{"url_path":"/sec/aixi/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 Operating and Financial Review and","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":9354,"has_tables":true,"body_markdown":"Item 5. Operating and Financial Review and\nProspects.\n\n** **\n\n**In the following management’s discussion\nand analysis of financial condition and operating results, “we,” “us,” or “our” refer to the PRC operating\nentities except when financial information is presented on a consolidated basis in which case “we”, “us,” or “our”\nrefer to Xiao-I Corporation and its subsidiaries and the PRC operating entities on a consolidated basis.**\n\n \n\n*The following discussion and analysis of our\nfinancial condition and results of operations is based upon and should be read in conjunction with our financial statements and the related\nnotes included elsewhere in this annual report. This discussion contains forward-looking statements. In evaluating our business, you should\ncarefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” and elsewhere\nin this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.*\n\n \n\nA. Operating Results.\n\n** **\n\n**Overview**\n\n** **\n\nWe are a leading cognitive artificial intelligence\n(“AI”) company. Since our establishment in 2001, we have been dedicated to continuous innovation and breakthroughs in core\ntechnologies related to cognitive intelligence rooted in natural language processing. Xiao-I’s development goal is to achieve scalable\nimplementation and commercialization of our innovative proprietary technologies. We adhere to the mission of “serve and benefit\nmore people with our AI technology” and provide our clients with a whole range of AI solutions, covering industries of customer\nservice center, finance, urban public service, architecture, healthcare, manufacturing, metaverse and more.\n\n \n\nDuring the year ended December 31, 2025, the operating\nenvironment for independent providers of general-purpose AI customer-service solutions in the People’s Republic of China (the “PRC”)\ndeteriorated materially. Two factors had the most significant impact on our results of operations during the year:\n\n \n\n●Increased competition from large integrated cloud platforms. Major\nPRC cloud service providers expanded their AI customer-service offerings during 2025. In a number of cases, these offerings were bundled\nwith broader cloud or consumer-internet ecosystems and were made available on a free-trial basis, with free usage allowances, or at entry-level\nprice points significantly below those historically prevailing in the market. These developments increased pricing pressure on independent\nvendors, including the Company, particularly in the small- and medium-enterprise (“SME”) segment, and reduced our ability\nto convert SME opportunities into paid engagements on terms consistent with our historical margin profile.\n\n \n\n●Tightening of enterprise IT budgets and lengthening of customer\ndecision cycles. Reflecting broader macroeconomic conditions in the PRC, enterprise customers applied increased return-on-investment\nscrutiny to AI-related expenditures during 2025. We observed longer proof-of-concept evaluation periods, an increased proportion of customers\nrequiring quantifiable cost-saving or revenue-enhancement metrics prior to commitment, and, in the SME segment, a higher rate of deferral\nor cancellation of previously contemplated AI upgrade plans. A number of enterprise customers also reported that their own AI operating\nexpenditures (principally inference and API usage fees) had increased materially over the course of the year, which in certain cases\ncontributed to delays in additional AI investment decisions.\n\n \n\n72\n\n \n\n \n\nIn response to these conditions, during 2025 we\nimplemented a strategic realignment intended to concentrate our resources on a smaller number of vertical applications in which we believe\nwe can compete effectively, and to reduce our overall cost base. The principal elements of this realignment included:\n\n \n\n●the discontinuation or scaling-back of certain product lines\nand customer engagements that were not generating, or were not expected to generate, acceptable margins, including substantial portions\nof our technology development services, hardware sales and cloud-platform resale activities;\n\n \n\n●a reduction in headcount and the consolidation of certain\noffice facilities; and\n\n \n\n●a reorientation of our research and development activities\ntoward task-specific fine-tuning, lightweight deployment and the commercialization of our existing model assets, rather than foundational\nmodel pre-training.\n\n \n\nThe realignment had a material adverse effect\non our reported revenue and net loss for 2025, and resulted in certain non-recurring charges, principally severance and statutory compensation\npayments associated with the headcount reduction (recorded within general and administrative expenses) and a loss on disposal of property,\nplant and equipment associated with the facilities consolidation. Management believes these actions were necessary in light of the operating\nenvironment described above.\n\n \n\nThe financial and operating impact of the matters\ndescribed above is discussed in detail under “—Results of Operations” below. In addition to the matters discussed therein,\nwe note that, viewed by delivery category, revenue from maintenance and support services was the only category that increased year over\nyear, growing by US$2.39 million, or 98.8%, from US$2.42 million in 2024 to US$4.81 million in 2025, reflecting the renewal and expansion\nof recurring support arrangements with our existing customer base.** **\n\n** **\n\n**Recent Developments**\n\n \n\nDuring the year ended December 31, 2024, and into\nearly 2025, Xiao-I Corporation undertook a series of registered offerings pursuant to its shelf registration statement on Form F-3. These\nofferings involved the issuance of convertible promissory notes and, in certain cases, related ADSs issued at par value to institutional\ninvestors. The transactions were completed in June 2024, October 2024, and January 2025, providing the company with aggregate gross proceeds\nof approximately $10 million. Each offering included customary terms such as fixed or variable conversion prices, anti-dilution protections,\nand covenants limiting future indebtedness and equity issuances on more favorable terms. The proceeds were used to support the company’s\ngeneral corporate purposes and strategic initiatives.\n\n \n\nDuring the same period, the company became subject\nto litigation relating to its initial public offering and post-IPO disclosures. Securities class action lawsuits were filed in New York\nstate court and U.S. federal court alleging material misstatements and omissions in the company’s offering materials and subsequent\nSEC filings. Xiao-I is actively contesting these claims. In addition, the company continued to pursue its patent litigation against Apple\nInc. in China. The Beijing Intellectual Property Court ruled in Xiao-I’s favor by confirming the validity of one of its patents,\nand trial proceedings for the infringement claims concluded before the Shanghai High Court in mid-2024, with a decision pending as of\nthe date of this filing.\n\n \n\nThe company also addressed Nasdaq listing compliance\nissues. In July 2024, Xiao-I received a deficiency notice from Nasdaq due to the bid price of its ADSs remaining below $1.00 for a sustained\nperiod. To regain compliance, the company effected a reverse ADS split in August 2024. Following this adjustment, Nasdaq confirmed in\nSeptember 2024 that Xiao-I had regained compliance with the minimum bid price requirement.\n\n \n\nFor additional information regarding these developments,\nsee “*Item 4.A — “Information on the Company — History and Development of the Company — Recent Developments*.”\n\n \n\n73\n\n \n\n \n\n**Major Factors Affecting Our Results of\nOperations**\n\n** **\n\nOur results of operations are affected by general\nfactors influencing the AI software industry, including the pace of technological change, the availability and cost of computing infrastructure,\nenterprise IT spending levels, and the competitive intensity of integrated cloud service providers. We believe that, during the period\ncovered by this report, our results of operations have been affected most directly by the following factors:\n\n \n\n**Competitive Environment**\n\n** **\n\nThe market for AI-based customer-service and language-model\nsolutions in the PRC is highly competitive, and competition intensified during 2025 as a result of expanded offerings from large integrated\ncloud platforms. During 2025, we implemented a strategic realignment to focus on vertical applications and deployment models in which\nwe believe our domain expertise, customization capabilities and edge-deployment options provide a basis for differentiation.\n\n \n\n**Enterprise Customer Spending Patterns**\n\n** **\n\nThe timing of our revenue recognition is sensitive\nto the duration of customer evaluation cycles and to enterprise IT spending patterns. Lengthened proof-of-concept periods and increased\ncontractual focus on outcome-based deliverables observed during 2025 affected the timing of revenue recognition during the year, and also\ncontributed to the increase in deferred revenue at period-end as compared to the prior year.\n\n** **\n\n**Product Mix**\n\n** **\n\nOur results of operations during 2025 were significantly\naffected by changes in the mix of our revenue, principally as a result of the strategic realignment. Lower-margin product and service\nlines—including technology development services, cloud-platform resale and certain hardware and software products—were discontinued\nor scaled back. The contraction in our higher-margin MaaS business was less severe than that of our non-MaaS business in absolute percentage\nterms, although both declined materially.\n\n** **\n\n**Cost Structure and Operating Efficiency**\n\n** **\n\nOur results are affected by the level and composition\nof our operating expenses, in particular research and development expenses and general and administrative expenses. The 2025 strategic\nrealignment resulted in a significant reduction in research and development expenses and selling expenses, while general and administrative\nexpenses increased as a result of non-recurring charges incurred in connection with the realignment, as discussed below under “—Results\nof Operations.”\n\n** **\n\n**Sales and Marketing**\n\n** **\n\nWe market our products and services through industry\ntrade shows, academic and industry seminars, publication of technical milestones and partner collaboration. During 2025, we reduced our\nsales and marketing activities and related expenditure in line with the realignment.\n\n** **\n\n**Intellectual Property**\n\n** **\n\nAs of May 1, 2026, the Group held 368 granted\npatents and 662 active patent applications globally, including six newly filed PRC invention patent applications relating to virtual fitting\nsystems, AI-Generated Content (AIGC) image synthesis, multimodal information processing and large-language-model-based AI agent applications,\nand three U.S. patent applications relating to automotive device control and smart-glasses technology. The portfolio also includes 246\nregistered trademarks and 146 registered computer software copyrights.\n\n** **\n\n**Impact of Foreign Exchange Fluctuations**\n\n** **\n\nA substantial portion of our revenue and expenses\nis denominated in RMB, while we report in US dollars. Fluctuations in the RMB/US$ exchange rate therefore affect our reported results.\nWe recognized a foreign currency exchange loss of US$1,522,101 for the year ended December 31, 2025, compared with a foreign currency\nexchange gain of US$150,248 for the year ended December 31, 2024.  \n\n** **\n\n74\n\n \n\n \n\n**RESULTS OF OPERATIONS**\n\n** **\n\nThe following table sets forth a summary of our\nconsolidated results of operations for the periods indicated, both in absolute amount and as a percentage of our revenues for the\nperiods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere\nin this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for\nany future period.\n\n \n\n  \nFor the Years Ended December 31, \n\n  \n2023  \n2024  \n2025 \n\n  \nUSD  \n%  \nUSD  \n%  \nUSD  \n% \n\n  \n   \n   \n   \n   \n   \n  \n\nNet revenue \n 59,165,259  \n 100.0% \n 70,314,315  \n 100.0% \n 12,327,684  \n 100.0%\n\nCost of revenues \n (19,741,689) \n (33.4)% \n (22,264,768) \n (31.7)% \n (6,848,700) \n (55.6)%\n\nGross profit \n 39,423,570  \n 66.6% \n 48,049,547  \n 68.3% \n 5,478,984  \n 44.4%\n\nSelling expenses \n (4,550,997) \n (7.7)% \n (3,320,886) \n (4.7)% \n (1,070,145) \n (8.7)%\n\nGeneral and administrative expenses \n (4,407,215) \n (7.4)% \n (22,940,916) \n (32.6)% \n (76,555,497) \n (621.0)%\n\nResearch and development expenses \n (52,387,540) \n (88.5)% \n (34,658,779) \n (49.3)% \n (24,456,422) \n (198.4)%\n\nOther loss, net \n (1,295,894) \n (2.2)% \n (1,680,294) \n (2.4)% \n (5,223,339) \n (42.4)%\n\nLoss before tax \n (23,218,076) \n (39.2)% \n (14,551,328) \n (20.7)% \n (101,826,419) \n (826.0)%\n\nIncome tax expenses \n (3,787,692) \n (6.4)% \n -  \n -  \n -  \n - \n\nNet loss \n (27,005,768) \n (45.6)% \n (14,551,328) \n (20.7)% \n (101,826,419) \n (826.0)%\n\n \n\n**KEY COMPONENTS OF RESULTS OF OPERATIONS**\n\n** **\n\n**Net revenues**\n\n** **\n\nNet revenue decreased by US$57.99 million, or 82.5%, from US$70.31\nmillion for the year ended December 31, 2024 to US$12.33 million for the year ended December 31, 2025.  As discussed under “—Overview”\nand “—Major Factors Affecting Our Results of Operations,” the decrease reflects both the industry conditions prevailing\nduring 2025 and the strategic realignment implemented during the year, which involved the discontinuation or scaling-back of a number\nof lower-margin product and service lines.\n\n \n\nThe following table sets forth the product lines\nof our net revenues by amounts and percentages of our total net revenues for the periods presented: We analyze our net revenue under\ntwo classification frameworks—by delivery category and by product line. The two classifications cover the same total net revenue\nand reconcile to one another in each period.\n\n \n\nNet revenue by delivery category. The table\nbelow sets forth the composition of our net revenue by delivery category:\n\n \n\n  \nFor the Years Ended December 31, \n\n  \n2023  \n2024  \n2025 \n\n  \nUSD  \n%  \nUSD  \n%  \nUSD  \n% \n\nSale of cloud platform products \n 47,007,556  \n 79.5% \n 40,877,256  \n 58.1% \n 4,329,729  \n 35.1%\n\nTechnology development service \n 7,839,700  \n 13.3% \n 24,105,644  \n 34.3% \n 2,147,523  \n 17.4%\n\nSale of software products \n 1,566,455  \n 2.6% \n 1,516,169  \n 2.2% \n 472,559  \n 3.8%\n\nM&S service \n 2,676,185  \n 4.5% \n 2,419,901  \n 3.4% \n 4,809,979  \n 39.0%\n\nSale of hardware products \n 75,363  \n 0.1% \n 1,395,345  \n 2.0% \n 567,894  \n 4.6%\n\nTotal \n 59,165,259  \n 100.0% \n 70,314,315  \n 100.0% \n 12,327,684  \n 100.0%\n\n  \n\nThe principal drivers of the year-over-year change\nin net revenue, viewed by delivery category, were:\n\n \n\n \n●\nSale of cloud-platform\nproducts decreased by US$36.55 million, or 89.4%, primarily reflecting the discontinuation of third-party cloud-platform resale\nactivities that generated revenue at gross margins substantially below those of our core product lines.\n\n \n\n \n●\nTechnology development\nservices decreased by US$21.96 million, or 91.1%, primarily reflecting our decision to decline or scale back customized development\nengagements that did not meet our revised margin thresholds, or that required incremental delivery resources inconsistent with the\nrealignment.\n\n \n\n \n●\nSale of software products and sale of hardware products decreased by US$1.04 million (68.8%) and US$0.83 million (59.3%), respectively, principally reflecting reduced delivery activity across discontinued engagements.\n\n \n\n \n●\nMaintenance and support\nservices revenue increased by US$2.39 million, or 98.8%, primarily reflecting recurring support arrangements with our existing\ncustomer base, which were retained through the realignment.\n\n  \n\n75\n\n \n\n \n\n**Selling expenses**\n\n** **\n\nSelling expenses primarily consist of: (i) salaries\nand benefits for our sales and marketing personnel; (ii) advertising costs and market promotion expenses; (iii) traveling expenses\nincurred by our sales and marketing personnel for business purposes; and (iv) others, which primarily include entertainment expenses\nrelated to selling and marketing functions, office expenses and consulting expenses.\n\n \n\n**General and administrative expenses**\n\n** **\n\nGeneral and administrative expenses primarily\nconsist of: (i) salaries and benefits for our administrative personnel; (ii) rental expenses relating to our leased properties\nused for administrative purposes and utilities which is primarily represented by water, electricity charges for administrative purposes;\n(iii) professional fees, which primarily represented fees we paid for legal services, audit services and consultation in the ordinary\ncourse of our business; (iv) credit losses expenses, which primarily represented the credit losses of accounts receivable and prepaid\nexpenses and other current assets; (v) share-based compensation, which primarily represented the expenses recognized related to the share\noptions and restricted share units granted to our employees and officers, directors, and non-employee consultants; and (vi) others,\nwhich primarily include depreciation and amortization expenses, office expenses for office supplies and consumables, and other miscellaneous\nexpenses for administrative purposes.\n\n \n\n**Research and development expenses**\n\n** **\n\nResearch and development expenses primarily include:\n(i) salaries and benefits for research and development personnel; (ii) service fees to purchase of computing power for R&D projects;\n(iii) professional services fees, which primarily represent fees paid for professional services in research and development activities;\n(iv) patent registration related expenses and patent litigation expenses; (v) amortization, which represents amortization expenses\nfor our intangible assets; and (vi) others, which primarily include rental expenses, consumables, traveling expenses, utilities and\nmiscellaneous expenses.\n\n \n\n**Income Tax Expenses**\n\n** **\n\n*Cayman Islands*\n\n* *\n\nOur company was incorporated in the Cayman Islands\nas an exempted company with limited liability under the Companies Act and accordingly is not subject to income tax from business carried\nin Cayman Islands.\n\n \n\n*Hong Kong*\n\n* *\n\nIn accordance with the relevant tax laws and regulations\nof Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the applicable tax rate\non taxable income. In March 2018, the Hong Kong Government introduced a two-tiered profit tax rate regime by enacting the Inland\nRevenue (Amendment) (No.3) Ordinance 2018 (the “Ordinance”). Under the two-tiered profits tax rate regime, the first HK dollar\n2 million of assessable profits of qualifying corporations is taxed at 8.25% and the remaining assessable profits at 16.5%. The Ordinance\nis effective from the year of assessment 2018-2019. According to the policy, if no election has been made, the whole of the taxpaying\nentity’s assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable. Because the preferential\ntax treatment is not elected by us, our subsidiaries registered in Hong Kong are subject to income tax at a rate of 16.5%. Payments\nof dividends by the subsidiary to us are not subject to withholding tax in Hong Kong.\n\n \n\n*PRC*\n\n* *\n\nGenerally, our PRC subsidiaries are subject to\nenterprise income tax on their taxable income in China at a statutory rate of 25%, except for our certain PRC subsidiaries that are qualified\nas high and new technology enterprises under the PRC Enterprise Income Tax Law and are eligible for a preferential enterprise income tax\nrate of 15%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting\nstandards.\n\n \n\nIn accordance with the implementation rules of\nEIT Laws, a qualified “High and New Technology Enterprise” (“HNTE”) is eligible for a preferential tax rate of\n15%. The HNTE certificate is effective for a period of three years. An entity could re-apply for the HNTE certificate when the prior\ncertificate expires. Our subsidiary, Shanghai Xiao-i, was approved as a HNTE and is eligible to enjoy a preferential tax rate of 15% from\n2020 to 2022 and renewed in 2023 to the extent it has taxable income under the EIT Law.\n\n \n\nOur subsidiary, Guizhou Xiao-i was qualified\nas an eligible software enterprise before the income tax year-end final settlement in 2017. As a result of this qualification, it is\nentitled to a tax holiday of a full exemption for the years ended December 31, 2017 and 2018, in which its taxable income is\ngreater than zero, followed by a three-year 50% exemption. In 2022, the tax holiday has expired and Guizhou Xiao-i renewed qualification\nof HNTE, which allows Guizhou Xiao-i to enjoy a preferential tax rate of 15% from 2022 to 2024.\n\n \n\n76\n\n \n\n \n\n**Comparison of Years Ended December 31,\n2024 and 2025**\n\n \n\n**Net revenues**\n\n** **\n\n*Sale of cloud platform product*\n\n* *\n\nRevenue from sales of cloud platform products\ndecreased by 89.4% from US$ 40.88 million for the year ended December 31, 2024 to US$4.33 million for the year ended December 31, 2025.\nThe revenue decline reflects the strategic realignment implemented during the year, under which we discontinued third-party cloud-platform\nresale activities that generated revenue at gross margins substantially below those of our core product lines. These resale activities\nhad historically accounted for a significant portion of cloud platform revenue but were not aligned with our revised margin thresholds\nand resource allocation priorities. The discontinuation of these lower-margin engagements was a deliberate component of our portfolio\nrationalization, intended to concentrate resources on higher-value, productized offerings where we maintain greater differentiation and\npricing power.\n\n \n\n*Technology development service*\n\n* *\n\nOur technology development service provided to\ncustomers comprises: (1) development of new customized software and applications based on customers’ specifications and needs, and (2)\nfunctional customization development based on original software products sold. Revenue from technology development service decreased by\n91.1% from US24.11 million for the year ended December 31, 2024 to US2.15 million for the year ended December 31, 2025. This decline reflects\nour strategic decision, implemented during 2025, to decline or scale back customized development engagements that did not meet our revised\nmargin thresholds, or that required incremental delivery resources inconsistent with the realignment. Bespoke technology development services,\nwhile generating substantial revenue in 2024, were characterized by lower gross margins and higher resource intensity relative to our\nproductized offerings. The discontinuation of these engagements was a deliberate element of our portfolio rationalization, intended to\nimprove overall profitability and operational efficiency.\n\n \n\n*Sale of software products*\n\n* *\n\nOur software products sold to customers comprise\ncustomized software products for specific needs. Revenue from sales of software products decreased by 68.8% from US$1.52 million for the\nyear ended December 31, 2024 to US$0.47 million for the year ended December 31, 2025. The decline in 2025 principally reflects reduced\ndelivery activity across discontinued engagements in connection with the strategic realignment.\n\n \n\n*M&S service*\n\n* *\n\nWe provide M&S services for software products\ncontracts which consist of future software updates, upgrades, and enhancements as well as technical product support services, and the\nprovision of updates and upgrades on a when-and-if-available basis. Revenue from M&S service increased by 98.8% from US$2.42 million\nfor the year ended December 31, 2024 to US$4.81 million for the year ended December 31, 2025, primarily reflecting the renewal and expansion\nof recurring support arrangements with our existing customer base, which were retained through the realignment. M&S service was the\nonly delivery category that increased year over year during 2025, and accounted for 39.0% of total net revenue in 2025, compared with\n3.4% in 2024.\n\n \n\n*Sale of hardware products*\n\n* *\n\nOur hardware products sold to customers comprise\nhardware designed for specific needs. Revenue from sales of hardware products decreased from US$1.40 million for the year ended December\n31, 2024 to US$0.57 million for the year ended December 31, 2025, principally reflecting reduced delivery activity across discontinued\nengagements in connection with the strategic realignment.\n\n** **\n\n77\n\n \n\n** **\n\n**Gross Profit and Gross Profit Margin**\n\n** **\n\nWe have different types of products and services\nthat have different profit margins. For the years ended December 31, 2024 and 2025, our gross profit was US$48.05 million and US$5.48\nmillion, respectively. Our gross profit margin declined to 44.4% for the year ended December 31, 2025, compared to 68.3% for the year\nended December 31, 2024. The decline in gross profit and gross profit margin primarily attributed to (i) a significant absolute contraction\nin total revenue, particularly from delivery-based categories, as a result of the strategic realignment implemented during the year, which\ninvolved the discontinuation or scaling-back of a number of lower-margin product and service lines; and (ii) reduced absorption of relatively\nfixed delivery and support-related costs over a smaller revenue base during the transition period, as well as retained delivery capacity\npending completion of the realignment.\n\n \n\n**Selling expenses**\n\n** **\n\nOur selling expenses decreased by 67.8% from US$3.32 million\nfor the year ended December 31, 2024 to US$1.07 million for the year ended December 31, 2025. This decrease was primarily\ndriven by reduced marketing activity, the rationalization of customer-acquisition channels and a reduction in sales headcount in line\nwith the strategic realignment.\n\n \n\n**General and administrative expenses**\n\n** **\n\nOur general and administrative expenses increased\nby 233.7% from US$22.94 million for the year ended December 31, 2024 to US$76.56 million for the year ended December 31, 2025, which\nwas primarily attributable to non-recurring charges incurred in connection with the strategic realignment, principally (i) severance\nand statutory compensation payments associated with the headcount reduction implemented during the year; and (ii) related professional\nfees and other direct costs of the realignment. These charges are, by their nature, non-recurring, and the headcount reductions giving\nrise to them had been substantially completed by December 31, 2025. Excluding the effect of these non-recurring items, underlying general\nand administrative expenses during 2025 were lower than in the prior year; and (iii) provision for bad debts.\n\n \n\n**Research and development expenses**\n\n** **\n\nOur research and development expenses decreased\nby 29.4% from US$34.66 million for the year ended December 31, 2024 to US$24.46 million for the year ended December 31, 2025, which was\nprimarily attributable to (i) the continued tapering of training-related expenditure following the completion of the foundational pre-training\nphase of Hua Zang LLM in 2023; (ii) the reorientation of research and development activities toward task-specific fine-tuning, lightweight\ndeployment and commercialization-related work, which are less capital-intensive than foundational training; and (iii) a reduction in\nresearch and development headcount in connection with the strategic realignment. \n\n**  **\n\n**Income tax expenses**\n\n** **\n\nIncome tax expenses was nil for both the years ended December 31, 2024\nand 2025. The absence of income tax expense in both periods principally reflects our loss position and the non-recognition of deferred\ntax assets in respect of tax losses where recoverability was not considered probable. We expect it more likely than not that all of the\ndeferred tax assets will not be realized as the VIE is not expected to generate enough taxable income to utilize all of the deferred tax\nassets in the near future as a result of our history of recurrent losses.\n\n \n\n**Net loss**\n\n** **\n\nAs a result of the foregoing, we had a net loss\nof US$101.8 million in 2025, compared with a net loss of US$14.55 million in 2024.\n\n** **\n\n**Comparison of Years Ended December 31,\n2023 and 2024**\n\n \n\n**Net revenues**\n\n** **\n\n*Sale of cloud platform product*\n\n* *\n\nRevenue from sales of cloud platform products\ndecreased by 13.0% from US$47.01 million for the year ended December 31, 2023 to US$40.88 million for the year ended December 31,\n2024. The year-over-year revenue decline was partially attributable to timing-related factors in contract renewals, where multi-year agreements\nsigned in previous periods created cyclical fluctuations in revenue recognition. However, the inherent customer stickiness of our subscription-based\ncloud platform model-evidenced by consistently high renewal rates and multi-year commitments-reinforces our long-term confidence. We expect\ncloud platform products to sustain a revenue contribution proportion broadly in line with year 2024, supported by their mission-critical\nrole in client operations and recurring revenue characteristics.\n\n \n\n78\n\n \n\n \n\n*Technology development service*\n\n* *\n\nOur technology development service provided to\ncustomers comprises: (1) development of new customized software and applications based on customers’ specifications and needs, and\n(2) functional customization development based on original software products sold. Revenue from technology development service increased\nby 207.5% from US7.84 million for the year ended December 31, 2023 to US24.11 million for the year ended December 31, 2024. This substantial\nincrease was primarily driven by the revenue of US$10.4 million generated from certain MaaS (based on Hua Zang) contracts mainly signed\nin 2024, which accounted for approximately 43.1% of the total revenue from technology development services. During the period, multiple\nclients demonstrated strong interest in Hua Zang LLM, requesting customized development implementations that leveraged model distillation\nand vertical industry corpus pre-training to better align the technology with their operational scenarios. This growth reflects the burgeoning\ndemand for customized AI solutions. Such solutions include tailored model architecture, industry-specific fine-tuning, and hybrid deployment\nframeworks.\n\n \n\n*Sale of software products*\n\n* *\n\nOur software products sold to customers comprising\ncustomized software products for specific needs. Revenue from sales of software products decreased slightly by 3.2% from US$1.57 million\nfor the year ended December 31, 2023 to US$1.52 million for the year ended December 31, 2024.\n\n \n\n*M&S service*\n\n* *\n\nWe provide M&S services for software products\ncontracts which consist of future software updates, upgrades, and enhancements as well as technical product support services, and the\nprovision of updates and upgrades on a when-and-if-available basis. Revenue from sales of M&S service decreased slightly from US$2.68 million\nfor the year ended December 31, 2023 to US$2.42 million for the year ended December 31, 2024.\n\n \n\n*Sale of hardware products*\n\n* *\n\nOur hardware products sold to customers comprising\nthe hardware designed for specific needs. Revenue from sales of hardware products increased from US$0.08 million for the year ended\nDecember 31, 2023 to US$1.40 million for the year ended December 31, 2024. The substantial growth can be attributed mainly to\nthe highly successful commercial debut of our AI-powered smart glasses in the second half of 2024. These smart glasses have been extremely\nwell-received in the North American market, where the demand for wearable AI devices has been experiencing a remarkable upsurge.\n\n \n\n**Gross Profit and Gross Profit Margin**\n\n** **\n\nWe have different types of products and services\nthat have different profit margins. For the years ended December 31, 2023 and 2024, our gross profit was US$ 39.42 million and\nUS$48.05 million, respectively. Our gross profit margin improved to 68.3% for the year ended December 31, 2024, compared to 66.6%\nfor the year ended December 31, 2023, primarily attributed to the significant increase in the proportion of revenues from our MaaS (based\non Hua Zang), which carried higher profit margins of 72.1% for the year ended December 31, 2024. The above improvement in gross profit\nreflected operational leverage from MaaS commercialization and cost-optimized deployment.\n\n \n\n**Selling expenses**\n\n** **\n\nOur selling expenses decreased by 27.0% from US$4.55 million\nfor the year ended December 31, 2023 to US$3.32 million for the year ended December 31, 2024. This decrease was primarily\ndriven by a US$0.62 million decrease in staff costs and a US$0.63 million decrease in marketing and advertising expenses. The above decrease\nwas a result of our efforts to reduce costs and expenses and enhance operational efficiency.\n\n \n\n**General and administrative expenses**\n\n** **\n\nOur general and administrative expenses increased\nby 420.5% from US$4.41 million for the year ended December 31, 2023 to US$22.94 million for the year ended December 31,\n2024, which was primarily attributable to (i) a US$16.22 increase of allowance for credit losses mainly resulted from the increased account\nreceivable balance, which was a direct consequence of the growth in our net revenues and extended collection periods, and (ii) an increase\nof US$1.56 million in share-based compensation expenses.\n\n \n\n79\n\n \n\n \n\n**Research and development expenses**\n\n** **\n\nOur research and development expenses decreased\nby US$17.73 million from US$52.39 million for the year ended December 31, 2023 to US$34.66 million for the year ended December 31,\n2024, primarily due to the completion of Hua Zang LLM’s pre-training phase in 2023. Moving forward, as we strategically pivot our\nfocus towards attaining profitability, we foresee a notable decline in research and development (R&D) expenses.\n\n \n\n**Other loss, net**\n\n** **\n\nOther loss, net primarily consists of: (i) government\ngrants, which primarily include government support for project development; (ii) interest expense of borrowings from banks and third\nparties; (iii) investment gain/(loss), which represent gain or losses from long-term equity investment; and (iv) non-operating\nexpenses, which primarily includes the loss of disposal of non-current assets.\n\n \n\nOther loss increased by US$0.38 million from US$1.30 million\nfor the year ended December 31, 2023 to US$1.68 million for the year ended December 31, 2024. The fluctuation was mainly due\nto a decrease of the government grants of US$0.43 million due to a decline in the amount dedicated to research and development activities.\n\n \n\n**Income tax expenses**\n\n** **\n\nIncome tax expenses was nil in 2024, compared with income tax expenses\nof US$3.79 million in 2023. The fluctuation was primarily due to the full allowance of deferred tax assets we recognized in 2023.\nAlthough we anticipate a decline in research and development expenses as we strategically focus on achieving profitability, we expect\nit more likely than not that all of the deferred tax assets will not be realized as the VIE is not expect to generate enough taxable income\nto utilize all of the deferred tax assets in the near future as a result of our history of recurrent losses.\n\n \n\n**Net loss**\n\n** **\n\nAs a result of the foregoing, we had a net loss\nof US$14.55 million in 2024, compared with a net loss of US$27.01 million in 2023. \n\n \n\nB. Liquidity and Capital Resources.\n\n** **\n\nAs of December 31, 2024 and 2025, we had US$0.85 million\nand US$2.44 million in cash and cash equivalents, respectively. Our cash and cash equivalents primarily consist of cash on hand and\nrestricted cash.\n\n \n\nIn March 2023, we completed our initial public\noffering (“IPO”) and was listed on the Nasdaq Global Market under the symbol “AIXI”. 5,700,000 American depositary\nshares (each, an “ADS”, collectively, “ADSs”), each represents one-third of an ordinary shares, were issued at\na price of US$6.8 per share for net proceeds of approximately US$33.11 million, after deducting underwriting discounts, commissions and\nother offering expenses of US$5.65 million. We used the net proceeds from the offering for research and development, investment in technology\ninfrastructure, marketing and branding, and other capital expenditure, and other general corporate purposes. Apart from a small amount\nof the IPO proceeds reserved for overseas use, we were able to transfer the rest of the IPO proceeds from overseas to WFOE for VIE’s\nproduct development and operations through both WFOE’s new capital account with Bank of Ningbo and WFOE’s pre-existing capital\naccount with Agricultural Bank of China where WFOE has reserved foreign exchange quota. For more detailed information, please see “Item\n3.D Key Information - Risk Factors — Risks Relating to Our Corporate Structure — 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.” As of December 31, 2023, we applied all the net proceeds of the IPO.\n\n \n\n80\n\n \n\n \n\nOn June 17, 2024, we entered into a Securities\nPurchase Agreement with an institutional investor for the sale of senior convertible notes in the aggregate principal amount of approximately\n$3.26 million, issued at an 8% original issue discount. The notes are convertible into ADSs (each representing one-third of an ordinary\nshare at the time). Concurrently, the company sold 1,000,002 ADSs at par value. The offering was made pursuant to our effective Form F-3\nshelf registration statement and a prospectus supplement filed on the same date. The notes bear interest at 6% per annum, are convertible\nat a fixed price, and are secured by a pledge over certain assets. Additionally, the agreement provides the investor with registration\nrights, anti-dilution protection, and customary covenants including restrictions on further debt issuance without consent. Gross proceeds\nfrom the transaction were approximately $2.99 million.\n\n \n\nOn October 30, 2024, we entered into a Securities\nPurchase Agreement with another institutional investor for the issuance of a $2,175,000 convertible promissory note, sold with an 8%\noriginal issue discount. The note is convertible into ADSs representing the company’s ordinary shares at a fixed conversion price\nand matures in one year, with an annual interest rate of 6%. In connection with the note issuance, we issued 550,000 ADSs at par value.\nProceeds from the transaction were to be used for general corporate purposes. The note includes standard covenants and restrictions,\nincluding a limitation on additional indebtedness and customary registration rights for the underlying securities. \n\n \n\nOn January 6, 2025, we entered into two separate\nSecurities Purchase Agreements with two institutional investors, issuing convertible promissory notes in an aggregate principal amount\nof $4,637,840, composed of an initial principal of $4,295,000 and an additional $342,840 of original issue discount to be added 30 days\nafter issuance. The notes bear interest at 6% per annum and are convertible into ADSs at a conversion price equal to 85% of the lowest\ndaily VWAP (volume-weighted average price) during the 10 consecutive trading days prior to the conversion date. We also agreed to file\na resale registration statement for the conversion shares. These notes contain customary anti-dilution provisions, adjustment rights upon\nstock splits and similar corporate events, and restrictions against future financings on more favorable terms (most-favored-nation provisions).\nGross proceeds to us were $4.295 million.\n\n \n\nWe may decide to enhance our liquidity position\nor increase our cash reserve for future operations and investments through additional financing. The issuance and sale of additional equity\nwould result in further dilution to our shareholders. The occurrence of indebtedness would result in increasing fixed obligations and\ncould result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts\nor on terms acceptable to us, if at all.\n\n \n\nFor the years ended December 31, 2023, 2024 and 2025, we incurred negative\noperating flows of $15.79 million and $15.14 million and $3.69 million, respectively. As of December 31, 2025, we had an accumulated\ndeficit of $226.56 million.  We concluded that there is substantial doubt about our ability to continue as a going concern for\na period of one year from the date that these audited consolidated financial statements are issued.\n\n \n\n81\n\n \n\n \n\nTo meet the cash requirements for the next 12 months\nfrom the issuance date of this report, we are undertaking a combination of below remediation plans:\n\n \n\n(a)We are in the progress of negotiation\nof liabilities extension including borrowings, and loans from third parties.\n\n \n\n(b)We are working to secure new\nbank financing and will use commercially reasonable best efforts to raise additional funds to support daily operations.\n\n \n\n(c)We are focusing on the improvement\nof operation efficiency, implementation of strict cost control and budget and enhancement of internal controls to create a synergy of\nresources.\n\n \n\nThe management plan cannot alleviate the substantial\ndoubt of our ability to continue as a going concern. There can be no assurance that we will be successful in achieving strategic plans,\nthat our future capital raises will be sufficient to support its ongoing operations, or that any additional financing will be available\nin a timely manner or on acceptable terms, if at all. If we are unable to raise sufficient financing or events or circumstances occur\nsuch that we do not successful execute strategic plans, we will be required to reduce certain discretionary spending, alter or scale back\nresearch and development programs, or be unable to fund capital expenditures, which would have a material adverse effect on our financial\nposition, results of operations, cash flows, and ability to achieve intended business objectives.\n\n \n\nXiao-I is a holding company with no operations\nof its own. Xiao-I conducts its operations in China primarily through the PRC operating entities in China. As a result, although other\nmeans are available for us to obtain financing at the holding company level, Xiao-I’s ability to pay dividends and other distributions\nto its shareholders and to service any debt it may incur may depend upon dividends and other distributions paid by Xiao-I’s PRC\nsubsidiaries, which relies on dividends and other distributions paid by the PRC operating entities pursuant to the VIE Agreements. If\nany of these entities incurs debt on its own in the future, the instruments governing such debt may restrict its ability to pay dividends\nand other distributions to Xiao-I.\n\n \n\nIn addition, dividends and distributions from\nWFOE and the VIE are subject to regulations and restrictions on dividends and payment to parties outside of China. Applicable PRC law\npermits payment of dividends to Xiao-I by WFOE only out of net income, if any, determined in accordance with PRC accounting standards\nand regulations. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset\nby general reserve fund and profits (if general reserve fund is not enough). Profits retained from prior fiscal years may be distributed\ntogether with distributable profits from the current fiscal year. In addition, registered share capital and capital reserve accounts are\nalso restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is presently\nno foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, Xiao-I’s Hong Kong subsidiary\nis able to transfer cash without any limitation to the Cayman Islands under normal circumstances.\n\n \n\nFurther, the PRC government also imposes controls\non the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Xiao-I’s WFOE generates primarily\nall of its revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange\nmay limit the ability of Xiao-I’s WFOE to use its Renminbi revenues to pay dividends to Xiao-I. The PRC government may continue\nto strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by State Administration of\nForeign Exchange (the “SAFE”) for cross-border transactions falling under both the current account and the capital account.\nAny limitation on the ability of Xiao-I’s WFOE to pay dividends or make other kinds of payments to Xiao-I could materially and adversely\nlimit its ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund\nand conduct our business.\n\n \n\n82\n\n \n\n \n\nAdditionally, the transfer of funds among the\nPRC operating entities are subject to the Provisions on Private Lending Cases, which was implemented on January 1, 2021 to regulate\nthe financing activities between natural persons, legal persons and unincorporated organizations. The Provisions on Private Lending Cases\ndoes not prohibit using cash generated from one PRC operating entity to fund another affiliated PRC operating entity’s operations.\nXiao-I or the PRC operating entities have not been notified of any other restriction which could limit the PRC operating entities’\nability to transfer cash among each other. In the future, cash proceeds from overseas financing activities, including the IPO proceeds,\nmay be transferred by Xiao-I to AI Plus, and then transferred to Xiao-i Technology, and then transferred to WFOE via capital contribution\nor shareholder loans, as the case may be. Cash proceeds may flow to Shanghai Xiao-i from WFOE pursuant to certain contractual arrangements\nbetween WFOE and Shanghai Xiao-i as permitted by the applicable PRC regulations. As a result of these PRC laws and regulations, the PRC\noperating entities are restricted in their ability to transfer a portion of their net assets to the Company.\n\n \n\nAs of December 31, 2024 and 2025, US$461,382 and US$631,389 of cash\nand cash equivalents were denominated in RMB, US$272,050 and US$1,766,279 of cash and cash equivalents were denominated in US dollars,\nUS$113,161 and US$ 38,651 of cash and cash equivalents were denominated in Hong Kong dollars, respectively.\n\n \n\n**Cash Flows**\n\n** **\n\nThe following table sets forth a summary of our\ncash flows for the periods indicated:\n\n \n\n  \nFor the Years Ended December 31, \n\n  \n2023  \n2024  \n2025 \n\nNet cash used in operating activities \n$(15,789,498) \n$(15,138,249) \n$(3,688,864)\n\nNet cash (used in) provided by investing activities \n (20,059,814) \n (468,571) \n 42,087 \n\nNet cash provided by financing activities \n 36,473,075  \n 15,839,701  \n 5,719,535 \n\nEffects of exchange rate changes on cash and cash equivalents and restricted cash \n (85,466) \n (950,830) \n (483,032)\n\nNet increase/(decrease) in cash, cash equivalents and restricted cash \n 538,297  \n (717,949) \n 1,589,726 \n\nCash, cash equivalents and restricted cash at the beginning of the year \n 1,026,245  \n 1,564,542  \n 846,593 \n\nCash, cash equivalents and restricted cash at the end of the year \n$1,564,542  \n$846,593  \n**$****2,436,319** \n\n \n\n**Operating Activities**\n\n** **\n\nOur net cash used in operating activities was US$3.69 million\nin 2025, compared to net loss of US$101.83 million. The principal changes accounting for the difference between our net loss and\nour net cash used in operating activities in 2025 were an adjustment of US$71.68 million non-cash items including share-based compensation\nexpenses of US$5.88 million, allowance of accounts receivable, advance to suppliers and due from a related party of US$59.47 million;\na decrease in accounts receivable of US$3.46 million, an increase in prepaid expenses and other current assets of US$0.65 million; an\nincrease in accounts payable of US$12.07 million; and an increase in accrued expenses and other liabilities of US$8.49 million.\n\n** **\n\nOur net cash used in operating activities was\nUS$15.14 million in 2024, compared to net loss of US$14.55 million. The principal changes accounting for the difference between\nour net loss and our net cash used in operating activities in 2024 were an adjustment of US$13.45 million non-cash items including\nshare-based compensation expenses of US$1.56 million, allowance of accounts receivable, advance to suppliers and other receivables of\nUS$9.92 million; an increase in accounts receivable of US$30.43 million attributable to the growth of net revenues and extension of collection\nperiods affected by the challenging market conditions, an increase in prepaid expenses and other current assets of US$2.17 million; partially\noffset by an increase of US$14.08 in accounts payable and an increase of US$5.13 million in accrued expenses and other current liabilities.\nThe increase in accounts payable was attributed to the growth of business and extension our payment periods to suppliers, and the increase\nin accrued expenses and other current liabilities was primarily due to the increase in payroll payable, and other tax payable.\n\n \n\nOur net cash used in operating activities was\nUS$15.79 million in 2023, compared to net loss of US$27.01 million. The principal changes accounting for the difference between\nour net income and our net cash used in operating activities in 2023 were an adjustment of US$0.67 million non-cash items including\nreversal of allowance of accounts receivable and other receivables of US$6.20 million offset by the change of deferred tax assets of US$3.79\nmillion, an increase in prepaid expenses and other current assets of US$2.50 million, offset by a decrease in accounts receivable of US$11.11\nmillion due to the well collection, and an increase in accounts payable of US$4.77 million. The increase in prepaid expenses and other\ncurrent assets was primarily due to prepaid expenses for marketing promotion service and the increased receivables from third parties.\nThe increase in accounts payable was mainly due to the increased significant investment in R&D activities engaged third-party professionals\nin 2023.\n\n \n\n83\n\n \n\n \n\n**Investing Activities**\n\n** **\n\nOur net cash used in investing activities amounted to US$42,087 in\n2025, primarily due to purchase of equipment and property of US$41,739 and cash received from equipment and property US$83,826.\n\n** **\n\nOur net cash used in investing activities amounted\nto US$0.47 million in 2024, primarily due to loan to third parties of US$0.10 million and purchase of equipment and property of US$0.37\nmillion.\n\n \n\nOur net cash used in investing activities amounted\nto US$20.06 million in 2023, primarily due to loan to a related party of US$13.90 million, loan to third parties of US$7.94\nmillion, purchase of equipment and property of US$2.16 million, and partially offset by collection of loans to third parties of US$4.45\nmillion.\n\n \n\n**Financing Activities**\n\n* *\n\nOur net cash provided by financing activities amounted to US$5.72 million\nin 2025, mainly due to proceeds of US$11.78 million from short-term and long-term borrowings from banks, proceeds of US$3.11 million from\nthird-parties borrowings, proceeds of US$8.51 million from convertible loans, partially offset by repayments of short-term borrowings\nfrom banks of US$15.36 million and repayments of borrowings from third parties of US$3.55 million; convertible notes payable US$1.37 million.\n\n* *\n\nOur net cash provided by financing activities\namounted to US$15.84 million in 2024, mainly due to proceeds of US$34.05 million from short-term borrowings from banks, proceeds\nof US$0.15 million from related-parties borrowings, proceeds of US$5.74 million from third-parties borrowings, proceeds of US$4.50 million\nfrom convertible loans, partially offset by repayments of short-term borrowings from banks of US$27.10 million and repayments of borrowings\nfrom third parties of US$1.24 million.\n\n \n\nOur net cash provided by financing activities\namounted to US$36.47 million in 2023, mainly due to proceeds of US$34.40 million from issuance of ordinary shares upon IPO,\nproceeds of US$26.83 million from short-term borrowings from banks, proceeds of US$4.59 million from third-parties borrowings, and partially\noffset by repayments of short-term borrowings from banks of US$18.30 million, repayments of borrowings from third parties of US$6.41 million,\nrepayments of convertible loans of US$3.66 million and repayments of borrowings from related parties of US$1.36 million.\n\n \n\n**Disclosure of Contractual Obligations**\n\n** **\n\nThe following table sets forth our contractual\nobligations as of December 31, 2025:\n\n \n\n  \nPayment Due by Period \n\n  \nWithin one year  \n1 – 3 years  \nTotal \n\nOperating lease payment \n$40,098  \n$18,390  \n$58,488 \n\nShort-term bank borrowings \n$29,214,396  \n$-  \n$29,214,396 \n\nLong-term bank borrowings \n -  \n 1,387,082  \n 1,387,082 \n\nLoans and other payables from related parties and third parties \n$10,349,683  \n$3,764,131  \n$14,113,814 \n\n \n\nOperating lease obligations consist of leases\nin relation to certain offices and buildings, plants and other property for our sales and after-sales network. Borrowings are short-term\nbank borrowings due in one year, and loans from related parties and third parties are for the purpose of ordinary business operation.\n\n \n\nOther than those shown above, we did not have\nany other significant capital commitments and long-term obligations as of December 31, 2025.\n\n \n\n84\n\n \n\n \n\nFrom February to November 2023, we pledged 37\npatents to obtain US$20.4 million credit limits from banks. No other new credit contract signed with third parties during the year of\n2023. These patents were not recorded in our consolidated balance sheets as they do not meet all the capitalization criteria.\n\n \n\nIn 2025, we pledged 6 patents to obtain US$7.1 million borrowing from\nbanks. No other new credit contract signed with third parties during the year of 2025. These patents were not recorded in our consolidated\nbalance sheets as they do not meet all the capitalization criteria.\n\n \n\nOther than those shown above, we have not entered\ninto any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in\nour consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated\nentity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated\nentity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development\nservices with us.\n\n \n\nC. Research and Development, Patents\nand Licenses, etc.\n\n \n\nSee “Item 4. Information on the Company—B.\nBusiness Overview” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results.” \n\n \n\nD. Trend Information.\n\n** **\n\nOther than as disclosed elsewhere in this report,\nwe are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2023, 2024 and 2025\nthat are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources,\nor that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial\nconditions.\n\n \n\nE. Critical Accounting Estimates.\n\n** **\n\nWe prepare our consolidated financial statements\nin accordance with U.S. GAAP, which requires our management to make estimates that affect the reported amounts of assets, liabilities\nand disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses\nduring the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial\ncondition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that\nwe believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We\nevaluate these estimates on an ongoing basis.\n\n \n\nOur expectations regarding the future are based\non available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters\nthat are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process,\nour actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others\nin their application.\n\n \n\nWe consider an accounting estimate to be critical\nif: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting\nestimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different\nestimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results\nof operations. When reading our consolidated financial statements, you should consider our selection of critical accounting policies,\nthe judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in\nconditions and assumptions.\n\n \n\nOut of our significant accounting policies, which\nare described in Note 2 — Summary of Significant Accounting Policies of our consolidated financial statements included\nelsewhere in this Form 20-F, certain accounting policies are deemed “critical,” as they require management’s highest\ndegree of judgment, estimates and assumptions.\n\n \n\nWhile management believes its judgments, estimates\nand assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those\nestimates under different assumptions and conditions. We believe that the following critical accounting estimates involve the most significant\njudgments used in the preparation of our financial statements.\n\n \n\n85\n\n \n\n \n\n**(a) Allowance for credit losses**\n\n** **\n\nAccounts receivable, net are stated at the original\namount less an allowance for credit losses. Accounts receivable are recognized in the period when we have provided services to its customers\nand when its right to consideration is unconditional. Before January 1, 2023, we review the accounts receivable on a periodic basis and\nmake specific allowances when there is doubt as to the collectability of individual balances. We consider many factors in assessing the\ncollectability of its receivables, such as the age of the amounts due, the customer’s payment history, credit-worthiness and other\nspecific circumstances related to the accounts.\n\n \n\n*Adoption of Accounting Standards Update (“ASU”)\n2016-13*\n\n \n\nIn June 2016, the FASB issued ASU 2016-13: Financial\nInstruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the\nreporting date based on historical experience, historical loss levels adjusted for current conditions, and reasonable and supportable\nforecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured\nat amortized cost. We adopted ASU 2016-13 from January 1, 2023 using modified-retrospective transition approach with a cumulative-effect\nadjustment to shareholders’ equity amounting to $5,888,082 recognized as of January 1, 2023.\n\n \n\nAn allowance for credit losses is recorded in the period in which a\nloss is determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted. We made\na provision of credit losses amounted to US$2,053,698 and US$45,776,123 for the years ended December 31, 2024 and 2025, respectively,\nand reversed credit losses of $5,108,723 for the year ended December 31, 2023.\n\n \n\n**(b) Valuation of deferred tax assets**\n\n** **\n\nDeferred tax assets and liabilities are measured\nusing enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be\nrecovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period\nincluding the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected\nto be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.\n\n \n\nAs of December 31, 2024 and 2025, we had net operating loss carryforwards\nof approximately $64,006,738 and $108,099,845, respectively. As of December 31, 2024 and 2025, deferred tax assets from the net operating\nloss carryforwards amounted to $10,574,640 and $5,298,347, respectively. Due to our history of recurrent losses, we do not expect to generate\nenough profit to utilize the deferred tax assets in the future. We have recognized an addition to the valuation allowance of $15,013,296,\n$984,663 and $4,259,475 for the years ended December 31, 2023, 2024 and 2025, respectively.  While we consider the facts\nabove, our projections of future income qualified tax-planning strategies may be changed due to the macroeconomic conditions and our business\ndevelopment. The deferred tax assets (“DTAs”) could be utilized in the future years if we make profits in the future,\nthe valuation allowance shall be reversed.\n\n \n\nThe provisions of ASC 740-10-25, “Accounting for Uncertainty\nin Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of\na tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income\ntax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties\nassociated with tax positions, and related disclosures. The PRC operating entities in PRC are subject to examination by the relevant tax\nauthorities. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment\nof taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years\nunder special circumstances, where the underpayment of taxes is more than RMB100,000 ($14,300). In the case of transfer pricing issues,\nthe statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Penalties and interest incurred\nrelated to underpayment of income tax are classified as income tax expense in the period incurred.\n\n \n\nWe did not accrue any liability, interest or penalties related to uncertain\ntax positions in its provision for income taxes line of its consolidated statements of operations for the years ended December 31,\n2023, 2024 and 2025, respectively. We do not expect that its assessment regarding unrecognized tax positions will materially change over\nthe next 12 months.\n\n \n\n86\n\n \n\n \n\n**(c) transaction price allocation between software income\nand maintenance service income**\n\n \n\nWe provide M&S service along with the sale\nof software products and technology development service for some contracts. As M&S service constitute a single performance obligation,\nwe use 10% of total transaction price to allocate to the M&S service for contracts with no specified price term for M&S service\nrenewal, due to the fact that contracts with specified renewal price were generally set to be approximately 10% of the total contract\namount.\n\n \n\n**Recent Accounting Pronouncements**\n\n \n\nA description of recent relevant accounting pronouncements\nis included in Note 2 “Summary of Principal Accounting Policies” of our Consolidated Financial Statements."}