{"url_path":"/sec/aixi/10-k/2026/item-3","section_key":"item-3","section_title":"Item 3 Key Information.","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":41605,"has_tables":true,"body_markdown":"Item 3. Key Information.\n\n \n\n**A. [Reserved]**\n\n \n\n**B. Capitalization and Indebtedness.**\n\n \n\nNot applicable.\n\n \n\n**C. Reasons for the Offer and Use of Proceeds.**\n\n \n\nNot applicable.\n\n \n\nD. Risk Factors.\n\n \n\n**SUMMARY OF RISK FACTORS**\n\n \n\n*An\ninvestment in our ADSs is subject to a number of risks, including but not limited to**risks relating to doing business in\nChina, risks relating to doing business in Hong Kong, risks relating to our corporate structure, risks relating to our business and industry,\nand risks relating to the ADSs. Investors should carefully consider all of the\ninformation in this annual report before making an investment in the ADSs. The following list summarizes some, but not all, of these risks.\nPlease read the information in the section below entitled “Risk Factors” for a more thorough description of these and other\nrisks.*\n\n \n\n**Risks Relating to Our Business and Industry**\n\n \n\n●Recent U.S. Treasury rules\non investment in Chinese AI and technology sectors may adversely impact our financial condition and results of our operations.\n\n \n\n●We have had net losses (except\nfor 2021) and negative cash flows from operating activities in the past, and we may not achieve or sustain profitability.\n\n \n\n●If we fail to maintain and\ngrow our customer base, keep our customers engaged through our products and solutions, our business growth may not be sustainable.\n\n \n\n●If we fail to maintain and\nenhance the functions, performance, reliability, design, security, and scalability of our platforms to meet our customers’ evolving\nneeds, we may lose our customers.\n\n \n\n●If our products and solutions\ndo not achieve sufficient market acceptance, our business and competitive position will suffer.\n\n \n\n●If our expansion into new industries\nis not successful, our business, prospects and growth momentum may be materially and adversely affected.\n\n \n\n1\n\n \n\n \n\n●The market in which we participate\nis competitive, and if we do not compete effectively, our business, operating results and financial condition could be harmed.\n\n \n\n●If we fail to adapt and respond\neffectively to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements\nor preferences, our business may be materially and adversely affected.\n\n \n\n●To support our business growth,\nwe continue to invest heavily in our research and development efforts, the expenses of which may negatively impact our cash flow, and\nmay not generate the results we expect to achieve.\n\n \n\n●If our platforms experience\nmaterial errors, defects or security issues, we may lose our customers, fail to honor our obligations in respect of our contract liabilities,\nand incur significant remedial costs.\n\n \n\n●Our brand is integral to our\nsuccess. If we fail to effectively maintain, promote and enhance our brand, our business and competitive advantage may be harmed.\n\n \n\n●Security breaches and attacks\nagainst our systems and network, and any failure to otherwise protect personal, confidential and proprietary information, could damage\nour reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of\noperations.\n\n \n\n●We partially rely on third-party\nservice providers to conduct our business and any interruption or delay in such third parties or our own failure may impair our customers’\nexperience.\n\n \n\n●Our products and solutions\nrely on the stable performance of servers, and any disruption to our servers due to internal and external factors could diminish demand\nfor our products and solutions, harm our business, our reputation and results of operations and subject us to liability.\n\n \n\n●Our and our business partners’\nbusiness operations have been adversely affected by the COVID-19 outbreak, and may in the future continue to be affected by the COVID-19\noutbreak.\n\n \n\n●If the adoption of our products\nand solutions by our customers are slower than we expected, our business, results of operations and financial condition may be adversely\naffected.\n\n \n\n●We may fail to conduct our\nsales and marketing activities in a cost-effective manner and we are subject to limitations in promoting our products and solutions.\n\n \n\n●If we fail to provide high\nquality customer services, our brand, business, and results of operations may be harmed.\n\n \n\n●We had a concentration of major customers during the years ended December 31,\n2023, 2024 and 2025 and if our existing major customers cease to engage our services, we may be unable to find new customers with similar\nattributable revenue within a reasonable time or at all.\n\n \n\n●The intensifying competition,\nchange in sector trend and landscape and government policies may have a direct impact on the industries where our clients operate their\nbusinesses, and negatively affect the stability of our clients, which may subsequently have negative impact on our business.\n\n \n\n2\n\n \n\n \n\n●Our reliance on a limited number\nof suppliers for certain essential services could adversely affect our ability to manage our business effectively and subsequently harm\nour business.\n\n \n\n●We may fail to obtain or maintain\nall required licenses, permits and approvals to operate our business.\n\n \n\n●We may fail to obtain, maintain\nand protect our intellectual property rights and proprietary information or prevent third parties from any unauthorized use of our technologies.\n\n \n\n●We may become subject to intellectual\nproperty disputes, which are costly and may subject us to significant liability and increased costs of business.\n\n \n\n●We and our management may from\ntime to time be subject to claims, disputes, lawsuits and other legal and administrative proceedings.\n\n \n\n●Changes in laws and regulations\nrelated to the internet or changes in the internet infrastructure itself may diminish the demand for our products and solutions and have\na negative impact on our business.\n\n \n\n●We are dependent on the continuous\nservices of our senior management and other key employees. If we fail to attract, retain and motivate qualified personnel, our business\ncould be materially and adversely affected.\n\n \n\n●Future strategic acquisitions\nand investments may fail and may result in material and adverse impact on our financial condition and results of operations.\n\n \n\n●We may, in the future, grow\nand expand our international operations, which may expose us to significant risks.\n\n \n\n●We may be unable to obtain\nany additional capital required in a timely manner or on acceptable terms, or at all. Moreover, our future capital needs may require\nus to sell additional equity or debt securities that may dilute our shareholders’ shareholdings or subject us to covenants that\nmay restrict our operations or our ability to pay dividends.\n\n \n\n●We have not independently verified\nthe accuracy or completeness of data, estimates, and projections in this annual report that we obtained from third-party sources, and\nsuch information involves assumptions and liabilities.\n\n \n\n●We have identified one material\nweakness in our internal control over financial reporting as of December 31, 2024. If our remediation of the material weaknesses is not\neffective, or if we experience additional material weaknesses in the future or otherwise fail to maintain proper and effective internal\ncontrol over financial reporting, our ability to produce accurate and timely consolidated financial statements could be impaired, investors\nmay lose confidence in our financial reporting and the trading price of the ADSs may decline.\n\n \n\n●We face risks related to natural\ndisasters, health epidemics and other outbreaks, which could significantly disrupt our business operations.\n\n \n\n●Economic substance legislation\nof the Cayman Islands may adversely impact us or our operations.\n\n \n\n●The Cayman Islands was removed\nfrom the Financial Action Task Force (“**FATF**”) grey list” in October 2023.  It is not currently listed\non the FATF’s high-risk jurisdictions (grey list) or blacklist.  The European Union still includes the Cayman Islands\non its own list of non-cooperative tax jurisdictions, but this is separate from FATF. It is unclear how this will affect us.\n\n \n\n3\n\n \n\n \n\n**Risks Relating to Our Corporate Structure**\n\n \n\n●In the following discussion\nof risks relating to our corporate structure, “we,” “us,” or “our” refer to Xiao-I.\n\n \n\n●If the PRC government finds\nthat the agreements that establish the structure for operating our businesses in China do not comply with PRC regulations on foreign\ninvestment in internet and other related businesses, or if these regulations or their interpretation change in the future, we could be\nsubject to severe penalties or be forced to relinquish our interests in those operations and our ADSs may decline in value dramatically\nor even become worthless.\n\n \n\n●The contractual arrangements\nwith the VIE and its shareholders may not be as effective as equity ownership in providing operational control.\n\n \n\n●Any failure by the VIE or its\nshareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our\nbusiness.\n\n \n\n●The contractual arrangements\nwith the VIE are governed by PRC law. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes\nwould be resolved in accordance with PRC legal procedures, which may not protect you as much as those of other jurisdictions, such as\nthe United States.\n\n \n\n●Contractual arrangements we\nhave entered into with the VIE and its shareholders may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional\ntaxes could significantly reduce our consolidated net income and the value of your investment.\n\n \n\n●We are a holding company and\nwill rely on dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make dividend\npayments to us, or any tax implications of making dividend payments to us, could limit our ability to pay our parent company expenses\nor pay dividends to holders of our ADSs.\n\n \n\n●If the seals of our PRC subsidiary\nand the VIE are not kept safely, are stolen, or used by unauthorized persons or for unauthorized purposes, the corporate governance of\nthese entities could be severely and adversely compromised.\n\n \n\n●We may lose the ability to\nuse and enjoy assets held by the VIE that are critical to the operation of our business if the VIE declares bankruptcy or become subject\nto a dissolution or liquidation proceeding.\n\n \n\n●Substantial uncertainties exist\nwith respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability\nof our current corporate structure and business operations.\n\n \n\n●Some of our shareholders are\nnot in compliance with the PRC’s regulations relating to offshore investment activities by PRC residents. As a result, these shareholders\nmay be subject to penalties themselves, and WFOE may be unable to open a new capital account with relevant banks within China according\nto their internal control policies and may be restricted from remitting funds or handling other foreign exchange businesses within China\nunless and until we remediate the non-compliance.\n\n \n\n4\n\n \n\n \n\n**Risks Relating to Doing Business in China**\n\n \n\n●In the following discussion\nof risks relating to doing business in China “we,” “us,” or “our” refer to the PRC operating entities.\n\n \n\n●Changes in the political and\neconomic policies of the PRC government or in relations between China and the United States or other governments may materially and adversely\naffect our PRC operating entities’ business, financial condition and results of operations and may result in its inability to sustain\nour growth and expansion strategies.\n\n \n\n●Uncertainties with respect\nto the enforcement of laws, and changes in laws and regulations in China with little advance notice, could materially and adversely affect\nus.\n\n \n\n●Content posted or displayed\non our platform may be found objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.\n\n \n\n●Advertisements shown on our\nplatform may subject us to penalties and other administrative actions.\n\n \n\n●The Holding Foreign Companies\nAccountable Act (“HFCAA”) and the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”) passed by\nthe U.S. Senate, all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification\nof their auditors, especially the non-U.S. auditors who are not inspected by the Public Company Accounting Oversight Board (“PCAOB”).\nThese developments could add uncertainties to our offering and listing on the Nasdaq Global Market, and Nasdaq may determine to delist\nour securities if in the future the PCAOB determines that it cannot inspect or fully investigate our auditor.\n\n \n\n●It may be difficult for overseas\nregulators to conduct investigation or collect evidence within China.\n\n \n\n●The approval, filing or other\nrequirements of the CSRC or other PRC government authorities may be required under PRC laws.\n\n \n\n●If the Chinese government chooses\nto exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, such\naction could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the\nvalue of Xiao-I’s ADSs to significantly decline or become worthless.\n\n \n\n●The custodians or authorized\nusers of our controlling non-tangible assets, including seals, may fail to fulfill their responsibilities, or misappropriate or misuse\nthese assets.\n\n \n\n●Under the PRC Enterprise Income\nTax Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and\nour shareholders and have a material adverse effect on our results of operations and the value of your investment.\n\n \n\n●There are significant uncertainties\nunder the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our\noffshore subsidiaries may not qualify to enjoy certain treaty benefits.\n\n \n\n5\n\n \n\n \n\n●We face uncertainty with respect\nto indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies. We face uncertainties regarding\nthe reporting on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in\nour Company by non-resident investors.\n\n \n\n●China’s M&A Rules\nand certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which\ncould make it more difficult for us to pursue growth through acquisitions in China.\n\n \n\n●PRC regulations relating to\noffshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase its registered capital or distribute\nprofits to us or otherwise expose us to liability and penalties under PRC law.\n\n \n\n●Failure to comply with PRC\nregulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan\nparticipants or us to fines and other legal or administrative sanctions.\n\n \n\n●PRC regulation of loans to,\nand direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may delay us from\nusing our available funds to make loans to our PRC subsidiary and consolidated affiliated entities, or to make additional capital contributions\nto our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand the business of our\nPRC subsidiary and consolidated affiliated entities.\n\n \n\n●Fluctuation in the value of\nthe RMB may have a material adverse effect on the value of your investment.\n\n \n\n●If additional remedial measures\nare imposed on major PRC-based accounting firms, including our independent registered public accounting firm, our financial statements\ncould be determined not to be in compliance with the SEC requirements.\n\n \n\n●We face uncertainties with\nrespect to the enactment, interpretation and implementation of Anti-Monopoly Guidelines for the Internet Platform Economy Sector.\n\n \n\n**Risks Relating to Doing Business in Hong Kong**\n\n \n\n●We may be subject to uncertainty\nabout any changes in the economic, political and legal environment in Hong Kong, and it is possible that most of the legal and operational\nrisks associated with operating in the PRC may also apply to operations in Hong Kong in the future.\n\n \n\n●Our operations in Hong Kong\nare governed by the laws and regulations in Hong Kong. If there is significant change to current political arrangements between mainland\nChina and Hong Kong, the PRC government may intervene or influence our Hong Kong operations, which could result in a material change\nin our operations in Hong Kong.\n\n \n\n●You may incur additional costs\nand procedural obstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong against\nXiao-I or its management named in the annual report based on Hong Kong laws.\n\n \n\n6\n\n \n\n \n\n**Risks Relating to the ADSs**\n\n \n\n●Because we do not expect to\npay dividends in the foreseeable future, you must rely on a price appreciation of the ADSs for a return on your investment.\n\n \n\n●A large, active trading market\nfor the ADSs may not develop and you may not be able to resell your ADSs at or above the public offering price.\n\n \n\n●The trading price of the ADSs\nis likely to be volatile, which could result in substantial losses to investors.\n\n \n\n●The sale or availability for\nsale of substantial amounts of ADSs could adversely affect their market price.\n\n \n\n●Holders of ADSs have fewer\nrights than shareholders and must act through the depositary to exercise their rights.\n\n \n\n●Except in limited circumstances,\nthe depositary for our ADSs will give us a discretionary proxy to vote the Ordinary Shares underlying your ADSs if you do not vote at\nshareholders’ meetings, which could adversely affect your interests.\n\n \n\n●You may not receive distributions\non the ADSs or any value for them if such distribution is illegal or impractical or if any required government approval cannot be obtained\nin order to make such distribution available to you.\n\n \n\n●Your right to participate in\nany future rights offerings may be limited, which may cause dilution to your holdings.\n\n \n\n●You may be subject to limitations\non transfers of your ADSs.\n\n \n\n●Your rights to pursue claims\nagainst the depositary as a holder of ADSs are limited by the terms of the deposit agreement.\n\n \n\n●ADS holders may not be entitled\nto a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s)\nin any such action.\n\n \n\n●The deposit agreement may be\namended or terminated without your consent.\n\n \n\n●Holders or beneficial owners\nof the ADSs have limited recourse if we or the depositary fail to meet our respective obligations under the deposit agreement.\n\n \n\n●Techniques employed by short\nsellers may drive down the market price of the ADSs.\n\n \n\n●If securities or industry analysts\ndo not publish research or publish inaccurate or unfavorable research about our business, the market price for the ADSs and trading volume\ncould decline.\n\n \n\n●Our failure to meet the continued\nlisting requirements of Nasdaq could result in a delisting of the ADSs.\n\n \n\n7\n\n \n\n \n\n●Because we are incorporated\nunder the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights\nthrough the U.S. Federal courts may be limited.\n\n \n\n●United States civil liabilities\nand certain judgments obtained against us by our shareholders may not be enforceable.\n\n \n\n●The ability of U.S. authorities\nto bring actions for violations of U.S. securities law and regulations against us, our directors and executive officers named in this\nannual report (except H. David Sherman) may be limited. Therefore, you may not be afforded the same protection as provided to investors\nin U.S. domestic companies.\n\n \n\n●You may experience difficulties\nin effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC, based on United States or\nother foreign laws, against us, our directors and executive officers named in this annual report (except H. David Sherman). Therefore,\nyou may not be able to enjoy the protection of such laws in an effective manner.\n\n \n\n●As a company incorporated in\nthe Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ\nsignificantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than\nthey would enjoy if we complied fully with the Nasdaq corporate governance listing standards.\n\n \n\n●Our articles of association\ncontain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity\nto sell their shares, including Ordinary Shares represented by the ADSs, at a premium, as a result, it could materially adversely affect\nthe rights of holders of our ADSs.\n\n \n\n●We are an emerging growth company\nwithin the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.\n\n \n\n●We are a foreign private issuer\nwithin the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic\npublic companies.\n\n \n\n●We will incur increased costs\nas a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”\n\n \n\n●There can be no assurance we\nwill not be a passive foreign investment company (“PFIC”), for any taxable year, which could result in adverse U.S. federal\nincome tax consequences to U.S. investors in our ADSs or Ordinary Shares.\n\n \n\n●We are not required to disclose\ncompensation of Directors and Officers under Cayman Islands law.\n\n \n\n8\n\n \n\n \n\n**Holding Foreign Companies Accountable Act**\n\n \n\nPursuant to the HFCAA if the SEC determines that\nwe have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the PCAOB for two\nconsecutive years, the SEC will prohibit our shares or the ADSs from being traded on a national securities exchange or in the over-the-counter\ntrading market in the United States. As a result of such trading prohibition, the Nasdaq Global Market may make a determination to delist\nour securities. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered\npublic accounting firms headquartered in mainland China and Hong Kong completely in 2022. The PCAOB Board vacated its previous 2021 determinations\nthat the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and\nHong Kong (the “Determinations”). However, whether the PCAOB will continue to be able to satisfactorily conduct inspections\nof PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainties and depends on a\nnumber of factors out of our and our auditor’s control. The PCAOB continues to demand complete access in mainland China and Hong\nKong moving forward and is making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing\ninvestigations and initiate new investigations as needed. Our financial statements contained in this annual report on Form 20-F have been\naudited by Assentsure PAC, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB,\nis subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable\nprofessional standards. Notwithstanding the foregoing, in the future, if there is any regulatory change or step taken by PRC regulators\nthat does not permit our auditor to provide audit documentations located in China to the PCAOB for inspection or investigation, investors\nmay be deprived of the benefits of such inspection. Any audit reports not issued by auditors that are completely inspected by the PCAOB,\nor a lack of PCAOB inspections of audit work undertaken in China that prevents the PCAOB from regularly evaluating our auditors’\naudits and their quality control procedures, could result in a lack of assurance that our financial statements and disclosures are adequate\nand accurate, then such lack of inspection could cause our securities to be delisted from the stock exchange. The delisting of our ADSs,\nor the threat of their being delisted, may materially and adversely affect the value of your investment. As such, as of the date of this\nannual report, Xiao-I’s auditor is not subject to the Determinations announced by the PCAOB. However, Xiao-I cannot assure you whether\nNasdaq or regulatory authorities would apply additional and more stringent criteria to it after considering the effectiveness of its auditor’s\naudit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or\nexperience as related to the audit of our financial statements. Furthermore, there is a risk that Xiao-I’s auditor cannot be inspected\nby the PCAOB because of a position taken by an authority in a foreign jurisdiction in the future, and that the PCAOB may re-evaluate its\ndetermination as a result of any obstruction with the implementation of the Statement of Protocol. Such lack of inspection or re-evaluation\ncould cause trading in Xiao-I’s securities to be prohibited on a national exchange or in the over-the-counter trading market under\nthe HFCAA, and, as a result, Nasdaq may determine to delist Xiao-I’s securities, which may cause the value of Xiao-I’s securities\nto decline or become worthless. For more detailed information, see “Item 3. Key Information—D. Risk Factors —Risks Relating\nto Doing Business in China— The HFCCA and the AHFCCA passed by the U.S. Senate, all call for additional and more stringent criteria\nto be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are\nnot inspected by the PCAOB. These developments could add uncertainties to our offering and listing on the Nasdaq Global Market, and Nasdaq\nmay determine to delist our securities if in the future the PCAOB determines that it cannot inspect or fully investigate our auditor.”\n\n \n\n**Permissions, Approvals, Licenses and Permits\nRequired from the PRC Government Authorities for Our Operations and for Offering of Our Securities to Foreign Investors**\n\n \n\nThe PRC operating entities’ operations in\nChina are governed by PRC laws and regulations. Xiao-I, its subsidiaries, the PRC operating entities have received all requisite permissions\nand approvals from the PRC government authorities for their business operations currently conducted in China. Neither has Xiao-I nor its\nsubsidiaries, nor the PRC operating entities received any denial of permissions for their business operations currently conducted in China.\nThese permissions and approvals include (without limitation) License for Value-added Telecommunications Services, Business License, Record\nRegistration Form for Foreign Trade Business Operators, Customs Declaration Entity Registration Certificate. Xiao-I, its subsidiaries,\nthe PRC operating entities are currently not required to obtain permission from any of the PRC authorities to issue ADSs or Ordinary Shares\nto foreign investors. However, Xiao-I is subject to the risks of uncertainty of any future actions of the PRC government in this regard\nincluding the risk that Xiao-I inadvertently concludes that the permissions or approvals discussed here are not required, that applicable\nlaws, regulations or interpretations change such that Xiao-I is required to obtain approvals in the future, or that the PRC government\ncould disallow Xiao-I’s holding company structure, which would likely result in a material change in its operations, including its\nability to continue its existing holding company structure, carry on its current business, accept foreign investments, and offer or continue\nto offer securities to its investors. These adverse actions could cause the value of Xiao-I’s ADSs to significantly decline or become\nworthless. Xiao-I may also be subject to penalties and sanctions imposed by the PRC regulatory agencies, including the CSRC, if it fails\nto comply with such rules and regulations, which would likely adversely affect the ability of Xiao-I’s securities to be listed on\na U.S. exchange, which would likely cause the value of Xiao-I’s securities to significantly decline or become worthless. For more\ndetailed information, see “Item 3. Key Information—D. Risk Factors —Risks Relating to Doing Business in China—The\napproval, filing or other requirements of the CSRC or other PRC government authorities may be required under PRC laws.”\n\n \n\n9\n\n \n\n \n\n**Implications of Being an Emerging Growth Company**\n\n \n\nWe are an “emerging growth company”\nas defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we may take advantage of specific exemptions\nfrom various reporting requirements that are applicable to other publicly traded entities that are not emerging growth companies. These\nexemptions include:\n\n \n\n●not being required to comply\nwith the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002;\n\n \n\n●not being required to comply\nwith any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or\na supplement to the auditor’s report providing additional information about the audit and the financial statements (*i.e.*,\nan auditor discussion and analysis);\n\n \n\n●not being required to submit\nsome executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency” and\n“say-on-golden parachutes;” and\n\n \n\n●not being required to disclose\nsome executive compensation related items such as the correlation between executive compensation and performance and comparisons of the\nchief executive officer’s compensation to median employee compensation.\n\n \n\nAs a result, we do not know if some investors\nwill find our ADSs less attractive. The result may be a less active trading market for our ADSs, and the price of our ADSs may become\nmore volatile.\n\n \n\nWe will remain an emerging growth company until\nthe earliest of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion; (ii) the last day\nof the fiscal year following the fifth anniversary of the completion of our initial public offering; (iii) the date that we become a “large\naccelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common equity\nheld by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; or (iv)\nthe date on which we have issued more than $1 billion in non-convertible debt securities during any three-year period.\n\n \n\n**Implications of Being a Foreign Private Issuer**\n\n \n\nWe report under the Exchange Act as a non-U.S.\ncompany with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a\nforeign private issuer under the Exchange Act, we will be exempt from specific provisions of the Exchange Act that are applicable to U.S.\ndomestic public companies, including:\n\n \n\n●the sections of the Exchange\nAct regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;\n\n \n\n●the sections of the Exchange\nAct requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from\ntrades made in a short period of time; and\n\n \n\n●the rules under the Exchange\nAct requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specific information,\nor current reports on Form 8-K, upon the occurrence of specified significant events.\n\n \n\n●In addition, we will not be\nrequired to file annual reports and consolidated financial statements with the SEC as promptly as U.S. domestic companies whose securities\nare registered under the Exchange Act, and we will not be required to comply with Regulation FD, which restricts the selective disclosure\nof material information.\n\n \n\nBoth foreign private issuers and emerging growth\ncompanies also are exempt from some more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging\ngrowth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required\nof companies that are neither an emerging growth company nor a foreign private issuer.\n\n \n\n**Implications of Being a Controlled Company**\n\n \n\nOn December 13, 2023, Xiao-I issued 3,700,000\npreferred shares, each with a par value of US$0.00005 and carrying a voting right equivalent to 20 votes (the “3.7 million Preferred\nShares” or the “Preferred Shares”) to ZunTian Holding Limited (“ZunTian”), an existing shareholder of Xiao-I\n(the “Issuance”). ZunTian is a BVI-incorporated company wholly owned and controlled by Mr. Hui Yuan (“Mr. Yuan”).\nMr. Yuan is the Chief Executive Officer (the “CEO”) and Chairman of the Company and a recognized A1 industry key opinion leader\nand domain expert. As of the date of this annual report, Mr. Yuan beneficially owns more than 50% of the voting power of Xiao-I. Under\nthe Nasdaq Global Market (“Nasdaq”) listing rules, the Issuance resulted in a change in control and the Company became a “controlled\ncompany” as defined under those rules. As a “controlled company,” we are permitted to elect not to comply with certain\ncorporate governance requirements. If we rely on these exemptions, you will not have the same protection afforded to shareholders of companies\nthat are subject to these corporate governance requirements.\n\n \n\n10\n\n \n\n \n\n**RISK FACTORS**\n\n \n\nAn investment in Xiao-I’s ADSs involves\nsignificant risks. You should carefully consider all of the information in this annual report, including the risks and uncertainties described\nbelow, before making an investment in its ADSs. Any of the following risks could have a material adverse effect on the business, financial\ncondition and results of operations of Xiao-I, its subsidiaries and the PRC operating entities. In any such case, the market price of\nXiao-I’s ADSs could decline, and you may lose all or part of your investment.\n\n \n\nIn the following discussion of risks relating\nto of our business, operations and financial information, “we,” “us,” or “our” refer to the PRC operating\nentities except where consolidated financial information is presented in which case “we”, “us” or “our”\nrefer to Xiao-I and its subsidiaries and the PRC operating entities on a consolidated basis.\n\n \n\nRisks Relating to Our Business and Industry\n\n \n\n**Recent U.S. Treasury rules on investment\nin Chinese AI and technology sectors may adversely impact our financial condition and results of our operations.**\n\n \n\nThe U.S. Treasury Department has finalized rules\nrestricting U.S. investments in certain Chinese technology sectors, including artificial intelligence, effective January 2, 2025. These\nrules are intended to prevent U.S. capital from supporting Chinese technological advancements that could pose national security risks\nto the United States. As a PRC-based company engaged in artificial intelligence, these restrictions may adversely affect our ability to\nattract and secure U.S.-based investments in the future.\n\n \n\nWhile the restrictions primarily target direct\nU.S. investment in companies operating in sensitive technology sectors, the broad nature of these measures could create indirect challenges,\nincluding increased scrutiny of our activities by U.S. investors, difficulties in forming partnerships with U.S.-based entities, or reduced\naccess to global capital markets. Furthermore, any tightening of export controls on advanced technology or AI-related hardware could also\nlimit our ability to access critical components for our operations.\n\n \n\nAdditionally, the implementation of these rules\ncould impact investor confidence in our business and the market value of our securities, including our ADSs, potentially leading to significant\nadverse effects on our financial condition, operations, and growth prospects. While we are actively monitoring the implications of these\nrules, uncertainties surrounding their interpretation and enforcement add risks to our ability to maintain competitive operations and\nattract foreign investments.\n\n \n\n**We have had net losses (except for 2021)\nand negative cash flows from operating activities in the past, and we may not achieve or sustain profitability.**\n\n \n\nIn 2023, we had net loss of US$27.01 million and\nnegative cash flows from operations of US$15.79 million. In 2024, we had net loss of US$14.55 million and negative cash flows from operations\nof US$15.14 million. In 2025, we had net loss of US$101.82 million and negative cash flows from operations of US$3.69 million. We cannot\nassure you that we will be able to generate net profit or positive cash flows from operating activities in the future. Our future revenue\ngrowth and profitability will depend on a variety of factors, many of which are beyond our control. These factors include market acceptance\nof our products, effectiveness of our monetization strategy, our ability to control cost and expenses and to manage our growth effectively,\nmarket competition, macroeconomic and regulatory environment. We also expect our costs and expenses to increase in the future as we continue\nto expand our operations and to increase our investments in research and development, which will place significant demands on our management\nand our operational and financial resources. Continuous expansion may increase the complexity of our business, and we may encounter various\ndifficulties. We may fail to develop and improve our operational, financial and managerial controls, enhance our financial reporting systems\nand procedures, recruit, train and retain skilled professional personnel, or maintain customer satisfaction to effectively support and\nmanage our growth. If we invest substantial time and resources to expand our operations but fail to manage the growth of our business\nand capitalize on our growth opportunities effectively, we may not be able to achieve profitability, and our business, financial condition,\nresults of operations and prospects would be materially and adversely affected.\n\n** **\n\n**If we fail to maintain and grow our customer\nbase, keep our customers engaged through our products and solutions, our business growth may not be sustainable.**\n\n \n\nTo achieve the sustainable growth of our business,\nwe must continuously attract new customers, retain existing customers and increase their incremental spending on our products and solutions.\nTo keep pace with our customers’ evolving demands, we need to improve our existing products and solutions, and launch new products\nand solutions, on a timely basis. If we fail to accurately identify our customers’ demands or continuously provide them with products\nand solutions that add value to their businesses, our customers may be reluctant to increase their spending on our platform, and as a\nresult, the growth of our business may be stalled.\n\n \n\n11\n\n \n\n \n\nIf we fail to maintain and enhance the functions,\nperformance, reliability, design, security, and scalability of our platforms to meet our customers’ evolving needs, we may lose\nour customers.\n\n \n\nThe market for AI industry services in China is\nconstantly changing with innovations. Our success has been based on our dedication to the development of innovative and high-quality products\nand solutions on our platforms. Our ability to continue to attract and retain customers and increase sales depends largely on our ability\nto continue improving and enhancing the functions, performance, reliability, design, security, and scalability of our platforms.\n\n \n\nWe may experience difficulties in developing new\ntechnologies as it is costly and time consuming, which in turn could delay or prevent the development, introduction or implementation\nof new products and solutions. While we have invested a significant amount of time and money in our service development to date, we may\nnot have sufficient resources to invest at the same level going forward. To the extent we are unable to improve and enhance the functions,\nperformance, reliability, design, security, and scalability of our platforms in a manner that timely and effectively responds to our customers’\nevolving needs, we may lose our customers and our business, financial condition, results of operations, and prospects may be materially\nand adversely affected.\n\n \n\n**If our products and solutions do not achieve\nsufficient market acceptance, our business and competitive position will suffer.**\n\n \n\nTo meet our customers’ rapidly evolving\ndemands, we invest substantial resources in research and development to enhance our products and solutions, as well as in improving our\nplatforms. When we develop or acquire new or enhanced products and solutions, we typically incur significant expenses and expend resources\nupfront to develop, market, promote and sell the new offerings. Therefore, when we develop or acquire and introduce new or enhanced products\nand solutions, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing\nthem to market. Our new products and solutions, or enhancements and changes to our existing products and solutions, could fail to attain\nsufficient market acceptance for many reasons, including, among others:\n\n \n\n●failure to predict market demand\naccurately in terms of functionality and a failure to supply products and solutions that meet this demand in a timely manner;\n\n \n\n●defects, errors, or disruptions;\n\n \n\n●negative publicity about our\nplatform’s performance or effectiveness;\n\n \n\n●changes in the legal or regulatory\nrequirements, or increased legal or regulatory scrutiny, adversely affecting our platform;\n\n \n\n●emergence of competitors that\nachieve market acceptance before we do;\n\n \n\n●delays in releasing enhancements\nto our platform to the market; and\n\n \n\n●introduction or anticipated\nintroduction of competing products or solutions by our competitors.\n\n \n\nIf our new products and solutions, or any enhancements,\ndo not achieve adequate acceptance in the market, or if products and solutions developed by others achieve greater acceptance in the market,\nour business could be harmed.\n\n \n\n**If our expansion into new industries is\nnot successful, our business, prospects and growth momentum may be materially and adversely affected.**\n\n \n\nOur products and solutions are specifically designed\nto address the diversified needs of our customers across different industries. Through our platform resources and years of technology\naccumulation, we have a track record of successful expansion into and becoming a leader in new industries. We cannot assure you, however,\nthat we will be able to maintain this momentum in the future. Expanding into new industries involves new risks and challenges. Our lack\nof familiarity with new industries may make it more difficult for us to keep pace with the evolving customer needs and preferences. In\naddition, there may be one or more existing market leaders in any industry that we decide to expand into. Such companies may be able to\ncompete more effectively than us by leveraging their experience in doing business in that market as well as their deeper industry insight\nand greater brand recognition among customers. We will need to comply with new laws and regulations applicable to these businesses, the\nfailure of which would adversely affect our reputation, business, results of operations and financial condition. Expansion into any new\nvertical may place significant strain on our management and resources, and failure to expand successfully could have a material adverse\neffect on our business and prospects.\n\n \n\n12\n\n \n\n \n\n**The market in which we participate is competitive,\nand if we do not compete effectively, our business, operating results and financial condition could be harmed.**\n\n \n\nThe AI industry market is competitive and rapidly\nevolving. The principal competitive factors in our market include research and development capabilities, industry know-how, continuous\ncapital investment, product portfolio, among others. Some of our existing competitors might have substantial competitive advantages, including\nlarger scale, longer operating history, greater brand recognition, more established relationships with customers, suppliers and partners,\nand greater financial, research and development, marketing and other resources. As a result, our competitors may be able to respond more\nquickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some\ncompetitors may offer products, solutions and services that address one or more number of functions at lower prices, with greater depth\nthan our products, solutions and services or in different geographies. Our existing and potential competitors may develop and market new\nproducts, solutions and services with functionality comparable to ours, and this could force us to decrease prices in order to remain\ncompetitive. If we are unable to compete successfully against our current or potential competitors, our business, financial condition,\nand results of operations may be materially and adversely impacted.\n\n \n\n**If we fail to adapt and respond effectively\nto rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements or preferences,\nour business may be materially and adversely affected.**\n\n \n\nThe AI industry market is subject to rapid technological\nchanges, evolving industry standards, regulations and customer needs, requirements and preferences. The success of our business will depend,\nin part, on our ability to adapt and respond to these changes on an effective and timely basis. If we fail to upgrade products and solutions\nthat satisfy customers and end-users and provide enhancements and new features for existing products that keep pace with rapid technological\nand industry changes, our business, operating results and financial condition could be adversely affected. If new technologies emerge\nthat are able to deliver competitive products, solutions and services at lower prices, more efficiently, more conveniently or more securely,\nsuch technologies could adversely impact our ability to compete effectively.\n\n \n\nOur platforms must integrate with a variety of\nnetwork, hardware, mobile and software platforms and technologies, and we need to continuously modify and enhance our products and solutions\nto adapt to changes and innovation in these technologies. Any failure of our products and solutions to function effectively with evolving\ntechnologies could reduce the demand for our products and solutions. If we are unable to respond to these changes in a cost-effective\nand timely manner, our products and solutions may become less marketable and less competitive or obsolete, and our business, operating\nresults and financial condition could be adversely affected.\n\n \n\n**To support our business growth, we continue\nto invest heavily in our research and development efforts, the expenses of which may negatively impact our cash flow, and may not generate\nthe results we expect to achieve.**\n\n \n\nOur technological capabilities are critical to\nour success, and we have been continuously investing heavily in our research and development efforts. Our R&D expenses incurred were\nUS$52.39 million, US$34.66 million, and US$24.46 million, respectively, for the years ended December 31, 2023, 2024 and 2025, accounting\nfor 85.4%, 56.9% and 24.0% of our operating expenses for each of the corresponding periods. The industry in which we operate is subject\nto rapid technological changes and is evolving quickly in terms of technological innovation. We need to invest significant resources,\nincluding financial and human resources, in research and development to lead technological advances in order to make our products and\nsolutions innovative and competitive in the market. As a result, we expect that our research and development expenses will continue to\nincrease.\n\n \n\nFurthermore, development activities are inherently\nuncertain, and we might encounter practical difficulties in commercializing our development results. Our significant expenditures on research\nand development may not generate corresponding benefits. Given the fast pace with which the technology has been and will continue to be\ndeveloped, we may not be able to timely upgrade our technologies in an efficient and cost-effective manner, or at all. New technologies\nin our industry could render our platforms, our products and solutions that we are developing or expect to develop in the future obsolete,\nnot commercially viable or unattractive, thereby limiting our ability to recover related development costs, which could result in a decline\nin our revenues, profitability and market share.\n\n \n\n13\n\n \n\n \n\nIf our platforms experience material errors, defects\nor security issues, we may lose our customers, fail to honor our obligations in respect of our contract liabilities, and incur significant\nremedial costs.\n\n \n\nDespite repeated testing, our products and solutions\nby their nature may contain technical errors, defects or security issues that are difficult to detect and rectify, particularly when first\nintroduced or when new versions or upgrades are implemented. Due to the complexity of our products and solutions, we may not be able to\nfix these errors, defects and security issues in a timely manner or at all. We may incur significant expenses rectifying any material\nerror or defect and compensating our customers who are affected by such error or defect.\n\n \n\nGiven that many of our customers use our products\nand solutions in critical parts of their businesses, any error, defect or service interruption on our platforms could result in significant\nlosses for our customers. Our customers may seek significant compensation from us for any losses they incur as a result of such errors\nor cease using our products and solutions altogether. Such claims, even if unsuccessful, could be costly, time-consuming and distracting\nto management, result in a diversion of significant resources, and have an adverse effect on our business, operating results and financial\ncondition. We cannot assure you that the disclaimers limiting our exposure to claims, which we typically include in the agreements with\nour customers, will be enforceable or give us adequate protections against liabilities. Moreover, our customers may share information\nabout their poor experiences in the community, resulting in negative publicity about us. Such negative publicity could damage our reputation\nand hurt our future sales.\n\n \n\n**Our brand is integral to our success. If\nwe fail to effectively maintain, promote and enhance our brand, our business and competitive advantage may be harmed.**\n\n \n\nWe believe that maintaining, promoting and enhancing\nour Xiao-I (Chinese: 小i机器人) brand is critical to maintaining and expanding our business. Maintaining and enhancing\nour brand depends largely on our ability to continue to provide high quality, well-designed, useful, reliable, and innovative products\nand solutions, which we cannot assure you we will do successfully.\n\n \n\nWe believe the importance of brand recognition\nwill increase as competition in our market increases. In addition to our ability to provide reliable and useful AI solutions at competitive\nprices, the successful promotion of our brand will also depend on the effectiveness of our marketing efforts. We primarily market our\nproducts and solutions through our sales and marketing force, and a number of free traffic sources including developers’ word-of-mouth\nreferrals. Our efforts to market our brand have incurred significant costs and expenses and we intend to continue such efforts. We cannot\nassure you, however, that our selling and marketing expenses will lead to increasing revenue, and even if they did, such increases in\nrevenue might not be sufficient to offset the expenses incurred.\n\n \n\n**Security breaches and attacks against our\nsystems and network, and any failure to otherwise protect personal, confidential and proprietary information, could damage our reputation\nand negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.**\n\n \n\nWe have implemented various cybersecurity measures,\nbut such measures may not detect, prevent or control all attempts to compromise our systems, including distributed denial-of-service attacks,\nviruses, Trojan horses, malicious software, break-ins, phishing attacks, third-party manipulation, security breaches, employee misconduct\nor negligence or other attacks, risks, data leakage and similar disruptions that may cause service interruptions or jeopardize the security\nof data stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in\nunauthorized access to our systems, misappropriation of information or data, deletion or modification of user information, or a denial-of-service\nor other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently\nand may not be known until launched against us or our third-party service providers, there can be no assurance that we will be able to\nanticipate, or implement adequate measures to protect against these attacks. If we are unable to avert these attacks and security breaches,\nwe could be subject to significant legal and financial liabilities, our reputation and business would be harmed and we could sustain substantial\nrevenue loss from lost sales and customer dissatisfaction.\n\n \n\n14\n\n \n\n \n\n**We partially rely on third-party service\nproviders to conduct our business and any interruption or delay in such third parties or our own failure may impair our customers’\nexperience.**\n\n \n\nWe partially rely on third-party service providers\nwith respect to our software and smart city business. For example, we rent an Internet Data Center (IDC) server, which is a complete equipment\n(including high-speed Internet access bandwidth, high-performance local area network, safe and reliable computer room environment, etc.),\nprofessional management, and perfect application service platform, to arrange the software system required by customers. On the basis\nof this platform, IDC service providers provide customers with Internet basic platform services (server hosting, virtual host, mail cache,\nvirtual mail, etc.) and various value-added services (site rental services, domain name system services, load balancing systems, database\nsystems, data backup services, etc.). Customers need to be able to access our platforms at any time, without interruption or degradation\nof performance, and we provide some customers with service-level commitments with respect to uptime. Any limitation on the capacity of\nour data centers or cloud infrastructure could impede our ability to onboard new customers or expand the usage of our existing customers,\nhost our products or serve our customers, which could adversely affect our business, financial condition and results of operations. In\naddition, any incident affecting our data centers or cloud infrastructure that may be caused by cyberattacks, natural disasters, fire,\nflood, severe storm, earthquake, power loss, outbreaks of contagious diseases, telecommunications failures, terrorist or other attacks,\nor other events beyond our control could negatively affect our platform. A prolonged service disruption affecting our data centers or\ntechnology infrastructure for any of the foregoing reasons would negatively impact our ability to serve our customers and could damage\nour reputation with current and potential customers, expose us to liability, cause us to lose customers or otherwise harm our business.\nWe may also incur significant costs for using alternative providers or taking other actions in preparation for, or in response to, events\nthat damage the third-party hosting services we use.\n\n \n\nFurthermore, these third-party service providers\nmay not continue to be available to us on commercially reasonable terms, or at all. If we lose our right to use any of these service providers,\nit could lead to significant increase in our expenses or otherwise result in a delay or disruption in our solutions until equivalent technology\nis developed by us, or obtained from another third party, and integrated into our solutions. If performance of the third parties that\nwe work with proves unsatisfactory, or if any of them violates its contractual obligations to us, we may need to replace such third party\nand/or take other remedial action, which could result in additional costs and materially and adversely affect our offerings to customers.\nMoreover, the financial condition of our third-party service providers may deteriorate over the course of our contract term, which may\nalso impact the ability of such third parties to continue providing their services to us.\n\n \n\n**Our products and solutions rely on the stable\nperformance of servers, and any disruption to our servers due to internal and external factors could diminish demand for our products\nand solutions, harm our business, our reputation and results of operations and subject us to liability.**\n\n \n\nWe rely in part upon the stable performance of\nservers for provision of our products and solutions. Those servers may incur disruptions due to internal and external factors, such as\ninappropriate maintenance, defects in the servers, cyberattacks, occurrence of catastrophic events or human errors. Such disruptions could\nresult in negative publicity, loss of or delay in market acceptance of our products and solutions, loss of competitive position, lower\ncustomer retention or claims by customers for losses sustained by them. In such an event, we may need to expend additional resources to\nhelp with recovering. In addition, we may not carry insurance to compensate us for any losses that may result from claims arising from\ndisruption in third-party servers. As a result, our reputation and our brand could be harmed, and our business, results of operations\nand financial condition may be adversely affected.\n\n \n\n**Our and our business partners’ business\noperations have been adversely affected by the COVID-19 outbreak, and may in the future continue to be affected by the COVID-19 outbreak.**\n\n \n\nBeginning in 2020, normal economic activity received\na severe shock when many company offices, retail stores and production facilities across China were forced to temporarily close as a result\nof the COVID-19 outbreak. The population in most of the major cities was locked down to a greater or lesser extent at various times and\nopportunities for discretionary consumption were extremely limited. People are forced to stay at home, and travel and social activities\nare restricted.\n\n \n\nWe took a series of measures to protect our employees,\nclosing our offices, facilitating remote working arrangements for our employees, and canceling business meetings and travels. The operations\nof some of our business partners and service providers were also constrained and impacted. This has led to delays in the purchase decisions\nand sales and implementation cycles of our products and solutions for existing or potential customers. Meanwhile it reduces our efficiency\nin product development, sales, marketing, and customer service work.\n\n \n\n15\n\n \n\n \n\nChina began to modify its zero-COVID policy at\nthe end of 2022, which seems to have prompted a considerable degree of uncertainties about the economic and market outlook. Thus, we have\nto be prepared for the possibility for a wide range of possible outcomes, some of which could be highly unfavorable to our business. For\nexample, because of COVID-19 and other pandemic viruses, some of our employees were absent from work in 2023 due to viral infections,\nwhich had a negative impact on our daily operations. There is still uncertainty as to the future impact of the virus. The extent to which\nthe pandemic impacts our results of operations going forward will depend on future developments which are highly uncertain and unpredictable,\nincluding the frequency, duration and extent of outbreaks of COVID-19, the appearance of new variants with different characteristics,\nthe success or failure of efforts to contain or treat cases, and future actions we or the authorities may take in response to these developments.\n\n \n\n**If the adoption of our products and solutions\nby our customers is slower than we expected, our business, results of operations and financial condition may be adversely affected.**\n\n \n\nOur business has relied on the adoption of our\nproducts and solutions by a broad array of customers. Our ability to further increase our customer base and achieve broader market acceptance\nof our products and solutions will depend, in part, on our ability to effectively organize, focus and train our sales and marketing personnel.\nOur ability to achieve significant revenue growth in the future will depend, in part, on our ability to recruit, train and retain a sufficient\nnumber of experienced sales professionals. Our recent hires and planned hires may not become as productive and efficient as we expect\nand we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business.\n\n \n\nAs\nwe seek to increase the adoption of our products and solutions by our customers, we may incur higher costs and longer sales cycles. The\ndecision to adopt our products and solutions may require the review and approval of multiple departments including product, human resources,\nfinancial and legal departments. In addition, while customers may quickly deploy our products and solutions on a limited basis before\nthey will commit to deploying our products and solutions at scale, they often require extensive education about our products and solutions\nand significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development resources.\nIf our customers adopt our products and solutions more slowly than anticipated, it could negatively impact our business, operational results,\nand financial condition.\n\n \n\n**We may fail to conduct our sales and marketing\nactivities in a cost-effective manner, and we are subject to limitations in promoting our products and solutions.**\n\n \n\nDue to the technical nature of AI solutions, we\nmainly rely on our sales and marketing forces to conduct marketing activities and drive sales of our products and solutions. If we fail\nto conduct our sales and marketing activities in a cost-effective way, we may incur considerable marketing expenses, which could adversely\naffect our business and operating results. Additionally, our brand promotion and marketing activities may not be well received by customers\nand potential customers and may not result in the levels of sales that we anticipate. Meanwhile, marketing approaches and tools in the\nmarket for AI solutions in China are evolving, which may further require us to enhance our marketing approaches and experiment with new\nmarketing methods to keep pace with industry developments and customer preferences. Failure to introduce new marketing approaches in an\nefficient and effective manner could reduce our market share and materially and adversely affect our financial condition, results of operations\nand profitability.\n\n \n\n**If we fail to provide high quality customer\nservices, our brand, business, and results of operations may be harmed.**\n\n \n\nWe believe our focus on customer services and\nsupport is critical to attracting new customers, retaining existing customers and growing our business. We have invested in training our\ncustomer support team and improving the quality of our customer services. However, our customer services team may not be able to maintain\na high standard for themselves going forward for reasons such as budgetary constraints and employee losses, which could adversely affect\nour reputation and ability to retain and bring in customers. As a result, our brand, business, and results of operations may be harmed.\n\n \n\n**We had a concentration of major customers\nduring the years ended December 31, 2023, 2024 and 2025 and if our existing major customers cease to engage our services, we may\nbe unable to find new customers with similar attributable revenue within a reasonable time or at all.**\n\n \n\nFor the years ended December 31, 2023, 2024\nand 2025, the percentage of our revenue attributable to our largest customer amounted to 29.3%, 22.4% and 31.9%, respectively, while the\npercentage of our revenue attributable our five largest customers for the years ended December 31, 2023, 2024 and 2025 amounted to\n69.7%, 49.9% and 65.8%, respectively. \n\n \n\n16\n\n \n\n \n\nWe cannot assure you that there will not be any\ndisputes between our major customers and us, or that we will be able to maintain business relationships with our existing customers. As\na substantial amount of revenues were generated from a relatively small number of major customers, in the event that these existing major\ncustomers cease to engage our services and we are unable to find new customers with similar attributable revenue within a reasonable period\nof time or at all, our business and profitability may be adversely affected. In addition, if any of such customers default or delay on\ntheir payment or settlement of our trade and other receivables, our liquidity, financial condition and results of operations may be adversely\naffected.\n\n** **\n\n**Our expansion into consumer hardware products\npresents operational risks that could adversely affect our business**\n\n \n\nIn 2024, we launched AI-powered smart glasses\nand expanded into the consumer hardware sector. We have limited experience manufacturing, marketing, and distributing consumer electronics\nproducts at scale. Scaling our hardware operations presents numerous operational risks, including managing supply chains, ensuring product\nquality and reliability, controlling manufacturing costs, securing sufficient production capacity, and providing effective customer support.\nAny product recalls, delays, or failures to meet consumer expectations could damage our brand reputation and customer relationships.\n\n \n\nIf we are unable to successfully develop, manufacture,\nand distribute consumer hardware products, our growth prospects, financial condition, and results of operations could be materially and\nadversely affected.\n\n \n\n**We face significant risks relating to our\ncustomers’ ability to timely pay their obligations**\n\n \n\nWe extend credit to a concentrated group of customers,\nand a significant portion of our accounts receivable is from a limited number of them. During 2024, we recorded a material increase in\nour allowance for credit losses due to longer payment cycles and uncertainty regarding collections. Any adverse change in a major customer’s\nfinancial condition or ability to make timely payments could have a material adverse impact on our cash flows and liquidity.\n\n \n\nGiven our working capital needs and limited cash\nresources, increased payment delays or customer defaults could force us to seek additional external financing sooner than expected, and\nmay constrain our ability to fund operations, service debt, or pursue strategic initiatives.\n\n \n\nIf\nwe are unable to collect a substantial portion of our accounts receivable on a timely basis, or if significant write-offs occur, our liquidity,\nfinancial condition, and results of operations could be materially and adversely affected. \n\n \n\n**The intensifying competition, change in\nsector trend and landscape and government policies may have a direct impact on the industries where our clients operate their businesses,\nand negatively affect the stability of our clients, which may subsequently have negative impact on our business.**\n\n \n\nA significant portion of our revenues were derived\nfrom customers engaged in a few industries in China, some of which are emerging and highly competitive, such as the contact center industry.\nAny change in the competitive landscape, market trend or user behaviors in such sectors may have a negative impact on our customers, thus\nharm their ability to make payments and maintain and increase the usage of our products and solutions. In addition, some of these industries\nin China are highly regulated by the PRC government and numerous regulatory authorities of the central PRC government are empowered to\nissue and implement regulations governing various aspects of these industries. As the laws and regulations are evolving and some of them\nare relatively new, changes to the current laws and regulations may harm our business and results of operation. In addition, interpretation\nand enforcement of such laws and regulations involve significant uncertainty. As a result, in certain circumstances, it may be difficult\nto determine what actions or omissions may be deemed to be in violations of applicable laws and regulations. If these laws and regulations\nor the uncertainty associated with their interpretation negatively impact the industries where our customers operate, our business may\nbe adversely affected as well.\n\n \n\n**Our reliance on a limited number of suppliers\nfor certain essential services could adversely affect our ability to manage our business effectively and subsequently harm our business.**\n\n \n\nWe rely on a limited number of suppliers for certain\nessential services to operate our network and provide products and solutions to our customers. Due to the limited number of relevant suppliers\navailable in China, we rely on a limited number of suppliers for cloud, internet data center services and hardware. Our purchase from\ntop-three suppliers in aggregate accounted for 73.2%, 39.6% and 56.1% of total purchase for the years ended December 31, 2023, 2024\nand 2025, respectively. We may experience shortages in components or delays in delivery as a result of natural disasters, increased demand\nin the industry or our suppliers’ lacking sufficient rights to supply the servers or other products or services.\n\n \n\n17\n\n \n\n \n\nOur reliance on these suppliers exposes us to\nrisks, including reduced control over costs and constraints based on the then current availability, terms, and pricing of these services.\nWe generally do not have any long-term contracts guaranteeing supply with these suppliers. If our supply of certain services is disrupted\nor delayed, there can be no assurance that additional supplies or services can serve as adequate replacements or that supplies will be\navailable on terms that are favorable to us, if at all. Moreover, even if we can identify adequate replacements on substantially similar\nterms, our business could be adversely affected until those efforts were completed. Any disruption or delay in the supply of our hardware\nmay cause delay or other constraints on our operations that could damage our customer relationships.\n\n \n\n**We may fail to obtain or maintain all required\nlicenses, permits and approvals to operate our business.**\n\n \n\nOur business and operations have been subject\nto extensive regulations. We are required to obtain and maintain applicable licenses, permits and approvals from different regulatory\nauthorities in order to conduct our existing or future business in connection with smart city services. As we have been continually expanding\ninto new business operations in the area of architectural design AI services, and the interpretation and application of existing PRC laws\nand regulations and possible new laws and regulations relating to the telecommunication services have created substantial uncertainties\nregarding the legality of existing and future foreign investments in, and the businesses and activities of telecommunication services\nin China, including our business, we cannot assure you that we have obtained all the approvals, permits or licenses required for conducting\nour business in China or areas where we operate, or will be able to maintain our existing approvals, permits or licenses or obtain new\nones. The government authorities may require us to obtain additional licenses, permits or approvals so that we can continue to operate\nour existing or future businesses or otherwise prohibit our operation of the types of businesses to which the new requirements apply.\nIn addition, new regulations or new interpretations of existing regulations may increase our costs of doing business and prevent us from\nefficiently delivering services and expose us to potential penalties and fines. Lastly, our existing licenses may expire without proper\nrenewal or be revoked due to violations of relevant licensure maintenance requirements. If any of our entities is deemed by governmental\nauthorities to be operating without appropriate permits and licenses or outside of their authorized scopes of business or otherwise fail\nto comply with relevant laws and regulations, we may be subject to penalties and our business, financial condition, and results of operation\nmay be materially and adversely affected.\n\n  \n\n**We may fail to obtain, maintain and protect\nour intellectual property rights and proprietary information or prevent third parties from any unauthorized use of our technologies.**\n\n \n\nOur trade secrets, trademarks, copyrights, patents,\nand other intellectual property rights are critical to our success. We rely on, and expect to continue to rely on, confidentiality agreements\nand non-compete agreements with our employees and third parties to protect our intellectual properties. However, events beyond our control\nmay pose threats to our intellectual property rights and the integrity of our products and brand. Effective protection of our trademarks,\ncopyrights, domain names, patent rights, and other intellectual property rights is expensive and challenging. While we have taken measures\nto protect our intellectual property rights, including implementing a set of comprehensive internal policies to establish robust management\nover our intellectual property rights, and deploying a special team to guide, manage, supervise and monitor our daily work regarding intellectual\nproperty rights, we cannot assure you that such efforts are adequate to guard against any potential infringement and misappropriation.\nIn addition, our intellectual property rights may be declared invalid or unenforceable by the courts. We cannot assure you that any of\nour intellectual property rights applications will ultimately proceed to registration or will result in registration with adequate scope\nfor our business. Some of our pending applications or registrations may be successfully challenged or invalidated by others. If our intellectual\nproperty rights applications are not successful, we may have to use different intellectual property rights for our affected products or\nservices, or seek to enter into arrangements with any third parties who may have prior registrations, applications or rights, which might\nnot be available on commercially reasonable terms, if at all. If we fail to protect or enforce our intellectual property rights, our competitors\nmay copy or reverse-engineer our products and services without authorization and compete with us. As a result, our customers and partners\nmay devalue our services, and our ability to compete effectively may be impaired, which could have a material adverse effect on our business,\nfinancial condition and results of operations.\n\n \n\nSimilarly, to protect our unpatented proprietary\ninformation and technology, such as trade secrets, we rely on our agreements with employees and third parties that contain restrictions\non the use and disclosure of such information or technology. For example, our employees and third parties are required to keep confidential\nof any unpatented proprietary information and technology during the contract term and after the termination of the employment agreement.\nIn addition, the agreements with our employees and third parties explicitly provide for all rights and obligations regarding the ownership\nand protection of intellectual property rights. These agreements may be inadequate or may be breached, either of which could potentially\nresult in unauthorized use or disclosure of our trade secrets and other proprietary information to third parties, including our competitors.\nAs a result, we may lose our competitive advantages derived from such intellectual property. Significant impairments on our intellectual\nproperty rights may result in a material and adverse effect on our business.\n\n \n\n18\n\n \n\n \n\n**We may become subject to intellectual property\ndisputes, which are costly and may subject us to significant liability and increased costs of business.**\n\n \n\nWe compete in markets where there are a large\nnumber of patents, copyrights, trademarks, trade secrets, and other intellectual and proprietary rights, as well as disputes regarding\ninfringement of these rights. Our competitors and other third parties may, whether rightly or falsely, bring legal claims against us for\ninfringing on their intellectual property rights. The intellectual property laws in China, which cover the validity, enforceability and\nscope of protection of intellectual property rights, are evolving, and litigation is becoming a more popular means to resolve commercial\ndisputes. We are exposed to a higher litigation risk. Any intellectual property lawsuits against us, whether successful or not, may harm\nour brand and reputation.\n\n \n\nDefending intellectual property claims is costly\nand can impose a significant burden on our management and resources. Any intellectual property litigation to which we become a party may\nrequire us to do one or more of the following:\n\n \n\n●cease selling, licensing, or\nusing products or features that incorporate the intellectual property rights that we allegedly infringe, misappropriate, or violate;\n\n \n\n●make substantial payments for\nlegal fees, settlement payments, or other costs or damages, including indemnification of third parties;\n\n \n\n●obtain a license or enter into\na royalty agreement, either of which may not be available on reasonable terms or at all, in order to obtain the right to sell or use\nthe relevant intellectual property; or\n\n \n\n●redesign the allegedly infringing\nproducts to avoid infringement, misappropriation, or violation, which could be costly, time-consuming, or impossible.\n\n \n\nFurther, there is no guarantee that we can obtain\nfavorable judgment in all legal cases, in which case we may need to pay damages or be forced to cease using certain technologies or content\nthat are critical to our products and solutions. Any resulting liabilities or expenses or any changes to our products or solutions that\nwe have to make to limit future liabilities may have a material adverse effect on our business, results of operations, and prospects.\n\n \n\n**We and our management may from time to time\nbe subject to claims, disputes, lawsuits and other legal and administrative proceedings.**\n\n \n\nWe are currently not party to any material legal\nor administrative proceedings except for the ones described in Item 8. See “Item 8.A. Consolidated Statements and Other Financial\nInformation—Litigation.” However, in light of the nature of our business, we and our management are susceptible to potential\nclaims or disputes. We and our management have been, and may from time to time in the future be, subject to or involved in various claims,\ndisputes, lawsuits and other legal and administrative proceedings. Lawsuits and litigations may cause us to incur defense costs, utilize\na significant portion of our resources and divert management’s attention from our day-to-day operations, any of which could harm\nour business. Claims arising out of actual or alleged violations of law, breach of contract or torts could be asserted against us by customers,\nbusiness partners, suppliers, competitors, employees or governmental entities in investigations and legal proceedings. In particular,\naccording to the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employers are required, together with their\nemployees or separately, to pay the social insurance premiums and housing funds for their employees. Employers that fail to make adequate\nsocial insurance and housing fund contributions may be subject to fines and legal sanctions. A few of our PRC operating entities engaged\nthird-party human resources agencies to pay social insurance premium and housing funds for some of their employees. This is because such\nemployees worked outside of the cities where the operating entities are registered and third-party human resources agencies were engaged\nto pay social insurance premium and housing provident funds for such employees in cities where they worked. If the relevant PRC authorities\ndetermine that this third-party agency arrangement does not satisfy the requirements under the relevant PRC laws and regulations, that\nwe shall make supplemental contributions, that we are not in compliance with labor laws and regulations, or that we are subject to fines\nor other legal sanctions, such as order of timely rectification, and our business, financial condition and results of operation may be\nadversely affected.\n\n \n\n**Changes in laws and regulations related\nto the internet or changes in the internet infrastructure itself may diminish the demand for our products and solutions and have a negative\nimpact on our business.**\n\n \n\nThe future success of our business depends upon\nthe continued use of the internet as a primary medium for commerce, communication and business solutions. The PRC government has in the\npast adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these\nlaws or regulations could require us to modify our products in order to comply with these changes. In addition, government agencies may\nbegin to impose taxes, fees or other charges for accessing the internet or e-commerce. These laws and changes could limit the growth of\ninternet-related commerce or communications generally and reduce the demand for internet-based services such as ours.\n\n \n\n19\n\n \n\n \n\nIn addition, use of the internet as a business\ntool could be adversely affected. The performance of the internet and its acceptance as a business tool has been adversely affected by\n“viruses,” “worms” and similar malicious programs and the internet has experienced a variety of outages and other\ndelays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by the above issues,\nour business, financial condition, and results of operations could suffer.\n\n \n\nComplying with evolving privacy and other data\nrelated laws and requirements may be expensive and force us to make adverse changes to our business, and failure to comply with such laws\nand requirements could result in substantial harm to our business and results of operations.\n\n \n\nLaws and regulations governing data privacy and\nprotection, the use of the internet as a commercial medium, the use of data in artificial intelligence and machine learning, and data\nsovereignty requirements are rapidly evolving, extensive, complex, and include inconsistencies and uncertainties. These and other similar\nlegal and regulatory developments could contribute to legal and economic uncertainty, affect how we design, market, sell, and operate\nour platform, how our customers process and share data, how we process and use data, and how we transfer personal data from one jurisdiction\nto another, which could negatively impact demand for our platform. We may incur substantial costs to comply with such laws and regulations,\nto meet the demands of our customers relating to their own compliance with applicable laws and regulations, and to establish and maintain\ninternal compliance policies.\n\n \n\nWe have established privacy policies and other\ndocumentation regarding our collection, processing, use, and disclosure of personal information or other confidential information. Although\nwe endeavor to comply with our policies, we may at times fail to do so or may be perceived to have failed to do so. Moreover, despite\nour efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our policies. Such failures\ncould subject us to claims and proceedings, which could be costly and time-consuming. Our business, financial condition and results of\noperations could be adversely affected.\n\n \n\n**We are dependent on the continuous services\nof our senior management and other key employees. If we fail to attract, retain and motivate qualified personnel, our business could be\nmaterially and adversely affected.**\n\n \n\nOur future performance depends on the continued\nservices and contributions of our senior management to oversee and execute our business plans and to identify and pursue new opportunities\nand innovations. Any loss of service of our senior management or other key employees can significantly delay or prevent us from achieving\nour strategic business objectives, and adversely affect our business, financial condition and operating results. From time to time, there\nmay be changes in our senior management team, resulting from the hiring or departure of executives, which could also disrupt our business.\nHiring suitable replacements and integrating them into our existing teams also requires significant amount of time, training and resources,\nand may impact our existing corporate culture.\n\n \n\n**Future strategic acquisitions and investments\nmay fail and may result in material and adverse impact on our financial condition and results of operations.**\n\n \n\nWe may, in the future, acquire businesses or platforms\nthat we believe can improve our products and solutions, enhance our technological capacities, and expand our customer coverage. Our ability\nto implement our acquisition strategy will depend on our ability to identify suitable targets, our ability to reach agreements with them\non commercially reasonable terms, and within a desired timeframe, and the availability of financing to complete acquisitions, as well\nas our ability to obtain any required shareholder or government approvals. Our strategic acquisitions and investments could subject us\nto uncertainties and risks, including high acquisition and financing costs, potential ongoing financial obligations and unforeseen or\nhidden liabilities, failure to achieve our intended objectives, benefits or revenue-enhancing opportunities, uncertainty of entering into\nmarkets in which we have limited or no experience, costs associated with and difficulties in integrating acquired businesses, and diversion\nof our resources and management attention. Our failure to address these uncertainties and risks may have a material adverse effect on\nour business, financial condition, and results of operations. Even if we are able to successfully acquire or invest in suitable businesses,\nwe cannot assure you that we will achieve our expected returns on such acquisitions or investments through successful integration. As\nof the date of this annual report, we have not identified or pursued any acquisition or investment targets. If we fail to achieve our\nexpected returns on such acquisitions or investments in the future, our business, financial conditions, results of operations and prospects\nmay be materially and adversely affected.\n\n \n\nAcquisitions also pose the risk that we may be\nexposed to successor liability relating to the actions by an acquired company and its management before and after the acquisition. The\ndue diligence that we conduct in connection with an acquisition or investment may not be sufficient to discover unknown liabilities, and\nany contractual guarantees or indemnities that we receive from the sellers of the acquired companies or investment target companies or\ntheir shareholders may not be sufficient to protect us from, or compensate us for, actual liabilities. A material liability associated\nwith an acquisition or investment could adversely affect our reputation and reduce the benefits of the acquisition or investment. In addition,\nif the management team or key employees of an acquired company fail to perform as expected, this may affect the business performance of\nsuch acquired company and, in turn, have a material adverse effect on our business, financial conditions, and results of operations.\n\n \n\n20\n\n \n\n \n\n**Our expansion into international markets,\nincluding the commercialization of our AI-powered smart glasses, exposes us to significant risks and uncertainties.**\n\n \n\nWe have begun expanding our operations and customer\nbase internationally, particularly through the launch and commercialization of our AI-powered smart glasses in the second half of 2024,\nand we may continue to further expand our operations and customer base worldwide. We\nmay adapt to and develop strategies to address international markets but there is no guarantee that such efforts will have the desired\neffect. As a result, we may be required to devote significant management attention and financial resources worldwide. In connection with\nsuch expansion, we may face difficulties including costs associated with varying seasonality patterns, potential adverse movement of currency\nexchange rates, longer payment cycle difficulties in collecting accounts receivable in some countries, tariffs and trade barriers, a variety\nof regulatory or contractual limitations on our ability to operate, adverse tax events, reduced protection of intellectual property rights\nin some countries, political risks and a geographically and culturally diverse workforce and customer base. Failure to overcome any of\nthese difficulties could harm our business.\n\n  \n\nMoreover, the regulatory landscape for AI-powered\nand consumer-facing hardware products varies significantly across jurisdictions and is subject to change. In\nsome cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. We cannot\nassure you that we are able to fully comply with the legal requirements of each foreign jurisdiction and successfully adapt our business\nmodels to local market conditions and local consumer expectations. Due to the complexity involved in our international business expansion,\nparticularly as we enter new consumer markets with innovative hardware products, we\ncannot assure you that we are or will be in compliance with all\n\napplicable laws and regulations. Any failure to\nmanage these risks effectively could materially and adversely affect our business, results of operations, and prospects.\n\n \n\n**We may be unable to obtain any additional\ncapital required in a timely manner or on acceptable terms, or at all. Moreover, our future capital needs may require us to sell additional\nequity or debt securities that may dilute our shareholders’ shareholdings or subject us to covenants that may restrict our operations\nor our ability to pay dividends.**\n\n \n\nTo grow our business and remain competitive, we\nmay require additional capital from time to time for our daily operations. Our ability to obtain additional capital is subject to a variety\nof uncertainties, including:\n\n \n\n●our market position and competitiveness\nin the industries in which we operate;\n\n \n\n●our future profitability, overall\nfinancial condition, results of operations and cash flows;\n\n \n\n●general market conditions for\ncapital-raising activities by our competitors in China; and\n\n \n\n●economic, political and other\nconditions in China and internationally.\n\n \n\nWe may be unable to obtain additional capital\nin a timely manner or on acceptable terms, or at all. In addition, our future capital or other business needs could require us to sell\nadditional equity or debt securities, or to obtain a credit facility. The sale of additional equity or equity-linked securities could\ndilute our shareholders’ shareholdings. Any incurrence of indebtedness will also lead to increased debt service obligations, and\ncould result in operating and financing covenants that may restrict our operations or our ability to pay dividends to our shareholders.\n\n \n\n**We have not independently verified the accuracy\nor completeness of data, estimates, and projections in this annual report that we obtained from third-party sources, and such information\ninvolves assumptions and limitations.**\n\n \n\nCertain facts, forecasts, and other statistics\ncontained in this annual report relating to the industry in which we operate have been derived from various public data sources and industry\nreports of third-party industry consultants. In deriving the market size of these industries, these industry consultants may have adopted\ndifferent assumptions and estimates for certain metrics. While we generally believe such reports to be reliable, we have not independently\nverified the accuracy or completeness of such information. Such reports may not be prepared on a comparable basis or may not be consistent\nwith other sources.\n\n \n\nIndustry data and projections involve a number\nof assumptions and limitations. Our industry data and market share data should be interpreted in light of the industries in which we operate.\nAny discrepancy in the interpretation of such data could lead to different measurements and projections, and actual results could differ\nfrom the projections.\n\n \n\n21\n\n \n\n \n\n**We have identified one material weakness\nin our internal control over financial reporting as of and for the year ended December 31, 2024. If our remediation of the material weaknesses\nis not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain proper and effective\ninternal control over financial reporting, our ability to produce accurate and timely consolidated financial statements could be impaired,\ninvestors may lose confidence in our financial reporting and the trading price of the ADSs may decline.**\n\n \n\nPursuant to Section 404 of Sarbanes-Oxley,\nas an “emerging growth company,” we are exempt from the requirement for auditor attestation of our internal control over financial\nreporting for as long as we maintain emerging growth company status, which may be up to five years following our initial public offering.\nHowever, our management is still required to assess and report on the effectiveness of our internal control over financial reporting under\nSection 404(a). When we lose our status as an “emerging growth company” and reach an accelerated filer threshold, our independent\nregistered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. The\nrules governing the standards that must be met for management to assess our internal control over financial reporting are complex and\nrequire significant documentation, testing and possible remediation. To comply with the requirements of being a reporting company under\nthe Exchange Act, we will need to upgrade our information technology systems, implement additional financial and management controls,\nreporting systems and procedures and hire additional accounting and finance staff. If we or, if required, our auditor is unable to conclude\nthat our internal control over financial reporting is effective, investors may lose confidence in our financial reporting and the trading\nprice of the ADSs may decline.\n\n \n\nIn connection with the audit of our consolidated\nfinancial statements, as of and for the year ended December 31, 2022, we identified two material weaknesses in our internal control\nover the financial statement closing process. A material weakness is a deficiency, or a combination of deficiencies, in internal control\nover financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated\nfinancial statements will not be prevented or detected on a timely basis. The material weakness that have been identified relates to\n(i) our lack of sufficient and competent financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and reporting\nrequirements set forth by the SEC to address complex U.S. GAAP technical accounting issues, and to prepare and review consolidated financial\nstatements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements and (ii) our lack of internal file management\nprocedures and effective recognition procedures to recognize revenue and costs timely.\n\n \n\nWe implemented the following remediation measurements\nduring the fiscal year ended December 31, 2023, which addressed the second material weakness identified as of December 31, 2022:\n\n \n\n(1)We\nestablished internal file management policy, included but not limited to: (i) established the internal procedures for assigning sequential\nand unique contract numbers to each project; (ii) assign responsibilities for file management to specific individuals and implemented\nsegregation of duties; and (iii) developed a standardized electronic worksheet that categorizes documents by date, name of project, revenue\ntype, consideration of the contracts, M&S periods, and other key terms of the contracts.\n\n \n\n(2)We\nimplemented documents control policies, included but not limited to: (i) all documents are properly labeled with their status, and revision\nhistory if any; (ii) all important documents and contracts were submitted to the legal department for retention and review;\n\n \n\n(3)We\nengaged the third-party financial consultant to develop clear guidelines for recognizing revenue and costs in accordance with U.S. GAAP,\nand provide training to our accounting personnels. Our responsible accounting personnel took regular review and analysis of revenue,\ncosts, and gross margin to ensure timely and accurate recognition of revenue and costs based on the service periods. The third-party\nfinancial consultants conducted the second review of the revenue/cost recognition.\n\n \n\nWe are working to remediate the remaining material\nweakness and are taking steps to strengthen our internal control. Specifically, we are still working to develop and implement a staffing\nplan for hiring additional accounting and finance personnel in 2024, hire additional qualified resources with appropriate knowledge and\nexpertise to handle complex accounting issues and effectively prepare financial statements and conduct regular and continuous U.S. GAAP\naccounting and financial reporting training programs for our financial reporting and accounting personnel. In order to maintain and improve\nthe effectiveness of our disclosure controls and procedures and internal controls over financial reporting, we will need to expend significant\nresources and provide significant management oversight.\n\n \n\nImplementing any appropriate changes to our internal\ncontrols may require specific compliance training of our directors and employees, entail substantial costs in order to modify our existing\naccounting systems, take a significant period of time to complete and divert management’s attention from other business concerns.\nThese changes may not, however, be effective in maintaining the adequacy of our internal control.\n\n \n\n22\n\n \n\n \n\nWe cannot assure you that there will not be additional\nmaterial weaknesses or any significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain\ninternal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of\noperations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent\nregistered public accounting firm determines that we have a material weakness or significant deficiency in our internal control over financial\nreporting once that firm begin its Section 404 reviews, investors may lose confidence in the accuracy and completeness of our financial\nreports, the market price of the ADSs could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other\nregulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain\nother effective control systems required of public companies, could also restrict our future access to the capital markets.\n\n \n\n**We face risks related to natural disasters,\nhealth epidemics and other outbreaks, which could significantly disrupt our business operations.**\n\n \n\nOur business could be adversely affected by the\neffects of epidemics. In recent years, there have been breakouts of epidemics in and outside China. Our business operations could be disrupted\nif any of our employees is suspected of having H1N1 flu, COVID-19, avian flu or another epidemic, since it could require our employees\nto be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent\nthat the outbreak harms the Chinese or global economy or our business environment in particular. We are also vulnerable to natural disasters\nand other calamities, which may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet\nfailures, and may adversely affect our ability to provide advertising services through our products. See “*Risk Factors —\nRisks Relating to Our Business and Industry — Our and our business partners’ business operations have been adversely affected\nby the COVID-19 outbreak, and may in the future continue to be affected by the COVID-19 outbrea*k.”\n\n \n\n**Economic substance legislation of the Cayman\nIslands may adversely impact us or our operations.**\n\n \n\nThe Cayman Islands introduced the International\nTax Co-operation (Economic Substance) Act (the “**Substance Act**”) effective from January 1, 2019, which established certain\neconomic substance requirements for in-scope Cayman Islands entities which are engaged in certain “relevant activities,” which\nin the case of exempted companies incorporated before January 1, 2019, will apply in respect of financial years commencing July 1, 2019,\nonwards. As we are a Cayman Islands company, compliance obligations include filing annual notifications for the Company, which need to\nstate whether we are carrying out any relevant activities and if so, whether we have satisfied economic substance tests to the extent\nrequired under the Substance Act. As it is a new regime, it is anticipated that the Substance Act will evolve and be subject to further\nclarification and amendments. We may need to allocate additional resources to keep updated with these developments, and may have to make\nchanges to our operations in order to comply with all requirements under the Substance Act. Failure to satisfy these requirements may\nsubject us to penalties under the Substance Act.\n\n \n\n**The Cayman Islands have been removed from\nthe “FATF grey list” of jurisdictions; however the European Union still includes the Cayman Islands on its own list of non-cooperative\ntax jurisdictions, but this is separate from the FATF. It is unclear how this will affect us.**\n\n \n\nIn February 2021, the Cayman Islands was added\nto the Financial Action Task Force (“FATF”) list of jurisdictions whose anti-money laundering practices are under increased\nmonitoring, commonly referred to as the “FATF grey list.” When the FATF places a jurisdiction under increased monitoring,\nit means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to\nincreased monitoring during that timeframe.\n\n \n\nOn March 13, 2022, the European Commission (“EC”)\nupdated its list of ‘high-risk third countries’ (“EU AML List”) identified as having strategic deficiencies in\ntheir anti-money laundering/counter-terrorist financing regimes. The EC has noted it is committed to greater alignment with the FATF listing\nprocess and the addition of the Cayman Islands to the EU AML List is a direct result of the inclusion of the Cayman Islands on the FATF\ngrey list in February 2021. It is unclear how long this designation will remain in place and what ramifications, if any, the designation\nwill have for us.\n\n \n\nThe Cayman Islands was removed from the FATF\ngrey list in October 2023 and while it is expected that the EC will now initiate steps to delist the Cayman Islands from the EU AML\nList, having previously indicated that the EU will not require further measures, beyond those required to remove the Cayman Islands from\nthe FATF grey list, it is still unclear how long this designation will remain in place and what ramifications, if any, the designation\nwill have for the Company.\n\n \n\n23\n\n \n\n \n\nRisks Relating to Our Corporate Structure\n\n \n\n**In the following discussion of risks relating\nto our corporate structure, “we,” “us,” or “our” refer to Xiao-I.**\n\n \n\n**If the PRC government finds that the agreements\nthat establish the structure for operating our businesses in China do not comply with PRC regulations on foreign investment in internet\nand other related businesses, or if these regulations or their interpretation change in the future, we could be subject to severe penalties\nor be forced to relinquish our interests in those operations and our ADSs may decline in value dramatically or even become worthless.**\n\n \n\nForeign ownership of internet-based businesses,\nsuch as provider of internet data centers services, are subject to restrictions under current PRC laws and regulations. Neither we nor\nour subsidiaries own any equity interest in Shanghai Xiao-I. Instead, we control and receive the economic benefits of Shanghai Xiao-I’s\nbusiness operation through the VIE Agreements. We, through our WFOE, have the full and exclusive right to manage and direct all cash flow\nand assets of the VIE and to direct and administrate the financial affairs and daily operation of Shanghai Xiao-I. Shanghai Xiao-I pays\nservice fees to WFOE in an amount determined by WFOE in WFOE’s sole discretion. If Shanghai Xiao-I is unable to pay the service\nfees due to the actual managing situation, with the written consent of WFOE, the unpaid part of the service fees in the previous fiscal\nyear can be deferred to the end of the next year and settled together. During the validity of the VIE Agreements, we will bear all the\neconomic benefits and risks arising from the business of Shanghai Xiao-I and its subsidiaries. WFOE will provide financial support to\nShanghai Xiao-I or its subsidiaries in the event of a loss or serious operational difficulties. The VIE structure is used to provide investors\nwith exposure to foreign investment in China-base companies where Chinese law prohibits direct foreign investments in certain industries.\nThe VIE Agreements allow Xiao-I to (i) exercise control over the VIE, (ii) receive all of the economic benefits of the VIE and the VIE’s\nsubsidiaries (excluding non-controlling interests) and bears all the economic risks arising from the business of the VIE and the VIE’s\nsubsidiaries (excluding non-controlling interests), (iii) provide financial support to the VIE or the VIE’s subsidiaries, and (iv)\nhave an exclusive option to purchase all or part of the equity interests and assets in the VIE when and to the extent permitted by PRC\nlaw.\n\n \n\nAs a result of these contractual arrangements,\nwe are regarded as the primary beneficiary of the VIE for accounting purposes and hence consolidate financial results of the VIE and its\nsubsidiaries into our consolidated financial statements under U.S. GAAP. For the avoidance of any doubt, any references to control or\nbenefits that accrue to us because of Shanghai Xiao-I refer only to the conditions satisfied for consolidation of Shanghai Xiao-I under\nU.S. GAAP and it is not an entity in which we own any equity.\n\n \n\nIf (i) the applicable PRC authorities invalidate\nthese contractual arrangements for violation of PRC laws, rules and regulations, (ii) any VIE Agreements are terminated with the consent\nof Zhizhen Technology or (iii) the VIE or its shareholders fail to perform its/his/her obligations under these contractual arrangements,\nour business operations in China would be materially and adversely affected, and the value of your ADSs would substantially decrease.\nFurther, if we fail to renew these contractual arrangements upon their expiration, we would not be able to continue our business operations\nunless the then current PRC law allows us to directly operate businesses in China.\n\n \n\nIn addition, if any VIE or all or part of its\nassets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities,\nwhich could materially and adversely affect our business, financial condition and results of operations. If any of the variable interest\nentities undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights\nto some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our\nbusiness and our ability to generate revenues.\n\n \n\nAll of these contractual arrangements are governed\nby PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed\nas in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability\nto enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to\nexert effective control over the PRC operating entities and we may be precluded from operating our business, which would have a material\nadverse effect on our financial condition and results of operations. Additionally, our ADSs may decline in value dramatically or even\nbecome worthless should we become unable to assert our contractual rights over the assets of the VIE that conducts all or substantially\nour operations.\n\n \n\n24\n\n \n\n \n\nWhile our opinion is that (i) the ownership structures\nof our WFOE and the VIE in China, currently are not in violation of any explicit provisions of PRC laws and regulations currently in effect;\nand (ii) the agreements under the contractual arrangements between our WFOE, the VIE and its shareholders governed by PRC law are valid,\nbinding and enforceable against each party thereto in accordance with their terms, there are substantial uncertainties regarding the interpretation\nand application of current and future PRC laws, regulations and rules. Thus, the PRC regulatory authorities may take a view contrary to\nour opinion. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure will be adopted or\nif adopted, what they would provide. If the ownership structures, contractual arrangements and business of our Company, our PRC subsidiary,\nthe VIE or subsidiaries of the VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or\nmaintain any of the required permits or approvals to operate our business, the relevant PRC regulatory authorities would have broad discretion\nto take action in dealing with such violations or failures, including:\n\n \n\n●revoking the business licenses\nand/or operating licenses of such entities;\n\n \n\n●imposing fines on us;\n\n \n\n●confiscating any of our income\nthat they deem to be obtained through illegal operations;\n\n \n\n●discontinuing or placing restrictions\nor onerous conditions on our operations;\n\n \n\n●placing restrictions on our\nright to collect revenues;\n\n \n\n●shutting down our servers or\nblocking our app/websites;\n\n \n\n●requiring us to restructure\nour ownership structure or operations;\n\n \n\n●restricting or prohibiting\nour use our available funds or the proceeds from any future financings activities to finance the business and operations of the VIE and\nits subsidiaries; or;\n\n \n\n●taking other regulatory or\nenforcement actions that could be harmful to our business.\n\n \n\nAny of these events could cause significant disruption\nto our business operations and severely damage our reputation, which would in turn have a material adverse effect on our financial condition\nand results of operations. If occurrences of any of these events results in our inability to direct the activities of the VIE and its\nsubsidiaries in China that most significantly impact its economic performance, and/or our failure to receive the economic benefits and\nresidual returns from the VIE and its subsidiaries, and we are not able to restructure our ownership structure and operations in a satisfactory\nmanner, we may not be able to consolidate the financial results of the VIE or its subsidiaries in our consolidated financial statements\nin accordance with U.S. GAAP.\n\n \n\n**The contractual arrangements with the VIE\nand its shareholders may not be as effective as equity ownership in providing operational control.**\n\n \n\nWe have to rely on the contractual arrangements\nwith the VIE and its shareholders to operate our business in China. These contractual arrangements, however, may not be as effective as\nequity ownership in providing us with control over the VIE. For example, the VIE and its shareholders could breach their contractual arrangements\nwith us by, among other things, failing to conduct the operations of the VIE in an acceptable manner or taking other actions that are\ndetrimental to our interests. And any economic losses as a result would be absorbed by us as we bear all economic risks arising from the\nbusinesses of the VIE under the contractual arrangements.\n\n \n\nIf we had equity ownership of the VIE in China,\nwe would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIE, which in turn could implement\nchanges, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual\narrangements, we rely on the performance by the VIE and its shareholders of their obligations under the contracts to exercise control\nover the VIE. The shareholders of the VIE may not act in the best interests of our Company or may not perform their obligations under\nthese contracts. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts\nthrough the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties\nin the PRC legal system.\n\n \n\n25\n\n \n\n \n\n**Any failure by the VIE or its shareholders\nto perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.**\n\n \n\nIf the VIE or its shareholders fail to perform\ntheir respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements\nthat give us operational control over our business operations in China and may have to incur substantial costs and expend additional resources\nto enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive\nrelief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders\nof the VIE were to refuse to transfer their equity interests in the VIE to us or our designee if we exercise the purchase option pursuant\nto these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to\ncompel them to perform their contractual obligations. In addition, if there are any disputes or governmental proceedings involving any\ninterest in such shareholders’ equity interests in the VIE, our ability to exercise shareholders’ rights or foreclose the\nshare pledges according to the contractual arrangements may be impaired. If these disputes or proceedings were to impair our control over\nthe VIE, we may not be able to maintain operational control over our business operations in the PRC and thus would not be able to continue\nto consolidate the VIE’s financial results, which would in turn result in a material adverse effect on our business, operations\nand financial condition.\n\n \n\nAll the agreements under the contractual arrangements\nwith the VIE are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts\nwould be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal\nsystem in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC\nlegal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal\nguidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced\nunder PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary.\nIn addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings\nare revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a\nprescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition\nproceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements,\nor if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to\nexert operational control over the consolidated variable interest entity, and our ability to conduct our business may be negatively affected.\nAs a result, our ADSs may decline in value dramatically or even become worthless should we become unable to assert our contractual rights\nover the assets of the VIE that conducts all or substantially our operations.\n\n \n\n**The contractual arrangements with the VIE\nare governed by PRC law. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes would be resolved\nin accordance with PRC legal procedures, which may not protect you as much as those of other jurisdictions, such as the United States.**\n\n \n\nAll the agreements under the contractual arrangements\nwith the VIE are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts\nwould be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal\nsystem in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC\nlegal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal\nguidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced\nunder PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary.\nIn addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing\nparties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration\nawards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event\nwe are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing\nthese contractual arrangements, we may not be able to exert operational control over the VIE, and our ability to conduct our business\nmay be negatively affected.\n\n \n\n**Contractual arrangements we have entered\ninto with the VIE and its shareholders may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could\nsignificantly reduce our consolidated net income and the value of your investment.**\n\n \n\nPursuant to applicable PRC laws and regulations,\narrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We may be subject\nto adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our PRC subsidiary, the VIE and\nits shareholders are not on an arm’s length basis and therefore constitute favorable transfer pricing. As a result, the PRC tax\nauthorities could require that the VIE adjust its taxable income upward for PRC tax purposes. Such an adjustment could adversely affect\nus by increasing our consolidated affiliated entities’ tax expenses without reducing the tax expenses of our PRC subsidiary, subjecting\nthe VIE to late payment fees and other penalties for under-payment of taxes, and resulting in our PRC subsidiary’s loss of its preferential\ntax treatment. Our consolidated results of operations may be adversely affected if the VIE’s tax liabilities increase or if it is\nsubject to late payment fees or other penalties.\n\n \n\n26\n\n \n\n \n\n**We are a holding company, and will rely\non dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make dividend payments\nto us, or any tax implications of making dividend payments to us, could limit our ability to pay our parent company expenses or pay dividends\nto holders of our ADSs.**\n\n \n\nWe are a holding company and conduct substantially\nall of our business through the VIE and its subsidiaries. We may rely on dividends to be paid by the VIE to fund our cash and financing\nrequirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we\nmay incur and to pay our operating expenses. If the VIE incurs debt on its own behalf in the future, the instruments governing the debt\nmay restrict its ability to pay dividends or make other distributions to us.\n\n \n\nUnder PRC laws and regulations, our WFOE, which\nis a wholly foreign-owned enterprise in China, may pay dividends only out of its accumulated profits as determined in accordance with\nPRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its\naccumulated after-tax profits each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches\n50% of its registered capital.\n\n \n\nOur WFOE generates primarily all of its revenue\nin Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability\nof our WFOE to use its Renminbi revenues to pay dividends to us. The PRC government may continue to strengthen its capital controls, and\nmore restrictions and substantial vetting process may be put forward by State Administration of Foreign Exchange (the “SAFE”)\nfor cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our WFOE\nto pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions\nthat could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.\n\n \n\nIn addition, the Enterprise Income Tax Law and\nits implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies\nto non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government\nand governments of other countries or regions where the non-PRC resident enterprises are incorporated. Any limitation on the ability of\nour PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments\nor acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.\n\n \n\n**If the seals of our PRC subsidiary and the\nVIE are not kept safely, are stolen, or used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities\ncould be severely and adversely compromised.**\n\n \n\nIn China, a company chop or seal serves as the\nlegal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China\nis required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory\ncompany chop, companies may have several other seals which can be used for specific purposes. The seals of our PRC subsidiary, the VIE\nand its subsidiaries generally held securely by personnel designated or approved by us in accordance with our internal control procedures.\nTo the extent those seals are not kept safe, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate\ngovernance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms\nof any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so.\n\n \n\n**We may lose the ability to use and enjoy\nassets held by the VIE that are critical to the operation of our business if the VIE declares bankruptcy or become subject to a dissolution\nor liquidation proceeding.**\n\n \n\nThe VIE holds certain assets that may be critical\nto the operation of our business, including permits, domain names and most of our intellectual property rights. If the shareholders of\nthe VIE breach the contractual arrangements and voluntarily liquidate the VIE or its subsidiaries, or if the VIE or its subsidiaries declare\nbankruptcy and all or part of their assets become subject to liens or rights of third-party creditors or are otherwise disposed of without\nour consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business,\nfinancial condition and results of operations. In addition, if the VIE or its subsidiaries undergo an involuntary liquidation proceeding,\nthird-party creditors may claim rights to some or all of their assets, thereby hindering our ability to operate our business, which could\nmaterially or adversely affect our business, financial condition and results of operations.\n\n \n\n27\n\n \n\n \n\n**Substantial uncertainties exist with respect\nto the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current\ncorporate structure and business operations.**\n\n \n\nThe National People’s Congress approved\nthe Foreign Investment Law (the “FIL”) on March 15, 2019 and the State Council approved the Regulation on Implementing the\nForeign Investment Law (the “Implementation Regulations”) on December 12, 2019, effective from January 1, 2020, which replaced\nthe trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign\nCooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and\nancillary regulations. The Supreme People’s Court of China issued a judicial interpretation on the Foreign Investment Law on December\n26, 2019, effective from January 1, 2020, to ensure fair and efficient implementation of the Foreign Investment Law. According to this\njudicial interpretation, courts in China shall not, among other things, support contracted parties to claim foreign investment contracts\nin sectors not on the Special Administrative Measures for Access to Foreign Investment (Negative List) (2024) (the “Negative List\n(2024)”), as void because the contracts have not been approved or registered by administrative authorities. The Foreign Investment\nLaw grants national treatment to foreign invested enterprises, except for those operating in “restricted” or “prohibited”\nindustries in the “negative list”, where if a foreign invested enterprise proposes to conduct business in an industry subject\nto foreign investment “restrictions” in the “negative list,” the foreign invested enterprise must go through a\nMOFCOM pre-approval process. The internet content service, internet audio-visual program services and online culture activities that we\nconduct through the VIE, is subject to foreign investment restrictions set forth in the Negative List (2024). The Foreign Investment Law\nand Implementation Regulations embody an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line\nwith prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic\ninvestments.\n\n \n\nHowever, since these rules are relatively new,\nuncertainties still exist in relation to their interpretation. For instance, under the Foreign Investment Law, “foreign investment”\nrefers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though\nit does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment\nvia contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future.\nIn addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated\nin laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws,\nadministrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign\ninvestment. In any of these cases, it will be uncertain whether the contractual arrangements with the VIE will be deemed to be in violation\nof the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative\nregulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual\narrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure\nto take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely\naffect our current corporate structure, corporate governance and business operations.\n\n \n\n**Some of our shareholders are not in compliance\nwith the PRC’s regulations relating to offshore investment activities by PRC residents. As a result, these shareholders may be subject\nto penalties themselves, and WFOE may be unable to open a new capital account with relevant banks within China according to their internal\ncontrol policies and may be restricted from remitting funds or handling other foreign exchange businesses within China unless and until\nwe remediate the non-compliance.**\n\n \n\nIn July 2014, the State Administration of Foreign\nExchange promulgated the Circular on Issues Concerning Foreign Exchange Administration over the Overseas Investment and Financing and\nRoundtrip Investment by Domestic Residents via Special Purpose Vehicles (“Circular 37”). According to Circular 37, prior registration\nwith the local SAFE branch is required for Chinese residents to contribute domestic assets or interests to offshore companies, known as\nSPVs. Circular 37 further requires amendment to a PRC resident’s registration in the event of any significant changes with respect\nto the SPV, such as an increase or decrease in the capital contributed by PRC individuals, share transfer or exchange, merger, division,\nor other material event. Further, foreign investment enterprises established by way of round-tripping shall complete the relevant foreign\nexchange registration formalities pursuant to the prevailing foreign exchange control provisions for direct investments by foreign investors,\nand disclose the relevant information such as actual controlling party of the shareholders truthfully.\n\n \n\nCurrently, most of our shareholders have completed\nCircular 37 Registration and are in compliance. Some of our beneficial owners, who are PRC residents, have not completed the Circular\n37 Registration. All our significant shareholders, directors and officers have completed Circular 37 Registration. We have asked our shareholders\nwho are Chinese residents to make the necessary applications and filings as required by Circular 37. We attempt to comply and attempt\nto ensure that our shareholders who are subject to these rules comply, with the relevant requirements. We cannot, however, provide any\nassurances that all of our and future shareholders who are Chinese residents will comply with our request to make or obtain any applicable\nregistration or comply with other requirements required by Circular 37 or other related rules. The Chinese resident shareholders’\nfailure to comply with Circular 37 registration may result in restrictions being imposed on part of foreign exchange activities of the\noffshore special purpose vehicles, including restrictions on its ability to receive registered capital as well as additional capital from\nChinese resident shareholders who fail to complete Circular 37 registration; and repatriation of profits and dividends derived from special\npurpose vehicles to China, by the Chinese resident shareholders who fail to complete Circular 37 registration, are also illegal. In addition,\nthe failure of the Chinese resident shareholders to complete Circular 37 registration may subject each of the shareholders to fines less\nthan RMB50,000. We cannot assure you that each of our Chinese resident shareholders will in the future complete the registration process\nas required by Circular 37. In addition, as of 2024, seven of our shareholders did not register according to the registration procedures\nstipulated in Circular 37 Registration of the SAFE when they conducted their other external investment activities unrelated to us. As\na result, these shareholders may be subject to penalties themselves, and WFOE may be unable to open a new capital account with relevant\nbanks within China according to their internal control policies and may be restricted from remitting funds or handling other foreign exchange\nbusinesses within China unless and until we remediate the non-compliance. However, WFOE has successfully opened a new capital account\nwith Bank of Ningbo in 2023. Apart from a small amount of the IPO proceeds reserved for overseas use, we were able to transfer the rest\nof the IPO proceeds from overseas to WFOE for VIE’s product development and operations through both WFOE’s new capital account\nwith Bank of Ningbo and WFOE’s pre-existing capital account with Agricultural Bank of China where WFOE has reserved foreign exchange\nquota. So long as there are no changes to PRC laws and regulations, or internal control policies of Bank of Ningbo, we are not aware of\nany substantial obstacles for WFOE to receive fund transfers from overseas in the near future. However, should there be any changes to\nPRC laws and regulations or internal control policies of Bank of Ningbo in the future, WFOE then may be restricted from transferring funds\nfrom overseas to its capital account with Bank of Ningbo as a result.\n\n \n\n28\n\n \n\n \n\nRisks Relating to Doing Business in China\n\n \n\n**In the following discussion of risks relating\nto doing business in China “we,” “us,” or “our” refer to the PRC operating entities.**\n\n \n\n**Changes in the political and economic policies\nof the PRC government or in relations between China and the United States or other governments may materially and adversely affect our\nPRC operating entities’ business, financial condition and results of operations and may result in its inability to sustain our growth\nand expansion strategies.**\n\n \n\nOur principal offices are based in China. Accordingly,\nthe PRC operating entities’ financial condition and results of operations are affected to a significant extent by economic, political\nand legal developments in the PRC or changes in government relations between China and the United States or other governments. There is\nsignificant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government\nregulations and tariffs.\n\n \n\nThe PRC economy differs from the economies of\nmost developed countries in many respects, including the extent of government involvement, level of development, growth rate, control\nof foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market\nforces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance\nin business enterprises, a substantial portion of productive assets in China are still owned by the government. In addition, the PRC government\ncontinues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises\nsignificant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations,\nsetting monetary policies, regulating financial services and institutions, and providing preferential treatment to particular industries\nor companies.\n\n \n\nWhile the PRC economy has experienced significant\ngrowth in the past four decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government\nhas implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit\nthe overall PRC economy but may also have a negative effect on our PRC operating entities. Our PRC operating entities’ financial\ncondition and results of operations could be materially and adversely affected by government control over capital investments or changes\nin tax regulations that are applicable to it. In addition, the PRC government has implemented certain measures, including interest rate\nincreases, to control the pace of economic growth. These measures may cause decreased economic activities.\n\n \n\nAny changes in economic conditions in China, in\nthe policies of the Chinese government or in the laws and regulations in China could have a material effect on a specific industry including\nour operating companies in China. Such developments could affect our business and operating results, cause changes in demand for our services\nand affect our competitive position.\n\n \n\n**Uncertainties with respect to the enforcement\nof laws, and changes in laws and regulations in China with little advance notice, could materially and adversely affect us.**\n\n \n\nSubstantially all our operations are located in\nChina. Our PRC operating entities are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal\nsystem is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference\nbut do not have binding authority. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations\nincluding, but not limited to, the laws and regulations governing our business and the enforcement and performance of our business arrangements\nin certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation\nand enforcement could be unpredictable, with little advance notice. The effectiveness and interpretation of newly enacted laws or regulations,\nincluding amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations\nwhich are subsequently adopted or interpreted in a manner different from our current understanding of these laws and regulations. New\nlaws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect\nthe interpretation of existing or new PRC laws or regulations may have on our business.\n\n \n\n29\n\n \n\n \n\nSince late 1970s, the PRC government has been\ndeveloping a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over\nthe past several decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However,\nChina has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects\nof economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume\nof published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.\nIn addition, the PRC legal system is based in part on government policies and internal rules, some of which may not be published on a\ntimely basis or at all, and some of which may have a retroactive effect. As a result, we may not be aware of our violation of these policies\nand rules until sometime after the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial\ncosts and diversion of resources and management attention. However, since PRC administrative and court authorities have significant discretion\nin interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and\ncourt proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may also impede\nour ability to enforce the contracts we have entered into. As a result, these uncertainties could materially and adversely affect our\nbusiness and results of operations.\n\n \n\n**Content posted or displayed on our platform\nmay be found objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.**\n\n \n\nThe PRC government has adopted regulations governing\ninternet and wireless access and the distribution of information over the internet and wireless telecommunication networks. Under these\nregulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet or wireless\nnetworks content that, among other things, violates PRC laws and regulations, impairs the public interest, or is obscene, superstitious,\nfraudulent or defamatory. Furthermore, internet content providers are also prohibited from displaying content that may be deemed by relevant\ngovernment authorities as “socially destabilizing” or leaking “state secrets” of the PRC. Failure to comply with\nthese requirements may result in the revocation of licenses to provide internet content or other licenses, the closure of the concerned\nplatforms and reputational harm. The operator may also be held liable for any censored information displayed on or linked to their platform.\n\n \n\nWe operate a number of portfolio products in China.\nWe have implemented procedures to monitor the content displayed on our products in order to comply with relevant laws and regulations.\nHowever, it may not be possible to determine in all cases the types of content that could result in our liability as a distributor of\nsuch content and, if any of the content posted or displayed on our products is deemed by the PRC government to violate any content restrictions,\nwe would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines,\nsuspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition\nand results of operations.\n\n \n\nWe may also be subject to potential liability\nfor any unlawful actions by our users on our products. It may be difficult to determine the type of content or actions that may result\nin liability to us and, if we are found to be liable, we may be prevented from operating our business in China. Moreover, the costs of\ncompliance with these regulations may continue to increase as a result of more content being made available by an increasing number of\nusers of our platform, which may adversely affect our results of operations. Although we have adopted internal procedures to monitor content\nand to remove offending content once we become aware of any potential or alleged violation, we may not be able to identify all the content\nthat may violate relevant laws and regulations or third-party intellectual property rights. Even if we manage to identify and remove offensive\ncontent, we may still be held liable. As of the date of this annual report, we have not received government sanctions in connection with\ncontent posted on our platform. However, we cannot assure you that our business and operations will be immune from government actions\nor sanctions in the future. To the extent that PRC regulatory authorities find any content displayed on our platform objectionable, they\nmay require us to limit or eliminate the dissemination of such content on our platform in the form of take-down orders or otherwise. In\naddition, these laws and regulations are subject to interpretation by the relevant authorities, and it may not be possible to determine\nin all cases the types of content that could result in our liability as a platform operator.\n\n \n\n**Advertisements shown on our platform may\nsubject us to penalties and other administrative actions.**\n\n \n\nUnder PRC advertising laws and regulations, we\nare obligated to monitor the advertising content shown on our platform to ensure that such content is true and accurate and in full compliance\nwith applicable laws and regulations. Advertisements shall not hinder public order, violate social morality or contain illegal contents,\nincluding but not limited to obscenity, pornography, gambling, superstition, terror and violence contents. Otherwise, the administration\nof market regulation may (1) order to stop publishing of the advertisement and; (2) confiscate the advertising fees; (3) impose a penalty\nranging from RMB200,000 to RMB1,000,000; or (4) in serious cases, cancel the business license and cancel the registration certificate\nfor publishing advertisements. In addition, where a special government review is required for specific types of advertisements prior to\ninternet posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals,\nwe are obligated to confirm that such review has been performed and approval has been obtained. Violation of these laws and regulations\nmay subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements\nand orders to publish an announcement correcting the misleading information. In circumstances involving serious violations by us, PRC\ngovernmental authorities may force us to terminate our advertising operations or revoke our licenses.\n\n \n\n30\n\n \n\n \n\nWhile we have made significant efforts to ensure\nthat the advertisements shown on our platform are in full compliance with applicable PRC laws and regulations, we cannot assure you that\nall the content contained in such advertisements or offers is true and accurate as required by the advertising laws and regulations or\notherwise in full compliance with applicable PRC laws and regulations, especially given the uncertainty in the interpretation of these\nPRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and regulations, we may be subject to\npenalties and our reputation may be harmed, which may negatively affect our business, financial condition, and results of operations and\nprospects. Although the advertisements displayed on our platform may not directly contain sensitive or illegal contents, including but\nnot limited to gambling and pyramid selling, the advertisers may use inducing words to indirectly attract advertisement viewers to participate\nin gambling, pyramid selling, or other illegal activities. If we receive a complaint that any superficially compliant advertisement is\nlinked to one or more webpages that feature non-compliant advertising content, we will remove the related advertisement. Although our\nagreements with the advertising agencies provide that the advertisements provided by the advertisers shall comply with the requirements\nof relevant laws and regulations, we cannot control or supervise advertising contents and the linked webpages all the time. Therefore,\nwe cannot guarantee you that all of the advertisements displayed on our platform will comply with relevant laws and regulations.\n\n \n\nIn April 2015, the SCNPC promulgated the PRC Advertising\nLaw, effective on September 1, 2015 and amended on October 26, 2018. According to the Advertising Law, advertisements shall not have any\nfalse or misleading content, or defraud or mislead consumers. Furthermore, an advertisement will be deemed as a “false advertisement”\nif any of the following situations exist: (1) the advertised product or service does not exist; (2) there is any inconsistency that has\na material impact on the decision to purchase in what is included in the advertisement with the actual circumstances with respect to the\nproduct’s performance, function, place of production, usage, quality, specification, ingredient, price, producer, term of validity,\nsales condition and honors received, among others, or the service’s content, provider, form, quality, price, sales condition, and\nhonors received, among others, or any commitments, among others, made on the product or service; (3) using fabricated, forged or unverifiable\nscientific research results, statistical data, investigation results, excerpts, quotations or other information as supporting material;\n(4) effect or results of using the good or receiving the service are fabricated; or (5) other circumstances where consumers are defrauded\nor misled by any false or misleading content.\n\n \n\nThe laws and regulations of advertising are relatively\nnew and evolving and there is substantial uncertainty as to the interpretation of “false advertisement” by the State Administration\nfor Market Regulation (formerly known as the State Administration for Industry and Commerce), or the SAMR.\n\n \n\n**The HFCCA and the AHFCCA passed by the U.S.\nSenate, all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification\nof their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to\nour offering and listing on the Nasdaq Global Market, and Nasdaq may determine to delist our securities if in the future the PCAOB determines\nthat it cannot inspect or fully investigate our auditor.**\n\n \n\nOn April 21, 2020, SEC Chairman Jay Clayton and\nPCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated\nwith investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized\nthe risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in\nemerging markets.\n\n \n\nOn May 18, 2020, Nasdaq filed three proposals\nwith the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market”, (ii)\nadopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and (iii) apply\nadditional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.\nOn December 18, 2020, the HFCAA was signed by President Donald Trump and became law. This legislation requires certain issuers of securities\nto establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the\nPCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection\nby the PCAOB. Furthermore, if the PCAOB is unable to inspect the issuer’s public accounting firm for three consecutive years beginning\nin 2021, the issuer’s securities are banned from trade on a national exchange or through other methods.\n\n \n\nOn June 22, 2021, the U.S. Senate passed the AHFCAA,\nwhich, if passed by the U.S. House of Representatives and signed into law by the President, would decrease the number of non-inspection\nyears for foreign companies to comply with PCAOB audits from three to two years, thus reducing the time period before their securities\nmay be prohibited from trading or delisted.\n\n \n\n31\n\n \n\n \n\nOn November 5, 2021, the SEC approved the PCAOB’s\nRule 6100, Board Determinations Under the HFCAA. Rule 6100 provides a framework for the PCAOB to use to determine whether it\nis unable to inspect or investigate registered public accounting firms located in a foreign jurisdiction because of a position taken by\none or more authorities in that jurisdiction.\n\n \n\nOn December 2, 2021, The SEC adopted amendments\nto finalize rules implementing the submission and disclosure requirements in the HFCAA. The rules apply to registrants the SEC identifies\nas having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction\nand that the PCAOB is unable to inspect or investigate.\n\n \n\nOn December 16, 2021, the PCAOB issued the Determination\nReport which found that the Board is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered\nin mainland China and in Hong Kong, a Special Administrative Region of the People’s Republic of China (the “PRC”), because\nof positions taken by PRC authorities in those jurisdictions (the “Determination”). Furthermore, the Determination Report\nidentified the specific registered public accounting firms which are subject to these determinations, *i.e.*, PCAOB Identified Firms.\nThe Board made these determinations pursuant to PCAOB Rule 6100, which provides a framework for how the PCAOB fulfills its responsibilities\nunder the HFCAA.\n\n \n\nThe lack of access to the PCAOB inspection in\nChina prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the\ninvestors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in\nChina makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures\nas compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors\nto lose confidence in audit procedures and reported financial information and the quality of financial statements of China-based companies.\n\n \n\nOn December 15, 2022, the PCAOB board announced\nthat it has completed the inspections, determined that it had complete access to inspect or investigate completely registered public accounting\nfirms headquartered in mainland China and Hong Kong, and voted to vacate the Determination Report. On December 29, 2022, the CAA was signed\ninto law by President Biden. The CAA contained, among other things, an identical provision to the AHFCAA, which reduces the number of\nconsecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. Xiao-I’s ability\nto retain an auditor subject to the PCAOB inspection and investigation, including but not limited to inspection of the audit working papers\nrelated to Xiao-I, may depend on the relevant positions of U.S. and Chinese regulators. With respect to audits of companies with operations\nin China, such as the Company, there are uncertainties about the ability of Xiao-I’s auditor to fully cooperate with a request by\nthe PCAOB for audit working papers in China without the approval of Chinese authorities. As such, as of the date of this annual report,\nXiao-I’s auditor is not subject to the Determinations announced by the PCAOB. However, Xiao-I cannot assure you whether Nasdaq or\nregulatory authorities would apply additional and more stringent criteria to it after considering the effectiveness of its auditor’s\naudit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or\nexperience as related to the audit of our financial statements. Furthermore, there is a risk that Xiao-I’s auditor cannot be inspected\nby the PCAOB because of a position taken by an authority in a foreign jurisdiction in the future, and that the PCAOB may re-evaluate its\ndetermination as a result of any obstruction with the implementation of the Statement of Protocol. Such lack of inspection or re-evaluation\ncould cause trading in Xiao-I’s securities to be prohibited on a national exchange or in the over-the-counter trading market under\nthe HFCAA, and, as a result, Nasdaq may determine to delist Xiao-I’s securities, which may cause the value of Xiao-I’s securities\nto decline or become worthless.\n\n \n\nOur former auditor, Marcum Asia CPAs LLP (“Marcum\nAsia”), the independent registered public accounting firm that issued the audit report for the year ended December 31, 2022 included\nelsewhere in this annual report, is a firm registered with the PCAOB and subject to laws in the U.S. pursuant to which the PCAOB conducts\nregular inspections to assess its compliance with the applicable professional standards. Marcum Asia, is headquartered in New York, New\nYork, and, as of the date of this annual report, was not included in the list of PCAOB Identified Firms in the Determination Report.\n\n \n\nOur current auditor, Assentsure PAC, as an auditor\nof companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States\npursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Notwithstanding\nthe foregoing, in the future, if there is any regulatory change or step taken by PRC regulators that does not permit our auditor to provide\naudit documentations located in China to the PCAOB for inspection or investigation, investors may be deprived of the benefits of such\ninspection. Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections of audit\nwork undertaken in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures,\ncould result in a lack of assurance that our financial statements and disclosures are adequate and accurate, then such lack of inspection\ncould cause our securities to be delisted from the stock exchange. The delisting of our ADSs, or the threat of their being delisted, may\nmaterially and adversely affect the value of your investment.\n\n \n\n32\n\n \n\n \n\n**It may be difficult for overseas regulators\nto conduct investigation or collect evidence within China.**\n\n \n\nShareholder claims or regulatory investigation\nthat are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China,\nthere are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated\noutside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities\nof another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory\nauthorities in the Unities States may not be efficient in the absence of a mutual and practical cooperation mechanism. Furthermore, according\nto Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly\nconduct investigation or evidence collection activities within the territory of the PRC; no organization or individual is allowed to provide\ndocuments and information related to securities business activities to overseas securities regulators without the consent of the securities\nregulatory authority under the State Council and the relevant competent department under the State Council; and according to the Data\nSecurity Law, no organization or individual within the territory of the PRC may provide foreign judicial or law enforcement authorities\nwith data stored within the territory of the PRC without the approval of the competent authorities of the PRC. While detailed interpretation\nof or implementation rules under these regulations have yet to be promulgated, the inability of an overseas securities regulator to directly\nconduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your\ninterests.\n\n \n\n**If the Chinese government chooses to exert\nmore oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, such action could\nsignificantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of Xiao-I’s\nADSs to significantly decline or become worthless.**\n\n \n\nRecent statements by the Chinese government indicating\nan intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers,\nany such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause\nthe value of such securities to significantly decline or become worthless.\n\n \n\nRecently, the General Office of the Central Committee\nof the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely Cracking Down on Illegal\nSecurities Activities According to Law, or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized\nthe need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas\nlistings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems, will be taken to\ndeal with the risks and incidents of China-concept overseas listed companies. As of the date of this annual report, we have not received\nany inquiry, notice, warning, or sanctions from PRC government authorities in connection with the Opinions.\n\n \n\nOn June 10, 2021, the SCNPC promulgated the PRC\nData Security Law, which took effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities\nand individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance\nof data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate\nrights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The\nPRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and\nimposes export restrictions on certain data an information.\n\n \n\nIn early July 2021, regulatory authorities in\nChina launched cybersecurity investigations with regard to several China-based companies that are listed in the United States. The Chinese\ncybersecurity regulator announced on July 2 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered\nthat the company’s app be removed from smartphone app stores. On July 5, 2021, the Chinese cybersecurity regulator launched the\nsame investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and\nBoss of KANZHUN LIMITED (Nasdaq: BZ). On July 24, 2021, the General Office of the Central Committee of the Communist Party of China Central\nCommittee and the General Office of the State Council jointly released the Guidelines for Further Easing the Burden of Excessive Homework\nand Off-campus Tutoring for Students at the Stage of Compulsory Education, pursuant to which foreign investment in such firms via mergers\nand acquisitions, franchise development, and variable interest entities are banned from this sector.\n\n \n\nOn August 17, 2021, the State Council promulgated\nthe Regulations on the Protection of the Security of Critical Information Infrastructure, or the Regulations, which took effect on September\n1, 2021. The Regulations supplement and specify the provisions on the security of critical information infrastructure as stated in the\nCybersecurity Review Measures. The Regulations provide, among others, that protection department of certain industry or sector shall notify\nthe operator of the critical information infrastructure in time after the identification of certain critical information infrastructure.\n\n \n\n33\n\n \n\n \n\nOn August 20, 2021, the SCNPC promulgated the\nPersonal Information Protection Law of the PRC (the “Personal Information Protection Law”), which took effect in November\n2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information\nProtection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information,\nsuch as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information\nshall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information\noperators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s\nCourt. Given that the above mentioned newly promulgated laws, regulations and policies were recently promulgated or issued, and have not\nyet taken effect (as applicable), their interpretation, application and enforcement are subject to substantial uncertainties.\n\n \n\nOn September 24, 2024, the State Council promulgated\nthe Regulations on the Management of Network Data Security, or the Network Data Regulation, which came into effect on January 1, 2025.\nThe Network Data Regulation serves as a comprehensive implementing regulation for the compliance requirements set out by the Cybersecurity\nLaw, Data Security Law, and Personal Information Protection Law. The Network Data Regulation introduces several key obligations, including\nrequiring network data handlers to specify the purpose and method of personal information processing, as well as the types of personal\ninformation involved, before any personal information is handled. It clarifies definitions for important data, outlines the obligations\nof those handling important data, and establishes broader contractual requirements for data sharing between data handlers. It remains\nto be seen how this regulation will be interpreted and implemented, and to what extent it will affect our operations. According to the\nlatest amended Cybersecurity Review Measures, which was promulgated on December 28, 2021 and became effective on February 15, 2022, and\nreplaced the Cybersecurity Review Measures promulgated on April 13, 2020, online platform operator holding more than one million users/users’\nindividual information shall be subject to cybersecurity review before listing abroad. Since the Cybersecurity Review Measures is new,\nthe implementation and interpretation thereof is not yet clear. Shanghai Xiao-I has applied for a cybersecurity review organized by the\nCenter, which is authorized by the Cybersecurity Review Office of the CAC to accept public consultation and cybersecurity review submissions,\npursuant to the Cybersecurity Review Measures, which became effective on February 15, 2022.\n\n \n\n**The custodians or authorized users of our\ncontrolling non-tangible assets, including seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.**\n\n \n\nUnder the PRC law, legal documents for corporate\ntransactions, including agreements and contracts are executed using the chop or seal of the signing entity or with the signature of a\nlegal representative whose designation is registered and filed with relevant PRC market regulation administrative authorities.\n\n \n\nIn order to secure the use of our seals, we have\nestablished internal control procedures and rules for using these seals. In any event that the seals and seals are intended to be used,\nthe responsible personnel will submit a formal application, which will be verified and approved by authorized employees in accordance\nwith our internal control procedures and rules. In addition, in order to maintain the physical security of our seals, we generally have\nthem stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures\nmay not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority,\nfor example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or our affiliated entities\nor their subsidiaries. If any employee obtains, misuses or misappropriates our seals or other controlling non-tangible assets for whatever\nreason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve\nsignificant time and resources to resolve and divert management from our operations, and we may not be able to recover our loss due to\nsuch misuse or misappropriation if the third party relies on the apparent authority of such employees and acts in good faith.\n\n \n\n**In the following discussion of risks relating\nto doing business in China “we,” “us,” or “our” refer to Xiao-I.**\n\n \n\n**The approval, filing or other requirements\nof the CSRC or other PRC government authorities may be required under PRC laws.**\n\n \n\nOn February 17, 2023, the CSRC published\nthe Overseas Listing Measures which took effect on March 31, 2023. Under the Overseas Listing Measures, a filing-based regulatory\nsystem applies to “indirect overseas offerings and listings” of companies in mainland China, which refers to securities offerings\nand listings in an overseas market made under the name of an offshore entity but based on the underlying equity, assets, earnings or other\nsimilar rights of a company in mainland China that operates its main business in mainland China. The Overseas Listing Measures states\nthat, any post-listing follow-on offering by an issuer in an overseas market, including issuance of shares, convertible notes and other\nsimilar securities, shall be subject to filing requirement within three business days after the completion of the offering. Therefore,\nany of our future offering and listing of our securities in an overseas market may be subject to the filing requirements under the Overseas\nListing Measures. In connection with the Overseas Listing Measures, on February 17, 2023, the CSRC also published the Notice on Overseas\nListing Measures. According to the Notice on Overseas Listing Measures, issuers that have already been listed in an overseas market by\nMarch 31, 2023, the date the Overseas Listing Measures became effective, are not required to make any immediate filing and are only\nrequired to comply with the filing requirements under the Overseas Listing Measures when it subsequently seeks to conduct a follow-on\noffering.\n\n \n\n34\n\n \n\n \n\n**Under the PRC Enterprise Income Tax Law,\nwe may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders\nand have a material adverse effect on our results of operations and the value of your investment.**\n\n \n\nUnder the PRC Enterprise Income Tax Law, or the\nEIT Law, which became effective in January 2008 and most recently amended in December 2018, an enterprise established outside the PRC\nwith “*de facto* management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise\nincome tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. In 2009, the State Administration\nof Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC\nTax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining\nwhether the “*de facto* management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.\nFurther to SAT Circular 82, in 2011, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore\nIncorporated Resident Enterprises (Trial), or SAT Bulletin 45, amended in 2018, to provide more guidance on the implementation of SAT\nCircular 82. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration\nand competent tax authorities’ procedures.\n\n \n\nAccording to SAT Circular 82, an offshore incorporated\nenterprise controlled by a PRC enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise by virtue of having\nits “*de facto* management body” in China and will be subject to PRC enterprise income tax on its worldwide income only\nif all of the following conditions are met: (1) the senior management and core management departments in charge of its daily operations\nfunction have their presence mainly in the PRC; (2) its financial and human resources decisions are subject to determination or approval\nby persons or bodies in the PRC; (3) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’\nmeetings are located or kept in the PRC; and (4) more than half of the enterprise’s directors or senior management with voting rights\nhabitually reside in the PRC. SAT Bulletin 45 specifies that when provided with a copy of Chinese tax resident determination certificate\nfrom a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced\ndividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise.\n\n \n\nAlthough SAT Circular 82 and SAT Bulletin 45 only\napply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals\nor foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how the term “*de\nfacto* management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether\nthey are controlled by PRC enterprises, individuals or foreigners.\n\n \n\nIn addition, the SAT issued the Announcement of\nthe State Administration of Taxation on Issues concerning the Determination of Resident Enterprises Based on the Standards of Actual Management\nInstitutions in January 2014 to provide more guidance on the implementation of SAT Circular 82. This bulletin further provides that, among\nother things, an entity that is classified as a “resident enterprise” in accordance with the circular shall file the application\nfor classifying its status of residential enterprise with the local tax authorities where its main domestic investors are registered.\nFrom the year in which the entity is determined to be a “resident enterprise,” any dividend, profit and other equity investment\ngain shall be taxed in accordance with the enterprise income tax law and its implementing rules.\n\n \n\nAlthough our offshore holding entity is not controlled\nby PRC enterprises or a PRC enterprise group and our revenues are primarily generated from business operations conducted outside of China,\nwe cannot rule out the possibility that the PRC tax authorities determine that we or any of our non-PRC subsidiaries is a PRC resident\nenterprise for PRC enterprise income tax purposes, which could subject our Company or any of our non-PRC subsidiaries to PRC tax at a\nrate of 25% on its world-wide income, which could materially reduce our net income. In addition, we may also be subject to PRC enterprise\nincome tax reporting obligations.\n\n \n\nIf the PRC tax authorities determine that our\nCompany is a PRC resident enterprise for PRC enterprise income tax purposes, gains realized on the sale or other disposition of the ADSs\nmay be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case,\nsubject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. Any such tax may reduce the\nreturns on your investment in the ADSs.\n\n \n\n35\n\n \n\n \n\n**There are significant uncertainties under\nthe EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore\nsubsidiaries may not qualify to enjoy certain treaty benefits.**\n\n \n\nUnder the EIT Law and its implementation rules,\nthe profits of a foreign-invested enterprise generated through operations, which are distributed to its immediate holding company outside\nChina, will be subject to a withholding tax rate of 10.0%. Pursuant to a special arrangement between Hong Kong and China, such rate may\nbe reduced to 5.0% if a Hong Kong resident enterprise owns more than 25.0% of the equity interest in the PRC company. Our current PRC\nsubsidiary is wholly owned by Xiao-I Technology. Accordingly, Xiao-I Technology may qualify for a 5.0% tax rate in respect of distributions\nfrom its PRC subsidiary. Under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend\nProvision in Tax Treaties promulgated on February 20, 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under\na tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate\nshareholder to receive dividends from the PRC subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive\nmonths preceding the receipt of the dividends. Further, the SAT promulgated the Notice on How to Understand and Recognize the “Beneficial\nOwner” in Tax Treaties in 2009, most recently amended on February 3, 2018 and effective from April 1, 2018, which sets forth several\nnon-rebuttable presumptions to be a “beneficial owner”, and certain detailed factors in determining the “beneficial\nowner” status, a Hong Kong enterprise must obtain a tax resident certificate from the relevant Hong Kong tax authority to apply\nfor the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case\nbasis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority. As\nof the date of this annual report, we have not commenced the application process for a Hong Kong tax resident certificate from the relevant\nHong Kong tax authority, and there is no assurance that we will be granted such a Hong Kong tax resident certificate.\n\n \n\nEven after we obtain the Hong Kong tax resident\ncertificate, we are required by applicable tax laws and regulations to file required forms and materials with relevant PRC tax authorities\nto prove that we can enjoy 5% lower PRC withholding tax rate. Xiao-I Technology intends to obtain the required materials and file with\nthe relevant tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve\nthe 5% withholding tax rate on dividends received from Xiao-I Technology.\n\n \n\n**We face uncertainty with respect to indirect\ntransfer of equity interests in PRC resident enterprises by their non-PRC holding companies. We face uncertainties regarding the reporting\non and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our Company by\nnon-resident investors.**\n\n \n\nIn February 2015, the SAT issued the Bulletin\non Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7. Pursuant to Bulletin\n7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of\na PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying\nPRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment\nof PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and\nthe transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a\nrate of 10% for the transfer of equity interests in a PRC resident enterprise. Bulletin 7 also introduced safe harbors for internal group\nrestructurings and the purchase and sale of equity securities through a public securities market. On October 17, 2017, the SAT issued\nthe Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Nonresident Enterprise Income Tax at\nSource, or Bulletin 37, which came into effect on December 1, 2017. The Bulletin 37 further clarifies the practice and procedure of the\nwithholding of nonresident enterprise income tax.\n\n \n\nWe face uncertainties on the reporting and consequences\nof future private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our Company\nby investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a\nfiling or the transferees with respect to withholding obligation, and request our PRC subsidiary to assist in the filing. As a result,\nwe and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under Bulletin\n7 and Bulletin 37, and may be required to expend valuable resources to comply with them or to establish that we and our non-resident enterprises\nshould not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.\n\n \n\n36\n\n \n\n \n\n**China’s M&A Rules and certain\nother PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it\nmore difficult for us to pursue growth through acquisitions in China.**\n\n \n\nThe Regulations on Mergers and Acquisitions of\nDomestic Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted regulations and rules concerning mergers and\nacquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors\nmore time consuming and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction\nin which a foreign investor takes control of a PRC domestic enterprise, if (1) any important industry is concerned, (2) such transaction\ninvolves factors that impact or may impact national economic security, or (3) such transaction will lead to a change in control of a domestic\nenterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the SCNPC in August\n2007 and effective in August 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover\nthresholds (*i.e.*, during the previous fiscal year, (1) the total global turnover of all operators participating in the transaction\nexceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China, or (2) the total\nturnover within China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators\neach had a turnover of more than RMB400 million within China) must be cleared by MOFCOM before they can be completed. In addition, in\nFebruary 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and\nAcquisitions of Domestic Enterprises by Foreign Investors, or the Circular 6, which officially established a security review system for\nmergers and acquisitions of domestic enterprises by foreign investors. Further, in August 2011, MOFCOM promulgated the Regulations on\nImplementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM Security\nReview Regulations, to implement the Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign\ninvestors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire\nthe “*de facto* control” of domestic enterprises with “national security” concerns. Under the MOFCOM Security\nReview Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger or\nacquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to security review, it will\nsubmit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the National Development and Reform Commission,\nor NDRC, and MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors\nfrom bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual\narrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition\nof a company engaged in the internet information services, online games, online audio-visual program services and related businesses requires\nsecurity review, and there is no requirement that acquisitions completed prior to the promulgation of the Security Review Circular are\nsubject to MOFCOM review.\n\n \n\nIn the future, we may grow our business by acquiring\ncomplementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such\ntransactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts\nmay delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry\nthat raises “national defense and security” or “national security” concerns. However, MOFCOM or other government\nagencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which\ncase our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities,\nmay be closely scrutinized or prohibited.\n\n \n\n**PRC regulations relating to offshore investment\nactivities by PRC residents may limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us\nor otherwise expose us to liability and penalties under PRC law.**\n\n \n\nIn July 2014, the SAFE promulgated the Circular\non Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles,\nor SAFE Circular 37, which replaced the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing\nand Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75. Circular 37 requires PRC residents or entities to\nregister with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose\nof overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore\nspecial purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or\nresidents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.\nAccording to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released\non February 13, 2015 by the SAFE, as amended in 2019, local banks will examine and handle foreign exchange registration for overseas direct\ninvestment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.\n\n \n\n37\n\n \n\n \n\nIf our shareholders who are PRC residents or entities\ndo not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing its profits and\nproceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional\ncapital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under\nPRC laws for evasion of applicable foreign exchange restrictions. See “Item 3. Key Information—D. Risk Factors —Risks\nRelating to Our Corporate Structure— Some of our shareholders are not in compliance with the PRC’s regulations relating to\noffshore investment activities by PRC residents. As a result, these shareholders may be subject to penalties themselves, and WFOE may\nbe unable to open a new capital account with relevant banks within China according to their internal control policies and may be restricted\nfrom remitting funds or handling other foreign exchange businesses within China unless and until we remediate the non-compliance,”\nand “Item 3. Key Information—D. Risk Factors —Risks Relating to Doing Business in China—PRC regulation of loans\nto, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may delay us\nfrom using our available funds to make loans to our PRC subsidiary and consolidated affiliated entities, or to make additional capital\ncontributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand the\nbusiness of our PRC subsidiary and consolidated affiliated entities.”\n\n \n\n**Failure to comply with PRC regulations regarding\nthe registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to\nfines and other legal or administrative sanctions.**\n\n \n\nPursuant to SAFE Circular 37, PRC residents who\nparticipate in share incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or\nemployees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange\nregistration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC residents\nand who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before our Company becomes\nan overseas listed company. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for\nDomestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules. Under the\nStock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed\ncompany are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive\nplan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company\nor another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to\nthe stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle\nmatters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers.\nIn addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material\nchange to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. The PRC operating entities\nand their PRC employees who have been granted stock options are subject to these regulations. The VIE has completed such SAFE registrations\nfor its PRC stock option holder employees in March 2019. However, we cannot assure you that the VIE will be able to complete the relevant\nregistration for new employees who participate in such stock incentive plan in the future in a timely manner or at all. Failure of the\nVIE’s PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions\nand may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute\ndividends to us, or otherwise materially adversely affect our business.\n\n \n\n**PRC regulation of loans to, and direct investment\nin, PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using our available funds\nto make loans to our PRC subsidiary and consolidated affiliated entities, or to make additional capital contributions to our PRC subsidiary,\nwhich could materially and adversely affect our liquidity and our ability to fund and expand the business of our PRC subsidiary and consolidated\naffiliated entities.**\n\n \n\nWe are an offshore holding company conducting\nour operations in China through our PRC subsidiary and consolidated affiliated entities. We may make loans to our PRC subsidiary and consolidated\naffiliated entities, or we may make additional capital contributions to our PRC subsidiary, or we may establish new PRC subsidiaries and\nmake capital contributions to these new PRC subsidiaries, or we may acquire offshore entities with business operations in China in an\noffshore transaction.\n\n \n\nMost of these ways are subject to PRC regulations\nand approvals. For example, loans by us to our wholly owned PRC subsidiary to finance its activities cannot exceed statutory limits and\nmust be registered with the local counterpart of SAFE. If we decide to finance our wholly owned PRC subsidiary by means of capital contributions,\nthese capital contributions are subject to the requirement of making necessary filings with the MOFCOM and registration with other governmental\nauthorities in China. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not\nlikely to make such loans to our consolidated affiliated entities, which are PRC domestic companies. Further, we are not likely to finance\nthe activities of our consolidated affiliated entities by means of capital contributions due to regulatory restrictions relating to foreign\ninvestment in PRC domestic enterprises engaged in internet information services, online games, online audio-visual program services and\nrelated businesses.\n\n \n\n38\n\n \n\n \n\nThe SAFE promulgated the Notice of the State Administration\nof Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE\nCircular 19, effective in June 2015. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated\nregistered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted\nloans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE\nCircular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used\nfor equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital\nof a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. SAFE promulgated the Notice\nof the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital\nAccount, or SAFE Circular 16, effective in June 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the\nprohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to\nissue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. SAFE Circular 19 and\nSAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold to our PRC subsidiary, which may adversely\naffect our liquidity and our ability to fund and expand our business in the PRC. On October 23, 2019, SAFE issued Notice of the State\nAdministration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or the Circular 28. Circular\n28 allows non-investment foreign-invested enterprises to use their capital funds to make equity investments in China, provided that such\ninvestments do not violate the Negative List and the target investment projects are genuine and in compliance with PRC laws. Since Circular\n28 was issued only recently, its interpretation and implementation in practice are still subject to substantial uncertainties.\n\n \n\nIn light of the various requirements imposed by\nPRC regulations on loans to and direct investment in PRC entities by offshore holding companies, and the fact that the PRC government\nmay at its discretion restrict access to foreign currencies for current account transactions in the future, we cannot assure you that\nwe will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if\nat all, with respect to future loans to PRC subsidiaries or future capital contributions by us to our PRC subsidiary. As a result, uncertainties\nexist as to our ability to provide prompt financial support to our subsidiaries when needed. If we fail to complete such registrations\nor obtain such approvals, our ability to use our available funds to capitalize or otherwise fund our PRC operations may be negatively\naffected, which could materially and adversely affect our liquidity and our ability to fund and expand our business of our PRC subsidiary\nand consolidated affiliated entities.\n\n \n\n**Fluctuation in the value of the RMB may\nhave a material adverse effect on the value of your investment.**\n\n \n\nThe conversion of Renminbi into foreign currencies,\nincluding U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar,\nat times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in\nChina’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you\nthat Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict\nhow market forces or the PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.\n\n \n\nAny significant depreciation of the RMB may materially\nadversely affect the value of, and any dividends payable on, our Ordinary Shares in U.S. Dollars. To the extent that we need to convert\nU.S. Dollars we received from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. Dollar\nwould have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into\nU.S. Dollars for the purpose of paying dividends to the holders of our ADSs or for other business purposes, appreciation of the U.S. Dollar\nagainst the RMB would have an adverse effect on the U.S. Dollar amount available to us.\n\n \n\nVery limited hedging options are available in\nChina to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to\nreduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability\nand effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency\nexchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.\nAs a result, fluctuations in exchange rates may have a material adverse effect on your investment.\n\n \n\n**Risks\nRelated to Our Independent Registered Public Accounting Firm and Regulatory Oversight of PRC-Based Auditors.**\n\n \n\nIf additional remedial measures are imposed on PRC-based accounting\nfirms, including those that audit U.S.-listed companies, our ability to maintain compliance with SEC requirements could be adversely affected.\n\n \n\nBeginning in 2011, the Chinese affiliates of the “big four”\naccounting firms became involved in a conflict between U.S. and Chinese law, where the SEC and PCAOB sought access to audit work papers\nlocated in China. Chinese law restricted these firms from providing such documents directly to U.S. regulators without going through the\nChina Securities Regulatory Commission (CSRC). This led to SEC enforcement actions and the threat of penalties, including temporary suspensions\nfrom practicing before the SEC. Although a settlement was reached in 2015 that established procedures for cooperation through the CSRC,\nthe SEC retained the authority to impose further remedial measures if compliance is not achieved.\n\n \n\n39\n\n \n\n \n\nAlthough our independent registered public accounting firm is not one\nof the “big four” accounting firms, similar regulatory challenges or additional enforcement actions affecting PRC-based accounting\nfirms generally could create uncertainty about the reliability of the audit work for PRC-based, U.S.-listed companies. If our auditor\nwere to become subject to restrictions on practicing before the SEC, and we were unable to timely engage a qualified alternative auditor,\nour financial statements could be found non-compliant with SEC requirements. This could lead to the delisting of our ADSs from Nasdaq,\nderegistration from the SEC, or both, which would severely impact the liquidity and trading price of our securities.\n\n \n\n**We face uncertainties with respect to the\nenactment, interpretation and implementation of Anti-Monopoly Guidelines for the Internet Platform Economy Sector.**\n\n \n\nOn February 7, 2021, the Anti-Monopoly Committee\nof the State Council (PRC) published Guidelines of the Anti-monopoly Commission of the State Council for Anti-monopoly in the Field of\nPlatform Economy that aims at specifying some of the circumstances under which an activity of Internet platform may be identified as monopolistic\nact as well as setting out merger controlling filing procedures involving variable interest entities. The Guidelines of the Anti-monopoly\nCommission of the State Council for Anti-monopoly in the Field of Platform Economy prohibits certain monopolistic acts of internet platforms\nso as to protect market competition and safeguard interests of users and undertakings participating in internet platform economy, including\nwithout limitation, prohibiting platforms with dominant position from abusing their market dominance (such as discriminating customers\nin terms of pricing and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements,\nusing technology means to block competitors’ interface, favorable positioning in search results of goods displays, using bundle\nservices to sell services or products, compulsory collection of unnecessary user data). In addition, the Guidelines of the Anti-monopoly\nCommission of the State Council for Anti-monopoly in the Field of Platform Economy also reinforces antitrust merger review for internet\nplatform related transactions to safeguard market competition. Due to the uncertainties associated with the evolving legislative activities\nand varied local implementation practices of anti-monopoly and competition laws and regulations in the PRC, it may be costly to adjust\nsome of our business practice in order to comply with these laws, regulations, rules, guidelines, and implementations, and any incompliance\nor associated inquiries, investigations, and other governmental actions may divert significant management time and attention and our financial\nresources, bring negative publicity, subject us to liabilities or administrative penalties, and/or materially and adversely affect our\nfinancial conditions, operations, and business prospects.\n\n \n\n**Changes in US trade policy, including the\nimposition of tariffs and the resulting consequences, may have a material adverse impact on our business and results of operations.**\n\n \n\nThe United States has recently proposed to impose\nmultiple rounds of tariffs on a wide range of goods imported from multiple countries, including China, and China has responded\nwith retaliatory tariffs. Since February 2025, the U.S. administration has increased the total tariff level for imported\nChinese goods to 145% and additional tariff increase could be imposed as the trade tension between the two countries continues\nto heighten. On April 11, 2025, China has responded by hiking its tariff on U.S. imports to 125%. Historically,\ntariffs have led to increased trade and political tensions, between the U.S. and China, as well as between the U.S. and\nother countries. Political tensions as a result of trade policies could reduce trade volume, cross-border investment, technological\nexchange, and other economic activities between major economies, resulting in a material adverse effect on global economic conditions\nand the stability of global financial and stock markets. Moreover, the heightened geopolitical uncertainty and potential for further escalation\nmay discourage investments in securities issued by China-based issuers and affect the global macroeconomic environment. For\nexample, it has been reported that the U.S. administration may consider imposing further restrictions or prohibitions on listing\nand trading of securities of Chinese companies on U.S. stock exchanges. Any such geopolitical developments could materially and adversely\naffect our offering, financing, overall financial performance and prices of our ADSs.\n\n \n\nWe cannot predict future trade policy or the terms\nof any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence\nof a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact\ndemand for our products, our costs, our customers, our suppliers, and the US economy, which in turn could adversely impact our business,\nfinancial condition and results of operations.\n\n \n\nRisks Relating to Doing Business in Hong\nKong\n\n \n\n**In the following discussion of risks relating\nto doing business in Hong Kong “we,” “us,” or “our” refer to the PRC operating entities.**\n\n \n\n**We may be subject to uncertainty about any\nchanges in the economic, political and legal environment in Hong Kong, and it is possible that most of the legal and operational risks\nassociated with operating in the PRC may also apply to operations in Hong Kong in the future.**\n\n \n\nWe\ngenerated approximately 0.9%, 0.9% and 0.6% of our revenues from Hong\nKong in fiscal year 2022, 2023 and 2024, respectively. Hong Kong is a special administrative region of the PRC and the basic policies\nof the PRC regarding Hong Kong are reflected in the Basic Law, namely, Hong Kong’s constitutional document, which provides Hong\nKong with a high degree of autonomy and executive, legislative and independent judicial powers, including that of final adjudication under\nthe principle of “one country, two systems”. We cannot assure you that there will not be any changes in the economic, political\nand legal environment in Hong Kong. We may be subject to uncertainty about any future actions of the PRC government and is possible that\nmost of the legal and operational risks associated with operating in the PRC may also apply to our operations in Hong Kong in the future.\nThe PRC government may intervene or influence our current and future operations in Hong Kong at any time and exert more influence over\nthe manner in which we must conduct our business activities. Such government actions, if and when they occur, could result in a material\nchange in our operations in Hong Kong.\n\n \n\n40\n\n \n\n \n\n**Our operations in Hong Kong are governed\nby the laws and regulations in Hong Kong. If there is significant change to current political arrangements between mainland China and\nHong Kong, the PRC government may intervene or influence our Hong Kong operations, which could result in a material change in our operations\nin Hong Kong.**\n\n \n\nIn Hong Kong, the collection of personal data,\ntheir use and disclosure, retention and granting of access to and correction of personal data is governed by the Personal Data (Privacy)\nOrdinance (Chapter 486 of the Laws of Hong Kong). The competition law in Hong Kong is primarily governed by the Competition Ordinance\n(Chapter 619 of the Laws of Hong Kong), which prohibits three principal types of anti-competitive conducts, namely (a) anti-competitive\nagreements or practices; (b) abuse of market power; and (c) merger control of arrangements that could substantially reduce the level of\ncompetition in telecommunication industry. The Merger Rule in the Competition Ordinance prohibits undertakings from directly or indirectly\ncarrying out a merger that has, or is likely to have, the effect of substantially reduce the level of competition in Hong Kong. This rule\nis only applicable to telecommunication carrier licensees. There is no general merger control regime in Hong Kong.\n\n \n\nAs of the date of this annual report, our business\noperations in Hong Kong, which are relatively insignificant as compared to our business as a whole, are only required to comply with the\nHong Kong laws and regulations. The PRC government has recently initiated a series of regulatory actions and statements to regulate business\noperations in mainland China with little advance notice. We do not expect such statements by the PRC government would have any specific\nimpact on our business operations in Hong Kong. If there is any change in political arrangements between mainland China and Hong Kong,\nit would affect the business environment in Hong Kong generally.\n\n \n\n**You may incur additional costs and procedural\nobstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong against Xiao-I or its management\nnamed in the annual report based on Hong Kong laws.**\n\n \n\nCurrently, all of Xiao-I’s operations are\nconducted outside the United States, and all of its assets are located outside the United States. You may incur additional costs and procedural\nobstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong against Xiao-I or its management\nnamed in the annual report, as judgments entered in the United States can be enforced in Hong Kong only at common law. If you want to\nenforce a judgment of the United States in Hong Kong, it must be a final judgment conclusive upon the merits of the claim, for a liquidated\namount in a civil matter and not in respect of taxes, fines, penalties, or similar charges, the proceedings in which the judgment was\nobtained were not contrary to natural justice, and the enforcement of the judgment is not contrary to public policy of Hong Kong. Such\na judgment must be for a fixed sum and must also come from a “competent” court as determined by the private international\nlaw rules applied by the Hong Kong courts.\n\n \n\nRisks Relating to the ADSs\n\n \n\n**In the following discussion of risks relating\nto the ADSs “we,” “us,” or “our” refer to Xiao-I.**\n\n \n\n**Because we do not expect to pay dividends\nin the foreseeable future, you must rely on a price appreciation of the ADSs for a return on your investment.**\n\n \n\nWe currently intend to retain most, if not all,\nof our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay\nany cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend\nincome.\n\n \n\n**A large, active trading market for the ADSs\nmay not develop and you may not be able to resell your ADSs at or above the public offering price.**\n\n \n\nWe cannot assure you that a liquid public market\nfor the ADSs will develop. If a large, active public market for the ADSs does not develop, the market price and liquidity of the ADSs\nmay be materially adversely affected.\n\n \n\n41\n\n \n\n \n\n**The trading price of the ADSs is likely\nto be volatile, which could result in substantial losses to investors.**\n\n \n\nThe trading price of the ADSs is likely to be\nvolatile and could fluctuate widely due to factors beyond our control. Such volatility may be unrelated to our actual or expected operating\nperformance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our\nADSs. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of\nother companies with operations located mainly in China that have listed their securities in the United States. In addition to market\nand industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including\nthe following:\n\n \n\n●variations\nin our net revenue, earnings and cash flows;\n\n \n\n●announcements\nof new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;\n\n \n\n●announcements\nof new offerings and expansions by us or our competitors;\n\n \n\n●changes\nin financial estimates by securities analysts;\n\n \n\n●detrimental\nadverse publicity about us, our shareholders, affiliates, directors, officers or employees, our business model, our services or our industry;\n\n \n\n●announcements\nof new regulations, rules or policies relevant for our business;\n\n \n\n●additions\nor departures of key personnel;\n\n \n\n●release\nof lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and\n\n \n\n●potential\nlitigation or regulatory investigations.\n\n \n\nAny of these factors may result in large and sudden\nchanges in the volume and price at which the ADSs will trade. In addition, if the trading volumes of our ADSs are low, persons buying\nor selling in relatively small quantities may easily influence prices of our ADSs. This low volume of trades could also cause the price\nof our ADSs to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our ADSs may\nalso not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading.\n\n \n\nAs a result of this volatility, investors may\nexperience losses on their investment in our ADSs. A decline in the market price of our ADSs also could adversely affect our ability to\nissue additional ADSs or other securities and our ability to obtain additional financing in the future. No assurance can be given that\nan active market in our ADSs will develop or be sustained. If an active market does not develop, holders of our ADSs may be unable to\nreadily sell the securities they hold or may not be able to sell their securities at all.\n\n \n\nIn the past, shareholders of public companies\nhave often brought securities class action suits against those companies following periods of instability in the market price of their\nsecurities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other\nresources from our business and require us to incur significant expenses to defend the suit, which could harm our results of operations.\n\n \n\nAny such class action suit, whether or not successful,\ncould harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against\nus, we may be required to pay significant damages, which could materially adversely affect our financial condition and results of operations.\n\n \n\n42\n\n \n\n \n\n**The sale or availability for sale of substantial\namounts of ADSs could adversely affect their market price.**\n\n \n\nFuture sales of substantial amounts of the ADSs\nin the public market, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially\nimpair our ability to raise capital through equity offerings in the future. Shares held by our existing shareholders may be sold in the\npublic market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable\nlockup agreements.\n\n \n\nWe cannot predict what effect, if any, market\nsales of securities held by our significant shareholders or any other holders or the availability of these securities for future sale\nwill have on the market price of the ADSs.\n\n \n\n**Issuances of Convertible Promissory Notes\nCould Result in Significant Dilution to Our Existing Shareholders and Restrict Our Future Financing Flexibility**\n\n \n\nIn 2024 and early 2025, we issued\nconvertible promissory notes in registered offerings under our shelf registration statement. These notes contain provisions that\nallow conversion into our ADSs at fixed or variable prices, with anti-dilution protections that could lead to the issuance of a\nsubstantial number of additional ADSs if converted. The issuance of additional ADSs upon conversion would dilute the ownership\ninterests of existing shareholders.\n\n \n\nIn addition, the financing agreements contain\nrestrictions on our ability to issue additional securities or incur new indebtedness without the investors’ consent, which may limit\nour ability to raise future financing on favorable terms or at all.\n\n \n\nIf we are unable to manage the dilution and financing restrictions\nassociated with our outstanding convertible notes, our share price could decline significantly, and our ability to fund our operations\nand grow our business could be adversely affected.\n\n \n\n**Holders of ADSs have fewer rights than shareholders\nand must act through the depositary to exercise their rights.**\n\n \n\nHolders of ADSs do not have the same rights as\nour registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders\nor to cast any votes at such meetings. As an ADS holder, you will only be able to exercise the voting rights carried by the underlying\nOrdinary Shares which are represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions\nof the deposit agreement, as amended (the “deposit agreement”). Upon receipt of your voting instructions, the depositary will\ntry, as far as is practicable, to vote the Ordinary Shares underlying your ADSs in accordance with your instructions. If we ask for your\ninstructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Ordinary Shares in accordance\nwith these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance\nwith instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect\nto the underlying Ordinary Shares unless you withdraw the shares, and become the registered holder of such shares prior to the record\ndate for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw\nthe Ordinary Shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and\nto vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition,\nunder our memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote\nat any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such\nclosure of our register of members or the setting of such a record date may prevent you from withdrawing the Ordinary Shares underlying\nyour ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general\nmeeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to\ndeliver our voting materials to you. We have agreed to give the depositary notice of shareholder meetings sufficiently in advance of such\nmeetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary\nto vote the underlying Ordinary Shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing\nto carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to\nexercise your right to direct how the Ordinary Shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying\nyour ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’\nmeeting.\n\n \n\n**Except in limited circumstances, the depositary\nfor our ADSs will give us a discretionary proxy to vote the Ordinary Shares underlying your ADSs if you do not vote at shareholders’\nmeetings, which could adversely affect your interests.**\n\n \n\nUnder the deposit agreement for the ADSs, if you\ndo not vote, the depositary will deem that you have instructed the depositary to give us a discretionary proxy to vote the Ordinary Shares\nunderlying your ADSs at shareholders’ meetings unless we have timely provided the depositary with notice of meeting and related\nvoting materials and\n\n \n\n●we\nhave instructed the depositary that we do not wish a discretionary proxy to be given;\n\n \n\n●we\nhave informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;\n\n \n\n43\n\n \n\n \n\n●a\nmatter to be voted on at the meeting would have a material adverse impact on shareholders; or\n\n \n\n●the\nvoting at the meeting is to be conducted via a show of hands unless voting by poll is required by the applicable listing rules or our\narticles of association.\n\n \n\nThe effect of this discretionary proxy is that\nyou cannot prevent our Ordinary Shares underlying your ADSs from being voted, except under the circumstances described above. This may\nmake it more difficult for shareholders to influence the management of our Company. Holders of our Ordinary Shares will not be subject\nto this discretionary proxy.\n\n \n\n**You may not receive distributions on the\nADSs or any value for them if such distribution is illegal or impractical or if any required government approval cannot be obtained in\norder to make such distribution available to you.**\n\n \n\nAlthough we do not have any present plan to pay\nany dividends, the depositary of the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives\non Ordinary Shares or other deposited securities underlying the ADSs, after deducting its fees and expenses and any applicable taxes and\ngovernmental charges. You will receive these distributions in proportion to the number of Ordinary Shares your ADSs represent. However,\nthe depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of\nADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities whose offering would require\nregistration under the Securities Act but are not so properly registered or distributed under an applicable exemption from registration.\nThe depositary may also determine that it is not reasonably practicable to distribute certain property. In these cases, the depositary\nmay determine not to distribute such property. We have no obligation to register under the U.S. securities laws any offering of ADSs,\nOrdinary Shares, rights or other securities received through such distributions. We also have no obligation to take any other action to\npermit the distribution of ADSs, Ordinary Shares, rights or anything else to holders of ADSs. This means that you may not receive distributions\nwe make on our Ordinary Shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions\nmay cause a material decline in the value of the ADSs.\n\n \n\n**Your right to participate in any future\nrights offerings may be limited, which may cause dilution to your holdings.**\n\n \n\nWe may from time to time distribute rights to\nour shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless\nwe register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements\nis available. Also, under the deposit agreement, the depositary will not make rights available to you unless either both the rights and\nany related securities are registered under the Securities Act, or the distribution of them to ADS holders is exempted from registration\nunder the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or\nto endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from\nregistration under the Securities Act. If the depositary does not distribute the rights, it may, under the deposit agreement, either sell\nthem, if possible, or allow them to lapse. Accordingly, you may be unable to participate in our rights offerings and may experience dilution\nin your holdings.\n\n \n\n**You may be subject to limitations on transfers\nof your ADSs.**\n\n \n\nYour ADSs are transferable on the books of the\ndepositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection\nwith the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally\nwhen our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of\nany requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.\n\n \n\n**Your rights to pursue claims against the\ndepositary as a holder of ADSs are limited by the terms of the deposit agreement.**\n\n \n\nUnder the deposit agreement, any action or proceeding\nagainst or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by\nvirtue of owning the ADSs, including without limitation claims under the Securities Act of 1933, may only be instituted in the United\nStates District Court for the Southern District of New York (or, if the Southern District of New York lacks subject matter jurisdiction\nover a particular dispute, in the state courts of New York County, New York), and you, as a holder of the ADSs, will have irrevocably\nwaived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction\nof such courts in any such action or proceeding.\n\n \n\n44\n\n \n\n \n\n**ADS holders may not be entitled to a jury\ntrial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in\nany such action.**\n\n \n\nThe deposit agreement governing the ADSs representing\nour Ordinary Shares provides that the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine\nclaims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders, including purchasers\nof ADSs in secondary transactions, waive the right to a jury trial of any claim they may have against us or the depositary arising out\nof or relating to our Ordinary Shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.\n\n \n\nIf we or the depositary opposed a jury trial demand\nbased on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in\naccordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver\nin connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court.\nIn determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party\nknowingly, intelligently and voluntarily waived the right to a jury trial. We believe that a contractual pre-dispute jury trial waiver\nprovision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. We believe\nthat this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the\njury waiver provision before investing in the ADSs.\n\n \n\nIf you or any other holders or beneficial owners\nof ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including\nclaims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to\nsuch claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought\nagainst us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court,\nwhich would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have\nhad, including results that could be less favorable to the plaintiff(s) in any such action.\n\n \n\nNevertheless, if this jury trial waiver provision\nis not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No\ncondition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by\nus or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated\nthereunder.\n\n \n\n**The deposit agreement may be amended or\nterminated without your consent.**\n\n \n\nWe and the depositary may amend or terminate the\ndeposit agreement without your consent. Such amendment or termination may be done in favor of our Company. Holders of the ADSs, subject\nto the terms of the deposit agreement, will receive notice in the event of an amendment that prejudices a substantial existing right or\na termination. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement\nas amended. The deposit agreement may be terminated at any time upon a prior written notice. Upon the termination of the deposit agreement,\nour Company will be discharged from all obligations under the deposit agreement, except for our obligations to the depositary thereunder.\n\n \n\n**Holders or beneficial owners of the ADSs\nhave limited recourse if we or the depositary fail to meet our respective obligations under the deposit agreement.**\n\n \n\nThe deposit agreement expressly limits the obligations\nand liability of us and the depositary. For example, the depositary is not liable if any of us or our respective controlling persons or\nagents are prevented or forbidden from, or subjected to any civil or criminal penalty or restraint on account of, or delayed in, doing\nor performing any act or thing required by the terms of the deposit agreement and any American Depositary Receipt (“ADR”),\nby reason of any provision of any present or future law or regulation of the United States or any state thereof, the Cayman Islands or\nany other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal\nor civil penalties or restraint, or by reason of any provision, present or future, of our memorandum and articles of association or any\nprovision of or governing any deposited securities, or by reason of any act of God or war or other circumstances beyond its control (including,\nwithout limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions,\nexplosions and computer failure). In addition, the depositary and any of its agents also disclaim any liability for (i) any failure to\ncarry out any instructions to vote, the manner in which any vote is cast or the effect of any vote or failure to determine that any distribution\nor action may be lawful or reasonably practicable or for allowing any rights to lapse in accordance with the provisions of the deposit\nagreement, (ii) the failure or timeliness of any notice from us, the content of any information submitted to it by us for distribution\nto you or for any inaccuracy of any translation thereof, (iii) any investment risk associated with the acquisition of an interest in the\ndeposited securities, the validity or worth of the deposited securities or the credit-worthiness of any third party, (iv) any tax consequences\nthat may result from ownership of ADSs, Ordinary Shares or deposited securities, or (v) any acts or omissions made by a successor depositary\nwhether in connection with a previous act or omission of the depositary or in connection with any matter arising wholly after the removal\nor resignation of the depositary, provided that in connection with the issue out of which such potential liability arises the depositary\nperformed its obligations without gross negligence or willful misconduct while it acted as depositary. These provisions of the deposit\nagreement will limit the ability of holders or beneficial owners of the ADSs to obtain recourse if we or the depositary fail to meet our\nrespective obligations under the deposit agreement.\n\n \n\n45\n\n \n\n \n\n**Techniques employed by short sellers may\ndrive down the market price of the ADSs.**\n\n \n\nShort selling is the practice of selling securities\nthat the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later\ndate to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed\nsecurities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the\nsale.\n\n \n\nAs it is in the short seller’s interest\nfor the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the\nrelevant issuer and its prospects to create negative market momentum and generate profits for themselves after selling a security short.\nThese short attacks have, in the past, led to selling of shares in the market.\n\n \n\nPublic companies that have substantially all of\ntheir operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations\nof a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate\ncorporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies\nare now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits\nand/or SEC enforcement actions. It is not clear what effect such negative publicity could have on us. If we were to become the subject\nof any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend significant resources\nto investigate such allegations and/or defend ourselves.\n\n \n\nWhile we would strongly defend against any such\nshort seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom\nof speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could\ndistract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against\nus could severely impact our business, and any investment in the ADSs could be greatly reduced or even rendered worthless.\n\n \n\n**If securities or industry analysts do not\npublish research or publish inaccurate or unfavorable research about our business, the market price for the ADSs and trading volume could\ndecline.**\n\n \n\nThe trading market for the ADSs will depend in\npart on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish\nand maintain adequate research coverage or if one or more of the analysts who covers us downgrades the ADSs or publishes inaccurate or\nunfavorable research about our business, the market price for the ADSs would likely decline. If one or more of these analysts ceases coverage\nof our Company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause\nthe market price or trading volume for the ADSs to decline.\n\n \n\n**Our ADS price could decline again, and our\nfailure to meet the continued listing requirements of Nasdaq could result in a delisting of the ADSs.**\n\n \n\nIn July 2024, we received a notification letter\nfrom the Nasdaq Stock Market stating that the closing bid price of our ADSs had been below the minimum $1.00 per share requirement for\n30 consecutive business days. To regain compliance, we implemented a one-for-nine reverse ADS split in August 2024, and in September 2024,\nNasdaq confirmed that we had regained compliance with the minimum bid price requirement. However, there can be no assurance that we will\nbe able to maintain compliance with Nasdaq’s continued listing requirements in the future.\n\n \n\nAdverse developments related to our business,\nunfavorable market conditions, or broader economic downturns could cause the price of our ADSs to decline below $1.00 again. If we fail\nto maintain the minimum bid price or other applicable listing standards, Nasdaq may initiate delisting proceedings.\n\n \n\nMoreover, on January 17, 2025, Nasdaq adopted\nRule 5810(c)(3)(A)(iv), which provides that if a company regains compliance with the minimum bid price requirement by effecting a reverse\nstock split and thereafter fails to comply with the minimum bid price standard within 12 months following the reverse split, Nasdaq will\nnot grant a new compliance period and will issue an immediate delisting determination. Because we effected a reverse ADS split in August\n2024 to regain compliance, if our ADS price again falls below $1.00 before August 2025, we may not be eligible for a new compliance period\nand could be subject to immediate delisting from Nasdaq.\n\n \n\n46\n\n \n\n \n\nA delisting would likely have a material adverse\neffect on the liquidity, trading price, and marketability of our ADSs and could impair our ability to raise additional capital through\npublic or private equity financings.\n\n \n\nIf we fail to maintain compliance with Nasdaq’s\nlisting requirements, our ADSs could be delisted, which would materially and adversely affect the liquidity and trading price of our securities\nand our ability to access capital markets.\n\n \n\n**Because we are incorporated under the laws\nof the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights through the U.S.\nFederal courts may be limited.**\n\n \n\nWe have been advised by Conyers, Dill and Pearman,\nour Cayman Islands legal counsel, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments\nof courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or any\nstate; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability\nprovisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are\npenal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the\nUnited States, the courts of the Cayman Islands will recognize a final and conclusive judgment in the federal or state courts of the United\nStates based on agreements to which we are a party and under which a sum of money is payable (other than a sum of money payable in respect\nof multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an\nin personam judgment for non-monetary relief, and would give a judgment based thereon provided that (i) such courts had proper jurisdiction\nover the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii)\nsuch judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman\nIslands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the\nCayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.\n\n \n\n**United States civil liabilities and certain\njudgments obtained against us by our shareholders may not be enforceable.**\n\n \n\nWe are a Cayman Islands exempted company and substantially\nall of our assets are located outside of the United States. In addition, all of our directors and officers (except H. David Sherman) are\nnationals and residents of countries other than the United States. A substantial portion of the assets of our officers and directors is\nlocated outside of the United States. As a result, it may be difficult to effect service of process within the United States upon our\nofficers and directors (except H. David Sherman). It may also be difficult to enforce in U.S. courts judgments obtained in liability provisions\nof the U.S. federal securities laws against us and our officers and directors who are not resident in the United States and the substantial\nmajority of whose assets are located outside of the United States.\n\n \n\nFurther, it is unclear if original actions predicated\non civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in\nthe Cayman Islands. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments\nof U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States\non the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments\nobtained in the United States, courts of the Cayman Islands would recognize a final and conclusive judgment in the federal or state courts\nof the United States based on agreements to which we are a party and under which a sum of money is payable (other than a sum of money\npayable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain\ncircumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that (i) such courts\nhad proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of\nthe Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public\npolicy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment\nby the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.\n\n \n\nFurther, there is uncertainty as to whether the\ncourts of China would:\n\n \n\n●recognize\nor enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions\nof the securities laws of the United States or any state in the United States; or entertain original actions brought in each respective\njurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United\nStates.\n\n \n\n47\n\n \n\n \n\nWhile the recognition and enforcement of foreign\njudgments are provided for under the PRC Civil Procedures Law, PRC courts may recognize and enforce foreign judgments in accordance with\nthe requirements of the PRC Civil Procedures Law and other applicable laws and regulations based either on treaties between China and\nthe country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other\nform of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign\njudgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or\nour directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security\nor public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in\nthe United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC\nlaw against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and\nmeet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be\na concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to originate actions\nagainst us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult\nfor U.S. shareholders, by virtue only of holding ADSs or Ordinary Shares, to establish a connection to the PRC for a PRC court to have\njurisdiction as required under the PRC Civil Procedures Law.\n\n \n\nFurther, there is uncertainty as to whether the\ncourts of Hong Kong would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers\npredicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain\noriginal actions brought in Hong Kong against us or our directors or officers predicated upon the securities laws of the United States\nor any state in the United States.\n\n \n\nIn addition, foreign judgments of United States\ncourts will not be directly enforced in Hong Kong as there are currently no treaties or other arrangements providing for reciprocal enforcement\nof foreign judgments between Hong Kong and the United States. However, the common law permits an action to be brought upon a foreign judgment.\nThat is to say, a foreign judgment itself may form the basis of a cause of action since the judgment may be regarded as creating a debt\nbetween the parties to it. In a common law action for enforcement of a foreign judgment in Hong Kong, the enforcement is subject to various\nconditions, including but not limited to, that the foreign judgment is a final judgment conclusive upon the merits of the claim, the judgment\nis for a liquidated amount in civil matter and not in respect of taxes, fines, penalties, or similar charges, the proceedings in which\nthe judgment was obtained were not contrary to natural justice, and the enforcement of the judgment is not contrary to public policy of\nHong Kong. Such a judgment must be for a fixed sum and must also come from a “competent” court as determined by the private\ninternational law rules applied by the Hong Kong courts. The defenses that are available to a defendant in a common law action brought\non the basis of a foreign judgment include lack of jurisdiction, breach of natural justice, fraud, and contrary to public policy. However,\na separate legal action for debt must be commenced in Hong Kong in order to recover such debt from the judgment debtor. As a result, subject\nto the conditions with regard to enforcement of judgments of United States courts being met, including but not limited to the above, a\nforeign judgment of the United States of civil liabilities predicated solely upon the federal securities laws of the United States or\nthe securities laws of any State or territory within the United States could be enforceable in Hong Kong.\n\n \n\n**The ability of U.S. authorities to bring\nactions for violations of U.S. securities law and regulations against us, our directors and executive officers named in this annual report\n(except H. David Sherman) may be limited. Therefore, you may not be afforded the same protection as provided to investors in U.S. domestic\ncompanies.**\n\n \n\nThe SEC, the U.S. Department of Justice, or the\nDOJ, and other U.S. authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies such\nas us, and non-U.S. persons, such as our directors and executive officers in the PRC. Due to jurisdictional limitations, matters of comity\nand various other factors, the SEC, the DOJ and other U.S. authorities may be limited in their ability to pursue bad actors, including\nin instances of fraud, in emerging markets such as the PRC. We conduct our operations mainly in the PRC and our assets are mainly located\nin the PRC. There are significant legal and other obstacles for U.S. authorities to obtain information needed for investigations or litigation\nagainst us or our directors, executive officers (except H. David Sherman) or other gatekeepers in case we or any of these individuals\nengage in fraud or other wrongdoing. In addition, local authorities in the PRC may be constrained in their ability to assist U.S. authorities\nand overseas investors in connection with legal proceedings. As a result, if we, our directors, executive officers or other gatekeepers\ncommit any securities law violation, fraud or other financial misconduct, the U.S. authorities may not be able to conduct effective investigations\nor bring and enforce actions against us, our directors, executive officers (except H. David Sherman) or other gatekeepers. Therefore,\nyou may not be able to enjoy the same protection provided by various U.S. authorities as it is provided to investors in U.S. domestic\ncompanies.\n\n \n\n48\n\n \n\n \n\n**You may experience difficulties in effecting\nservice of legal process, enforcing foreign judgments or bringing original actions in the PRC, based on United States or other foreign\nlaws, against us, our directors and executive officers named in this annual report (except H. David Sherman). Therefore, you may not be\nable to enjoy the protection of such laws in an effective manner.**\n\n \n\nWe are a company incorporated under the laws of\nthe Cayman Islands, we conduct our operations mainly in the PRC, and our assets are mainly located in the PRC. As a result, it may not\nbe possible to effect service of process within the United States or elsewhere outside the PRC upon us, our directors and executive officers\n(except H. David Sherman), including with respect to matters arising under U.S. federal securities laws or applicable state securities\nlaws. Even if you obtain a judgment against us, our directors and executive officers named in this annual report (except H. David Sherman)\nin a U.S. court or other court outside the PRC, you may not be able to enforce such judgment against us or them in the PRC. The PRC does\nnot have treaties providing for the reciprocal recognition and enforcement of judgments of courts in the United States, the United Kingdom,\nJapan or most other western countries. Therefore, recognition and enforcement in the PRC of judgments of a court in any of these jurisdictions\nmay be difficult or impossible. In addition, you may not be able to bring original actions in the PRC based on the U.S. or other foreign\nlaws against us, our directors and executive officers named in this annual report (except H. David Sherman). As a result, shareholder\nclaims that are common in the United States, including class actions based on securities law and fraud claims, are difficult or impossible\nto pursue as a matter of law and practicality in the PRC.\n\n \n\nFor example, in the PRC, there are significant\nlegal and other obstacles to obtaining information needed for shareholder investigations or litigation outside the PRC or otherwise with\nrespect to foreign entities. Although the local authorities in the PRC may establish a regulatory cooperation mechanism with the securities\nregulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation\nwith the securities regulatory authorities in the Unities States have not been efficient in the absence of mutual and practical cooperation\nmechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is\nallowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the\nconsent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and\nmaterials relating to securities business activities to overseas parties. While detailed interpretation of or implementation rules under\nArticle 177 of the PRC Securities Law is not yet available, the inability for an overseas securities regulator to directly conduct investigation\nor evidence collection activities within the PRC may further increase difficulties faced by investors in protecting your interests. Therefore,\nyou may not be able to effectively enjoy the protection offered by the U.S. laws and regulations that are intended to protect public investors.\n\n \n\n**As a company incorporated in the Cayman\nIslands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly\nfrom the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy\nif we complied fully with the Nasdaq corporate governance listing standards.**\n\n \n\nAs a Cayman Islands exempted company listed on\nNasdaq, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like\nus to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which\nis our home country, may differ significantly from the Nasdaq corporate governance listing standards. We have chosen, and may from time\nto time choose, to follow home country exemptions with respect to certain corporate matters.\n\n \n\n**Our articles of association contain anti-takeover\nprovisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their\nshares, including Ordinary Shares represented by the ADSs, at a premium, as a result, it could materially adversely affect the rights\nof holders of our ADSs.**\n\n \n\nWe have adopted a set of amended and restated\narticles of association that contains provisions to limit the ability of others to acquire control of our Company. These provisions could\ndeprive our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties\nfrom seeking to obtain control of our Company in a tender offer or similar transaction.\n\n \n\nOur board of directors has the authority to issue\npreferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional\nor special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms\nof redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Ordinary Shares, in\nthe form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of\nour Company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our\nADSs may fall and the voting and other rights of the holders of our Ordinary Shares and ADSs may be materially adversely affected.\n\n \n\n49\n\n \n\n \n\n**We are an emerging growth company within\nthe meaning of the Securities Act and may take advantage of certain reduced reporting requirements.**\n\n \n\nWe are an “emerging growth company,”\nas defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that\nare not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements\nof Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not\nto comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.\nIn addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition\nperiod provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying\nwith new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards\nuntil those standards would otherwise apply to private companies. We elect to use this extended period. transition period, as a result,\nour financial statements may not be comparable to companies that comply with public company effective dates.\n\n \n\n**We are a foreign private issuer within the\nmeaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.**\n\n \n\nBecause we qualify as a foreign private issuer\nunder the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable\nto U.S. domestic issuers, including:\n\n \n\n●the\nrules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;\n\n \n\n●the\nsections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under\nthe Exchange Act;\n\n \n\n●the\nsections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability\nfor insiders who profit from trades made in a short period of time; and\n\n \n\n●the\nselective disclosure rules by issuers of material nonpublic information under Regulation FD.\n\n \n\nWe will be required to file an annual report on\nForm 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a semi-annually basis as\npress releases, distributed pursuant to the rules and regulations of Nasdaq. Press releases relating to financial results and material\nevents will also be furnished to the SEC on Form 6-K.\n\n \n\nHowever, the information we are required to file\nwith or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic\nissuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing\nin a U.S. domestic issuer.\n\n \n\n**We will incur increased costs as a result\nof being a public company, particularly after we cease to qualify as an “emerging growth company.”**\n\n \n\nAs a public company, we expect to incur significant\nlegal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently\nimplemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies. We expect these\nrules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and\ncostly.\n\n \n\nAs a result of becoming a public company, we will\nneed to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.\nWe also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer\nliability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain\nthe same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It\nmay also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently\nevaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree\nof certainty the amount of additional costs we may incur or the timing of such costs.\n\n \n\n50\n\n \n\n \n\nIn addition, after we are no longer an “emerging\ngrowth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with\nthe requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.\n\n \n\n**We are a “controlled company”\nas defined under the Nasdaq Global Market (“Nasdaq”) listing rules, and as such we are permitted to elect not to comply with\ncertain corporate governance requirements.**\n\n \n\nOn December 13, 2023, Xiao-I issued 3,700,000 preferred shares, each with a par value of US$0.00005 and carrying\na voting right equivalent to 20 votes (the “3.7 million Preferred Shares” or the “Preferred Shares”) to ZunTian\nHolding Limited (“ZunTian”), an existing shareholder of Xiao-I (the “Issuance”). ZunTian is a BVI-incorporated\ncompany wholly owned and controlled by Mr. Hui Yuan (“Mr. Yuan”). Mr. Yuan is the CEO and Chairman of the Company and a recognized\nA1 industry key opinion leader and domain expert. As a result of the Issuance, Mr. Yuan beneficially owns more than 79% of the voting\npower of Xiao-I. As of the date of this annual report, Mr. Yuan beneficially owns more than 50% of the voting power of Xiao-I. Under the\nNasdaq listing rules, the Issuance resulted in a change in control and the Company became a “controlled company” as defined\nunder those rules. As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements.\nIf we rely on these exemptions, you will not have the same protection afforded to shareholders of companies that are subject to these\ncorporate governance requirements.\n\n \n\n**There can be no assurance we will not be\na passive foreign investment company (“PFIC”), for any taxable year, which could result in adverse U.S. federal income tax\nconsequences to U.S. investors in our ADSs or Ordinary Shares.**\n\n \n\nA non-U.S. corporation, such as our Company, will\nbe classified as a PFIC for U.S. federal income tax purposes for any taxable year in which (i) 75% or more of its gross income consists\nof passive income or (ii) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets\nthat produce passive income or are held for the production of passive income. For purposes of these calculations, we will be treated as\nearning our proportionate share of the income and owning our proportionate share of the assets of any other corporation in which we own,\ndirectly or indirectly, 25% (by value) of the stock. Although the law in this regard is not entirely clear, we treat the VIE and its subsidiaries\nas being owned by us for U.S. federal income tax purposes because we control their management decisions and are entitled to all of the\neconomic benefits associated with them (excluding non-controlling interests). As a result, we consolidate their results of operations\nin our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of the VIE and its subsidiaries\nfor U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year.\n\n \n\nAssuming that we are the owner of the VIE and\nits subsidiaries for U.S. federal income tax purposes, and based upon the manner in which we currently operate our business through the\nVIE, the expected composition of our income and assets and the value of our assets, we do not presently expect to be a PFIC for the current\ntaxable year or the foreseeable future. However, this is a factual determination that must be made annually after the close of each taxable\nyear, and the application of the PFIC rules is subject to uncertainty in several respects. The value of our assets for purposes of the\nPFIC determination generally will be determined by reference to the market price of our Ordinary Shares and ADSs, which could fluctuate\nsignificantly. In addition, our PFIC status will depend on the manner we operate our business. Furthermore, it is not entirely clear how\nthe contractual arrangements between us, the VIE and its nominal shareholders will be treated for purposes of the PFIC rules, and we may\nbe or become a PFIC if the VIE is not treated as owned by us. Because of these uncertainties, there can be no assurance that we will not\nbe a PFIC for the current taxable year or future taxable years.\n\n \n\nIf\nwe were a PFIC for any taxable year during which a U.S. holder (as defined in “Item 10 Additional Information – E.\nTaxation — United States Federal Income Taxation Considerations —\n*General*”) owns our ADSs or Ordinary Shares, certain adverse U.S. federal income tax consequences could apply to such U.S.\nholder. See “Item 10 Additional Information – E. Taxation\n— United States Federal Income Taxation Considerations — *Passive Foreign Investment Company Considerations; Passive Foreign\nInvestment Company Rules*.”\n\n \n\n**We are not required to disclose compensation\nof Directors and Officers under Cayman Islands law.**\n\n \n\nUnder Cayman Islands law, the Company is not required\nto disclose compensation paid to our senior management on an individual basis and the Company has not otherwise publicly disclosed this\ninformation elsewhere. The executive officers, directors and management of the Company receive fixed and variable compensation. They also\nreceive benefits in line with market practice. The fixed component of their compensation is set on market terms and adjusted annually.\nThe variable component consists of cash bonuses and awards of shares (or the cash equivalent). Cash bonuses are paid to executive officers\nand members of management based on previously agreed targets for the business. Shares (or the cash equivalent) are awarded under share\noptions.\n\n \n\n51"}