 \n\nAccounts receivable, net \n 55,543,017  \n 6,309,476 \n\nAmounts due from related parties, current \n 13,587,536  \n 21,356 \n\nInventories \n 14,362  \n \n-\n \n\nContract costs \n 2,502,678  \n 1,799,951 \n\nAdvance to suppliers \n 3,205,098  \n 36,478 \n\nPrepaid expenses and other current assets, net \n 792,732  \n 1,323,636 \n\nTotal current assets \n 76,492,016  \n 11,927,216 \n\n  \n    \n   \n\nNon-current assets: \n    \n   \n\nProperty and equipment, net \n 1,867,736  \n 141,805 \n\nIntangible assets, net \n 143,370  \n 114,442 \n\nLong-term investments \n 2,497,594  \n \n-\n \n\nRight of use assets \n 833,030  \n 61,981 \n\nPrepaid expenses and other non-current assets \n 3,677,728  \n 3,655,687 \n\nTotal non-current assets \n 9,019,458  \n 3,973,915 \n\n  \n    \n   \n\nTOTAL ASSETS \n$85,511,474  \n$15,901,131 \n\n  \n    \n   \n\nLiabilities \n    \n   \n\nCurrent liabilities: \n    \n   \n\nShort-term borrowings \n$32,879,865  \n$29,214,396 \n\nAccounts payable \n 27,131,439  \n 39,197,211 \n\nAmount due to related parties, current \n 217,068  \n 70,004 \n\nDeferred revenue \n 2,385,228  \n 2,842,878 \n\nConvertible loans \n 216,756  \n 2,006,119 \n\nAccrued expenses and other current liabilities \n 23,289,453  \n 29,917,735 \n\nLease liabilities, current \n 483,658  \n 40,098 \n\nTotal current liabilities \n 86,603,467  \n 103,288,441 \n\n  \n    \n   \n\nNon-current liabilities: \n    \n   \n\nAmount due to related parties, non-current \n 7,336,833  \n 7,602,043 \n\nAccrued liabilities, non-current \n 7,043,185  \n 8,469,103 \n\n Long-term borrowing \n \n-\n  \n 1,387,082 \n\nLease liabilities, non-current \n 295,962  \n 18,390 \n\nTotal non-current liabilities \n 14,675,980  \n 17,476,618 \n\nTOTAL LIABILITIES \n 101,279,447  \n 120,765,059 \n\n  \n    \n   \n\nCommitments and Contingencies \n \n-\n  \n \n-\n \n\n  \n    \n   \n\nShareholders’ deficit \n    \n   \n\nOrdinary shares (par value of $0.00005 per share; 1,000,000,000 shares and 1,000,000,000 shares authorized as of December 31, 2024 and 2025, respectively; 31,949,038 shares and 55,235,284 shares issued and outstanding as of December 31, 2024 and 2025, respectively) \n$1,598  \n$2,762 \n\nPreferred shares (par value of $0.00005 per share; 3,700,000 preferred shares authorized as of December 31, 2024 and 2025, respectively; 3,700,000 preferred shares issued and outstanding as of December 31, 2024 and 2025, respectively) \n 185  \n 185 \n\nAdditional paid-in capital \n 115,745,140  \n 130,134,778 \n\nStatutory reserve \n 237,486  \n 237,486 \n\nAccumulated deficit \n (125,338,509) \n (226,559,555)\n\nAccumulated other comprehensive loss \n (2,848,314) \n (4,370,415)\n\nXIAO-I CORPORATION shareholders’ deficit \n (12,202,414) \n (100,554,759)\n\nNon-controlling interests \n (3,565,559) \n (4,309,169)\n\nTotal shareholders’ deficit \n (15,767,973) \n (104,863,928)\n\nTOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT \n$85,511,474  \n$15,901,131 \n\n \n\nThe accompanying notes are an integral part of\nthese consolidated financial statements.\n\n \n\nF-4\n\n \n\n \n\n**XIAO-I CORPORATION\nCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS\n(In U.S. dollars, except for share and per share data, or otherwise noted)**\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nSale of software products \n$1,566,455  \n$1,516,169  \n$472,559 \n\nSale of hardware products \n 75,363  \n 1,395,345  \n 567,894 \n\nTechnology development service \n 7,839,700  \n 24,105,644  \n 2,147,523 \n\nM&S service \n 2,676,185  \n 2,419,901  \n 4,809,979 \n\nSale of cloud platform products \n 47,007,556  \n 40,877,256  \n 4,329,729 \n\nNet revenues \n 59,165,259  \n 70,314,315  \n 12,327,684 \n\nCost of sale of software products \n (834,570) \n (98,442) \n (249,259)\n\nCost of sale of hardware products \n (51,201) \n (583,939) \n (453,593)\n\nCost of technology development service \n (6,059,330) \n (10,444,827) \n (694,145)\n\nCost of M&S service \n (971,417) \n (781,258) \n (1,936,489)\n\nCost of sale of cloud platform products \n (11,825,171) \n (10,356,302) \n (3,515,214)\n\nCost of revenues \n (19,741,689) \n (22,264,768) \n (6,848,700)\n\nGross profit \n 39,423,570  \n 48,049,547  \n 5,478,984 \n\n  \n    \n    \n   \n\nOperating expenses: \n    \n    \n   \n\nSelling expenses \n (4,550,997) \n (3,320,886) \n (1,070,145)\n\nGeneral and administrative expenses \n (4,407,215) \n (22,940,916) \n (76,555,497)\n\nResearch and development expenses \n (52,387,540) \n (34,658,779) \n (24,456,422)\n\nTotal operating expenses \n (61,345,752) \n (60,920,581) \n (102,082,064)\n\n  \n    \n    \n   \n\nLoss from operations \n (21,922,182) \n (12,871,034) \n (96,603,080)\n\n  \n    \n    \n   \n\nOther income/(expenses): \n    \n    \n   \n\nInvestment (loss)/income \n 75,542  \n (81,618) \n \n-\n \n\nInterest expenses, net \n (2,323,341) \n (2,319,820) \n (3,075,537)\n\nForeign currency exchange (loss)/gain \n 2,789  \n 3,864  \n (148,086)\n\nGain (Loss) from disposal of property, plant and equipment \n    \n    \n (1,761,193)\n\nImpairment loss on an unconsolidated entity \n    \n    \n (2,536,443)\n\nOther income, net \n 949,116  \n 717,280  \n 2,297,920 \n\nTotal other expenses \n (1,295,894) \n (1,680,294) \n (5,223,339)\n\n  \n    \n    \n   \n\nLoss before income tax expense \n (23,218,076) \n (14,551,328) \n (101,826,419)\n\nIncome tax expense \n (3,787,692) \n \n-\n  \n \n-\n \n\nNet loss \n$(27,005,768) \n$(14,551,328) \n$(101,826,419)\n\nNet loss attributable to non-controlling interests \n (543,961) \n (45,864) \n (605,373)\n\nNet loss attributable to XIAO-I CORPORATION shareholders \n (26,461,807) \n (14,505,464) \n (101,221,046)\n\nOther comprehensive income \n    \n    \n   \n\nForeign currency translation change, net of nil income taxes \n 303,114  \n 233,727  \n (1,522,101)\n\nTotal other comprehensive income \n 303,114  \n 233,727  \n (1,522,101)\n\nTotal comprehensive loss \n$(26,702,654) \n$(14,317,601) \n$(103,348,520)\n\nTotal comprehensive income/(loss) attributable to non-controlling interests \n (504,951) \n 37,615  \n (467,136)\n\nTotal comprehensive loss attributable to XIAO-I CORPORATION shareholders \n (26,197,703) \n (14,355,216) \n (102,881,384)\n\nLoss per ordinary share attributable to XIAO-I CORPORATION shareholders \n    \n    \n   \n\nBasic \n (1.12) \n (0.56) \n (2.44)\n\nDiluted \n (1.12) \n (0.56) \n (2.44)\n\nWeighted average number of ordinary shares outstanding \n    \n    \n   \n\nBasic \n 23,646,003  \n 25,760,207  \n 41,506,534 \n\nDiluted \n 23,646,003  \n 25,760,207  \n 41,506,534 \n\n \n\nNote:\n\n \n\n(1)Share-based compensation expenses were allocated as follows:\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nSelling expenses \n \n       -\n  \n 1,553  \n 461 \n\nGeneral and administrative expenses \n \n-\n  \n 1,556,761  \n 5,795,357 \n\nResearch and development expenses \n \n-\n  \n 2,213  \n 105 \n\n  \n$\n-\n  \n 1,560,527  \n$5,795,923 \n\n \n\nThe accompanying notes are an integral part of\nthese consolidated financial statements\n\n \n\nF-5\n\n \n\n \n\n**XIAO-I CORPORATION\nCONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT\n(In U.S. dollars, except for share and per share data, or otherwise noted)**\n\n \n\n  \nOrdinary\nshares  \nPreferred\nshares  \nAdditional paid-in  \nStatutory  \nAccumulated  \nAccumulated other comprehensive  \nTotal shareholders’  \nNon-controlling  \nTotal \n\n  \nShare  \nAmount  \nShares  \nAmount  \ncapital  \nreserve  \ndeficit  \nloss  \ndeficit  \ninterests  \ndeficit \n\nBalance as of January 1, 2023 \n 22,115,592  \n$1,106  \n -  \n$-  \n$75,621,294  \n$237,486  \n$(78,483,156) \n$(3,262,666) \n$(5,885,936) \n$(3,098,223) \n$(8,984,159)\n\nAdoption of ASC326 \n -  \n -  \n -  \n -  \n -  \n -  \n (5,888,082) \n -  \n (5,888,082) \n -  \n (5,888,082)\n\nNet loss \n -  \n -  \n -  \n -  \n -  \n -  \n (26,461,807) \n -  \n (26,461,807) \n (543,961) \n (27,005,768)\n\nForeign currency translation\nadjustment \n -  \n -  \n -  \n -  \n -  \n -  \n -  \n 264,104  \n 264,104  \n 39,010  \n 303,114 \n\nIssuance of preferred shares \n -  \n -  \n 3,700,000  \n 185  \n 546  \n -  \n -  \n -  \n 731  \n -  \n 731 \n\nIssuance\nof ordinary shares upon Initial Public Offering (“IPO”), net of issuance cost \n 1,900,000  \n 95  \n -  \n -  \n 33,107,207  \n -  \n -  \n -  \n 33,107,302  \n -  \n 33,107,302 \n\nBalance\nas of December 31, 2023 \n 24,015,592  \n$1,201  \n 3,700,000  \n$185  \n$108,729,047  \n$237,486  \n$(110,833,045) \n$(2,998,562) \n$(4,863,688) \n$(3,603,174) \n$(8,466,862)\n\nNet loss \n -  \n -  \n -  \n -  \n -  \n -  \n (14,505,464) \n -  \n (14,505,464) \n (45,864) \n (14,551,328)\n\nForeign currency translation\nadjustment \n -  \n -  \n -  \n -  \n -  \n -  \n -  \n 150,248  \n 150,248  \n 83,479  \n 233,727 \n\nConversion of convertible\nloans \n 5,281,142  \n 265  \n -  \n -  \n 4,475,698  \n -  \n -  \n -  \n 4,475,963  \n -  \n 4,475,963 \n\nPre-delivery ordinary shares\nfor conversion of convertible loans \n 1,649,983  \n 82  \n -  \n -  \n (82) \n -  \n -  \n -  \n -  \n -  \n - \n\nPre-delivery ordinary shares\nfor Share Incentive Plan \n 78,333  \n 4  \n -  \n -  \n (4) \n -  \n -  \n -  \n -  \n -  \n - \n\nIssuance of ordinary shares \n 600,000  \n 30  \n -  \n -  \n 979,970  \n -  \n -  \n -  \n 980,000  \n -  \n 980,000 \n\nShare-based\ncompensation expense \n 323,988  \n 16  \n -  \n -  \n 1,560,511  \n -  \n -  \n -  \n 1,560,527  \n -  \n 1,560,527 \n\nBalance\nas of December 31, 2024 \n 31,949,038  \n$1,598  \n 3,700,000  \n$185  \n$115,745,140  \n$237,486  \n$(125,338,509) \n$(2,848,314) \n$(12,202,414) \n$(3,565,559) \n$(15,767,973)\n\nNet loss \n -  \n -  \n -  \n -  \n -  \n -  \n (101,221,046) \n -  \n (101,221,046) \n (605,373) \n (101,826,419)\n\nAccumulated other comprehensive\n(loss) income \n -  \n -  \n -  \n -  \n -  \n -  \n -  \n (1,522,101) \n (1,522,101) \n (137,237) \n (1,660,338)\n\nConversion of convertible\nloans \n 18,332,865  \n 917  \n -  \n -  \n 8,512,551  \n -  \n -  \n -  \n -  \n -  \n 8,513,468 \n\nCancellation of ordinary shares \n (9) \n -  \n -  \n -  \n -  \n -  \n -  \n -  \n -  \n -  \n - \n\nShare-based\ncompensation expense \n 4,953,390  \n 247  \n -  \n -  \n 5,877,087  \n -  \n -  \n -  \n -  \n -  \n 5,877,334 \n\nBalance\nas of December 31, 2025 \n 55,235,284  \n 2,762  \n 3,700,000  \n 185  \n 130,134,778  \n 237,486  \n (226,559,555) \n (4,370,415) \n (100,554,759) \n (309,169) \n (104,863,928)\n\n \n\nThe accompanying notes are an integral part of\nthese consolidated financial statements\n\n \n\nF-6\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**CONSOLIDATED STATEMENTS OF CASH FLOWS**\n\n**(In U.S. dollars, except for share and\nper share data, or otherwise noted)**\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nCASH FLOWS FROM OPERATING ACTIVITIES: \n   \n   \n  \n\nNet loss \n$(27,005,768) \n$(14,551,328) \n$(101,826,419)\n\nAdjustments to reconcile net loss to net cash used in operating activities: \n    \n    \n   \n\n(Recovery of allowance)/ Allowance for credit losses \n (5,108,723) \n 2,053,698  \n 45,776,123 \n\nInterest expenses from convertible loans \n \n-\n  \n 195,773  \n 417,331 \n\nShare-based compensation expenses \n \n-\n  \n 1,560,527  \n 5,877,334 \n\n(Recovery of allowance)/Allowance for prepaid expenses and other current and non-current assets \n (1,090,759) \n 7,028,173  \n 1,115,241 \n\nAllowance for advance to suppliers \n \n-\n  \n 833,831  \n \n-\n \n\nAllowance for amount due from a related party \n \n-\n  \n \n-\n  \n 13,690,435 \n\nImpairment on equity investment \n 150,708  \n \n-\n  \n 2,536,443 \n\nWritten-down of inventories \n 557,518  \n \n-\n  \n \n-\n \n\nInterest expenses on loans from shareholder \n 522,081  \n 449,843  \n 420,262 \n\nDepreciation and amortization \n 692,775  \n 539,935  \n 120,850 \n\nLoss from the disposal of property and equipment \n 3,442  \n 80,542  \n 1,677,367 \n\nLoss from lease termination and modification \n 591,980  \n 19,654  \n \n-\n \n\nGain from the disposal of equity investment \n (208,837) \n \n-\n  \n \n-\n \n\nLoss from equity investment \n 155,734  \n 81,618  \n \n-\n \n\nDeferred tax expenses \n 3,787,692  \n \n-\n  \n \n-\n \n\nRight-of-use assets amortization \n 615,968  \n 604,341  \n 49,411 \n\n  \n    \n    \n   \n\nChanges in assets and liabilities \n    \n    \n   \n\nAccounts receivable \n 11,107,280  \n (30,428,887) \n 3,457,418 \n\nInventories \n 122,761  \n 52,407  \n 14,362 \n\nContract costs \n 264,272  \n (867,850) \n 702,727 \n\nPrepaid expenses and other current assets \n (2,497,385) \n (2,166,932) \n (645,157)\n\nAmount due from related parties \n 47,593  \n (108,329) \n (124,255)\n\nAccounts payable \n 4,767,425  \n 14,075,170  \n 12,065,772 \n\nDeferred revenue \n (828,971) \n 787,447  \n 457,650 \n\nAccrued expenses and other current liabilities \n (1,245,200) \n 5,132,181  \n 7,064,260 \n\nAmount due to related parties \n (134,560) \n (84,676) \n (152,116)\n\nAdvance to suppliers \n \n-\n  \n \n-\n  \n 3,168,620 \n\nLease payment liabilities \n (1,106,876) \n (647,385) \n 506 \n\nPrepaid expenses and other non-current assets \n (408,567) \n 221,998  \n (978,947)\n\nAccrued liabilities, non-current \n 458,919  \n \n-\n  \n 1,425,918 \n\nNet cash used in operating activities \n (15,789,498) \n (15,138,249) \n (3,688,864)\n\n  \n    \n    \n   \n\nCASH FLOWS FROM INVESTING ACTIVITIES: \n    \n    \n   \n\nPurchase of property and equipment \n (2,164,442) \n (368,171) \n (41,739)\n\nPurchase of intangible assets \n (41,177) \n (3,120) \n \n-\n \n\nCash received from property and equipment \n \n-\n  \n \n-\n  \n 83,826 \n\nPurchase of equity investments \n (917,962) \n \n-\n  \n \n-\n \n\nDisposal of equity investments \n 164,659  \n \n-\n  \n \n-\n \n\nCollection of loans to third parties \n 4,448,587  \n \n-\n  \n \n-\n \n\nLoan to third parties \n (7,942,875) \n (97,280) \n \n-\n \n\nCollection of loans to related parties \n 290,076  \n \n-\n  \n \n-\n \n\nLoan to related parties \n (13,896,680) \n \n-\n  \n \n-\n \n\nNet cash used in investing activities \n (20,059,814) \n (468,571) \n 42,087 \n\n  \n    \n    \n   \n\nCASH FLOWS FROM FINANCING ACTIVITIES: \n    \n    \n   \n\nProceeds from short borrowings \n 26,832,747  \n 34,046,722  \n 10,393,043 \n\nRepayments of short-term borrowings \n (18,297,134) \n (27,098,128) \n (15,360,112)\n\nProceeds from long-term borrowings \n \n-\n  \n \n-\n  \n 1,387,082 \n\nProceeds from interests-free borrowings from related parties \n \n-\n  \n 150,000  \n \n-\n \n\nRepayments of interests-free borrowings from related parties \n (31,776) \n (416,916) \n (150,000)\n\nProceeds from borrowings from related parties \n 400,000  \n \n-\n  \n \n-\n \n\nRepayments of borrowings from related parties \n (1,355,760) \n (812,747) \n \n-\n \n\nProceeds from borrowings from third-parties \n 4,589,812  \n 5,738,524  \n 3,113,099 \n\nRepayments of borrowings from third-parties \n (6,407,941) \n (1,244,699) \n (3,549,077)\n\nRepayment of convertible loans \n (3,656,872) \n \n-\n  \n   \n\nConvertible notes payable \n \n-\n  \n \n-\n  \n 1,372,032 \n\nProceeds from convertible loans \n \n-\n  \n 4,496,945  \n 8,513,468 \n\nProceeds from issuance of ordinary shares \n \n-\n  \n 980,000  \n \n-\n \n\nProceeds from issuance of ordinary shares upon Initial Public Offering, net of issuance cost \n 34,399,268  \n \n-\n  \n \n-\n \n\nProceeds from issuance of preferred shares \n 731  \n \n-\n  \n \n-\n \n\nNet cash provided by financing activities \n 36,473,075  \n 15,839,701  \n 5,719,535 \n\n  \n    \n 　  \n   \n\nEffect of exchange rate changes \n (85,466) \n (950,830) \n (483,032)\n\n  \n    \n    \n   \n\nNet change in cash, cash equivalents and restricted cash \n 538,297  \n (717,949) \n 1,589,726 \n\nCash, cash equivalents and restricted cash, at beginning of year \n 1,026,245  \n 1,564,542  \n 846,593 \n\nCash, cash equivalents and restricted cash, at end of year \n$1,564,542  \n$846,593  \n$2,436,319 \n\n  \n    \n    \n   \n\nSUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: \n    \n    \n   \n\nInterest paid \n$3,799,202  \n$1,613,858  \n$3,075,537 \n\nIncome taxes paid \n \n-\n  \n \n-\n  \n \n-\n \n\nSUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: \n    \n    \n   \n\nRecognition of right-of-use assets and lease payment liabilities \n$2,793,664  \n$\n-\n  \n$\n-\n \n\nAccrued expense and other liabilities, non-current converted into current \n 605,609  \n 512,313  \n \n-\n \n\n-Conversion of convertible loans \n \n-\n  \n 4,475,962  \n \n-\n \n\n \n\nThe accompanying notes are an integral part of\nthese consolidated financial statements.\n\n \n\nF-7\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n** **\n\n**1.**\n**ORGANIZATION AND PRINCIPAL ACTIVITIES**\n\n \n\nXIAO-I CORPORATION. (“Xiao-I”,\nor the “Company”) was incorporated under the laws of the Cayman Islands on August 13, 2018. The Company through its\nwholly-owned subsidiaries, variable interest entity (“VIE”) and VIE’s subsidiaries (collectively, the “Group”)\nprimarily engages in artificial intelligence technology in the People’s Republic of China (“PRC” or “China”).\nThe Company completed its IPO on the Nasdaq Global Market in March 2023.\n\n \n\nAs of December 31, 2025, the Company’s\nmajor subsidiaries and consolidated VIE are as follows:\n\n \n\nName  Date of\nIncorporation \n**Place of**\n\n**incorporation**\n  Percentage of\nbeneficial\nownership for\npurposes of\naccounting   Principal\nActivities\n\nWholly and Major owned subsidiaries             \n\nAI PLUS HOLDING LIMITED (“AI Plus”)  August 30, 2018  British Virgin Islands   100%  Investing holding company\n\nXiao-i Technology Limited (“Xiao-i Technology”)  December 17, 2018  Hong Kong   100%  Investing holding company\n\nZhizhen Artificial Intelligent Technology (Shanghai) Co. Ltd. (“Zhizhen Technology”) (“WFOE”)  February 21, 2019  PRC   100%  WFOE, a holding company\n\n               \n\nVIE              \n\nShanghai Xiao-i Robot Technology Co., Ltd. (“Shanghai Xiao-i”)  August 27, 2009  PRC   100%  Internet technology development\n\n               \n\nSubsidiaries of VIE              \n\nXiaoi Robot Technology (H.K) Ltd. (“Xiaoi Robot”)  June 3, 2016  Hong Kong   100%  Internet technology development\n\nGuizhou Xiao-i Robot Technology Co., Ltd. (“Guizhou Xiao-i”)  July 18, 2016  PRC   70%  AI robot development\n\n \n\n**Reorganization**\n\n \n\nDuring 2019, the Company undertook\na reorganization and became the ultimate holding company of AI PLUS, Xiaoi Technology and WFOE, in which the shareholding percentages\nand rights of each shareholder are the same before and after the Reorganization. Effective on March 29, 2019, shareholders of Shanghai\nXiao-i and WFOE entered into a series of contractual arrangements (“VIE Agreements”) which are described below.\n\n \n\nF-8\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**1.**\n**ORGANIZATION AND PRINCIPAL ACTIVITIES** (cont.)\n\n \n\nThe VIE Agreements\n\n \n\nThe PRC government regulates the telecommunications\nand internet industry, including software industry, through strict business licensing requirements and other government regulations. These\nlaws and regulations also include limitations on foreign ownership of PRC companies that engage in the software business. The Company,\nAI Plus, Zhizhen Technology, are considered as foreign invested enterprises. To comply with these regulations, the Group conducts the\nmajority of its activities in PRC through Shanghai Xiao-i (the “VIE”), and the VIE’s subsidiaries.\n\n \n\nThe currently effective contractual\narrangements, as described in more detail below, by and among Zhizhen Technology, the VIE, and 61 of the VIE’s shareholders include\n(i) certain exclusive call option agreement, power of attorney agreement, share interest pledge agreement and spousal commitment letter,\nthat enable the Company to exercise operational control over the VIE, and (ii) exclusive business cooperation agreement, that enable\nthe Company to realize all of the economic risks and benefits arising from Shanghai Xiao-i and its subsidiaries (excluding non-controlling\ninterests). Therefore, the Group, through its wholly owned subsidiaries AI Plus and Zhizhen Technology, has been determined to be the\nprimary beneficiary of Shanghai Xiao-i and its subsidiaries for accounting purposes and has consolidated Shanghai Xiao-i’s and\nits subsidiaries’ assets, liabilities, results of operations, and cash flows in the accompanying consolidated financial statements.\n\n \n\nImmediately before and after reorganization,\nthe Company together with its wholly-owned subsidiaries AI Plus and Zhizhen Technology and its VIE were effectively controlled by the\nsame shareholders; therefore, the Reorganization is accounted for in a manner similar to a common control transaction because it is determined\nthat the transfers lack economic substance. The accompanying consolidated financial statements have been prepared as if the current corporate\nstructure has been in existence throughout the periods presented. The consolidation of the Company and its subsidiaries and VIE has been\naccounted for at historical cost as of the beginning of the first period presented in the accompanying financial statements.\n\n* *\n\n*Exclusive Call Option Agreement*\n\n \n\nPursuant to the Exclusive Call Option\nAgreement among Zhizhen Technology, Shanghai Xiao-i and its shareholders, the shareholders irrevocably granted Zhizhen Technology, or\nany third party designated by Zhizhen Technology an option to purchase all or part of their equity interests in Shanghai Xiao-i at any\ntime at a price determined at Zhizhen Technology’s discretion. According to the Exclusive Call Option Agreement, the purchase price\nto be paid by the Company to each shareholder of Shanghai Xiao-i will be the minimum price permitted by applicable PRC Law at the time\nwhen such share transfer occurs. Without Zhizhen Technology’s prior written consent, the shareholders and Shanghai Xiao-i agreed\nnot to, among other things: set encumbrance on, transfer all or part of, or dispose of the equity interests; amend the articles of association\nof Shanghai Xiao-i; change the registered capital of Shanghai Xiao-i or holding structure; change Shanghai Xiao-i’s business activities;\nsell, assign, mortgage or dispose of any legal or beneficial rights to or in any of Shanghai Xiao-i’s assets, business, or revenue;\nincur, assume or guarantee any debts; enter into any material contract; extend any loan or credit to any party, or provide any guarantee\nor assume any obligation of any party; merge or consolidate with any third party or acquire or invest in any third party; or distribute\ndividends. The shareholders and Shanghai Xiao-i agreed to manage business and handle financial and commercial affairs prudently and in\naccordance with relevant laws and codes of practice. This Agreement will continue with full force and effect until the earlier of the\ndate on which Zhizhen Technology has acquired all of the Equity Interests in Shanghai Xiao-i, or this Agreement is terminated by the mutual\nwritten consent.\n\n \n\n*Exclusive Business Cooperation Agreement*\n\n \n\nOn March 29, 2019, Zhizhen Technology\nentered into an Exclusive Business Cooperation Agreement with Shanghai Xiao-i to enable Zhizhen Technology to engage in the development\nand operation of the Internet technology development in accordance with applicable laws. Under this Agreement, Zhizhen Technology intends\nto use its labor, technology and information advantages to provide exclusive technical services, technical consultation and other services\nto Shanghai Xiao-i, and Shanghai Xiao-i agrees to accept such services. The term of the Services provided by Zhizhen Technology shall\nbe 10 years from the effective date of March 29, 2019, and will be automatically extended after the expiration until when terminated in\nwriting by Zhizhen Technology. Additionally, Zhizhen Technology has the full and exclusive right to manage and direct all cash flow and\nassets of Shanghai Xiao-i and to direct and administrate the financial affairs and daily operation of Shanghai Xiao-i. Shanghai Xiao-i\npays service fees to Zhizhen Technology in an amount determined by Zhizhen Technology in its sole discretion. If Shanghai Xiao-i is unable\nto pay the service fees due to the actual managing situation, with the written consent of Zhizhen Technology, the unpaid part of the service\nfees in the previous fiscal year can be deferred to the end of the next year and settled together. During the validity term of this agreement,\nZhizhen Technology will bear all the economic benefits and risks arising from the business of Shanghai Xiao-i and its subsidiaries. Zhizhen\nTechnology will provide financial support to Shanghai Xiao-i or its subsidiaries in the event of a loss or serious operational difficulties.\n\n* *\n\nF-9\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**1.**\n**ORGANIZATION AND PRINCIPAL ACTIVITIES** (cont.)\n\n* *\n\n*Power of Attorney Agreement*\n\n \n\nOn March 29, 2019, each shareholder\nof Shanghai Xiao-i, signed the Power of Attorney Agreement to irrevocably entrust Zhizhen Technology or any person(s) designated\nby Zhizhen Technology to act as its attorney-in-fact to exercise any and all of its rights as a shareholder of Shanghai Xiao-i, including,\nbut not limited to, the right to convene, attend and present the shareholders’ meetings, vote, sign and perform as a shareholder;\ntransfer, pledge or dispose of all the equity interest of Shanghai Xiao-i held by the shareholder; collect the dividend, and participate\nin litigation procedures. This agreement is effective and irrevocable until all of each shareholder’s equity interest in Shanghai\nXiao-i has been transferred to Shanghai Xiao-i or the person(s) designated by Zhizhen Technology.\n\n* *\n\n*Share Interest Pledge Agreement*\n\n \n\nUnder the Share Interest Pledge Agreement\nsigned on March 29, 2019 by and among Zhizhen Technology and each shareholder of Shanghai Xiao-i, the shareholders of Shanghai Xiao-i\nhave agreed to pledge 100% equity interest in Shanghai Xiao-i to Zhizhen Technology to guarantee the performance obligations of Shanghai\nXiao-i under the Exclusive Business Cooperation Agreement, and the performance obligations of each shareholder under the Exclusive Call\nOption Agreement. If Shanghai Xiao-i or its shareholders breach their contractual obligations under these agreements, Zhizhen Technology,\nas pledgee, will have the right to exercise the pledge.\n\n \n\nThe shareholders also agreed that,\nwithout prior written consent of Zhizhen Technology, they will not dispose of the pledged equity interests or create or allow any encumbrance\non the pledged equity interests. The pledge of equity interests in Shanghai Xiao-i has been registered with the relevant office of the\nState Administration for Market Regulation in accordance with the Civil Code of the People’s Republic of China.* *\n\n \n\n*Spousal Commitment Letters*\n\n \n\nThe spouses of each individual shareholder\nof Shanghai Xiao-i have each signed Spousal Commitment Letters. Under the Spousal Commitment Letter, the signing spouse unconditionally\nand irrevocably has agreed to the execution by his or her spouse of the above-mentioned Exclusive Business Cooperation Agreement, Exclusive\nCall Option Agreement, Power of Attorney Agreement and Share Interest Pledge Agreement, and that his or her spouse may perform, amend\nor terminate such agreements without his or her consent. In addition, in the event that the spouse obtains any equity interest in Shanghai\nXiao-i held by his or her spouse for any reason, he or she agrees to be bound by and sign any legal documents substantially similar to\nthe contractual arrangements entered into by his or her spouse, as may be amended from time to time.\n\n \n\nAs the lock-up period of some shareholders\nof the Company has expired, the shareholders wish to withdraw their shares in the Company, and in order to mirror the shareholding of\nthe Company at Shanghai Xiao-i, they need to correspondingly withdraw their shares in Shanghai Xiao-i. Therefore, Shanghai Rongzhi Industry\nCo., Ltd. (the “Shanghai Rongzhi”) was set up to purchase the withdrawn shares of the shareholders in Shanghai Xiao-i, and\nthus Shanghai Rongzhi became the new shareholder of Shanghai Xiao-i. Pursuant to the VIE agreements, Shanghai Rongzhi signed Exclusive\nCall Option Agreement, Share Interest Pledge Agreement, and Power of Attorney Agreement separately with Zhizhen Technology and Shanghai\nXiao-i on January 24, 2024. The provisions of these agreements are substantively consistent with the text of the VIE Agreements signed\non March 29, 2019.\n\n \n\nF-10\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**1.**\n**ORGANIZATION AND PRINCIPAL ACTIVITIES** (cont.)\n\n \n\nRisks in relation to the VIE structure\n\n \n\nThe Company believes that the contractual\narrangements with its VIE and their respective shareholders are in compliance with PRC laws and regulations and are legally enforceable.\nHowever, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the\nlegal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could, among\nothers:\n\n \n\n●revoke the business licenses\nand/or operating licenses of the Company;\n\n \n\n●discontinue or place restrictions\nor onerous conditions on the operations;\n\n \n\n●impose fines, confiscate the\nincome from Zhizhen Technology or the VIE, or impose other requirements with which the Company or the VIE may not be able to comply;\n\n \n\n●require the Company to restructure\nthe ownership structure or operations, including terminate the contractual arrangements with the VIE and deregister the equity pledges\nof the VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert operational control over\nthe VIE, or impose restrictions on the Company’s right to collect revenues;\n\n \n\n●impose additional conditions\nor requirements with which the Company may not be able to comply;\n\n \n\n●require the Company to restructure\nthe operations in such a way as to compel the Company to establish a new enterprise, re-apply for the necessary licenses or relocate\nour businesses, staff and assets; or\n\n \n\n●restrict or prohibiting the\nCompany use of the proceeds of overseas offering to finance the business and operations in China.\n\n \n\nThe revenue producing assets that are\nheld by the VIE and the VIE’s subsidiaries primarily comprise of leasehold improvements, electronic equipment, office equipment\nand software. Substantially all of such assets are recognized in the Group’s consolidated financial statements, except for certain\nInternet Content Provider Licenses, internally developed software, trademarks and patent applications which were not recorded in the Company’s\nconsolidated balance sheets as they do not meet all the capitalization criteria. The Internet content provision and other licenses are\nrequired under relevant PRC laws, rules and regulations for the operation of Internet businesses in the PRC and therefore are integral\nto the Company’s operations. The Internet content provision licenses require that core PRC trademark registrations and domain names\nare held by the VIE and the VIE’s subsidiaries that provide the relevant services. The VIE and the VIE’s subsidiaries also\nhire assembled work force on sales, research and development and operations whose costs are expensed as incurred.\n\n \n\nThe Company’s ability to conduct\nits business may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, The\nCompany may not be able to consolidate its VIE in its consolidated financial statements as it may lose the ability to exert operational\ncontrol over the VIE and their respective shareholders and it may lose the ability to receive economic benefits from the VIE. The Company,\nhowever, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiaries and VIE.\n\n \n\nThe interests of the shareholders of\nVIE may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual\nterms, for example by influencing VIE not to pay the service fees when required to do so. The Company cannot assure that when conflicts\nof interest arise, shareholders of VIE will act in the best interests of the Company or that conflicts of interests will be resolved in\nthe Company’s favor. The Company believes the shareholders of VIE will not act contrary to any of the contractual arrangements and\nthe exclusive option agreements provide the Company with a mechanism to remove the current shareholders of VIE should they act to the\ndetriment of the Company. The Company relies on certain current shareholders of VIE to fulfill their fiduciary duties and abide by the\nlaws of the PRC and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between\nthe Company and the shareholders of VIE, the Company would have to rely on legal proceedings, which could result in disruption of its\nbusiness, and there is substantial uncertainty as to the outcome of any such legal proceedings.\n\n \n\nF-11\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**1.**\n**ORGANIZATION AND PRINCIPAL ACTIVITIES** (cont.)\n\n \n\nThe following financial statement amounts\nand balances of the VIE and its subsidiaries were included in the accompanying consolidated financial statements after elimination of\nintercompany transactions within the consolidated VIE:\n\n* *\n\n*Consolidated Balance Sheets Information*\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nAssets \n   \n  \n\nCurrent assets: \n   \n  \n\nCash and cash equivalents \n$566,544  \n$43,721 \n\nRestricted cash \n \n-\n  \n 116,838 \n\nAccounts receivable, net \n 55,522,880  \n 5,097,619 \n\nAmounts due from related parties, current \n 13,587,536  \n 21,356 \n\nInventories \n 10,724  \n \n-\n \n\nContract costs \n 2,357,950  \n 1,639,892 \n\nAdvance to suppliers \n 3,205,098  \n 36,478 \n\nPrepaid expenses and other current assets, net \n 413,579  \n 343,376 \n\nAmount due from intercompany, current \n 2,063,000  \n 3,537,843 \n\nTotal current assets \n 77,727,311  \n 10,837,122 \n\n  \n    \n   \n\nNon-current assets: \n    \n   \n\nProperty and equipment, net \n 1,777,249  \n 118,497 \n\nIntangible assets, net \n 140,366  \n 111,420 \n\nLong-term investments \n 937,909  \n 61,981 \n\nRight of use assets \n 66,913  \n \n-\n \n\nPrepaid expenses and other non-current assets \n 3,558,515  \n 3,655,687 \n\nTotal non-current assets \n 6,480,952  \n 3,947,585 \n\n  \n **　**  \n   \n\nTOTAL ASSETS \n$84,208,263  \n$14,784,707 \n\n  \n    \n   \n\nLiabilities \n    \n   \n\nCurrent liabilities: \n    \n   \n\nShort-term borrowings \n$32,879,865  \n$29,214,396 \n\nAccounts payable \n 26,740,606  \n 36,757,500 \n\nAmount due to related parties, current \n 67,068  \n 70,004 \n\nDeferred revenue \n 2,385,228  \n 2,363,266 \n\nAccrued expenses and other current liabilities \n 22,173,896  \n 24,988,421 \n\nLease liabilities, current \n 57,545  \n 40,098 \n\nAmount due to intercompany, current \n 31,080,404  \n 37,322,575 \n\nTotal current liabilities \n 115,384,612  \n 130,756,260 \n\n  \n    \n   \n\nNon-current liabilities: \n    \n   \n\nAmount due to related parties, non current \n 7,336,833  \n 7,602,043 \n\nAccrued liabilities, non-current \n 4,508,695  \n 4,704,972 \n\nLong-term borrowing \n    \n 1,387,082 \n\nLease liabilities, non-current \n \n-\n  \n 18,390 \n\nTotal non-current liabilities \n 11,845,528  \n 13,712,487 \n\n  \n    \n   \n\nTOTAL LIABILITIES \n$127,230,140  \n$144,468,747 \n\n \n\nF-12\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n  \n\n**1.**\n**ORGANIZATION AND PRINCIPAL ACTIVITIES** (cont.)\n\n \n\n*Consolidated Statements of Operations\nand Comprehensive loss*\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nNet revenue \n$59,165,258  \n$71,030,671  \n$18,315,230 \n\nNet loss \n$(24,030,102) \n$(4,260,015) \n$(85,741,785)\n\n \n\n*Consolidated Cash Flows Information*\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nNet cash (used in) provided by operating activities \n$15,185,225  \n$(10,504,500) \n$4,599,443 \n\nNet cash (used in) provided by investing activities \n (16,842,456) \n (465,451) \n 42,087 \n\nNet cash provided by (used in) financing activities \n 1,322,448  \n 10,612,756  \n (4,015,965)\n\nEffect of exchange rate changes \n 200,007  \n 12,698  \n (1,031,550)\n\nNet change in cash, cash equivalents and restricted cash \n$(134,776) \n$(344,497) \n$(405,985)\n\n \n\nAs of December 31, 2023, 2024\nand 2025, there were no pledge or collateralization of the VIE’s assets that can only be used to settle obligations of the VIE. The\namount of the net liabilities of the VIE was $43,021,877 and $101,038,681 as of December 31, 2024 and 2025, respectively. The creditors\nof the VIE’s third party liabilities did not have recourse to the general credit of the Company in the normal course of business.\nCurrently there is a contractual arrangement that would require the Company or its subsidiaries to provide financial support to the VIE.\nUnder the Exclusive Business Cooperation Agreement signed on March 29, 2019 between WFOE and the VIE, WFOE will provide financial support\nto the VIE or the VIE’s subsidiaries in the event of a loss or serious operational difficulties during the validity term of this\nagreement.\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**\n\n \n\n**(a).** **Basis of presentation**\n\n \n\nThe accompanying consolidated financial\nstatements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).\n\n \n\nThe accompanying consolidated financial\nstatements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The realization\nof assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Group’s\nability to operate profitably, to generate cash flows from operations, and its ability to attract investors and to borrow funds on reasonable\neconomic terms.\n\n** **\n\n**(b).** **Going concern**\n\n \n\nAs of December 31, 2024 and 2025, the Group had an accumulated deficit\nof $125,338,509 and $226,559,555, respectively, and negative working capital of $10,111,451 and $91,361,225, respectively. In addition,\nfor the years ended December 31, 2023, 2024 and 2025, the Group recorded an amount of net cash used in operating activities of $15,789,498,\n$15,138,249 and $3,688,864, respectively. These conditions raised substantial doubts about the Group’s ability to continue as a\ngoing concern.\n\n \n\nHistorically, the Group has relied principally on both operational\nsources of cash and non-operational sources of borrowings from banks, related parties and third parties, and proceeds from equity financing\nto fund its operations and business development. Management has obtained a letter of financial support from the shareholder of Shanghai\nXiao-i and has developed response plans (including but not limited to seeking alternative financing and adjusting operational scale).\nHowever, after evaluating the feasibility of those plans and related supporting data, management still has a material uncertainty about\nthe reporting entity’s ability to continue as a going concern. This material uncertainty has been disclosed in the notes to the financial\nstatements. In addition, the Group focuses on the improvement of operation efficiency, implementation of strict cost control and budget\nand enhancement of internal controls to create a synergy of resources. The Group’s ability to continue as a going concern is dependent\non management’s ability to successfully execute its business plan, which includes generating revenue while controlling operating\ncost and expenses to generate positive operating cash flows and obtaining funds from outside sources of financing to generate positive\nfinancing cash flows. There can be no assurance that the Group will be successful in achieving strategic plans, that the Group’s\nfuture capital raises will be sufficient to support its ongoing operations, or that any additional financing will be available in a timely\nmanner or on acceptable terms, if at all. If the Group is unable to raise sufficient financing or events or circumstances occur such that\nthe Group does not successful execute strategic plans, the Group will be required to reduce certain discretionary spending, alter or scale\nback research and development programs, or be unable to fund capital expenditures, which would have a material adverse effect on our financial\nposition, results of operations, cash flows, and ability to achieve intended business objectives.\n\n \n\nThe accompanying consolidated financial\nstatements have been prepared on the basis the Group will be able to continue as a going concern for a period of one year after the issuance\nof the consolidated financial statements.\n\n** **\n\nF-13\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n \n\n**(c).** **Principles of consolidation**\n\n \n\nThe consolidated financial statements\ninclude the financial statements of the Company, its subsidiaries, the VIE in which the Company, through its WFOE, has a controlling financial\ninterest, and the VIE’s subsidiaries.\n\n \n\nSubsidiaries are those entities in\nwhich the Company, directly or indirectly, controls more than one half of the voting power or has the power to govern the financial and\noperating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the\nmeeting of directors. A VIE is an entity in which the Company, or its WFOE, through contractual arrangements, is fully and exclusively\nresponsible for the management of the entity, absorbs all risk of losses of the entity (excluding non-controlling interests), receives\nthe benefits of the entity that could be significant to the entity (excluding non-controlling interests), and has the exclusive right\nto exercise all voting rights of the entity, and therefore the Company or its WFOE is the primary beneficiary of the entity for accounting\npurposes. However, the contractual arrangements with the VIE and its shareholders may not be as effective as equity ownership in providing\noperational control.\n\n \n\nAll intercompany transactions and balances\namong the Company, its subsidiaries, the VIE, and the VIE’s subsidiaries have been eliminated upon consolidation.\n\n \n\n**(d).** **Use of estimates**\n\n \n\nThe preparation of the consolidated\nfinancial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts\nof assets and liabilities, related disclosures of contingent assets and liabilities at the balance sheet date, and the reported revenues\nand expenses during the reported periods in the consolidated financial statements and accompanying notes. Significant accounting estimates\ninclude, but not limited to, the allowance for credit losses, depreciable lives and recoverability of property and equipment, the realization\nof deferred income tax assets and other equity investments, transaction price allocation between software income and maintenance service\nincome, as well as fair value determination of share-based compensation arrangements. Changes in facts and circumstances may result in\nrevised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial\nstatements.\n\n \n\n**(e).** **Cash and cash equivalents**\n\n \n\nCash and cash equivalents consist of\ncash on hand, the Group’s demand deposit placed with financial institutions, which have original maturities of less than three months\nand unrestricted as to withdrawal and use.** **\n\n \n\n**(f).** **Restricted cash**\n\n \n\nRestricted cash represents cash pledged\nwith China Bank as collateral for bank guarantee issued by the bank in respect of project performance. The Group had restricted cash\namounting to nil and $116,866 as of December 31, 2024 and 2025.\n\n \n\nF-14\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n \n\n**(g).** **Accounts receivable, net**\n\n \n\nAccounts receivable, net are stated\nat the original amount less an allowance for credit losses. Accounts receivable are recognized in the period when the Group has provided\nservices to its customers and when its right to consideration is unconditional. Before January 1, 2023, the Group reviews the accounts\nreceivable on a periodic basis and makes specific allowances when there is doubt as to the collectability of individual balances. The\nGroup considers many factors in assessing the collectability of its receivables, such as the age of the amounts due, the customer’s\npayment history, creditworthiness and other specific circumstances related to the accounts. An allowance for credit losses is recorded\nin the period in which a loss is determined to be probable. Accounts receivable balances are written off after all collection efforts\nhave been exhausted.\n\n \n\n*Adoption of Accounting Standards\nUpdate (“ASU”) 2016-13*\n\n* *\n\nIn June 2016, the FASB issued ASU 2016-13:\nFinancial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held\nat the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the\nexisting incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. The\nGroup adopted ASU 2016-13 from January 1, 2023 using modified-retrospective transition approach with a cumulative-effect adjustment to\nshareholders’ equity amounting to $5,88,082 recognized as of January 1, 2023.\n\n \n\n**(h).** **Contract costs**\n\n \n\nContract costs represented the costs\ndirectly related to a contract with a customer including labor costs and direct materials used in fulfilling the contract and other allocations\nof costs that relate directly to the contract or to contract activities. The contract costs are determined principally by the specific\nidentification method, and recognized as cost of revenues on a systematic basis that is consistent with the transfer to the customer of\nthe related services.\n\n** **\n\n**(i).** **Inventories**\n\n \n\nInventories, primarily consisting\nof robot, displayer, server and software, are stated at the lower of cost or net realizable value, with net realized value represented\nby estimated selling prices in the ordinary course of business, less reasonably predictable costs of disposal and transportation. Cost\nof inventory is determined using the specific identification method. Adjustments are recorded to write down the cost of inventory to\nthe estimated net realizable value due to slow-moving merchandise and damaged products, which is dependent upon factors such as historical\nand forecasted consumer demand. There was $557,518 and nil of inventory write-down for the years ended December 31, 2023 and 2024,\nnil was reversed in the year ended December 31, 2025.\n\n \n\nF-15\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n \n\n**(j).** **Property and equipment, net**\n\n \n\nProperty and equipment are stated at\ncost less accumulated depreciation and impairment, if any, and depreciated on a straight-line basis over the estimated useful lives of\nthe assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its intended use. Estimated\nuseful lives are as follows:\n\n \n\nCategory  Estimated useful lives\n\nElectronic equipment  5 years\n\nOffice equipment  5 years\n\nLeasehold improvement \nShorter of the lease term or the estimated useful life of the assets\n\n \n\nRepair and maintenance costs are charged\nto expenses as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment are capitalized\nas additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the costs, accumulated depreciation\nand impairment with any resulting gain or loss recognized in the consolidated statements of loss.\n\n \n\n**(k).** **Intangible assets, net**\n\n \n\nIntangible assets are carried at cost\nless accumulated amortization and any recorded impairment. Intangible assets are amortized using the straight-line approach over the estimated\neconomic useful lives of the assets as follows:\n\n \n\n**Category**   **Estimated useful lives**\n\nSoftware   5 years\n\n** **\n\n**(l).** **Impairment of long-lived assets**\n\n \n\nThe Group reviews its long-lived assets\nfor impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.\nWhen these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted\nfuture cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted\ncash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss, which is the excess of carrying\namount over the fair value of the assets, using the expected future discounted cash flows. There was no impairment of long-lived assets\nfor the years ended December 31, 2023, 2024 and 2025.\n\n \n\n**(m).  ****Long-term investments**\n\n \n\nFor an investee over which the Group\nholds less than 20% voting interest and has no ability to exercise significant influence, the investments are accounted for under the\ncost method.\n\n \n\nFor an investee over which the Group\nhas the ability to exercise significant influence, but does not own a majority equity interest or otherwise control, the Group accounted\nfor those using the equity method. Significant influence is generally considered to exist when the Group has an ownership interest in\nthe voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors,\nvoting rights and the impact of commercial arrangements, are also considered in determining whether the equity method of accounting is\nappropriate. Under the equity method of accounting, the Group’s share of the investee’s results of operations is reported\nas share of losses of equity method investments in the consolidated statements of comprehensive loss.\n\n \n\nF-16\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n \n\n**(m).  **\n**Long-term investments** (cont.)\n\n \n\nThe process of assessing and determining\nwhether impairment on an investment is other than temporary requires a significant amount of judgment. To determine whether an impairment\nis other than temporary, management considers whether it has the ability and intent to hold the investment until recovery and whether\nevidence indicating the carrying value of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this\nassessment includes the reasons for the impairment, the severity and duration of the decline in value, any change in value subsequent\nto the period end, and forecasted performance of the investee. There was $150,708, nil and $2,536,443 of impairment loss of long-term\ninvestment for the years ended December 31, 2023, 2024 and 2025, respectively.\n\n \n\n**(n).** **Fair value measurement**\n\n \n\nAccounting guidance defines fair value\nas the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants\nat the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded\nat fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that\nmarket participants would use when pricing the asset or liability.\n\n \n\nAccounting guidance establishes a fair\nvalue hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring\nfair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that\nis significant to the fair value measurement. The three levels of inputs are:\n\n** **\n\n(a)Level 1 — Observable\ninputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.\n\n \n\n(b)Level 2 — Include\nother inputs that are directly or indirectly observable in the marketplace.\n\n \n\n(c)Level 3 — Unobservable\ninputs which are supported by little or no market activity.\n\n \n\nAccounting guidance also describes\nthree main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost\napproach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable\nassets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement\nis based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that\nwould currently be required to replace an asset.\n\n \n\nFinancial assets and liabilities of\nthe Group primarily consist of cash and cash equivalents, accounts receivable, amounts due from related parties, other receivables included\nin prepayments and other current assets, equity investment, short-term borrowings, accounts payable, amounts due to related parties, other\npayables included in accrued expenses and other current liabilities, convertible loans. The Group’s non-financial assets, such as\nproperty and equipment as well as intangible assets, would be measured at fair value only if they were determined to be impaired.\n\n \n\nF-17\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(o).** **Convertible loans**\n\n** **\n\nThe Group evaluates embedded conversion\nfeatures within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument\nand accounted for as a derivative at fair value with changes in fair value recorded in earnings. If an embedded derivative is bifurcated\nfrom share-settled convertible debt, the Group records the debt component at cost less a debt discount equal to the bifurcated derivative’s\nfair value. If the conversion feature is not required to be accounted for separately as an embedded derivative, the convertible debt instrument\nis accounted for wholly as debt. The Group amortizes the debt discount over the life of the debt instrument as an additional non-cash\ninterest expense utilizing the effective interest method. Debt issuance and offering costs are recorded as debt discount, which is amortized\nas interest expense over the term of the convertible debt instrument using the effective interest method.\n\n \n\n**(p).** **Commitments and contingencies**\n\n \n\nIn the normal course of business, the\nGroup is subject to commitments and contingencies, including operating lease commitments, legal proceedings and claims arising out of\nits business that relate to a wide range of matters, such as government investigations and tax matters. The Group recognizes a liability\nfor such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Group\nmay consider many factors in making these assessments on liability for contingencies, including historical and the specific facts and\ncircumstances of each matter.\n\n \n\n**(q).** **Revenue recognition**\n\n \n\nThe Group’s revenues are mainly\ngenerated from (1) sale of software products; (2) sale of hardware products; (3) technology development services; (4) maintenance and\nsupport service, and (5) sale of cloud platform products, etc.\n\n \n\nThe Group recognizes revenue pursuant\nto ASC 606, *Revenue from Contracts with Customers* (“ASC 606”). In accordance with ASC 606, revenues\nfrom contracts with customers are recognized when control of the promised goods or services is transferred to the Group’s customers,\nin an amount that reflects the consideration the Group expects to be entitled to in exchange for those goods or services, reduced by Value\nAdded Tax (“VAT”). To achieve the core principle of this standard, we applied the following five steps:\n\n \n\n1.Identification of the contract,\nor contracts, with the customer;\n\n \n\n2.Identification of the performance\nobligations in the contract;\n\n \n\n3.Determination of the transaction\nprice;\n\n \n\n4.Allocation of the transaction\nprice to the performance obligations in the contract; and\n\n \n\n5.Recognition of the revenue when,\nor as, a performance obligation is satisfied.\n\n \n\nF-18\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n  \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(q).**\n**Revenue recognition**(cont.)\n\n \n\nThe Group enters into two major kinds\nof revenue arrangements with customers. The first kind of contract can include various combinations of software products, hardware products\nand maintenance and support service which are generally distinct and accounted for as separate performance obligations. The other kind\nof contract is sale of cloud platform products, which include software products and cloud platform service as two separate performance\nobligations. As a result, the Group’s contracts may contain multiple performance obligations. The Group determines whether arrangements\nare distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are\nreadily available and whether our commitment to transfer the product or service to the customer is separately identifiable from other\nobligations in the contract.\n\n** **\n\n**Sale of software products**\n\n \n\nThe Group’s software products\nsold to customers comprising customized software products for specific needs. The software products sold by the Group are intended to\nprovide the customer with full control of software, which means that revenues from the sale of such products are recognized at the point-in-time\nat which the control over the products is transferred to the customer upon acceptance. Typically, the software delivery period is less\nthan six months from the date of signing the contract. Payments are made by the customers in multiple instalments according to the payment\nschedule determined in the contract.\n\n** **\n\n**Sale of hardware products**\n\n \n\nHardware products sold to customers\ncomprising the hardware designed for specific needs. Revenue is recognized at the point-in-time when the customer is able to use and benefit\nfrom the hardware products, which is generally upon delivery to the customer.\n\n** **\n\n**Technology development services**\n\n \n\nThe technology development service\nprovided to customers comprises: (1) development of new customized software and applications based on customers’ specifications\nand needs; and (2) functional customization development based on original software products sold. Pursuant to contract terms, customers\ncan benefit from the software products sold and technology development services on their own, or with readily available resources, meanwhile\nthe Group fulfils its performance obligations by transferring software products and technology development services independently. Therefore,\nthe software products and technology development services are distinct performance obligations. The transaction prices for two performance\nobligations were determined separately in the contract, which also reflects their stand-alone selling price (“SSP”) respectively.\nRevenue is recognized at the point-in-time when the service is completed and the customer can benefit from it upon acceptance. Payments\nare made by the customers in multiple installments according to the payment schedule determined in the contract.\n\n** **\n\n**Maintenance and support service**\n\n \n\nMaintenance and support (“M&S”)\nservice is provided for software products contracts and consists of unspecified future software updates, upgrades, and enhancements as\nwell as technical product support services, and the provision of unspecified updates and upgrades on a when-and-if-available basis. Maintenance\nand support services are renewable, generally on an annual basis, at the option of the customer. Maintenance represents stand-alone obligations\nfor which revenue is recognized ratably over the term of the arrangement.\n\n**  **\n\nF-19\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(q).**\n**Revenue recognition** (cont.)\n\n \n\n**Sale of cloud platform products**\n\n \n\nCloud platform products sold to customers\ncomprise software products uploaded in the cloud platform. The Group does not provide any cancellation and refund provisions to customers.\nPursuant to contract terms, customers can benefit from the software products and cloud platform from each on its own, meanwhile the Group\nfulfils its promise by transferring software products and cloud platform services independently. Therefore, the software products and\nthe cloud platform services are distinct performance obligations. The transaction prices for two performance obligations were determined\nseparately in the contract, which also reflects their stand-alone selling price (“SSP”) respectively. Since customers continuously\nconsume the benefits from both software products and cloud platform, the Group recognizes revenue from sale of cloud platform products\nover time when the Group provides the customer a right to access the Group’s intellectual property throughout the service period.\nThe timing and pattern of transfer the right to access software products and cloud platform is the same. The service period is usually\n1 year and customer made quarterly payment after usage.\n\n \n\n**Contracts with multiple performance\nobligations**\n\n \n\nMost contracts with customers contain\nmultiple performance obligations that are distinct and are accounted for separately. The transaction price is allocated to the separate\nperformance obligations on a relative SSP basis. The Group determines SSP for all performance obligations using observable inputs, such\nas standalone sales and historical contract pricing. SSP is consistent with the Group’s overall pricing objectives, taking into\nconsideration the type of software products, maintenance and support services, and professional services purchased by the customer. SSP\nalso reflects the amount the Group would charge for that performance obligation if it were sold separately in a standalone sale, and the\nprice the Group would sell to similar customers in similar circumstances.\n\n \n\nThe following table disaggregates the\nGroup’s revenue for the years ended December 31, 2023, 2024 and 2025:\n\n \n\n  \nFor the Year Ended\nDecember 31, \n\n  \n2023  \n2024  \n2025 \n\nBy revenue type \n   \n   \n  \n\nSale of software products \n$1,566,455  \n$1,516,169  \n$472,559 \n\nSale of hardware products \n 75,363  \n 1,395,345  \n 567,894 \n\nTechnology development service \n 7,839,700  \n 24,105,644  \n 2,147,523 \n\nM&S service \n 2,676,185  \n 2,419,901  \n 4,809,979 \n\nSale of cloud platform products \n 47,007,556  \n 40,877,256  \n 4,329,729 \n\nTotal \n$59,165,259  \n$70,314,315  \n$12,327,684 \n\n ** **\n\nF-20\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(q).**\n**Revenue recognition** (cont.)\n\n \n\n**Contract balances**\n\n  \n\nThe contract liabilities consist of\ndeferred revenue, which represent the billings or cash received for services in advance of revenue recognition and is recognized as revenue\nwhen all of the Group’s revenue recognition criteria are met. The Group’s deferred revenue amounted to $2,385,228 and $2,842,878\nas of December 31, 2024 and 2025, respectively.\n\n** **\n\n**(r).** **Cost of revenues**\n\n \n\nCost of revenues consists primarily\nof (i) cost of materials, (ii) payroll, (iii) cloud hosting service fees, and other costs related to the business operation.\n\n** **\n\n**(s).** **Research and development expenses**\n\n \n\nResearch and development costs are\nexpensed as incurred in accordance with ASC 730. Software development costs required to be capitalized under ASC 985-20. The Company\ndetermined that technology feasibility for the software product is not reached. There are no software development costs capitalized for\nthe years ended December 31, 2023, 2024 and 2025. Research and development expenses consist primarily of (i) Software development\ncosts, (ii) payroll and related expenses for research and development professionals, and (iii) depreciation and rental related to technology\nand development functions. Research and development expenses are expensed as incurred.\n\n** **\n\n**(t).** **Selling and marketing expenses**\n\n \n\nSelling and marketing expenses mainly\nconsist of (i) staff cost, rental and depreciation related to selling and marketing functions, and (ii) advertising costs and\nmarket promotion expenses. Advertising costs, which consist primarily of online advertisements, are expensed as incurred.\n\n** **\n\n**(u).** **General and administrative expenses**\n\n \n\nGeneral and administrative expenses\nmainly consist of (i) staff cost, rental and depreciation related to general and administrative personnel, (ii) professional\nservice fees, (iii) share-based compensation, and (iv) other corporate expenses.\n\n \n\nF-21\n\n \n\n \n\n**XIAO-I CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n  \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(v).** **Government grants**\n\n \n\nGovernment grant is recognized when\nthere is reasonable assurance that the Group will comply with the conditions attached to it and the grant will be received. Government\ngrant for the purpose of giving immediate financial support to the Group with no future related costs or obligation is recognized in\nthe Group’s consolidated statements of comprehensive income/(loss) when the grant becomes receivable. The Group recognized government\ngrants $966,899, $541,498 and $367,723 in other income, net for the years ended December 31, 2023, 2024 and 2025, respectively.\n\n** **\n\n**(w).** **Employee benefits**\n\n \n\nThe Group’s subsidiaries and\nVIE and the VIE’s subsidiaries in PRC participate in a government mandated, multiemployer, defined contribution plan, pursuant to\nwhich certain retirement, medical, housing and other welfare benefits are provided to employees. PRC labor laws require the entities incorporated\nin the PRC to pay to the local labor bureau a monthly contribution calculated at a stated contribution rate on the monthly basic compensation\nof qualified employees. The Group has no further commitments beyond its monthly contribution.\n\n** **\n\n**(x).** **Leases**\n\n \n\nOn January 1, 2020, the Group\nadopted Accounting Standards Update (“ASU”) 2016-02, Lease (FASB ASC Topic 842). The adoption of Topic 842\nresulted in the presentation of operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated\nbalance sheet. The Group has elected the package of practical expedients, which allows the Group not to reassess (1) whether any\nexpired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing\nleases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. Lastly, the\nGroup elected the short-term lease exemption for all contracts with lease terms of 12 months or less.\n\n \n\nAt inception of a contract, the Group\nassesses whether a contract is, or contains, a lease. A contract is or contains a lease if it conveys the right to control the use of\nan identified asset for a period of time in exchange of a consideration. To assess whether a contract is or contains a lease, the Group\nassesses whether the contract involves the use of an identified asset, whether it has the right to obtain substantially all the economic\nbenefits from the use of the asset and whether it has the right to control the use of the asset.\n\n \n\nThe right-of-use assets and related\nlease liabilities are recognized at the lease commencement date. The Group recognizes operating lease expenses on a straight-line basis\nover the lease term.\n\n* *\n\n*Operating lease right-of-use\nof assets*\n\n \n\nThe right-of-use of assets is initially\nmeasured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement\ndate, plus any initial direct costs incurred and less any lease incentive received. \n\n \n\nF-22\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n ** **\n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(x).**\n**Leases** (cont.)\n\n \n\n*Operating lease liabilities*\n\n \n\nLease liability is initially measured\nat the present value of the outstanding lease payments at the commencement date, discounted using the Group’s incremental borrowing\nrate. Lease payments included in the measurement of the lease liability comprise fixed lease payments, variable lease payments that depend\non an index or a rate, amounts expected to be payable under a residual value guarantee and any exercise price under a purchase option\nthat the Group is reasonably certain to exercise.\n\n \n\nLease liability is measured at amortized\ncost using the effective interest rate method. It is re-measured when there is a change in future lease payments, if there is a change\nin the estimate of the amount expected to be payable under a residual value guarantee, or if there is any change in the Group assessment\nof option purchases, contract extensions or termination options.\n\n** **\n\n**(y).** **Income taxes**\n\n \n\nThe Group accounts for income taxes\nunder ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between\nthe consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.\n\n \n\nDeferred tax assets and liabilities\nare measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected\nto be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the\nperiod including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount\nexpected to be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.\n\n \n\nThe provisions of ASC 740-10-25, “Accounting\nfor Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and\nmeasurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition\nof income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest\nand penalties associated with tax positions, and related disclosures. The Group’s operating subsidiaries in PRC are subject to examination\nby the relevant tax authorities. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years\nif the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations\nis extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000 ($14,300). In the case\nof transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Penalties\nand interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.\n\n \n\nThe Group did not accrue any liability,\ninterest or penalties related to uncertain tax positions in its provision for income taxes line of its consolidated statements of loss\nfor the years ended December 31, 2023, 2024 and 2025, respectively. The Group does not expect that its assessment regarding unrecognized\ntax positions will materially change over the next 12 months.\n\n \n\nF-23\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n** **\n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(z).** **Value added tax (“VAT”)**\n\n \n\nThe Group is subject to VAT and related\nsurcharges on revenue generated from sales of products, facilitation services and platform services. The Group records revenue net of\nVAT. This VAT may be offset by qualified input VAT paid by the Group to suppliers. Net VAT balance between input VAT and output VAT\nis recorded in the line item of other current assets on the consolidated balance sheets.\n\n \n\nThe VAT rate is 13% for taxpayers selling\nconsumer products. For revenue generated from services, the VAT rate is 6% depending on whether the entity is a general taxpayer, and\nrelated surcharges on revenue generated from providing services. Entities that are VAT general taxpayers are allowed to offset qualified\ninput VAT, paid to suppliers against their output VAT liabilities.\n\n** **\n\n**(aa).**  **Foreign currency translation**\n\n \n\nThe consolidated financial statements\nare presented in United States dollars (“USD’’ or “$’’). The functional currency of certain of\nPRC subsidiaries is the Renminbi (“RMB’’).\n\n \n\nAssets and liabilities are translated\nat the exchange rates as of balance sheet date. Income and expenditure are translated at the average exchange rate of the reporting period.\nCapital accounts of the consolidated financial statements are translated into USD from RMB at their historical exchange rates when the\ncapital transactions occurred. Transaction gains and losses are recorded in foreign currency exchange gain/(loss) in the consolidated\nstatements of operations and comprehensive loss. The rates are obtained from H.10 statistical release of the U.S. Federal Reserve\nBoard.\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nPeriod end RMB: USD exchange rate \n 7.2993  \n 6.9931 \n\n \n\n  \nFor the years ended\nDecember 31, \n\n  \n2023  \n2024  \n2025 \n\nAverage RMB: USD exchange rate \n 7.0809  \n 7.1957  \n 7.1875 \n\n** **\n\n**(bb).**  **Non-controlling interest**\n\n \n\nFor the Group’s majority-owned\nsubsidiaries of VIE, a non-controlling interest is recognized to reflect the portion of their equity which is not attributable, directly\nor indirectly, to the Group’s consolidated net loss on the consolidated statements of operation and comprehensive loss includes\nthe net loss attributable to non-controlling interests. The cumulative results of operations attributable to non-controlling interests,\nare recorded as non-controlling interests in the Group’s consolidated balance sheets.\n\n \n\nF-24\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(cc).** **Statutory reserves**\n\n \n\nIn accordance with the PRC Company\nLaws, the Group’s PRC subsidiaries, VIE and the VIE’s subsidiary must make appropriations from their after-tax profits as\ndetermined under the generally accepted accounting principles in the PRC (“PRC GAAP”) to non-distributable reserve funds including\nstatutory surplus fund and discretionary surplus fund. The appropriation to the statutory surplus fund must be 10% of the after-tax profits\nas determined under PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital\nof the PRC companies. Appropriation to the discretionary surplus fund is made at the discretion of the PRC companies.\n\n \n\nThe statutory surplus fund and discretionary\nsurplus fund are restricted for use. They may only be applied to offset losses or increase the registered capital of the respective companies.\nThese reserves are not allowed to be transferred to the Company by way of cash dividends, loans or advances, nor can they be distributed\nexcept for liquidation.\n\n \n\nAs of December 31, 2025, none\nof the Group’s PRC subsidiaries and VIE entities had a general reserve that reached the 50% of their registered capital threshold.\nThe profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is\nmade to the statutory reserve. Therefore, no appropriations from after tax profits were recognized for the years ended December 31,\n2023, 2024 and 2025.\n\n \n\n**(dd).** **Share-based compensation**\n\n \n\nThe Group grants share options and\nrestricted share units of the Company to eligible employees, officers, directors, and non-employee consultants.\n\n \n\nAwards granted to employees, officers,\nand directors are initially accounted for as equity-classified awards. The related share-based compensation expenses are measured at the\ngrant date fair value of the award and are recognized using the graded vesting method, net of estimated forfeiture rates, over the requisite\nservice period, which is generally the vesting period. Forfeitures are estimated at the time of grant based on historical forfeiture rates\nand will be revised in the subsequent periods if actual forfeitures differ from those estimates. The Group also granted restricted share\nunits to non-employees, which are also initially accounted for as equity-classified awards. Awards granted to non-employees are initially\nmeasured at fair value on the grant date and periodically remeasured thereafter until the earlier of the performance commitment date or\nthe date the service is completed and recognized over the period the service is provided. Awards are remeasured at each reporting date\nusing the fair value as at each period end until the measurement date, generally when the services are completed and share-based awards\nare vested. Changes in fair value between the interim reporting dates are recorded in consistent with the method used in recognizing the\noriginal compensation costs.\n\n \n\nFor an award with a performance and/or\nservice condition that affects vesting, the performance and/or service condition is not considered in determining the award’s fair\nvalue on the grant date. Performance and service conditions should be considered when the Group is estimating the quantity of awards that\nwill vest. Compensation cost will reflect the number of awards that are expected to vest and will be adjusted to reflect those awards\nthat do ultimately vest. The Group recognizes compensation cost for awards with performance conditions if and when the Group concludes\nthat it is probable that the performance condition will be achieved, net of an estimate of pre-vesting forfeitures over the requisite\nservice period. The Group reassesses the probability of vesting at each reporting period for awards with performance conditions and adjusts\ncompensation cost based on its probability assessment, unless in certain situations, the Group may not be able to determine that it is\nprobable that performance conditions will be satisfied until the event occurs.\n\n \n\nF-25\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(dd).**\n**Share-based compensation** (cont.)\n\n \n\nThe Group’s share-based awards\nmainly include share-based awards, details of which are disclosed in Note 12. Fair value determination of these share-based awards is\nsummarized as below:\n\n \n\n(1) Restricted share units\n\n \n\nIn determining the fair value of restricted\nshare units granted, the fair value of the underlying shares of Xiao-I on the grant dates is applied. The grant date fair value of restricted\nshare units is based on stock price of Xiao-I in the Nasdaq Global Market.\n\n \n\n(2) Share options\n\n \n\nIn determining the fair value of share\noptions granted, a binomial option-pricing model is applied. The determination of the fair value is affected by the stock price of Xiao-I\nin the Nasdaq Global Market, as well as assumptions regarding a number of complex and subjective variables, including risk-free interest\nrates, exercise multiples, expected forfeiture rates, the expected share price volatility rates, and expected dividends.\n\n \n\n**(ee).** **Loss per share**\n\n \n\nBasic loss per share is computed by\ndividing net loss attributable to ordinary shareholders, taking into consideration the deemed dividends to preferred shareholders (if\nany), by the weighted average number of ordinary shares outstanding during the year using the two-class method. Under the two-class method,\nnet loss is allocated between ordinary shares and other participating securities based on their participating rights. Shares issuable\nfor little to no consideration upon the satisfaction of certain conditions are considered as outstanding shares and included in the computation\nof basic loss per share as of the date that all necessary conditions have been satisfied. Net losses are not allocated to other participating\nsecurities if based on their contractual terms they are not obligated to share the losses.\n\n \n\nDiluted loss per share is calculated\nby dividing net loss attributable to ordinary shareholders, as adjusted for the effect of dilutive ordinary equivalent shares, if any,\nby the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares\nconsist of ordinary shares issuable upon the conversion of the preferred shares, using the if-converted method, and shares issuable upon\nthe exercise of share options using the treasury stock method. Ordinary equivalent shares are not included in the denominator of the diluted\nloss per share calculation when inclusion of such share would be anti-dilutive.\n\n \n\nThe Preferred Shares of the Company\nare non-convertible, and not entitled to any dividend right (See Note 11). Therefore, the Company does not consider the impact of Preferred\nShares in the calculation of basic and diluted loss per share.\n\n \n\nAlthough legally issued, the Pre-Delivery\nShares (See Note 9) were not considered outstanding, and therefore excluded from basic and diluted loss per share unless default of the\nshare lending arrangement occurs, at which time the Pre-Delivery Shares would be included in the basic and diluted loss per share calculation.\n\n \n\nThe Group had share options, which\ncould potentially dilute basic earnings per share in the future. Nil and 951,776 share options, were excluded from the calculation of\ndiluted loss per ordinary share since their inclusion would have been anti-dilutive for the year ended December 31, 2024 and 2025.\n\n \n\nF-26\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n \n\n**(ff).** **Segment reporting**\n\n \n\nThe Group uses the management approach\nin determining its operating segments. The Group’s chief operating decision maker (“CODM”) identified as the Group’s\nChief Executive Officer, relies upon the consolidated results of operations as a whole when making decisions about allocating resources\nand assessing the performance of the Group. As a result of the assessment made by CODM, the Group has only one reportable segment. The\nGroup does not distinguish between markets or segments for the purpose of internal reporting. The Group has concluded that consolidated\nnet loss is the measure of segment profitability. The CODM assesses performance for the Group, monitors budget versus actual results,\nand determines how to allocate resources based on consolidated net loss as reported in the consolidated statements of operations. There\nare no other expense categories regularly provided to the CODM that are not already included in the primary financial statements herein.\nAs the Group’s long-lived assets are substantially located in the PRC, no geographical segments are presented.\n\n \n\n**(gg).** **Risks and uncertainties**\n\n \n\nIn February 2022, the Russian Federation\nand Belarus commenced a military action with the country of Ukraine. As a result of this action, various nations, including the United\nStates, have instituted economic sanctions against the Russian Federation and Belarus. Further, the impact of this action and related\nsanctions on the world economy are not determinable as of the date of these financial statements. The specific impact on the Company’s\nfinancial condition, results of operations, and cash flows is also not determinable as of the date of these financial statements.\n\n \n\nThe United States government has made\nstatements and taken certain actions that may lead to changes in United States and international trade policies towards China. It remains\nunclear what additional actions, if any, will be taken by the United States or other governments with respect to international trade agreements,\nthe imposition of tariffs on goods imported into the United States, tax policy related to international commerce, or other trade matters.\nIn February and March 2025, the United States administration imposed an additional 20 percent duty on Chinese imports. Subsequently, authorities\nin China announced tariffs over selected United States products and regulatory investigation against United States companies in response\nto the tariff imposed by the United States. Furthermore, on April 2, 2025, President Trump announced that the United States would impose\na 10% tariff on all countries, effective on April 5, 2025, and an individualized reciprocal higher tariff on countries with which the\nUnited States has the largest trade deficits, including a 34% additional reciprocal tariff on goods imported from China that brings the\ntotal tariff rate to 54%. On April 4, 2025, the Foreign Ministry of China announced that China would impose a retaliatory 34% tariff on\ngoods imported from the United States. On April 8, 2025, President Trump announced to impose an additional 50% tariff on Chinese imports.\nThe Trump administration proceeded to implement a 104% tariff on goods imported from China on April 9, 2025. Subsequently, on April 10,\n2025, President Trump announced a temporary suspension of reciprocal tariff measures targeting most U.S. trading partners for a 90-day\nperiod, while concurrently escalating tariffs on Chinese goods, which currently amounts to 145% and may become even higher in the future.\nThis sequence of actions underscored a strategic recalibration of the United States trade policy, emphasizing heightened pressure on international\ntrades. The Group are closely monitoring potential changes in international trade policy and assessing the potential impact of these and\nother trade policy changes on the Group’s business operations and financial performance.\n\n** **\n\n**(hh).** **Recent accounting pronouncements**\n\n \n\nThe Group is an “emerging growth\ncompany” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).\nUnder the JOBS Act, EGC can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until\nsuch time as those standards apply to private companies. The Group does not opt out of extended transition period for complying with any\nnew or revised financial accounting standards. Therefore, the Group’s financial statements may not be comparable to companies that\ncomply with public company effective dates.\n\n \n\nIn November 2023, the FASB issued ASU\n2023-07, which modifies the disclosure and presentation requirements of reportable segments. The new guidance requires the disclosure\nof significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within\neach reported measure of segment profit and loss. In addition, the new guidance enhances interim disclosure requirements, clarifies circumstances\nin which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities\nwith a single reportable segment, and contains other disclosure requirements. The update is effective for annual periods beginning after\nDecember 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The adoption\nof ASU 2023-07 did not have a material impact on its consolidated financial statements disclosures. \n\n \n\nF-27\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(hh).**\n**Recent accounting pronouncements** (cont.)\n\n \n\nIn December 2023, the FASB issued ASU\n2023-09, Improvement to Income Tax Disclosure. This standard requires more transparency about income tax information through improvements\nto income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This standard also includes\ncertain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for public business entities,\nfor annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for\nannual periods beginning after December 15, 2025.\n\n \n\nIn November 2024, the FASB issued ASU\n2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40), to improve the disclosures\nabout an entity’s expenses including more detailed information about the types of expenses in commonly presented expense captions\n(“ASU 2024-03”). In January 2025, the FASB issued ASU 2025-01, Income Statement - Reporting Comprehensive Income - Expense\nDisaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date (“ASU 2025-01”). At each interim and annual reporting\nperiod, entities will disclose in tabular format disaggregating information about prescribed categories underlying relevant income statement\ncaptions, as well as the total amount of selling expense and a description of the composition of its selling expense. ASU 2024-03, as\nclarified by ASU 2025-01, is effective for annual reporting periods beginning after December 15, 2026, and interim periods within annual\nreporting periods beginning after December 15, 2027. The Group will adopt the amendments in this ASU for its fiscal year beginning on\nJanuary 1, 2027. The Group is in the process of evaluating the impact of adopting this new guidance on its consolidated financial statement.\n\n \n\nIn January 2025, the FASB issued ASU\n2025-01, which revises the effective date of ASU 2024-03 (on disclosures about disaggregation of income statement expenses) “to\nclarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15,\n2026, and interim periods within annual reporting periods beginning after December 15, 2027.” Entities within the ASU’s scope\nare permitted to early adopt the ASU. The Company is currently evaluating these new disclosure requirements and does not expect the adoption\nto have a material impact.\n\n \n\nIn January 2025, the FASB issued ASU\n2025-01, “Income Statement – Comprehensive Income – Expense Disaggregation Disclosure (Subtopic 220-40): Clarifying\nthe Effective Date.” This pronouncement revises the effective date of ASU 2024-03 and clarify that all public business entities\nare required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting\nperiods beginning after December 15, 2027. Entities within the ASU’s scope are permitted to early adopt the accounting standard\nupdate. The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact.\n\n \n\nIn May 2025, the FASB issued ASU 2025-03,\nBusiness Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable\nInterest Entity. The ASU requires entities to apply the existing acquirer determination guidance in ASC 805-10-55-12 through 55-15 when\na business combination is effected primarily by exchanging equity interests and the legal acquiree is a VIE that meets the definition\nof a business, rather than automatically designating the primary beneficiary as the accounting acquirer. The ASU is effective for annual\nreporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. Early adoption is permitted.\nThe amendments will be applied prospectively. The Company is currently evaluating the impact of this ASU on its consolidated financial\nstatements.\n\n \n\nF-28\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**2.**\n**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(cont.)\n\n** **\n\n**(hh).**\n**Recent accounting pronouncements** (cont.)\n\n \n\nIn July 2025, the FASB issued ASU 2025-05,\nwhich amends ASC 326-20 to provide a practical expedient for all entities which elect a practical expedient that assumes that current\nconditions as of the balance sheet date do not change for the remaining life of the asset in developing reasonable and supportable forecasts\nas part of estimating expected credit losses, and an accounting policy election for all entities, other than a public business entity,\nthat elect the practical expedient related to the estimation of expected credit losses for current accounts receivable and current contract\nassets that arise from transactions accounted for under ASC 606. Under ASU 2025-05, an entity is required to disclose whether it has elected\nto use the practical expedient and, if so, whether it has also applied the accounting policy election. An entity that makes the accounting\npolicy election is required to disclose the date through which subsequent cash collections are evaluated. ASU 2025-05 is effective for\nannual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods, with\nearly adoption permitted. Entities should apply the new guidance prospectively. The Company is currently evaluating these new disclosure\nrequirements and does not expect the adoption to have a material impact.\n\n \n\nIn December 2025, the FASB issued\nASU 2025-11, which is intended to improve the navigability of the guidance in ASC 270 and clarify when it applies. Under the amendments,\nan entity is subject to ASC 270 if it provides interim financial statements and notes in accordance with GAAP. The ASU also addresses\nthe form and content of such financial statements, adds lists to ASC 270 of the interim disclosures required by all other Codification\ntopics, and establishes a principle under which an entity must disclose events since the end of the last annual reporting period that\nhave a material impact on the entity. As the Board stated in the proposed guidance and reiterates in the ASU, the amendments are not\nintended to change the fundamental nature of interim reporting or expand or reduce current interim disclosure requirements. For public\nbusiness entities, the amendments in ASU 2025-11 are effective for interim reporting periods within annual reporting periods beginning\nafter December 15, 2027. For entities other than public business entities, for interim reporting periods within annual reporting periods\nbeginning after December 15, 2028. Early adoption is permitted for all entities.\n\n \n\nOther accounting standards that have\nbeen issued by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial\nstatements upon adoption. The Group does not discuss recent standards that are not anticipated to have an impact on or are unrelated to\nits consolidated financial condition, results of operations, cash flows or disclosures.\n\n \n\n**3.**\n**ACCOUNTS RECEIVABLE, NET**\n\n \n\nAccounts receivable, net consisted\nof the following:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nAccounts receivable \n 58,223,168  \n 56,147,676 \n\nLess: Allowance for credit losses \n (2,680,151) \n (49,838,198)\n\n  \n$55,543,017  \n$6,309,476 \n\n \n\nThe Group adopted ASU 2016-13 from\nJanuary 1, 2023 using modified-retrospective transition approach with a cumulative-effect adjustment to shareholders’ equity amounting\nto $5,888,082 recognized as of January 1, 2023. The Group recorded recoveries of credit losses of $5,108,723 for the year ended December 31,\n2023. For the year ended December 31, 2024, the Group recorded credit losses of $2,053,698. For the year ended December 31,\n2025, the Group recorded credit losses of $45,776,123.\n\n \n\nF-29\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**4.**\n**PREPAID EXPENSES AND OTHER ASSETS, NET**\n\n \n\nPrepaid expenses and other assets,\nnet, consisted of the following:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nPrepaid expenses and other current assets, net: \n   \n  \n\nPrepaid expenses (1) \n$2,320,000  \n$2,402,310 \n\nReceivables from third parties (2) \n 1,267,001  \n 1,023,861 \n\nReceivables from disposal of long-term investment (3) \n 753,497  \n 786,490 \n\nValue-added tax (“VAT”) receivables \n 296,872  \n 160,822 \n\nRent deposits \n 128,165  \n 132,292 \n\nOthers \n 54,782  \n 1,031,148 \n\nPrepaid expenses and other current assets \n$4,820,317  \n$5,536,923 \n\nAllowance for credit losses (1) (2) (3)(5) \n (4,027,585) \n (4,213,287)\n\nPrepaid expenses and other current assets, net \n$792,732  \n$1,323,636 \n\nPrepaid expenses and other non-current assets: \n    \n   \n\nPrepaid case acceptance fee (4) \n$3,500,459  \n$3,653,730 \n\nLong-term receivables from third parties (5) \n 3,000,000  \n 3,000,000 \n\nOthers \n 177,269  \n 1,002,944 \n\nPrepaid expenses and other non-current assets \n$6,677,728  \n$7,656,674 \n\nAllowance for credit losses (5) \n (3,000,000) \n (4,000,987)\n\nPrepaid expenses and other non-current assets, net \n 3,677,728  \n 3,655,687 \n\nTotal \n$4,470,460  \n$4,979,323 \n\n \n\n(1)In March 2023, the Group appointed Lucky Panda Pte. Ltd to provide marketing solution, social media operations and public relationship services in respect to the Group’s business development in the Southeast Asia region, with a service period from April 1, 2023 to March 31, 2026. Therefore, the Group made a prepayment of $3 million for the service, including $1.8 million for the joint developing and creating of an AI content platform. The prepayment of the business development related service will be settled based on the service rendered. The Group recognized the settlement of $170,000 and nil into promotional service expenses for the years ended December 31, 2024 and 2025, respectively. For the year ended December 31, 2024 and 2025, the Group recognized credit losses amounting to $2,220,000 on the remaining prepayment, following management’s decision to terminate the AI content platform development due to a shortage of supporting human resources required to collaborate on the project.\n\n \n\n(2)Receivables from third parties mainly includes funds lent\nto third parties. In October 2023, the Group entered into agreement to lend $786,490 to a third party, with maturity of one year and\nannual interest rate of 6.8%. Additionally, the loan term was extended for another one year. In March and May 2024, the Group lent another\n$71,499 and $28,600 to the above third party, with maturity of one year and annual interest rate of 3.45%. For the year ended December\n31, 2024, the Group recorded credit losses of $826,946 for the receivables based on the management’ estimation of the collectability\nof the receivables from the third parties. The loan was further extended for one year as of December 31, 2025.\n\n \n\nF-30\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**4.**\n**PREPAID EXPENSES AND OTHER ASSETS, NET**(cont.)\n\n \n\n(3)In\nSeptember 2023, the Group entered into an agreement with a third party to dispose 11% of the shares of Zhizhen Guorui held by the Group\nwith a total consideration of RMB5,500,000 (equivalent to $786,490), and recognized a gain on disposal of $43,640. For the year ended\nDecember 31, 2025, the Group recorded credit losses for the above receivable based on the managements’ estimation of the collectability\nof the receivable from the third party.\n\n \n\n(4)Prepaid\ncase acceptance fee is the expense paid by the plaintiff in advance according to PRC law when the court decides to accept civil cases,\neconomic dispute cases, maritime cases and administrative cases. The court charged the case acceptance fee of $3.7 million in proportion\nto the claim amount of the lawsuit between the Group and Apple. The claim amount was RMB10 billion, approximately $1,430 million.\nThe lawsuit is not expected to close within the one year and the amount is recognized in non-current portion of prepaid expenses.\n\n \n\n(5)In\nMarch 2023, the Group entered into agreement to lend $3 million to Tackle Finance Limited, with maturity of one year and annual interest\nrate of 5%. In March 2024, the Group entered into a supplemental agreement to extend the maturity of the borrowing for another two years.\nFor the year ended December 31, 2024, the Group recorded credit losses for the above receivable amounting to $3 million, along with interest\nreceivable of $253,301 based on the management’ estimation of the collectability of the receivable from Tackle Finance Limited.\n\n \n\nFor the years ended December 31, 2023,\n2024 and 2025, the Group wrote off receivables from third parties of $22,342, $nil and nil, respectively.\n\n \n\n**5.**\n**PROPERTY AND EQUIPMENT, NET**\n\n \n\nProperty and equipment, net, consisted of the following:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nElectronic equipment \n$245,819  \n$39,953 \n\nOffice equipment \n 2,439,125  \n 396,427 \n\nLeasehold improvement \n 99,531  \n 140,728 \n\nLess: accumulated depreciation \n (916,739) \n (435,303)\n\nProperty and equipment, net \n$1,867,736  \n$141,805 \n\n \n\nDepreciation expense was $244,028, $490,331 and $86,596\nfor the years ended December 31, 2023, 2024 and 2025, respectively.\n\n \n\nF-31\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**6.**\n**INTANGIBLE ASSETS, NET** \n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nSoftware \n$979,391  \n$1,022,275 \n\nLess: accumulated amortization \n (836,021) \n (907,833)\n\nIntangible assets, net \n$143,370  \n$114,442 \n\n \n\nFor the years ended December 31,\n2023, 2024 and 2025, amortization expense amounted to $448,747, $49,604 and $34,254, respectively. Future estimated amortization expense\nof intangible assets is as follows:\n\n \n\n2026 \n 34,163 \n\n2027 \n 34,157 \n\n2028 \n 30,617 \n\n2029 \n 12,936 \n\nThereafter \n 2,569 \n\nTotal \n$114,442 \n\n \n\n**7.**\n**LONG-TERM INVESTMENTS** \n\n \n\nLong-term investments consist of investments\nin privately held companies. The following table sets forth the changes in the Group’s long-term investments:\n\n \n\n  \nAs of\nDecember 31, 2024  \nAs of\nDecember 31, 2025 \n\n  \n**$**  \nInterest\n%  \n**$**  \nInterest\n% \n\nEquity method investments \n   \n   \n   \n  \n\nZhizhen Guorui (1) \n 1,559,685  \n 26% \n \n-\n  \n \n-\n \n\nTotal \n 1,559,685  \n    \n \n-\n  \n \n  -\n \n\n  \n    \n    \n    \n   \n\nLong-term investment without readily determinable fair value \n    \n    \n    \n   \n\nShanghai Shenghan (2) \n 47,413  \n 16.56% \n \n-\n  \n \n-\n \n\nJiaxing Yuanbeibei (3) \n 684,997  \n 1.82% \n \n-\n  \n \n-\n \n\nShanghai Bangtu (4) \n 205,499  \n 5% \n \n-\n  \n \n-\n \n\nTotal \n 937,909  \n \n \n  \n \n-\n  \n \n-\n \n\n \n\n(1)In\nFebruary 2022, the Group entered into agreements with third parties to establish Zhizhen Guorui (Shanghai) Information Technology Development\nCo., Ltd. (“Zhizhen Guorui”) with a total consideration of $2.9 million. According to the investment agreement, Zhizhen\nGuorui’s board of directors consists of 5 directors, two of whom is appointed by the Group. Therefore, the Group recognized it\nas long-term equity investment and measured under equity method since the Group had the ability to exercise significant influence over\nZhizhen Guorui. In September 2023, the Group entered into an agreement with a third party to transfer 11% of the shares of Zhizhen Guorui\nheld by the Group for a total consideration of RMB5,500,000 (equivalent to $753,497) and recognized a gain on disposal of $44,297. Due\nto the unchanged structure of the board of directors, the Group still had the ability to exercise significant influence over Zhizhen\nGuorui.\n\n \n\nF-32\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**7.**\n**LONG-TERM INVESTMENTS**(cont.)\n\n \n\n(2) In September 2015, the Group signed an investment agreement to acquire 20% of the shares of Shanghai Shenghan Information Technology Co., Ltd (“Shanghai Shenghan”) for RMB 5 million, of which the registered capital of RMB 125,000 was subscribed. In January 2018, with the addition of new investors to the investee, Xiao-i’s shareholding percentage in Shanghai Shenghan was diluted to 17.6%. In June 2020, with the capital injection of Wuxi Zhixin Integrated Circuit Investment Center (Limited Partnership), Xiao-i’s shareholding in Shanghai Shenghan was once again diluted to 16.56%. According to the investment agreement, Shanghai Shenghan’s board of directors consists of 3 directors, one of whom is appointed by the Group. Therefore, the Group recognized it as long-term equity investment and measured under equity method since the Group had the ability to exercise significant influence over Shanghai Shenghan as of December 31, 2022. As of December 31, 2023, the board of directors of Shanghai Shenghan changed to 7 members, one of whom is appointed by the Group. The Group concluded that the long-term investment of Shanghai Shenghan should not be accounted for under equity method any more. As Shanghai Shenghan is a private held company without observable changes in fair value, the Group elected to use the alternative measurement without readily determinable fair value.\n\n \n\n(3) In May 2023, the Group subscribed 1.82% of the shares of Jiaxing Yuanbeibei Technology Co., Ltd. (“Jiaxing Yuanbeibei”) with the consideration of $704,235. The investment was accounted for at cost less impairment, adjusted by observable price changes if any, as the Group had neither significant influence nor control over the investee and Jiaxing Yuanbeibei is a privately held company without readily determinable fair value.\n\n \n\n(4)In\nJuly 2023, the Group subscribed 5% of the shares of Shanghai Bangtu Information Technology Co., Ltd. (“Shanghai Bangtu”)\nwith the consideration of $211,271. The investment was accounted for at cost less impairments, adjusted by observable price changes if\nany, as the Group had neither significant influence nor control over the investee and Shanghai Bangtu is a privately held company without\nreadily determinable fair value. In 2024, in accordance with the resolution of the Board of Directors and the Equity Incentive Plan,\nall shareholders contribute 2% of Shanghai Bangtu’s equity in proportion to their shareholdings for equity-based incentives to relevant\nemployees of Shanghai Bangtu. As a result, the Group’s shareholding ratio was diluted to 4.5%.\n\n \n\nThe Group recognized its share of loss\nof $155,734, $81,618, and nil in investment losses for the years ended December 31, 2023, 2024 and 2025, respectively.\n\n \n\nThe Group recognized impairment loss\nof long-term investment of $150,708, nil and $2,536,443 for the years ended December 31, 2023, 2024 and 2025, respectively. Management\ndetermined that the investment cost is unrecoverable, and therefore a full impairment provision was recognized in 2025.\n\n \n\nF-33\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**8.**\n**SHORT-TERM BORROWINGS**\n\n \n\nAs of December 31, 2024 and 2025, the\nbank borrowings were for working capital and capital expenditure purposes. Short-term borrowings consisted of the following:\n\n \n\n   Annual\nInterest\nRate   Maturity\n(Months)  Principal   As of\nDecember 31,\n\n2024   As of\nDecember 31,\n\n2025 \n\n          USD   USD   USD \n\nShort-term borrowings:                   \n\nChina Bohai Bank(1)   4.80%  February, 2026   3,424,987    \n-\n    1,422,831 \n\nAgricultura Bank of China (1)   3.45%  August, 2026   2,739,990    \n-\n    1,429,981 \n\nAgricultura Bank of China (1)   3.45%  March, 2026   2,465,991    \n-\n    1,136,835 \n\nAgricultura Bank of China (1)   3.60%  May, 2026   2,001,973    \n-\n    2,001,973 \n\nAgricultura Bank of China (1)   3.50%  May, 2026   2,573,966    \n-\n    2,573,966 \n\nShengjing Bank(1)(5)   4.00%  January, 2026   1,429,981    \n-\n    1,429,981 \n\nChina Zheshang Bank   3.15%  April, 2026   1,415,681    \n-\n    1,415,681 \n\nShanghai Rural Commercial Bank   3.50%  October, 2026   1,415,681    \n-\n    1,415,681 \n\nBank of Jiangsu (1)(6)   3.85%  July, 2025   1,369,994    \n-\n    714,992 \n\nChina Construction Bank (1) (4)   3.65%  March, 2025   3,424,987    3,424,987    3,551,957 \n\nBeijing Bank (1)   4.50%  September, 2025   2,739,990    2,739,990    2,859,962 \n\nAgricultura Bank of China (1)   3.35%  June, 2025   2,465,991    2,465,991    \n-\n \n\nAgricultura Bank of China (1)   3.35%  May, 2025   1,917,992    1,917,992    \n-\n \n\nShanghai Bank (2)   4.00%  February, 2025   1,643,993    1,643,993    \n-\n \n\nShanghai Bank (3)   4.00%  November, 2025   1,369,994    1,369,994    1,429,981 \n\nShanghai Bank (3)   4.00%  November, 2025   1,369,994    1,369,994    1,429,981 \n\nAgricultura Bank of China (1)   3.35%  August, 2025   1,369,994    1,369,994    \n-\n \n\nBank of Nanjing(6)   5.00%  December, 2025   1,369,994    1,369,994    1,395,661 \n\nBank of Ningbo (6)   4.30%  August, 2025   1,369,994    1,369,994    1,429,981 \n\nBank of Ningbo (6)   4.30%  August, 2025   1,369,994    1,369,994    1,429,981 \n\nShanghai Rural Commercial Bank   3.50%  October, 2025   1,369,994    1,369,994    \n-\n \n\nChina Bohai Bank   4.90%  February, 2025   1,369,994    1,369,994    \n-\n \n\nChina Bohai Bank   4.90%  February, 2025   1,369,994    1,369,994    \n-\n \n\nBank of Wenzhou   5.55%  April, 2025   1,369,994    1,369,994    \n-\n \n\nShengjing Bank (1)   4.00%  June, 2025   1,369,994    1,369,994    \n \n \n\nChina Zheshang Bank (1)   4.50%  September, 2025   1,369,994    1,369,994    \n-\n \n\nBank of Jiangsu (1)   4.00%  September, 2025   1,369,994    1,369,994    1,429,981 \n\nShanghai Bank (2)   4.00%  February, 2025   1,095,996    1,095,996    \n-\n \n\nAgricultura Bank of China (1)   3.35%  April, 2025   1,095,996    1,095,996    \n-\n \n\nBank of Jiangsu (1)   4.00%  July, 2025   684,998    684,998    714,990 \n\nTotal                32,879,865    29,214,396\n\n \n\n \n\n   Annual\nInterest\nRate   Maturity\n(Months)  Principal   As of December 31,\n\n2024   As of December 31,\n\n2025 \n\n          USD   USD   USD \n\nLong-term borrowings:                   \n\nBank of Wenzhou   5.55%  December, 2028   1,387,082    \n-\n    1,387,082 \n\nTotal                \n      -\n    1,387,082 \n\n    \n\n(1)These\nborrowings are pledged by the intellectual properties owned by Shanghai Xiao-I.\n\n \n\n(2)These\nborrowings are pledged by the intellectual properties owned by Shanghai Xiao-I, and guaranteed by Zhizhen Zhilian Artificial Intelligence\nTechnology (Shanghai) Co., Ltd., the subsidiary of the Group, and Shanghai Administration Center of Policy Financing Guarantee Funds\nfor SMEs.\n\n \n\nF-34\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**8.**\n**SHORT-TERM BORROWINGS**(cont.)\n\n \n\n(3)These\nborrowings are pledged by the account receivables owned by Shanghai Xiao-I.\n\n \n\n(4)The\nGroup is required to maintain a specified gearing ratio in accordance with the loan covenants under its agreement with China Construction\nBank. As at December 31, 2024, the Group met the required leverage threshold under Chinese Accounting Standards. In May 2025, the Huangpu\nDistrict People’s Court of Shanghai accepted a financial contract dispute filed by China Construction Bank Corporation Shanghai\nBranch against Shanghai Xiao-i, seeking repayment of loan principal and penalty interest totaling RMB25,036,162.25 ($3,494,913). The\ncourt has issued a final judgment ordering the defendant to pay the claimed amount. See Note 18 for details.\n\n \n\n(5)As of December 31, 2025, the borrowing was overdue. The Group\nis actively engaging with the bank to discuss repayment arrangements and related solutions.\n\n \n\n(6)These borrowings are subject to litigation. See Note 18 for\ndetails.\n\n \n\nThe interest expenses of short-term\nborrowings were $915,444, $1,311,845 and $1,343,885 for the years ended December 31, 2023, 2024 and 2025, respectively. The weighted\naverage interest rates of short-term loans outstanding were 4.18% and 4.33% per annum as of December 31, 2024 and 2025, respectively.\n\n \n\n**9.**\n**CONVERTIBLE LOANS**\n\n \n\n*Convertible Loan I*\n\n \n\nOn June 17, 2024, the Company entered\ninto a Convertible Loan Agreement with an institutional investor (the “Investor I”) to issue and sell an aggregate principal\namount of $3,260,869.57 senior convertible notes (the “Convertible Loan I”) with an 8% Original Issue Discount. The Company\nanticipates using the proceeds for general working capital purposes.\n\n \n\nThe Company also entered into a placement\nagency agreement (the “PAA”) with FT Global Capital Inc. (“FT Global” or “Placement Agent”), to engage\nFT Global as its exclusive Placement Agent on a “best efforts” basis for the offering. The Company agreed to pay the Placement\nAgent an aggregate cash fee equal to 7.5% of the gross proceeds raised in the offering, and to reimburse the Placement Agent for expenses\nup to $90,000.\n\n \n\nMaterial Terms of the Convertible\nLoan I:\n\n \n\n●Pre-Delivery Shares: The Company\nis also concurrently offering an additional ADS, at par, representing 333,334 of its ordinary shares (the “Pre-Delivery Shares”),\nto the Investor I. Each holder of Pre-Delivery Shares is not permitted to sell, assign or transfer such Pre-Delivery Shares except in\nconnection with a conversion of the Convertible Loan I of such holder to facilitate T+1 delivery of Conversion ADSs upon any conversion\nof  Convertible Loan I. At such time when no Convertible Loan I remain outstanding, the remaining Pre-Delivery ADSs will be\ndeemed surrendered and cancelled by the holder on the date the holder ceases to hold any Convertible Loan I. The offering of the Pre-Delivery\nADSs is to ensure the Company’s timely delivery of Conversion Shares represented by Conversion ADSs on a T+1 basis with respect\nto future conversions of the Convertible Loan I.\n\n \n\n●Conversion at the Option of\nHolder: The Convertible Loan I will mature 360-days after the Issuance Date and will be convertible into the Group’s ADSs at a\nconversion price equal to $1.00 per ADS. Each holder of Convertible Loan I may convert all, or any part, of the outstanding principal\nof the Convertible Loan I, together with accrued and unpaid interest, any make-whole amount and any late charges thereon, at any time,\nat such holder’s option, into Conversion Shares represented by Conversion ADSs at the “Conversion Price” of $1.00 per\nADS, subject to pro rata adjustment for any stock split, stock dividend, stock combination and/or similar transactions.\n\n \n\n●Interest Rate: the Convertible\nLoan I will bear interest at a rate of 6.0% per annum, which rate will increase to 15% in the event of occurrence and during the continuance\nof an event of default. Interest shall be payable on each interest date, which is the first calendar day of each calendar month with\nthe first interest date being July 1, 2024. The Group may, at its option, pay interest on any interest date in cash or in a combination\nof cash interest and interest ADSs. The Interest Conversion Price shall be the lowest of (i) the applicable Conversion Price as in effect\non the applicable Interest Date, (ii) 92% of the lowest VWAP of the ADSs during the ten 10 consecutive trading day period ending.\n\n \n\nF-35\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**9.**\n**CONVERTIBLE LOANS**(cont.)\n\n \n\n  ● Alternate Conversion at Option of Holder: Each holder of Convertible Loan I may also convert all, or any part, of the outstanding principal of the Convertible Loan I, together with accrued and unpaid interest, any make-whole amount and any late charges thereon (subject to an additional 25% premium if an event of default then exists), at any time, at such holder’s option, into Conversion Shares represented by Conversion ADSs at the “Alternate Conversion Price” calculated the lower of:\n\n     \n\n    (i) the Conversion Price then in effect; and\n\n       \n\n    (ii) either,\n\n       \n\n    x. if no event of default then exists, 92% of the lowest volume weighted average price of the Company’s ADSs during the ten (10) consecutive Trading Days ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable Conversion Notice; or\n\n       \n\n    y. if an event of default then exists, the lowest of:\n\n       \n\n    (a) 80% of the volume weighted average price of the Company’s ADSs as of the trading day immediately preceding the delivery or deemed delivery of the applicable notice of conversion or event of default (as applicable);\n\n       \n\n    (b)  80% of the volume weighted average price of the Company’s ADSs as of the trading day the delivery or deemed delivery of the applicable notice of conversion (if any); and\n\n       \n\n    (c) 80% of the price computed as the quotient of (I) the sum of the volume weighted average price of the Company’s ADSs for each of the three (3) Trading Days with the lowest volume weighted average price of the Company’s ADSs during the 20 consecutive trading day period ending and including the trading day immediately preceding the delivery or deemed delivery of the applicable Conversion Notice, divided by (II) three (3)).\n\n \n\n●Redemption Rights: In connection\nwith a change of control of the Group, each holder may require the Group to redeem in cash all, or any portion, of the Convertible Loan I at\na 25% redemption premium to the greater of (i) the face value of the Convertible Loan I to be redeemed, (ii) the equity value of the\nConversion Shares represented by Conversion ADSs underlying such Convertible Loan I, and (iii) the equity value of the change of control\nconsideration payable to the holder of the Conversion Shares represented by Conversion ADSs underlying such Convertible Loan I.\n\n \n\nThe Company assessed the Convertible\nLoan I under ASC 815, identifying there are two embedded features, including conversion feature and redemption feature, and concluded\nthat:\n\n \n\n●The conversion feature satisfied\nthe requirement of “fixed-for-fixed” criterion and is considered indexed to the Company’s own stock, the conversion\nfeature eligible for a scope exception from derivative accounting in accordance with ASC815-10-15-74 and the Company would not bifurcate\nthe conversion feature.\n\n \n\n●The redemption feature requires\ncash settlement instead of settlement in shares, which is not eligible for a scope exception in accordance with ASC815-10-15-74, and\nthe Group would bifurcate the redemption feature.\n\n \n\nF-36\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**9.**\n**CONVERTIBLE LOANS**(cont.)\n\n \n\nConsidering the above, the redemption\nfeature is required to be bifurcated as a separate unit of liability account and measured at fair value. After the bifurcation, the Convertible\nLoans I was accounted for using amortized cost method. The Company engaged a third-party appraiser to make the valuation of fair value\nof derivative liability of redemption feature, which was amounting to $280,198 initially. The Company recognized the issuance costs of\nConvertible Loan I of $503,055 and the discount as a direct deduction from the face amount of the Convertible Loan I in accordance with\nASC835-30-45-1A. The debt issuance cost was amortized as interest expense using the effective interest method, over the term of the Convertible\nLoan I, with interest expenses of $171,914 for the year ended December 31, 2024.\n\n \n\nDuring 2024, the Investor I made a\nseries of conversions, and as of October 7, 2024, the Investor I have converted all of the Convertible Loan I or unsettled interest expense\ninto ADSs, representing 3,920,797 ordinary shares. All of the Pre-Delivery Shares in connection with Convertible Loan I was used for the\nconversion of Convertible Loan I or cancelled.\n\n \n\n*Convertible Loan II*\n\n \n\nOn October 30, 2024, the Company entered\ninto a Convertible Loan Agreement with another institutional investor (the “Investor II”) to issue and sell an aggregate principal\namount of $2,175,000 convertible notes (the “Convertible Loan II”) with an 8% Original Issue Discount equal to $160,000. The\nCompany anticipates using the proceeds for general working capital purposes.\n\n \n\nMaterial Terms of the Convertible\nLoan II:\n\n \n\n●Pre-Delivery Shares: The Company\nis also concurrently offering an additional ADS, at par, representing 1,650,000 ordinary shares (the “Pre-Delivery Shares”),\nto the Investor II. The Investor II is not permitted to sell, assign or transfer such Pre-Delivery Shares except in connection with a\nconversion of the Convertible Loan II to facilitate T+1 delivery of Conversion ADSs. At such time when the Convertible Loan II is no\nlonger outstanding, the Company may repurchase the Pre-Delivery Shares at the same price they are sold to the Investor II.\n\n \n\n●Conversion at the Option of\nHolder: The Convertible Loan II will mature 12 months after the Purchase Price Date and will be convertible into the Company’s\nADSs at a conversion price equal to the lower of (i) $6.0841 (the “Fixed Price”) or (ii) 85% multiplied by the lowest daily\nvolume-weighted average price of the ADSs during the ten trading days preceding a conversion (the “Market Price”). The Conversion\nPrice will be further reduced by $0.05 per ADS to cover any receipt issuance fees borne by the holder in connection with any Conversion.\n\n \n\n●Interest Rate: The Convertible\nLoan II will bear interest at a rate of 6.0% per annum which, (a) shall commence accruing on the date of issuance, (b) shall be computed\non the basis of a 360-day year and twelve 30-day months and (c) shall be payable on the Maturity Date unless earlier converted. The interest\nrate will increase to 18% in the event of occurrence and during the continuance of an event of default.\n\n \n\nThe Company assessed the Convertible\nLoan II under ASC 815, identifying there are only conversion feature and concluded that the conversion feature is not required to be bifurcated\nas a separate unit of liability account as it satisfied the requirement of “fixed-for-fixed” criterion and is considered indexed\nto the Company’s own stock. Therefore, the Company accounts for the instrument as a liability in its entirety.\n\n \n\nThe Company recognized the issuance\ncosts and the discount of Convertible Loan II of $175,000 as a direct deduction from the face amount of the Convertible Loan II in accordance\nwith ASC835-30-45-1A. The debt issuance cost was amortized as interest expense using the effective interest method, over the term of the\nConvertible Loan II, with interest expenses of $23,859 for the year ended December 31, 2024.\n\n \n\nDuring 2024, the Investor II made a\nseries of conversions, pursuant to which the Group issued 1,360,345 ordinary shares with conversion prices ranging from US$1.26-US$1.63\nper share. The ending balance of Convertible Loan II was $216,756 as of December 31, 2024. Subsequently on January 14, 2025, the Investor\nII had converted the remaining balance of Convertible Loan II or unsettled interest expense into ADSs, pursuant to which the Group issued\n156,315 ordinary shares with conversion prices of US$1.50 per share.\n\n \n\n*Convertible Loan III*\n\n \n\nOn January 6, 2025, the Company entered\ninto a Convertible Loan Agreement with the Investor I and the Investor II to issue and sell an aggregate principal amount of $4,637,840\nconvertible notes (the “Convertible Loan III”) with an 8% Original Issue Discount equal to $342,840. The Company anticipates\nusing the proceeds for general working capital purposes.\n\n  \n\nF-37\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**9.**\n**CONVERTIBLE LOANS**(cont.)\n\n \n\nMaterial Terms of the Convertible\nLoan III:\n\n \n\n●Conversion\nat the Option of Holder: The Convertible Loan III will mature 12 months after the Purchase Price Date (as defined in the applicable Note)\nand will be convertible into the Company’s ADSs at a conversion price equal to the lower of (i) $7.201 (the “Fixed Price”)\nor (ii) 85% multiplied by the lowest daily volume-weighted average price of the ADSs during the ten trading days preceding a conversion\n(the “Market Price”). The conversion price will be further reduced by $0.05 per ADS to cover any receipt issuance fees incurred\nby the holder in connection with any conversion (the “Conversion Price”).\n\n \n\n●Interest\nRate: The Convertible Loan III will bear interest at a rate of 6.0% per annum, which will increase to 18% upon the occurrence and during\nthe continuance of an event of default and upon written notice from the Investor. Each Note represents a general obligation of the Company\nand ranks pari passu with other obligations.\n\n \n\nThe Company assessed the Convertible\nLoan III under ASC 815, identifying there are only conversion feature and concluded that the conversion feature is not required to be\nbifurcated as a separate unit of liability account as it satisfied the requirement of “fixed-for-fixed” criterion and is considered\nindexed to the Company’s own stock. Therefore, the Company accounts for the instrument as a liability in its entirety.\n\n \n\nThe Company recognized the issuance\ncosts and the discount of Convertible Loan III of $342,840 as a direct deduction from the face amount of the Convertible Loan III in accordance\nwith ASC835-30-45-1A. The debt issuance cost was amortized as interest expense using the effective interest method, over the term of the\nConvertible Loan III, with interest expenses of $219,220 for the year ended December 31, 2025.\n\n \n\nDuring the year ended December 31,\n2025, Investor I and Investor II completed a series of conversions of Convertible Loan III, pursuant to which the Group issued an aggregate\nof 4,708,110 ordinary shares at a conversion price ranging from $0.53-$1.43 per share.\n\n* *\n\n*Convertible Loan IV*\n\n \n\nOn June 18, 2025, the Company entered\ninto a Convertible Loan Agreement with the Investor I and Investor II to issue and sell an aggregate principal amount of $6,128,000 convertible\nnotes (the “Convertible Loan III”) with an Original Issue Discount equal to $518,000. The Company anticipates using the proceeds\nfor general working capital purposes.\n\n \n\nMaterial Terms of the Convertible\nLoan IV:\n\n \n\n●Conversion\nat the Option of Holder: The Convertible Loan IV will mature 12 months after the Purchase Price Date (as defined in the applicable Note)\nand will be convertible into the Company’s ADSs at a conversion price equal to the lower of (i) $3.04428 (the “Fixed Price”)\nor (ii) 85% multiplied by the lowest daily volume-weighted average price of the ADSs during the ten trading days preceding a conversion\n(the “Market Price”). The conversion price will be further reduced by $0.05 per ADS to cover any receipt issuance fees incurred\nby the holder in connection with any conversion (the “Conversion Price”).\n\n \n\n●Interest\nRate: The Convertible Loan IV will bear interest at a rate of 6% per annum, which will increase to 18% upon the occurrence and during\nthe continuance of an event of default and upon written notice from the Investor. Each Note represents a general obligation of the Company\nand ranks pari passu with other obligations.\n\n \n\nThe Company assessed the Convertible\nLoan IV under ASC 815, identifying there are only conversion feature and concluded that the conversion feature is not required to be bifurcated\nas a separate unit of liability account as it satisfied the requirement of “fixed-for-fixed” criterion and is considered indexed\nto the Company’s own stock. Therefore, the Company accounts for the instrument as a liability in its entirety.\n\n \n\nThe Company recognized the issuance\ncosts and the discount of Convertible Loan IV of $518,000 as a direct deduction from the face amount of the Convertible Loan IV in accordance\nwith ASC835-30-45-1A. The debt issuance cost was amortized as interest expense using the effective interest method, over the term of the\nConvertible Loan IV, with interest expenses of $198,111 for the year ended December 31, 2025.\n\n \n\nDuring the year ended December 31,\n2025, Investor I and Investor II completed a series of conversions of Convertible Loan IV, pursuant to which the Group issued an aggregate\nof 13,624,755 ordinary shares at a conversion price ranging from $0.03-$1.96 per share. The ending balance of Convertible Loan IV was\n$5,111,080 as of December 31, 2025\n\n \n\nOn December 31, 2025, Investor I and\nInvestor II elected to convert a portion of Convertible Loan IV into 13,624,755 ordinary shares at a conversion price of US$0.03- US$1.96\nper share. The ending balance of Convertible Loan IV was $ 2,006,119 as of December 31, 2025.\n\n \n\nF-38\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**10.**\n**ACCRUED EXPENSES AND OTHER LIABILITIES**\n\n \n\nAccrued expenses and other liabilities\nconsisted of the following:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nAccrued expenses and other current liabilities: \n   \n  \n\nLoan from third parties (1) \n$9,445,508  \n$10,349,683 \n\nPayroll payable \n 5,690,806  \n 9,701,281 \n\nOther tax payable \n 4,464,196  \n 4,797,160 \n\nInterest payable \n 492,334  \n 1,616,048 \n\nProfessional service fees payable \n 137,737  \n 482,743 \n\nOthers \n 3,058,872  \n 2,970,820 \n\nAccrued expenses and other current liabilities \n$23,289,453  \n$29,917,735 \n\nAccrued liabilities, non-current： \n    \n   \n\nLong-term loan from third parties (2) \n 2,534,490  \n 3,764,131 \n\nLitigation related payable (3) \n 4,508,695  \n 4,704,972 \n\nAccrued liabilities, non-current \n 7,043,185  \n 8,469,103 \n\nTOTAL \n$30,332,638  \n$38,386,838 \n\n \n\n(1) Loan from third parties mainly consisted of:\n\n \n\n  Unsecured borrowings from third parties for ordinary business operation. For the borrowings, the interest rates range from 3.0% to 15.4% per annum and from 3.8% to 15.4% per annum for the years ended December 31, 2024 and 2025, respectively. The interest expenses were $633,942, $258,646 and $453,004 for the years ended December 31, 2023, 2024 and 2025. The borrowings are payable on demand.\n\n   \n\n  Among them, five of the borrowings were sourced from five individuals or companies, who have no relationship with the Group. As of the date of this annual report, these borrowings remain overdue. The Group is actively engaging in negotiations with the aforesaid borrowers to secure an extension agreement. The loan are subject to litigation. See Note 18 for details.\n\n \n\n(2)Long-term\nloan from a third party primarily consisted of long-term loan for the purpose of investing in Zhizhen Guorui (Note 7) in February 2022,\namounted to $3,764,131 as of December 31, 2025, with free interest rate in the first three years. The loan is due in five years, and\nif Zhizhen Guorui declares any cash dividend to the Group, the cash dividend would become the source to repay the loan in the first priority.\nThe Group will repay the loan on the due day.\n\n \n\n(3)Litigation\nrelated payable mainly consisted of the litigation fee for the lawsuit between the Group and Apple paid by the third parties on behalf\nof the Group.\n\n \n\nF-39\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**11.**\n**EQUITY**\n\n \n\n*Initial Public Offering*\n\n \n\nIn March 2023, the Company completed\nits initial public offering and was listed on the Nasdaq Global Market under the symbol “AIXI”. 5,700,000 American depositary\nshares (each, an “ADS”, collectively, “ADSs”), each represents one-third of an ordinary shares, was issued at\na price of $6.8 per share for net proceeds of $33.11 million, after deducting underwriting discounts, commissions and other offering expense\nof $5.65 million. After the initial public offering, there were 24,015,592 ordinary shares outstanding, with par value of $0.00005.\n\n \n\n*Issuance of Preferred Shares*\n\n \n\nOn December 13, 2023, the Company issued\n3,700,000 preferred shares (“Preferred Shares”), each with a par value of US$0.00005 and carrying a voting right equivalent\nto 20 votes to ZunTian Holding Limited (“ZunTian”), an existing shareholder of the Company. (the “Issuance”).\nZunTian is a BVI-incorporated company wholly owned and controlled by Mr. Hui Yuan (“Mr. Yuan”), who is also the Chief Executive\nOfficer (the “CEO”) and Chairman of the Company. As a result of this Issuance, Mr. Yuan beneficially owns more than 79% of\nthe voting power of the Company, leading to a change in control under Nasdaq Global Market listing rules and resulting in the Company\nbecoming a controlled company under those rules.\n\n \n\nThe fair value of the 3.7 million Preferred\nShares is $730.93, equivalent to $0.0001975 per share. The rights of Preferred Shares are as follows:\n\n \n\n(1)each Preferred share confers\non the holder thereof the right to twenty (20) votes and holders of the Preferred Shares shall at all times vote together with holders\nof ordinary shares of the Company as one class on all resolutions submitted to a vote by the members of the Company save where a separate\nclass meeting is required by law;\n\n \n\n(2)the Preferred Shares shall\nnot confer any other rights, including, without limitation, dividend or liquidation rights or any other financial or economic rights;\n\n \n\n(3)the Preferred Shares shall\nbe non-convertible, non-redeemable, and non-transferable, except as otherwise resolved by the Board of Directors of the Company; and\n\n \n\n(4)for the avoidance of doubt,\nsave and except for the rights, preference, privileges and restrictions set out in (1) to (3) above, the Preferred Shares shall not have\nany other rights and restrictions.\n\n \n\nThe Company recognized the Preferred\nShares as permanent equity, and the consideration excess of the par value was recognized as additional paid-in capital.\n\n \n\nAs of December 31, 2024 and\n2025, the Company had 31,949,038 and 55,235,284 ordinary shares issued.\n\n \n\n*The Change in ADS Ratio*\n\n \n\nOn August 5, 2024, the Group decided\nto change the ratio of its ADSs to its ordinary shares (the “ADS Ratio”), par value US$0.00005 per share, from the current\nADS Ratio of one ADS to one-third of an ordinary share to a new ADS Ratio of one ADS to 3 ordinary shares. For the Company’s ADS\nholders, the change in the ADS Ratio will have the same effect as a one-for-nine reverse ADS split. The change in the ADS Ratio had been\neffective on August 23, 2024.\n\n \n\nF-40\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**12.**\n**SHARE-BASED COMPENSATION**\n\n** **\n\nFor the year ended December 31, 2024\nand 2025, total share-based compensation expenses recognized were $1,560,527 and $5,795,923. The table below presents a summary\nof the Group’s share-based compensation expenses:\n\n \n\n  \nFor the Year Ended\nDecember 31, \n\n  \n2024  \n2025 \n\nSelling expenses \n 1,553  \n 461 \n\nGeneral and administrative expenses \n 1,556,761  \n 5,795,357 \n\nResearch and development expenses \n 2,213  \n 105 \n\nTotal \n$1,560,527  \n$5,795,923 \n\n \n\n**2023 Share Incentive Plan**\n\n \n\nOn November 30, 2022, the Company\nadopted the 2023 Share Incentive Plan (“2023 Plan”), which permits the granting of share options and restricted share units\n(“RSUs”) to employees, directors and consultants of the Group. During 2024, the Company has authorized a grant quantity of\n310,000 ordinary shares for RSUs and 1,153,333 ordinary shares for options under the 2023 Plan. Under the Group’s 2023 Plan, the\nRSUs were vested upon grant and the options will vest in one-third increments annually over three years starting from the first anniversary\nof the Grant Date. The purpose of the 2023 Plan is to attract and retain exceptionally qualified individuals and to motivate them to\nexert their best efforts on behalf of the Group by providing incentives through granting awards.\n\n* *\n\n**2025 Share Incentive Plan**\n\n \n\nOn April 1, 2025, the Group adopted\nthe 2025 share incentive plan (the “2025 Plan”), to promote the success and enhance the value of the Group by linking the\npersonal interests of the Directors, Employees, and Consultants to those of the Group’s shareholders and by providing such individuals\nwith an incentive for outstanding performance to generate superior returns to the Group’s shareholders. Under the 2025 Plan, the\nmaximum aggregate number of Ordinary Shares which may be issued pursuant to all awards under such plan shall initially be 4,214,684, provided,\nthat if the aggregate number of Ordinary Shares reserved and available for future grants of awards under the 2025 Plan falls below 3.0%\nof the total Ordinary Shares in issue and outstanding on the last day of the immediately preceding calendar year (the “Limit”),\nsuch number shall automatically be increased so that the aggregate number of Ordinary Shares reserved and available for future grants\nof awards under the 2025 Plan shall be equal to the Limit on January 1 thereafter, assuming, for purposes of determining the number of\nOrdinary Shares outstanding on such date, that all preferred shares, options, warrants, convertible notes and other equity securities\nthat are convertible into or exercisable or exchangeable for Shares (whether or not by their terms then currently convertible, exercisable\nor exchangeable) that were outstanding on such date, are deemed to have been so converted, exercised or exchanged.\n\n \n\nF-41\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**12.**\n**SHARE-BASED COMPENSATION** (cont.)\n\n \n\n**Share options for employees**\n\n \n\nOn January 3, 2024, the Company granted\nHui Yuan, its CEO, the right and option to purchase 482,312 ordinary shares of the Company, at an exercise price of $6.21 per ordinary\nshare. On August 15, 2024, the Company granted 103 employees, the right and option to purchase 484,764 ordinary shares, at an exercise\nprice of $0.75 per ordinary share.\n\n \n\nWith the assistance of an independent\nvaluation firm using the management’s estimates and assumptions, the Company recorded stock-based compensation expense for options\nbased on the estimated fair value on the date of the grant using the binomial option pricing model. The key assumptions used to determine\nthe fair value of the options at the respective grant dates in 2024 were as follows:\n\n \n\n  \nFor the\n\nYear Ended\n\nDecember 31,\n\n2024 \n\nRisk-free interest rate \n 3.91%~3.92%\n\nExpected volatility \n 101.90%~111.35%\n\nExpected dividend yield \n 0.00%\n\nExercise multiple \n 1.5 \n\nFair value of underlying ordinary shares \n$0.75~$6.15 \n\nFair value of option* \n$0.1463~$1.3057 \n\n \n\n* One option can be exchanged for one ninth of ADS after the one-for-nine reverse ADS split.\n\n \n\nThe risk-free interest rate for periods\nwithin the contractual life of the options is based on the U.S. treasury yield curve in effect at the time of grant for a term consistent\nwith the contractual term of the awards. Expected volatility is estimated based on the historical volatility of the Company’s share\nprice. The expected dividend yield is estimated based on our expected dividend policy over the expected term of the options. The expected\nexercise multiple is based on management’s estimation, which the Company believes is representative of the future. The estimated\nfair value of the Company’s ordinary shares is based on the Company’s share price. The risk-free interest rate for periods\nwithin the contractual life of the options is based on the U.S. treasury yield curve in effect at the time of grant for a term consistent\nwith the contractual term of the awards. Expected volatility is estimated based on the historical volatility of the Company’s share\nprice. The expected exercise multiple is based on management’s estimation, which the Company believes is representative of the future.\n\n \n\nF-42\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**12.**\n**SHARE-BASED COMPENSATION** (cont.)\n\n \n\nThe following table summarized the\nCompany’s share option activities under the Option Plans:\n\n \n\n  \nNumber of\nordinary shares\nunderlying  \nWeighted\naverage\nexercise\nprice \n\nBalance, December 31, 2023 \n \n-\n  \n$\n-\n \n\n  \n    \n   \n\nGranted \n 967,076  \n$3.47 \n\nExercised \n \n-\n  \n$\n-\n \n\nForfeited \n (15,300) \n$0.75 \n\n  \n    \n   \n\nBalance, December 31, 2024 \n 951,776  \n$3.52 \n\n  \n    \n   \n\nExercisable, December 31, 2024 \n \n-\n  \n$\n-\n \n\n  \n    \n   \n\nExpected to vest, December 31, 2024 \n 951,776  \n$3.52 \n\n \n\n  \nNumber of\nordinary shares\nunderlying  \nWeighted\naverage\nexercise\nprice \n\nBalance, December 31, 2024 \n 951,776  \n$3.52 \n\n  \n    \n   \n\nForfeited \n (90,132) \n$0.75 \n\n  \n    \n   \n\nBalance, December 31, 2025 \n 861,644  \n$3.81 \n\n  \n    \n   \n\nExercisable, December 31, 2025 \n (287,215) \n$3.81 \n\n  \n    \n   \n\nExpected to vest, December 31, 2025 \n 574,429  \n$3.81 \n\n \n\nThe total intrinsic value of options\nexercised during the year ended December 31, 2024 was nil as the share options were out of the money. Total share-based compensation\nexpenses recognized for these share options in 2024 were $653,111. As of December 31, 2024, there was $1,442,218 unrecognized share-based\ncompensation expense relating to share options. This amount is expected to be recognized over a weighted-average vesting period of 2.08\nyears.\n\n* *\n\n*Restricted Shares Units for employees*\n\n \n\nOn January 3, 2024, the CEO and the\nChief financial Officer (“CFO”), Wei Weng, were each awarded RSUs, representing 16,667 and 10,000 ordinary shares, respectively,\nand the fair value on the grant date of each restricted share was $6.15.\n\n \n\nOn August 9, 2024, the Company granted\nRSUs, representing 133,333 ordinary shares, to a consultant of the Group, and the fair value on the grant date of each restricted share\nwas $1.12.\n\n \n\nOn August 15, 2024, the Company granted\n9 employees amounting to RSUs, representing 71,667 ordinary shares, and the fair value on the grant date of each restricted share was\n$0.75.\n\n \n\nOn May 22, June 2, 2025, June 13 and\nSeptember 4, 2025, the Company granted RSUs to two employees covering a total of 549,750 ordinary shares, with grant-date fair values\nranging from $0.79 to $1.41 per share.\n\n \n\nEach RSU represents the right to receive\none ADS of the Company and fully vested upon grant. The Award payout shall be made to employees in a lump sum as soon as practicable but\nno later than two and a half months following each vesting date which coincides with the Grant Date.\n\n \n\nF-43\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**12.**\n**SHARE-BASED COMPENSATION** (cont.)\n\n \n\nThe following table summarized the\nCompany’s restricted share unit activities under the 2023 Plan:\n\n \n\n  \nNonvested\nordinary shares\nunderlying  \nWeighted\naverage fair\nvalue per ordinary share\nat the grant\ndates \n\nOutstanding as of December 31, 2023 \n \n-\n  \n$\n-\n \n\n　 \n    \n   \n\nGranted \n 231,667  \n$1.59 \n\nVested \n (231,667) \n$1.59 \n\nForfeited \n \n-\n  \n$\n-\n \n\n　 \n    \n   \n\nOutstanding as of December 31, 2024 \n \n-\n  \n$\n-\n \n\n \n\nThe following table summarized the Company’s\nrestricted share unit activities under the 2025 Plan:\n\n \n\n  \nNonvested\nordinary shares\nunderlying  \nWeighted\naverage fair\nvalue per ordinary share\nat the grant\ndates \n\nOutstanding as of December 31, 2024 \n \n-\n  \n$\n-\n \n\n　 \n    \n   \n\nGranted \n 549,750  \n$1.01 \n\nVested \n (549,750) \n$1.01 \n\nForfeited \n \n-\n  \n$\n-\n \n\n　 \n    \n   \n\nOutstanding as of December 31, 2025 \n \n-\n  \n$\n-\n \n\n  \n\nRSUs granted to employees are measured\nbased on the closing price of RSUs on the grant date and recognized as compensation cost on a straight-line basis over the requisite\nservice period. Total share-based compensation expenses recognized for these RSUs in 2024 and 2025 were $367,394 and $394,109. There\nwas nil unrecognized compensation expenses related to nonvested restricted share units as the RSUs were vested upon grant.\n\n \n\nF-44\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**12.**\n**SHARE-BASED COMPENSATION** (cont.)\n\n \n\n**Restricted Shares Units for non-employees**\n\n \n\nIn 2024 and 2025, the Company granted\nRSUs, representing in total 692,321and 4,403,640 ordinary shares, to four external consultants for services, with the weighted average\nestimated fair value on the grant date of each ordinary shares underlying of $2.47 and $1.05. Each RSU represents the right to receive\none ADS of the Group and fully vested upon grant.\n\n \n\nThe following table summarized the\nGroup’s restricted share unit activities:\n\n \n\n  \nNonvested\nordinary\nshares\nunderlying  \nWeighted\naverage fair\nvalue per\nordinary share\nat the grant\ndates \n\nOutstanding as of December 31, 2023 \n \n-\n  \n$\n-\n \n\n  \n    \n   \n\nGranted \n 692,321  \n$2.47 \n\nVested \n (692,321) \n$2.47 \n\nForfeited \n \n-\n  \n$\n-\n \n\n  \n    \n   \n\nOutstanding as of December 31, 2024 \n \n-\n  \n$\n-\n \n\n \n\n  \nNonvested\nordinary\nshares\nunderlying  \nWeighted\naverage fair\nvalue per\nordinary share\nat the grant\ndates \n\nOutstanding as of December 31, 2024 \n \n-\n  \n$\n-\n \n\n  \n    \n   \n\nGranted \n 4,403,640  \n$1.05 \n\nVested \n (4,403,640) \n$1.05 \n\nForfeited \n \n-\n  \n$\n-\n \n\n  \n    \n   \n\nOutstanding as of December 31, 2025 \n \n-\n  \n$\n-\n \n\n \n\nRSUs granted to non-employees are\nmeasured based on the closing price of ADS on the grant date and recognized as compensation cost on a straight-line basis over the requisite\nservice period. Total share-based compensation expenses recognized for these RSUs in 2024 and 2025 were $540,022 and $5,483,225.\n\n \n\nOn September 2, 2024, the Company executed\na consulting agreement with a third-party company, issuing 600,000 ordinary shares as compensation. However, the agreement was mutually\nterminated on October 7, 2024, due to the third party’s non-performance of its obligations. Consequently, the consultant refunded\nthe full cash equivalent of the shares, totaling $945,230, deducting related charge, to the Company. The above transactions were deemed\nto be issuance of ordinary shares of the Company, which were presented in the consolidated statements of changes in deficit.\n\n \n\nAs of December 31, 2024 and 2025,\nthere were nil unrecognized compensation expenses related to nonvested restricted share units as the RSUs were vested upon grant.\n\n \n\nF-45\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n \n\n**13.**\n**TAXATION**\n\n \n\n**Cayman Islands**\n\n** **\n\nThe Company is incorporated in the\nCayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to income or capital gains taxes. In addition,\ndividend payments are not subject to withholdings tax in the Cayman Islands.\n\n \n\n**Hong Kong**\n\n** **\n\nIn accordance with the relevant tax\nlaws and regulations of Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the\napplicable tax rate on taxable income. In March 2018, the Hong Kong Government introduced a two-tiered profit tax rate regime\nby enacting the Inland Revenue (Amendment) (No.3) Ordinance 2018 (the “Ordinance”). Under the two-tiered profits tax rate\nregime, the first HK dollar 2 million of assessable profits of qualifying corporations is taxed at 8.25% and the remaining assessable\nprofits at 16.5%. The Ordinance is effective from the year of assessment 2018-2019. According to the policy, if no election has been\nmade, the whole of the taxpaying entity’s assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable.\nBecause the preferential tax treatment is not elected by the Group, all the subsidiaries registered in Hong Kong are subject to income\ntax at a rate of 16.5%. Payments of dividends by the subsidiary to the Company are not subject to withholding tax in Hong Kong.\n\n \n\n**PRC**\n\n** **\n\nGenerally, the Group’s WFOE,\nVIE and subsidiaries of VIE, which are considered PRC resident enterprises under PRC tax law, are subject to enterprise income tax on\ntheir worldwide taxable income as determined under PRC tax laws and accounting standards at a rate of 25%.\n\n \n\nIn accordance with the implementation\nrules of EIT Laws, a qualified “High and New Technology Enterprise” (“HNTE”) is eligible for a preferential tax\nrate of 15%. The HNTE certificate is effective for a period of three years. An entity could re-apply for the HNTE certificate when\nthe prior certificate expires. The Company’s subsidiary, Shanghai Xiao-i, was approved as a HNTE and is eligible to enjoy a preferential\ntax rate of 15% beginning 2021 and renewing the HNTE every three years. In November 2023, Shanghai Xiao-i renewed the HNTE, which allows\nShanghai Xiao-I to enjoy a preferential tax rate of 15% from 2023 to 2026 to the extent it has taxable income under the EIT Law.\n\n \n\nGuizhou Xiao-I was qualified as an\neligible software enterprise before the income tax year-end final settlement in 2017. As a result of this qualification, it is entitled\nto a tax holiday of a full exemption for the years ended December 31, 2017 and 2018, in which its taxable income is greater\nthan zero, followed by a three-year 50% exemption. In 2022, the tax holiday has expired and Guizhou Xiao-I renewed qualification of HNTE,\nwhich allows Guizhou Xiao-i to enjoy a preferential tax rate of 15% from 2022 to 2024.\n\n \n\nIn general, the PRC tax authority has\nup to five years to conduct examinations of the Company’s tax filings. Accordingly, the PRC subsidiaries’ and the VIE\nand subsidiaries of the VIE’s tax years 2019 through 2024 remain open to examination by the taxing jurisdictions. According\nto PRC tax regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the year\nsubsequent to the year in which the loss was incurred, and that of high-tech enterprises is no more than 10 years. Carryback of losses\nis not permitted.\n\n \n\nF-46\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**13.**\n**TAXATION** (cont.)\n\n \n\nThe income tax provision consists of\nthe following components:\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nCurrent income tax expenses \n$\n-\n  \n$\n-\n  \n$\n-\n \n\nDeferred income tax expenses \n 3,787,692  \n \n-\n  \n \n-\n \n\nTotal income tax expenses \n$3,787,692  \n$\n-\n  \n$\n-\n \n\n  \n\nA reconciliation between the Group’s\nactual provision for income taxes and the provision at the PRC, mainland statutory rate is as follows:\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nLoss before income tax \n$(23,218,076) \n$(14,551,328) \n$(101,826,416)\n\nLoss tax expense at statutory tax rate \n (5,804,519) \n (3,637,833) \n (25,456,604)\n\nAdditional deduction for R&D expenses \n (11,671,270) \n (7,426,068) \n \n-\n \n\nInvestment loss/(income) \n (18,886) \n 20,405  \n \n-\n \n\nNon-deductible expenses \n 222,400  \n 111,079  \n 296,956 \n\nTax effect of tax rate in a different jurisdiction \n 139,523  \n 2,175,361  \n 2,741,669 \n\nEffect of preferential tax rates \n 7,904,562  \n (2,388,224) \n 2,024,318 \n\nDeferred tax effect of tax rate change \n \n-\n  \n (715,120) \n \n-\n \n\nChange in valuation allowance \n 15,011,112  \n (4,148,501) \n 4,378,640 \n\nWrite-off of net operating loss (“NOL”) \n 78,655  \n 123,034  \n \n-\n \n\nPrior year true-up of NOL \n (2,073,885) \n 15,885,867  \n 16,014,986 \n\nIncome tax expense \n$3,787,692  \n$\n-\n  \n$\n-\n \n\n \n\nThe significant components of the net\ndeferred tax assets are summarized below:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nDeferred tax assets: \n   \n  \n\nTax losses \n$10,574,640  \n$5,298,347 \n\nAllowance for credit losses \n 1,866,187  \n 2,730,841 \n\nAccrued expenses \n 854,045  \n 1,462,159 \n\nWritten-down of inventories \n 312,247  \n 333,689 \n\nNon-deductible education expense \n 713  \n 745 \n\nAdvertising costs \n 200  \n 209 \n\nLease liabilities \n 189,650  \n 9,011 \n\nAmortization of intangible assets \n 994,517  \n 903,091 \n\nValuation allowance \n (14,590,077) \n (10,728,558)\n\nTotal deferred tax assets \n$202,122  \n$9,534 \n\nDeferred tax liabilities: \n    \n   \n\nRight-of-use assets \n (202,122) \n (9,534)\n\nDeferred tax assets, net \n$\n-\n  \n$\n-\n \n\n** **\n\nAs of December 31, 2024 and 2025, the Group had net operating loss\ncarryforwards of approximately $64,006,738 and $ 108,099,845 , respectively. The Group has recognized an addition to the valuation allowance\nof $15,013,296, $984,663 and $4,259,475 for the years ended December 31, 2023, 2024 and 2025, respectively.\n\n \n\nF-47\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**13.**\n**TAXATION** (cont.)\n\n \n\nChanges in valuation allowance are\nas follows:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nBalance at the beginning of the year \n$18,479,549  \n$14,590,077 \n\nCurrent year addition \n 984,663  \n (4,259,475)\n\nCurrent year reduction \n (5,133,164) \n 4,063,486 \n\nDeferred tax effect of tax rate change \n 715,119  \n - \n\nExchange rate effect \n (456,090) \n (3,665,530)\n\nBalance at the end of the year \n$14,590,077  \n$10,728,558 \n\n \n\nAs of December 31, 2025, net operating\nloss carryforwards from PRC will expire, if unused, in the following amounts:\n\n \n\n2026 \n$528,877 \n\n2027 \n 327,944 \n\n2028 \n 734,400 \n\n2029 \n 19,467,792 \n\n2030 \n 5,272,131 \n\nThereafter \n 81,768,701 \n\nTotal \n$108,099,845 \n\n \n\n**14.**\n**LEASES**\n\n \n\nEffective on January 1, 2020,\nthe Company adopted Topic 842. At the inception of a contract, the Group determines if the arrangement is, or contains, a lease.\nROU assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent its obligation\nto make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on\nthe present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term.\n\n \n\nSupplemental balance sheet information\nrelated to operating lease was as follows:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nRight-of-use Assets \n$833,030  \n$61,981 \n\n  \n    \n   \n\nLease payment liabilities-current \n (483,658) \n (40,098)\n\nLease payment liabilities- non-current \n (295,962) \n (18,390)\n\nTotal \n$(779,620) \n$(58,488)\n\n \n\nThe weighted-average discount rate\nfor the operating lease was 5.00%, 5.00% and 5.00% as of December 31, 2023, 2024 and 2025. The amortization expenses of right-of-use\nassets were $615,968, $604,341 and $148,839 for the years ended December 31, 2023, 2024 and 2025.\n\n \n\nF-48\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**14.**\n**LEASES** (cont.)\n\n \n\nFor the years ended December 31,\n2023, 2024 and 2025, the lease expense was as follows:\n\n \n\n  \nFor the years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nOperating leases cost excluding short-term rental expense \n$698,455  \n$666,488  \n$164,217 \n\nShort-term lease cost \n 22,504  \n 3,780  \n 17,043 \n\nTotal \n$720,959  \n$670,268  \n$181,261 \n\n \n\nThe following is a schedule of future\nminimum payments under our operating leases:\n\n \n\nFor the year ended December 31, \nOperating Leases \n\n2026 \n 40,347 \n\n2027 \n 19,047 \n\nTotal lease payments \n 59,394 \n\nLess: imputed interest \n (906)\n\nTotal \n$58,488 \n\n \n\n**15.**\n**RESTRICTED NET ASSETS**\n\n \n\nA significant portion of the Group’s\noperations are conducted through its PRC (excluding Hong Kong) VIE, the Group’s ability to pay dividends is primarily dependent\non receiving distributions of funds from its VIE and VIE’s subsidiaries. Relevant PRC statutory laws and regulations permit payments\nof dividends by its VIE and VIE’s subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC\naccounting standards and regulations, and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital\nof the VIE and VIE’s subsidiaries included in the Group’s consolidated net assets are also non-distributable for dividend\npurposes.\n\n \n\nIn accordance with the PRC regulations\non Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general\nreserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the\nenterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve\nuntil such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to\nthe enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves\ncan only be used for specific purposes and are not distributable as cash dividends. WFOE is subject to the above mandated restrictions\non distributable profits.\n\n \n\nAdditionally, in accordance with the\nCompany Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax\nprofit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic\nenterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned\nreserves can only be used for specific purposes and are not distributable as cash dividends. All of the Group’s PRC consolidated\nVIE and VIE’s subsidiaries are subject to the above mandated restrictions on distributable profits.\n\n \n\nAs a result of these PRC laws and regulations,\nthe Group’s VIE and VIE’s subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company.\nAs of December 31, 2024 and 2025, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of\nthe Group’s VIE and VIE’s subsidiaries, that are included in the Group’s consolidated net assets were approximately\n$72,416,973 and $72,416,973, respectively.\n\n \n\nF-49\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**16.**\n**RELATED PARTY TRANSACTIONS**\n\n \n\n**Related parties**\n\n** **\n\nThe following is a list of related\nparties which the Group has transactions with:\n\n \n\n**No.**   **Name of Related Parties**   **Relationship**\n\n1   Zhejiang Baiqianyin Network Technology Co., Ltd (“Zhejiang Baiqianyin”)   An entity which has a common director of the Board of Directors with the Group\n\n         \n\n2   Shanghai Shenghan   An entity which the Group holds 16.56% equity interests\n\n         \n\n3   Shanghai Aoshu Enterprise Management Partnership (Limited Partnership) (“Shanghai Aoshu”)   An entity which is the Group’s employee stock ownership platform, and has a common director of the Board of Directors with the Group\n\n         \n\n4   Jiaxing Sound Core Intelligent Technology Co., Ltd   An entity which Shanghai Shenghan holds 20% equity interests\n\n         \n\n5   Hui Yuan   Chairman of the board, one of the major shareholders holding 10.24% (excluded the preferred shares) equity interests of the Company\n\n         \n\n6   Jiaxing Chiyu Investment Partnership (limited Partnership)   A predecessor shareholder which holds 5.44% equity interests of the Company\n\n         \n\n7   Zhizhen Guorui   An entity which the Group holds 26% equity interests\n\n         \n\n8   Shanghai Machinemind Intelligent Technology Co., Ltd.   An entity which the Group holds 18% equity interests\n\n \n\n**Amounts due from related parties**\n\n \n\nAmounts due from related parties consisted\nof the following for the periods indicated:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nDue from related parties-current \n   \n  \n\nOther receivables \n   \n  \n\nZhizhen Guorui (a) \n$13,587,536  \n$14,092,369 \n\nShanghai Aoshu (b) \n 19,255  \n 20,098 \n\nAllowance for credit losses \n (19,255) \n (14,091,111)\n\nTotal \n 13,587,536  \n 21,356 \n\n \n\n(a). The balance consisted of:\n\n \n\n  (i) On March 31, 2023, the Group entered into agreement to provide a loan to Zhizhen Guorui, an equity investment of the Group, with a maximum amount of $14,084,705 (RMB100.0 million) and interest-free. As of December 31, 2024, the actual loan provided by the Group to Zhizhen Guorui amounted to $13,480,745 (RMB98.4 million).  The Group anticipates that it will be able to repay the loan within one year. For the years ended December 31, 2025, the Group made full provision of receivables based on the management’s estimation of the collectability of the receivable;\n\n     \n\n  (ii) As of December 31, 2024 and 2025, the prepayment of $106,791 and $21,356 to Zhizhen Guorui for the purchase of technology development service.\n\n \n\nF-50\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**16.**\n**RELATED PARTY TRANSACTIONS**(cont.)\n\n  \n\n(b).Other\nreceivable from Shanghai Aoshu was the payment to an employee on behalf of Shanghai Aoshu. For the years ended December 31, 2023, 2024\nand 2025, the Group made full provision of receivables from Shanghai Aoshu based on the management’s estimation of the collectability\nof the receivable from Shanghai Aoshu;\n\n \n\n**Amounts due to related parties**\n\n \n\nAmount due to related parties consisted\nof the following for the periods indicated:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nDue to related parties-current \n   \n  \n\nAccounts payable \n   \n  \n\nShanghai Shenghan \n$67,068  \n$70,004 \n\n  \n    \n   \n\nHui Yuan \n 150,000  \n \n \n \n\nSubtotal-due to related parties-current \n 217,068  \n 70,004 \n\n  \n    \n   \n\nDue to related parties-non current \n    \n   \n\nHui Yuan(c) \n$7,336,833  \n$7,602,043 \n\nSubtotal-due to related parties-non current \n 7,336,833  \n 7,602,043 \n\nTotal \n$7,553,901  \n$7,672,047 \n\n \n\n(c)Hui\nYuan provided several interest-free loans to the Group for its daily operation needs before 2022. In 2023, the Group entered into agreement\nwith Hui Yuan to establish an annual interest rate for the outstanding loans. The interest shall be calculated at an annual rate of 6.8%\nbased on the actual number of days used from January 1, 2023. The maturity of the loans from Hui Yuan will be extended based on mutual\nconsent. As of December 31, 2024 and 2025, the corresponding balance due to Hui Yuan was $7,336,833 and $7,602,043, respectively.\n\n  \n\nF-51\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**16.**\n**RELATED PARTY TRANSACTIONS**(cont.)\n\n \n\n**Significant transactions with related parties**\n\n** **\n\n  \nFor the years ended December 31, \n\nNature \n2023  \n2024  \n2025 \n\nTechnology service fee payable \n    \n    \n   \n\nZhizhen Guorui \n$661,010  \n$699,404  \n$180,173 \n\nShanghai Shenghan \n \n-\n  \n 7,991  \n 3,409 \n\n  \n    \n    \n   \n\nTechnology service fee paid \n    \n    \n   \n\nZhizhen Guorui \n$684,412  \n$878,512  \n$92,499 \n\nShanghai Shenghan \n 112,980  \n 21,888  \n 3,409 \n\n  \n    \n    \n   \n\nLoans from a related party \n    \n    \n   \n\nHui Yuan \n$400,000  \n$\n-\n  \n$- \n\n  \n    \n    \n   \n\nRepayment of loans from a related party \n    \n    \n   \n\nHui Yuan \n$\n-\n  \n$812,747  \n$474,786 \n\n  \n    \n    \n   \n\nInterest-free loans from related parties \n    \n    \n   \n\nZhejiang Baiqianyin \n$290,076  \n$\n-\n  \n$\n\n \n\nHui Yuan \n \n-\n  \n 150,000  \n - \n\n  \n    \n    \n   \n\nInterest-free loans repayment to related parties \n    \n    \n   \n\nJiaxing Chiyu Investment Partnership (limited Partnership) \n$\n-\n  \n$416,916  \n$\n-\n \n\nHui Yuan \n 1,355,760  \n \n-\n  \n 150,000 \n\nJiaxing Sound Core Intelligent Technology Co., LTD \n 31,776  \n \n-\n  \n \n-\n \n\nZhejiang Baiqianyin \n 141  \n \n-\n  \n \n-\n \n\n  \n    \n    \n   \n\nInterest-free loans to a related party \n    \n    \n   \n\nZhizhen Guorui \n$13,896,539  \n$\n-\n  \n$\n-\n \n\n **  **\n\nF-52\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**17.**\n**CONCENTRATION OF CREDIT RISK**\n\n \n\nFinancial instruments that potentially\nexpose the Group to concentrations of credit risk consist primarily of accounts receivable. The Group conducts credit evaluations of its\ncustomers and generally does not require collateral or other security from them. The Group evaluates its collection experience and long\noutstanding balances to determine the need for an allowance for credit losses. The Group conducts periodic reviews of the financial condition\nand payment practices of its customers to minimize collection risk on accounts receivable.\n\n \n\nThe following table sets forth a summary\nof single customers who represent 10% or more of the Group’s total revenue.\n\n \n\n  \nFor the Years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\n** **\nAmount  \n%  \nAmount  \n%  \nAmount  \n%** **\n\n**Percentage of the Group’s total revenue** \n   \n   \n   \n   \n   \n  \n\nCustomer A \n 17,311,971  \n 29.3% \n 15,724,792  \n 22.4% \n 3,932,948  \n 31.9%\n\nCustomer B \n \n-\n  \n \n-\n% \n *  \n \n*\n  \n 1,820,032  \n 14.8%\n\nCustomer C \n 6,297,152  \n 10.6% \n *  \n \n*\n% \n 1,456,341  \n 11.8%\n\nCustomer D \n 7,354,358  \n 12.4  \n *  \n \n*\n% \n \n-\n  \n \n-\n \n\n \n\n* represent percentage less than 10%\n\n \n\nThe following table sets forth a summary\nof single customers who represent 10% or more of the Group’s total accounts receivable:\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\n \nAmount  \n%  \nAmount  \n% \n\nPercentage of the Group’s accounts receivable, net \n   \n   \n   \n  \n\nCustomer A \n 17,781,671  \n 32.0% \n 22,883,269  \n 90.8%\n\nCustomer B \n 6,105,155  \n 11.0% \n \n-\n  \n \n-\n \n\nCustomer C \n 8,842,813  \n 15.9% \n \n-\n  \n \n-\n \n\n \n\n*represent\npercentage less than 10%\n\n \n\nThe following table sets forth a summary\nof single suppliers who represent 10% or more of the Group’s total purchases:\n\n \n\n  \nFor the Years ended December 31, \n\n  \n2023  \n2024  \n2025 \n\n \nAmount  \n%  \nAmount  \n%  \nAmount  \n% \n\nPercentage of the Group’s total purchase \n   \n   \n   \n   \n   \n  \n\nSupplier A \n 23,547,294  \n 37.6% \n 14,630,821  \n 24.4% \n 8,399,124  \n 21.5%\n\nSupplier B \n 12,974,197  \n 20.7% \n *  \n \n*\n% \n 7,215,198  \n 18.5%\n\nSupplier C \n 9,303,874  \n 14.9  \n *  \n \n*\n% \n 6,266,499  \n 16.1%\n\nSupplier D \n 7,999,350  \n 12.8  \n *  \n \n*\n% \n 5,044,067  \n 12.9%\n\nSupplier E \n \n-\n  \n \n-\n% \n \n-\n  \n \n-\n  \n 4,613,168  \n 11.8%\n\n \n\n*represent\npercentage less than 10%\n\n \n\nF-53\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**18.**\n**COMMITMENTS AND CONTINGENCIES**\n\n** **\n\n**Lease Commitments**\n\n** **\n\nThe Group leases offices for operation\nunder operating leases. Future minimum lease payments under non-cancellable operating leases with initial terms in excess of one year\nwas included in Note 14.\n\n \n\n**Contingencies**\n\n** **\n\nIn the ordinary course of business,\nthe Group may be subject to legal proceedings regarding contractual and employment relationships and a variety of other matters. The Group\nrecords contingent liabilities resulting from such claims, when a loss is assessed to be probable and the amount of the loss is reasonably\nestimable.\n\n \n\n*Patent Infringement Litigation in\nthe PRC*\n\n \n\nOn August 3, 2020, Shanghai Xiao-i\nfiled a lawsuit with the High People’s Court of Shanghai in China, against Apple Computer Trading (Shanghai) Co., Ltd., Apple,\nInc., and Apple Computer Trading (Shanghai) Co., Ltd. (together, “Apple”), demanding that Apple cease its infringement of\nShanghai Xiao-i’s intelligent assistant patent (ZL200410053749.9 invention patent) by its Siri (intelligent assistant) (the “Patent\nInfringement Case”). The lawsuit seeks various remedies, including but not limited to, requiring Apple to stop manufacturing, using,\noffering to sell, selling or importing products that infringe Shanghai Xiao-i’s patent, and a temporary claim amount of 10 billion\nyuan (RMB). On August 27, 2020, the High People’s Court of Shanghai formally accepted the Patent Infringement Case filed by Shanghai\nXiao-i against Apple. On September 4, 2021, Shanghai Xiao-i filed a behavior preservation application (injunction) with the Shanghai\nHigh People’s Court, demanding Apple to immediately stop the patent infringement involving Siri, including but not limited to stopping\nthe production, selling, offering to sell, importing or using of iPhone products that infringe Shanghai Xiao-i’s patent. On February\n3, 2023, Apple filed a lawsuit against Shanghai Xiao-i with the Shanghai High People’s Court, requesting confirmation that the\niPhone SE, iPhone 12, and iPhone 13 series products equipped with Siri (the “products in question”) do not infringe on the\npatent rights of ZL200410053749.9 invention patent, and ordered Shanghai Xiao-i to compensate the plaintiff for reasonable expenses,\nincluding lawyer fees, notarization fees, etc., totaling RMB 2 million temporarily. On January 29, 2024, the Shanghai High Court decided\nto merge the above two cases for trial, and they are currently under review. On March 27, 2023, the Beijing Intellectual Property Court\nnotified that Apple Computer Trading (Shanghai) Co., Ltd. had filed a patent administrative lawsuit against the defendant China National\nIntellectual Property Administration and the third person, Shanghai Xiao-i, regarding the 58271 and 58272 Review Decision of Request\nfor Invalidation, and the lawsuit was dismissed on June 28, 2024. As of the date of this interim report, the Patent Infringement Case\nis still pending.\n\n \n\n *Securities Class Action Litigation*\n\n \n\nOn June 26, 2024, a securities class\naction was filed in the Supreme Court of the State of New York, County of New York, against Xiao-I Corporation and certain of its officers\nand directors. Plaintiffs alleged violations of the Securities Act of 1933, asserting that the company’s IPO registration statement\nand prospectus contained materially misleading statements or omissions related to its AI capabilities and customer contracts. The action\nseeks unspecified damages and other relief. On September 13, 2024, plaintiffs filed an amended complaint expanding the allegations to\ninclude new information from Xiao-I’s subsequent SEC filings, arguing that post-IPO disclosures also failed to correct earlier\nmisstatements. Xiao-I Corporation moved to dismiss the state court case on October 31, 2024, that motion was granted on April 24, 2025.\nAt this time, the Company cannot reasonably estimate the maximum potential exposure or the range of possible loss for this matter.\n\n \n\nSeparately, on October 15, 2024, a\nsecond securities class action lawsuit was filed in the U.S. District Court for the Southern District of New York alleging violations\nof both the Securities Act and the Securities Exchange Act of 1934. The complaint focuses on similar alleged misrepresentations in the\nIPO filings and alleges the company failed to disclose material risks about its technology and commercialization prospects. Xiao-I disclosed\nthat it intends to vigorously contest both lawsuits. Xiao-I Corporation submitted pre-motion to dismiss letters on May 7, 2025, and motions\nto dismiss are due on June 9, 2025. The plaintiff filed the second amended class action complaint to the court on June 30,2025. Xiao-I\nCorporation filed the motion to dismiss to the Plaintiff’s second amended complaint on September 2, 2025.The Company believes the\nclaims are without merit and intends to vigorously defend the action. At this time, the Company cannot reasonably estimate the maximum\npotential exposure or the range of possible loss for this matter.\n\n \n\nF-54\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**18.**\n**COMMITMENTS AND CONTINGENCIES**(cont.)\n\n \n\n*PRC Financial and Commercial Litigation*\n\n \n\nIn November 2024, Baiyun District People’s\nCourt of Guiyang accepted a contract dispute filed by Guiyang Comprehensive Bonded Zone Intelligent Link Technology Co., Ltd. against\nShanghai Xiaoi, seeking payment of outstanding rental fees and overdue payment interest totaling RMB5,403,917.65 ($754,358). The case\nis currently pending second-instance proceedings, and no final judgment has been rendered.\n\n \n\nIn May 2025, the Huangpu District People’s\nCourt of Shanghai accepted a financial contract dispute filed by China Construction Bank Corporation Shanghai Branch against Shanghai\nXiao-i, seeking repayment of loan principal and penalty interest totaling RMB25,036,162.25 ($3,494,913). The court has issued a final\njudgment ordering the defendant to pay the claimed amount.\n\n \n\nIn July 2025, the Qingpu District People’s\nCourt of Shanghai accepted a private lending dispute filed by Quan Feng against Shanghai Xiao-i, seeking repayment of principal, interest,\nand legal fees totaling RMB15,116,000 ($2,110,112). The case was resolved through mediation under an installment repayment plan.\n\n \n\nIn June 2025, the Huangpu District\nPeople’s Court of Shanghai accepted a private lending dispute filed by Shanghai Tianyong Asset Management Co., Ltd. against Shanghai\nXiao-i, seeking payment of principal and attorney fees totaling RMB13,060,000 ($1,823,106), plus interest. In August 2025, following a\njurisdictional objection by the defendant, the case was transferred to the Jiading District People’s Court of Shanghai. The case\nhas not yet been heard.\n\n \n\nIn July 2025, the Jiading District\nPeople’s Court of Shanghai accepted a financial contract dispute filed by Jiangsu Bank Co., Ltd. Shanghai Jiading Branch against\nShanghai Xiao-i, seeking repayment of outstanding loan principal, penalty interest, compound interest, attorney fees, and litigation costs\ntotaling RMB20,139,027.78 ($2,811,300). The second-instance trial rendered a final judgment on April 28, 2025, dismissing the appeal and\nupholding the original judgment.\n\n \n\nIn October 2025, the People’s\nCourt of Pudong New Area, Shanghai accepted a financial contract dispute filed by Bank of Ningbo Limited Shanghai Branch against Shanghai\nXiao-i, seeking repayment of outstanding loan principal, penalty interest, and compound interest totaling RMB20,151,522.30 ($2,813,044).\nThe case has been heard, but no judgment has been rendered.\n\n \n\nIn October 2025, the Jiading District\nPeople’s Court of Shanghai accepted a financial contract dispute filed by Shanghai Rural Commercial Bank Co., Ltd. Jiading Branch\nagainst Shanghai Xiaoi, seeking repayment of principal and overdue interest totaling RMB10,023,435.07 ($1,399,218). The plaintiff has\nsince withdrawn the lawsuit.\n\n \n\nIn April 2025, Minhang District People’s\nCourt of Shanghai accepted a real estate lease contract dispute filed by Shanghai Caohejing Development Zone High-Tech Park Development\nCo., Ltd. against Shanghai Xiaoi, seeking payment of amounts totaling RMB4,748,644.08 ($662,885) after offsetting the security deposit,\nexcluding interest and post-termination occupation and use fees. The court has issued a final judgment ordering the defendant to pay the\nclaimed amount.\n\n \n\nIn July 2025, the Tianjin Free Trade\nZone People’s Court accepted a service contract dispute filed by Lion Public Relations Consultants (Tianjin) Co., Ltd. against Shanghai\nXiaoi, seeking payment of service fees and overdue payment interest totaling RMB602,088.36 ($84,048). The case is currently pending, and\nno final judgment has been rendered.\n\n \n\nIn August 2025, the Jing’an District\nPeople’s Court of Shanghai accepted a financial loan contract dispute filed by Bank of Nanjing Co., Ltd., Shanghai Branch against\nShanghai Xiaoi, seeking repayment of outstanding loan principal and related interest totaling approximately RMB9,907,358.11 ($1,383,014).\nThe case was heard on November 6, 2025, and no final judgment has been rendered.\n\n \n\nDuring 2025, in addition to the aforementioned\nlitigation, Xiao-I was involved in 14 other lawsuits within China, primarily arising from contractual disputes in business operations.\nAmong these, Xiao-I served as the plaintiff in 4 cases, with a total involved amount of approximately RMB 2,837,875($396,152.07). Xiao-I\nwas the defendant in 10 cases, with a total amount in dispute of approximately RMB 5,176,315.09($722,585.72).\n\n \n\nF-55\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**18.**\n**COMMITMENTS AND CONTINGENCIES**(cont.)\n\n \n\n*Shareholder Litigation*\n\n \n\nIn June 2025, the People’s Court\nof Pudong New Area, Shanghai accepted a shareholder rights infringement case filed by Shanghai Jixuan Enterprise Management Consulting\nPartnership (Limited Partnership) against Xiao-I Corporation and Yuan Hui. The plaintiff alleged that the defendants’ failure to promptly\nassist shareholders in converting Cayman Islands common shares into American Depositary Shares (ADS) for secondary market trading resulted\nin diminished stock value and financial losses. The plaintiff sought a court order requiring the defendants to: ) the release of lock-up\nrestrictions on 183,660 American Depositary Shares and conversion of the related ADRs, and (ii) compensation of RMB2,265,315.41. The defendants\nfiled a jurisdictional objection in August 2025, and the court has not yet issued a ruling. The case has not been heard.\n\n \n\nIn September 2025, the People’s\nCourt of Pudong New Area, Shanghai accepted a shareholder rights infringement case filed by Shanghai Jiding Enterprise Management Consulting\nPartnership (Limited Partnership) against Xiao-I Corporation and Yuan Hui. The plaintiff alleged that the defendants’ failure to promptly\nassist shareholders in converting Cayman Islands common shares into American Depositary Shares (ADS) for secondary market trading resulted\nin diminished stock value and financial losses. The plaintiff seeks, among other relief, (i) the release of lock-up restrictions on 980,661\nAmerican Depositary Shares and conversion of the related ADRs, and (ii) compensation of RMB12,108,027.86 ($1,690,216).  The defendants\nfiled a jurisdictional objection in October 2025, and the court has not yet issued a ruling. The case has not been heard.\n\n \n\n*Labor Disputes*\n\n \n\nDuring 2024, Xiao-I is involved in\nlabor disputes in China involving more than 40 former employees who were laid off as part of a workforce optimization initiative. The\ndisputes primarily relate to claims for unpaid wages, social insurance contributions, housing fund payments, and severance compensation.\nThe total amount of claims asserted exceeds RMB 5 million. During 2025, the Company was involved in multiple labor disputes in China involving\nmore than 109 former employees laid off pursuant to a workforce optimization plan. These disputes primarily relate to alleged unpaid wages,\nsocial insurance contributions, housing provident fund payments, and severance compensation, with total claims exceeding RMB 18 million.\nAs of the date of this interim report, more than 35 cases remain pending before local labor arbitration authorities, and the remaining\ncases have been concluded. For cases that have been concluded, the company is actively making repayments while negotiating with employees\nto establish payment plans with extended deadlines. The Company is actively engaging with relevant agencies to seek resolution. While\nmanagement does not currently expect the outcome to have a material adverse effect on its unaudited condensed consolidated financial statements,\nthe disputes could adversely affect employee morale, operational efficiency, or public perception.\n\n  \n\nIn the opinion of management, except\nfor the litigations mentioned above, there were no other pending or threatened claims and litigation as of December 31, 2025 and through\nthe issuance date of these unaudited condensed consolidated financial statements.\n\n \n\n**19.****SUBSEQUENT\nEVENTS**\n\n \n\nOn April 20, 2026, the Board of Directors\nof the Company approved by unanimous written resolutions to change the ratio of American Depositary Shares (ADS) to ordinary shares from one\n(1) ADS representing one-third of one ordinary share to 1 ADS representing 60 ordinary shares. No fractional new ADSs will be\nissued in connection with the ratio change. Instead, fractional entitlements will be aggregated and sold by the depositary bank, and the\nnet cash proceeds will be distributed to the applicable ADS holders. \n\n \n\nThe Group has evaluated subsequent\nevents through May 15, 2026, the date of issuance of the consolidated financial statements, and noted that there are no other subsequent\nevents.\n\n \n\nF-56\n\n \n\n \n\n**XIAO-I CORPORATION**\n\n**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**20.**\n**CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY**\n\n \n\nThe Group performed a test on the restricted\nnet assets of consolidated subsidiary in accordance with Securities and Exchange Commission Regulation S-X Rule 4-08 (e) (3), “General\nNotes to Financial Statements” and concluded that it was applicable for the Group to disclose the financial statements for the parent\nCompany.\n\n \n\n**PARENT COMPANY BALANCE SHEETS**\n\n \n\n  \nAs of December 31, \n\n  \n2024  \n2025 \n\nASSETS \n   \n  \n\nCash and cash equivalents \n$2,442  \n$4,140 \n\nPrepaid expenses and other current assets, net \n 49,049  \n 709,976 \n\nAmount due from intercompany-current \n 32,055,968  \n 39,456,083 \n\nTOTAL ASSETS \n$32,107,459  \n$40,170,199 \n\n  \n    \n   \n\nLIABILITIES \n    \n   \n\nAccounts payable \n$38,412  \n$ \n\nConvertible loans \n 216,756  \n 2,006,118 \n\nAccrued expenses and other current liabilities \n 335,563  \n 331,885 \n\nInvestment deficit in subsidiaries \n 43,544,549  \n 137,728,637 \n\nAmount due to intercompany-current \n 174,593  \n 658,318 \n\nTOTAL LIABILITIES \n$44,309,873  \n$140,724,958 \n\n  \n    \n   \n\nShareholders’ deficit \n    \n   \n\nOrdinary shares (par value of $0.00005 per share; 1,000,000,000 shares and 1,000,000,000 shares authorized as of December 31, 2024 and 2025, respectively; 31,949,038 shares and 55,235,284 shares issued and outstanding as of December 31, 2024 and 2025, respectively) \n$1,598  \n$2,762 \n\nPreferred shares (par value of $0.00005 per share; 3,700,000 and 3,700,000 preferred shares authorized as of December 31, 2024 and 2025, respectively; 3,700,000 and 3,700,000 preferred shares issued and outstanding as of December 31, 2024 and 2025, respectively) \n 185  \n 185 \n\nAdditional paid-in capital \n 115,745,140  \n 130,134,778 \n\nStatutory reserve \n 237,486  \n 237,486 \n\nAccumulated deficit \n (125,338,509) \n (226,559,555)\n\nAccumulated other comprehensive loss \n (2,848,314) \n (4,370,415)\n\nTotal shareholders’ deficit \n$(12,202,414) \n$(100,554,759)\n\n** **\n\n**PARENT COMPANY STATEMENTS OF\nOPERATIONS AND COMPREHENSIVE LOSS**\n\n \n\n  \nYears ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nOperating expenses: \n   \n   \n  \n\nSelling expenses \n$(811,129) \n$(146,929) \n$(461)\n\nGeneral and administrative expenses \n (1,496,239) \n (8,231,966) \n (8,032,086)\n\nResearch and development expenses \n \n-\n  \n (2,213) \n (105)\n\nOther income \n 161,408  \n 100,983  \n (526,409)\n\nShare of loss in subsidiaries and VIEs \n (24,315,847) \n (6,225,339) \n (92,661,985)\n\nLoss before income tax provision \n (26,461,807) \n (14,505,464) \n (101,221,046)\n\nProvision for income tax \n \n-\n  \n \n-\n  \n \n-\n \n\nNet loss \n$(26,461,807) \n$(14,505,464) \n$(101,221,046)\n\n** **\n\n**PARENT COMPANY STATEMENTS OF\nCASH FLOW**\n\n \n\n  \nYears ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nNet cash used in operating activities \n$(21,749,842) \n$(5,476,392) \n$(9,883,802)\n\nNet cash used in investing activities \n (13,000,000) \n \n-\n  \n \n-\n \n\nNet cash provided by financing activities \n 34,750,627  \n 5,476,945  \n 9,885,500 \n\nNet cash inflow \n$785  \n$553  \n$1,698 \n\n \n\nF-57\n\n \n\n \n\nhttp://fasb.org/us-gaap/2025#LeaseholdImprovementsMember\n588082\n\nLoan from third parties mainly consisted of:\nUnsecured borrowings from third parties for ordinary business operation. For the borrowings, the interest rates range from 3.0% to 15.4% per annum and from 3.8% to 15.4% per annum for the years ended December 31, 2024 and 2025, respectively. The interest expenses were $633,942, $258,646 and $453,004 for the years ended December 31, 2023, 2024 and 2025. The borrowings are payable on demand.\n\nAmong them, five of the borrowings were sourced from five individuals or companies, who have no relationship with the Group. As of the date of this annual report, these borrowings remain overdue. The Group is actively engaging in negotiations with the aforesaid borrowers to secure an extension agreement. The loan are subject to litigation. See Note 18 for details.\n\n692391\n\nThe balance consisted of:\n\n(i) On March 31, 2023, the Group entered into agreement to provide a loan to Zhizhen Guorui, an equity investment of the Group, with a maximum amount of $14,084,705 (RMB100.0 million) and interest-free. As of December 31, 2024, the actual loan provided by the Group to Zhizhen Guorui amounted to $13,480,745 (RMB98.4 million). The Group anticipates that it will be able to repay the loan within one year. For the years ended December 31, 2025, the Group made full provision of receivables based on the management’s estimation of the collectability of the receivable;\n\n(ii) As of December 31, 2024 and 2025, the prepayment of $106,791 and $21,356 to Zhizhen Guorui for the purchase of technology development 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