Lixiang Education Holding (LXEH) 20-F/A2021 FY Annual report (foreign) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

To

FORM 20-F

(Mark One)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021.

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                 

For the transition period from                 to                 

Commission file number: 001-39559

Lixiang Education Holding Co., Ltd.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

No. 818 Hua Yuan Street

Liandu District, Lishui City, Zhejiang Province, 323000

People’s Republic of China

(Address of principal executive offices)

Luoyuan Ye, Chief Financial Officer

Telephone: +86-578-2267142

Email: irlxeh@lsmxjy.com

No. 818 Hua Yuan Street

Liandu District, Lishui City, Zhejiang Province, 323000

People’s Republic of China

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2021, there were 66,667,000 ordinary shares outstanding, par value of US$0.0001 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐  Yes ☒ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐  Yes  ☒ No

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐  Item 17 ☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    ☐ Yes    ☐  No

TABLE OF CONTENTS

EXPLANATORY NOTE

Lixiang Education Holding Co., Ltd. (the “Company”) is filing this Amendment No. 2 on Form 20-F (this “Amendment”) to the Annual Report on Form 20-F for the fiscal year ended December 31, 2021 (the “Form 20-F”), which was originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 29, 2022, as amended on August 24, 2022, to add or revise certain disclosure in “Introduction”, “Enforceability of Civil Liabilities”, “Item 3. Key Information”, “Item 4. Information on the Company” and any other material discussion of the variable interest entity throughout the annual report, to (i) provide additional disclosure regarding the Company’s unique risks with operations conducted by its subsidiaries and consolidated variable interest entities based in China, (ii) revise and clarify certain disclosure with respect to the cash and asset flows through its organization.

This Amendment does not reflect subsequent events occurring after the original filing date of the Form 20-F or modify or update in any way the financial statements, consents or any other items disclosures made in the Form 20-F in any way other than as required to reflect the amendments discussed above. Accordingly, this Amendment should be read in conjunction with the Form 20-F and the Company’s other filings with the SEC subsequent to the filing of the Form 20-F.

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment also contains certifications under the Sarbanes-Oxley Act of 2002.

INTRODUCTION

In this annual report on Form 20-F, unless otherwise indicated or the context otherwise requires, references to:

Exchange Rate Information

Our and the VIEs’ business is conducted in China, all of our revenue is denominated in RMB and our financial records are maintained in RMB, our functional currency. Our reporting currency is RMB and this annual report on Form 20-F contains translations of RMB into U.S. dollars solely for the convenience of the reader. The exchange rate used for translation on December 30, 2021 was US$1.00=RMB6.3726 , representing the certificated exchange rate published by the Federal Reserve Board. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.

ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands exempted company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection for investors. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our assets and operations are located in China. All of our directors, namely Ms. Fen Ye, Mr. Biao Wei, Ms. Fang Ye, Ms. Hong Ye, Mr. Teck Yong Heng and Mr. Yan Kit Lee, and all of our officers, namely Mr. Guoliang Chen and Mr. Luoyuan Ye, reside within the PRC and Hong Kong, and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process upon us or these persons, or to bring actions or enforce judgments obtained in United States courts against us or them, based on the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder (Hong Kong) LLP, or Maples, our counsel as to the laws of the Cayman Islands has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (2) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

Maples has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, there is uncertainty with regard to Cayman Islands law on whether judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. Because such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws has not yet been made by a court of the Cayman Islands, it is uncertain whether such judgments would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

PRC

There is uncertainty as to whether the courts of China would:

As advised by our PRC legal counsel, Beijing DeHeng Law Offices, the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the jurisdiction where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or 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 the United States.

FORWARD-LOOKING INFORMATION

This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to:

We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information—D. Risk Factors.” Those risks are not exhaustive. We operate in an evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our and the VIEs’ business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law. You should read this annual report on Form 20-F and the documents that we reference in this annual report on Form 20-F completely and with the understanding that our actual future results may be materially different from what we expect.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

Our Corporate Structure and Contractual Arrangements with the Consolidated VIEs

Lixiang Education Holding Co., Ltd. is a Cayman Islands holding company and does not conduct operations directly. The operations in China are conducted through Liandu WOFE and its subsidiaries in which Lixiang holds equity ownership interests, and the VIEs incorporated in China, namely Lishui Mengxiang and Qingtian International School. The VIEs are consolidated for accounting purpose only and Lixiang does not own any equity interest in the VIEs. Our corporate structure involves unique risks to investors as they are purchasing equity securities in Lixiang, the Cayman Islands holding company, and are not purchasing, and may never directly hold, equity interests in the VIEs.

PRC laws, regulations, and rules restrict and impose conditions on direct foreign investment in certain types of business, including education at the primary, middle school and high school levels. As we are a company incorporated in the Cayman Islands, our wholly-owned subsidiary in the PRC, Liandu WFOE, is viewed as a foreign-owned enterprise thus is ineligible to apply for and hold licenses to operate, or otherwise own equity interests in, primary and middle school campuses or to independently or jointly invest and operate high school campus pursuant to the relevant laws and regulations. In response to these restrictions, we operate these businesses in China through the variable interest entity structure which provides investors with exposure to foreign investment in the Chinese operating companies where Chinese law prohibits us from direct foreign investment in the operating companies.

On April 20, 2022, Liandu WFOE entered into a series of contractual arrangements with Lishui Mengxiang and Qingtian International School, shareholders of Lishui Mengxiang and the Council Members of Qingtian International School. Below is a summary of the material provisions of these contractual arrangements with Liandu WFOE and the shareholders of Lishui Mengxiang. For more complete information you should read these agreements in their entirety. These agreements or their forms are filed as exhibits to this annual report on Form 20-F.

Exclusive Call Option Agreement. Under the Exclusive Call Option Agreement dated April 20, 2022, Ms. Fen Ye, Ms. Fang Ye and Ms. Hong Ye, or the shareholders of Lishui Mengxiang have irrevocably granted Liandu WFOE or its designated purchaser the exclusive right to purchase all or part of the direct and/or indirect equity interests of Lishui Mengxiang, or the Equity Call Option. The purchase price payable by Liandu WFOE or its designated purchaser in respect of the transfer of Lishui Mengxiang’s direct and/or indirect equity interest or equity interests shall be at the lowest price permitted under the PRC laws and regulations. Liandu WFOE or its designated purchaser shall have the right to purchase such proportion of Lishui Mengxiang’s interest in Qingtian International School and/or other equity interest of Lishui Mengxiang as it decides at any time. Qingtian International School provides high school education services, in which case the foreign investors are restricted to hold equity interests of Lishui Mengxiang, Qingtian International School’s sponsor, in accordance with the current PRC laws and regulations. If and when the PRC laws and regulations allow Liandu WFOE or us to directly hold all or part of the school sponsor interests in Qingtian International Schooland/or all or part of other equity interests of Lishui Mengxiang and operate competent education business in the PRC, Liandu WFOE shall issue the notice of exercise of such equity call option as soon as practicable, and the percentage of interests to be purchased upon exercise of such Equity Call Option shall be no less than the maximum percentage allowed to be held by Liandu WFOE or its designated purchaser under the PRC laws and regulations. Such equity transfer price is not expressly provided for in the current PRC laws and regulations and it is uncertain whether it may be further regulated by future PRC laws and regulations. Pursuant to the Exclusive Call Option Agreement, all taxes and fees associated with the equity transfer shall be paid by Lishui Mengxiang’s shareholders and/or the direct equity holders of the VIEs upon the transfer. In the absence of written consent from Liandu WFOE, except as otherwise described in the Exclusive Call Option Agreement, Lishui Mengxiang and its shareholders shall not sell, transfer, assign or otherwise dispose of or create any encumbrance on any of Lishui Mengxiang’s assets, businesses or equity interests or procure separation or merge with any other entities. Furthermore, without written consent from Liandu WFOE, Lishui Mengxiang may not terminate any material contracts or enter into any other contracts which may contradict such material contracts, incur any indebtedness or provide any loan or guarantee to a third party, except as disclosed to Liandu WFOE, or alter the nature or scope of its business. The Exclusive Call Option Agreement will remain in force during the operation term of VIEs and any periods that are renewable pursuant to the PRC laws, and will terminate automatically when Liandu WFOE and/or its designated entities fully exercised their options to purchase all the equities of VIEs in accordance with this agreement. In addition, unless otherwise stipulated by laws, this agreement may not be terminated by Lishui Mengxiang or its shareholders unilaterally, but may only be terminated by Liandu WFOE after notice in advance.

Proxy Agreement for School’s Sponsors and Council Members. Pursuant to the Proxy Agreement for School’s Sponsors and Council Members dated April 20, 2022, Lishui Mengxiang has irrevocably authorized and entrusted Liandu WFOE to exercise all its rights as school sponsor of Qingtian International School to the extent permitted by the PRC laws. These rights include, but are not limited to: (a) the right to appoint and/or elect of council members of Qingtian International School; (b) the right to appoint and/or elect the supervisors of Qingtian International School; the right to put forward the School’s mission and scope of operation;(c)the right to examine or approve the Articles of Association of Qingtian International School, development planning, major projects and budget for revenues and expenditures;(d) the right to supervise the performance of Qingtian International School and the achievement of the objectives set out in the bylaw;(e) the right to establish the executive school council in accordance with the authority and procedures prescribed in the bylaw of Qingtian International School and to participate in the running and management of the School;(f) the right to access the information about the operation conditions and financial conditions of Qingtian International School;(g) the right to consult the resolutions, records, financial and accounting statements and reports of the school council meetings in accordance with the PRC laws;(h) the right to obtain reasonable returns from Qingtian International School’s Sponsor in accordance with the PRC laws;(i) the right to obtain the remaining property of Qingtian International School after the liquidation in accordance with the PRC laws;(j) the right to transfer the interests of Qingtian International School’s Sponsor in accordance with the PRC laws;(k) the right to select the profitability and non-profitability of the characteristic of Qingtian International School in accordance with the PRC laws, regulations or regulatory documents; and(l) any other rights of Qingtian International School’s Sponsor provided by other applicable laws and regulations of the PRC and the articles of association of Qingtian International School (as amended from time to time).

The appointed Council Members of Qingtian International School from Lishui Mengxiang has irrevocably authorized and entrusted Liandu WFOE to exercise all its rights as school sponsor of Qingtian International School to the extent permitted by the PRC laws. These rights include, but are not limited to: (a) acting as the agent of Qingtian International School’s Sponsor to attend the council meeting of Qingtian International; enjoying the right to speak, propose, vote, elect and stand for election, and the right to know, propose and supervise council meeting and business activities carried out by Qingtian International School; (b) exercising the voting rights on behalf of Qingtian International School’s Sponsor for all matters requiring discussion and resolution of the council; (c) proposing to convene a council meeting of Qingtian International School; (d) signing the council meeting minutes, council meeting resolutions or other legal documents that the Appointed Council Members has the right to sign as the council member of Qingtian International School; (e) instructing the legal representative, the financial, business and administrative chiefs, etc. of Qingtian International School to act in accordance with the Trustee’s intention; (f) exercising other rights of the council member and council members’ voting rights under the articles of association (including any other council members’ voting rights as stipulated in the amended articles of association) of Qingtian International School; (g) handling legal procedures containing registration, examination and approval and license of schools at the competent departments of government; and (h) any other rights of the Council Member as pursuant to the applicable PRC laws, regulations and the articles of association (as amended from time to time) of Qingtian International School. In addition, each of Lishui Mengxiang and the Council Members of Qingtian International School have irrevocably agreed that (i) Liandu WFOE may delegate its rights under the Proxy Agreement for School’s Sponsors and Council Members to the directors of Liandu WFOE or its designated person, without prior notice to or approval by Lishui Mengxiang and the Council Members of Qingtian International School; and (ii) any person as successor of civil rights of Liandu WFOE or liquidator by reason of subdivision, merger, liquidation of Liandu WFOE or other circumstances shall have authority to replace Liandu WFOE to exercise all rights under the Proxy Agreement for School’s Sponsors and Council Members.

Proxy Agreement for Shareholders. Pursuant to the Proxy Agreement for Shareholders dated April 20, 2022, each shareholder of Lishui Mengxiang has irrevocably authorized and entrusted Liandu WFOE to exercise all its rights as the shareholder to the extent permitted by the PRC laws. These rights include, but are not limited to: (a) the right to attend the shareholders’ meeting of our school acting as WFOE’s nominee; (b) the right to vote on behalf of the sponsors for all matters requiring discussion and resolution of the shareholders’ meeting; (c) the right to sign the shareholders’ minutes, resolutions or other legal documents; (d) the right to indicate the directors, the legal representative, etc. to act in accordance with WFOE’s intention; (e) the right to handle legal procedures containing registration, examination and approval and license of schools at the competent departments of governments; (f) the right to decide to transfer or otherwise dispose of the equity of our school; (g) any other shareholder rights as pursuant to the applicable PRC laws, regulations and our school’s articles of association as amended from time to time.

Business Cooperation Agreement. Pursuant to the Business Cooperation Agreement dated April 20, 2022 , Liandu WFOE shall provide technical services, management support and consulting services necessary for the private education business, and in return, the VIEs shall make payments accordingly. In particular, such services include but not limited to developing curriculum, conducting market research and offering management and marketing advice, providing technology services, providing public relations services, providing support for teacher hiring and training and providing other services that the VIEs may need from time to time. Without the prior consent of Liandu WFOE, none of the VIEs may accept such services provided by any third party. As part of the business cooperative agreement, VIEs and the shareholders of Lishui Mengxiang agree that they will not take any actions except as otherwise described in the Business Cooperation Agreement, such as incurring indebtedness, disposing of material assets, materially changing the scope or nature of the business of the VIEs, disposing of their equity interests in the VIEs, or paying dividends or other similar payments to the sponsors or the shareholders VIEs in the absence of written consent from Liandu WFOE. The aforementioned agreements will terminate automatically when Liandu WFOE and/or its designated entities fully exercised their options to purchase all the equities held by Nominee Shareholders in accordance with the Exclusive Call Option Agreement. In addition, unless otherwise stipulated by laws, this agreement may not be terminated by VIEs or the shareholders, but may only be terminated by Liandu WFOE after notice in advance.

Exclusive Technical Service and Business Consulting Agreement. Pursuant to the Exclusive Technical Service and Business Consulting Agreement dated April 20, 2022 , Liandu WFOE agreed to provide exclusive technical services to Qingtian International School and Qingtian International School’s sponsor, Lishui Mengxiang. Furthermore, Liandu WFOE agreed to provide exclusive business consultancy services to Qingtian International School and Qingtian International School’s sponsor. In consideration of the technical and business consultancy services provided by Liandu WFOE, Qingtian International School and Qingtian International School’s sponsor agreed to pay Liandu WFOE a service fee withdrawn from their respective amount of surplus from operations after deducting all costs, expenses, taxes, losses (if required by the law) and the legally development fund of the respective school (if required by the law) and other costs and funds that shall be retained at Qingtian International School in accordance with applicable PRC laws. Liandu WFOE has the right (but not the obligation) to adjust the amount of such service fee by reference to the actual services provided and the actual business operations and needs of Qingtian International School and Qingtian International School’s sponsor, provided that any adjusted amount shall not exceed the amount mentioned above. Qingtian International School and Qingtian International School’s sponsor do not have any right to make any such adjustment. Unless otherwise prescribed under the PRC laws and regulations, Liandu WFOE shall have exclusive proprietary rights to any technology and intellectual property developed and materials prepared in the course of the provision of research and development, technical support and services by Liandu WFOE to Qingtian International School and Qingtian International School’s sponsor, and any intellectual property in the products developed, including any other rights derived thereunder, in the course of performance of obligations under the Exclusive Technical Service and Business Consulting Agreement and/or any other agreements entered into between Liandu WFOE and the VIEs.

Equity Pledge Agreement. Pursuant to the Equity Pledge Agreement dated April 20, 2022, the shareholders unconditionally and irrevocably pledged all of their equity interests in Lishui Mengxiang to Liandu WFOE to guarantee performance of the obligations of the VIEs under the Exclusive Call Option Agreement, Business Cooperation Agreement, Exclusive Technical Service and Business Consulting Agreement, Proxy Agreement for Shareholders, Proxy Agreement for School’s Sponsors and Council Members and Loan Agreement, each as described above the shareholders of Lishui Mengxiang agreed that without prior written consent of the PRC WFOE, they shall not transfer or dispose of the pledged equity interests, or create or allow any encumbrance on the pledged equity interests. Unless otherwise stipulated by laws, this agreement may not be terminated by Lishui Mengxiang or the shareholders of Lishui Mengxiang unilaterally, but may only be terminated by the Liandu WFOE after notice in advance. The equity pledge agreement remains in full force and effect until all of the obligations under the contractual arrangements have been duly performed or the guaranteed debts are duly paid. The pledge of equity interests in Lishui Mengxiang has been duly registered with the local branch of SAIC and is effective upon such registration.

The contractual agreements are not equivalent to equity ownership in the business of the VIEs. Our control over Lishui Mengxiang and Qingtian International School and our position of being the primary beneficiary of Lishui Mengxiang and Qingtian International School for the accounting purposes are limited to the conditions that we have met for consolidation of Lishui Mengxiang and Qingtian International School under U.S. GAAP. Such conditions include that (i) we have the power to govern the activities which most significantly impact the VIEs’ economic performance, (ii) we are contractually obligated to absorb losses of the VIEs that could potentially be significant to the VIEs, and (iii) we are entitled to receive benefits from the VIEs that could potentially be significant to the VIEs. We’ve met such conditions for consolidation of the VIEs under U.S. GAAP through the aforementioned contractual arrangements, and as a result, we are deemed as the primary beneficiary of the VIEs, and the VIEs will be treated as our consolidated affiliated entities for accounting purposes. We have consolidated the results of the VIEs in our consolidated financial statements included elsewhere in this annual report on Form 20-F in accordance with U.S. GAAP. For a more detailed discussion of the basis of presentation of our consolidated financial statements, see “Item 5. Operating and financial Review and Prospects—A. Operating Results—Critical Accounting Policies.”

We could face heightened risks and substantial costs in enforcing these contractual arrangements, because, although the aforementioned contractual arrangements have been widely adopted by PRC companies listed overseas, such arrangements have not been tested in any of the PRC courts. In addition,  there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the contractual arrangements. If the PRC government finds these contractual arrangements non-compliant with the restrictions on direct foreign investment in the relevant industries, or if the relevant PRC laws, regulations, and rules or the interpretation thereof change in the future, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs or forfeit our rights under the contractual arrangements. Lixiang and investors in the ADSs face uncertainty about potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements, consequently, significantly affect the financial condition and results of operations. If we are unable to claim our right to control the assets of the VIEs, the ADSs may decline in value or become worthless. The PRC government could even disallow the VIE structure completely, which would likely result in a material adverse change in our operations and the ADSs may significantly decline in value or become worthless. See “Risk Factors—Risks Related to Corporate Structure.”

Currently, the VIEs primarily offer high school education at Qingtian International School, in Lishui City, Zhejiang Province. Lishui Mengxiang became the sponsor of Qingtian International School in August 2021. Prior to August 31, 2021, the VIEs primarily operated primary and secondary school in Baiyun campus and Yijing campus—Featured Division of Lianwai School. Under the Implementation Rules for the Law for Promoting Private Education of the PRC (《中华人民共和国民办教育促进法实施条例》) for Private Education Laws, or the 2021 Implementation Rules, which took effect on September 1, 2021, social organizations and individuals are prohibited from controlling a private school that provides compulsory education by means of, among others, merger, acquisition, and contractual arrangements, and a private school providing compulsory education is prohibited from conducting transactions with its related party. In particular, the prohibition over related party transactions has significantly affected the enforceability of the exclusive management services and business cooperation agreements among Liandu WFOE and Lianwai School providing compulsory education. Therefore, we re-assessed our control over Lianwai School. Based on the relevant accounting standard in accordance with U.S. GAAP, we have concluded that we have lost control of Lianwai School since August 31, 2021, in view of the significant uncertainties and restrictions the 2021 Implementation Rules impose on our ability to direct the range of ongoing activities that would most significantly impact the returns of Lianwai School. In light of such regulatory developments, on April 20, 2022, we entered into an acknowledgment agreement of contractual agreements with Lianwai School and respective directors, to confirm all the terms of rights and obligations relating to Lianwai School and the directors appointed by the sponsor under the contractual arrangements among them, and agree among the parties that such arrangements shall have been terminated on August 31, 2021. To minimize disruptions to existing students enrolled in Lianwai School, we and the VIEs continued to offer essential services to the students. We deconsolidated Lianwai School commencing from September 1, 2021 and presented it as a discontinued operation in current and comparative period financial statements.

We and the VIEs have explored and considered business opportunities beyond high school education. We and the VIEs took steps to expand into online education and vocational education. In February 2021, Liandu WFOE completed the acquisition of 100% equity interests of Hangzhou Youxi for the layout of online education. In January 2022, Lishui Mengxiang formed Beijing Xinxiang with Beijing R.R.Z. to provide vocational education in the health care industry. In April  2022, as part of the transactions contemplated under the investment cooperation agreement entered into by Lishui Mengxiang and Beijing S.K. in July 2021 to expand our and the VIEs’ business into vocational education, Lishui Mengxiang entered into definitive agreements to acquire 100% equity interests of Beijing P.X., a wholly-owned subsidiary of Beijing S.K., which in turn holds 100% equity interests of Chuangmei Weiye and Hainan Jiangcai, and the sponsorship interests of Langfang School. As of the date of the annual report on Form 20-F, the administrative procedures with the PRC governmental authorities to amend the registration reflecting the result of the acquisition of Langfang School have not been completed due to the effects of COVID-19 pandemic. We expect to consolidate Beijing Xinxiang and Beijing P.X. in our annual report on Form 20-F for the year ending December 31, 2022.

On June 30, 2020, the Standing Committee of the National People’s Congress of the PRC, or the Standing Committee of the NPC, promulgated the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, or the Law of PRC on Safeguarding National Security in Hong Kong, the interpretation of which involves a degree of uncertainty. The PRC government has also announced recently that it would step up supervision of overseas listed PRC businesses, and check sources of funding for securities investment and control leverage ratios. The PRC government has also opened a probe into several U.S.-listed technology companies focusing on anti-monopoly, financial technology regulation and more recently, with the passage of the PRC Data Security Law, how companies collect, store, process and transfer personal data. Currently these laws (other than the Law of the PRC on Safeguarding National Security in Hong Kong) are expected to apply to China domestic businesses, rather than businesses in Hong Kong which operate under a different set of laws from China. However, there can be no assurance that the government of Hong Kong will not enact similar laws and regulations applicable to companies operating in Hong Kong. For example, the PRC government may pressure the government of Hong Kong to enact similar laws and regulations to those in the PRC, which may seek to exert control over offerings conducted overseas by Hong Kong companies. If any or all of the foregoing were to occur, and if our Hong Kong subsidiary elects to carry out substantive business activities in the future, it could lead to a material adverse change in our operations and limit or hinder our ability to offer securities to overseas investors or remain listed in the United States, which could cause the value of our ADSs to significantly decline or become worthless. See “Risk Factors—Risks Related to Doing Business in China—Implementation of the Law of the PRC on Safeguarding National Security in Hong Kong involves uncertainty, and the recent policy pronouncements by the PRC government regarding business activities of U.S.-listed PRC businesses may negatively impact Lixiang’s existing and future operations in Hong Kong.”

The following diagram illustrates the corporate structure of us, our subsidiaries and the VIEs, as of the date of the annual report:

Notes:

(1) The sponsorship registration of Qingtian International School was changed to Lishui Mengxiang in August 2021. We are in the process of filing the relevant application pursuant to the PRC national and local regulations (including Zhejiang Province and Lishui City) of classification registration of private schools. As of the date of the annual report, we have not received notice from the competent authorities of Qingtian County on the classified registration of private schools. Liandu WFOE entered into a series of contractual arrangements with respect to the operation of Qingtian International School in April 2022, which arrangements took effect on August 31, 2021.

(2) Lishui Mengxiang holds 43% equity interests of Beijing Xinxiang. Beijing R.R.Z. holds 42% equity interests of Beijing Xinxiang. The management team of Beijing Xinxiang formed Beijing Chuang’ao Technology Center (L.P.) (“Beijing C.A.”), holding 15% equity interests of Beijing Xinxiang. Given that the board of directors of Beijing Xinxiang consists of five members, three of which shall be appointed by Lishui Mengxiang, we are able to control Beijing Xinxiang by holding more than half of the voting power in the board of directors. Therefore, the financial statements of Beijing Xinxiang will be consolidated in our annual report on Form 20-F for the year ending December 31, 2022.

(3) According to PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” instead of “owners” or “shareholders.” The economic substance of “sponsorship” with respect to private schools is substantially similar to that of ownership with regard to legal, regulatory and tax matters. However, the differences between sponsorship and equity ownership can be found in the specific provisions of the laws and regulations applicable to sponsors and owners, such as provisions regarding the right to receive returns on investment and the right to the distribution of residual properties upon termination and liquidation.

Permissions Required for Our Operations in China

In order to conduct our and the VIEs’ business and operate schools in China, we and the VIEs are required to obtain and maintain various approvals, licenses and permits and fulfill registration and filing requirements. For example, to establish and operate a school in the PRC, we are required to obtain a private school operation permit from the local education bureau and register with competent administration authorities to obtain a business license or registration certificate. Such local regulatory authorities may also conduct annual inspection of the schools.

As of the date of the annual report, our PRC subsidiaries and the VIEs have received from PRC authorities requisite licenses, permissions or approvals needed to engage in the businesses currently conducted in China, and no permission or approval has been denied. Such licenses and permissions mainly include Business License, Public Institution Legal Person Certificate, Permit for Establishment of Privately-run Schools and Food Operation License. The following table provides details on the aforementioned licenses and permissions held by our PRC subsidiaries and VIEs.

However, we cannot assure you that our PRC subsidiaries and the VIEs are always able to successfully update or renew the licenses or permits required for the relevant business in a timely manner or that these licenses or permits are sufficient to conduct all of our and the VIEs’ present or future business. If our PRC subsidiaries and the VIEs (i) do not receive or maintain required permissions or approvals, (ii) inadvertently conclude that such permissions or approvals are not required, or (iii) applicable laws, regulations, or interpretations change and our PRC subsidiaries or the VIEs are required to obtain such permissions or approvals in the future, we could be subject to fines or legal sanctions, which may materially and adversely affect the business, financial condition and results of operations of us and the VIEs. For risks relating to permissions and approvals required for the operations of us and the VIEs in China, see “Risk Factors—Risks relating to our business and industry—We may not be able to obtain all necessary approvals, licenses and permits and to make all necessary registrations and filings for our and the VIEs' educational and other services in China.”

Regulatory Approval from the China Securities Regulatory Commission

As of the date of this annual report, based on our understanding of the current PRC laws and regulations, we are not required to obtain approvals from the China Securities Regulatory Commission, or CSRC, to maintain the listing status of our ADSs on the Nasdaq or to conduct offerings of securities in the future. However, our PRC legal counsel, Beijing DeHeng Law Offices, has further advised us that there remains some uncertainty as to how the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (Revised in 2009), or the M&A Rules, will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, regulations and rules or detailed implementations and interpretations in any form relating to the M&A Rules.

In addition, on December 24, 2021, the CSRC issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Enterprises (Draft for Comments) and the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Enterprise (Draft for Comments) (collectively, the "Overseas Listing Rules"), which propose to require domestic enterprises with direct or indirect overseas offering securities and listing shall apply for record-filing in accordance with these Measures. Meanwhile, according to the press conference of a CSRC official, on the premise of abiding by domestic laws and regulations, VIE structured enterprises which satisfy compliance requirements may be listed overseas upon completion of filing; and in term of system design, the filing procedure shall be implemented firstly on the Chinese companies that seek to offer and list securities in overseas markets after the implementation of the Overseas Listing Rules and the filing of other existing enterprises will be otherwise arranged and given a full transitional period. According to Relevant Officials of the CSRC Answered Reporter Questions, new initial public offerings and refinancing by existent overseas listed Chinese companies will be required to go through the filing process; other existent overseas listed companies will be allowed sufficient transition period to complete their filing procedure. However, it is uncertain when and in what form the Overseas Listing Rules will be enacted.

If it is determined that CSRC approval is required to maintain the listing status of our ADSs on the Nasdaq or to conduct offerings of securities in the future, or if we inadvertently conclude that such approvals are not required, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to obtain or delay in obtaining CSRC approval for our continued listing status or offering securities in the future. These sanctions may include fines and penalties on our operations in China, limitations on our operating privileges in China, delays in or restrictions on the repatriation of the proceeds from our offerings of securities into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our subsidiaries in China, or other actions that could have a material and adverse effect on our business, reputation, financial condition, results of operations, prospects, as well as the trading price of the ADSs. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals to maintain the listing status of our ADSs on the Nasdaq or to conduct offerings of securities in the future, we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could significantly limit or completely hinder our ability to maintain the listing status of our ADSs on the Nasdaq or continue to offer securities to investors and cause the value of our ADSs to significantly decline or be worthless.

Regulatory Approval from the Cyberspace Administration of China

On December 28, 2021, the Cyberspace Administration of China, or CAC, published the Revised Measures for Cyber Security Review, or the CAC Revised Measures, which further restates and expands the applicable scope of the cybersecurity review. Pursuant to the CAC Revised Measures, network platform operators grasping the personal information of more than 1 million users must apply to the office for cyber security review for cyber security review for foreign listing, and operators of critical information infrastructure purchasing network products and services are also obligated to apply for the cybersecurity review for such purchasing activities.

We currently have less than 100 subscribers on our digital platform such as WeChat public account. We have no registered users on our website. We only require and obtain user information after users register with us. Although the CAC Revised Measures provides no further explanation on the extent of “network platform operator” and “foreign” listing, as advised by our PRC counsel, Beijing DeHeng Law Offices, we do not need to apply for a cyber security review pursuant to the above regulation to maintain the listing status of our ADSs on the Nasdaq, given that (i) we are not in possession of personal information of over one million users and it is also very unlikely that it will reach such threshold in the near future; and (ii) as of the date of the annual report, we have not received any notice or determination from applicable PRC governmental authorities identifying us as a critical information infrastructure operator.

Considering that the CAC Revised Measures empower the cybersecurity review office to initiate cybersecurity review when they believe any particular data processing activities “affect or may affect national security”, it is uncertain whether the competent government authorities will deem that our data processing activities may affect national security and thus initiate the cybersecurity review against our business. Although we believe we currently are not required to obtain clearance from the CAC in order to maintain the listing status of our ADSs on the Nasdaq under the CAC Revised Measures or the Opinions on Strictly Cracking Down on Illegal Securities Activities, we face uncertainties as to the interpretation or implementation of such regulations or rules, and if required, whether such clearance can be timely obtained, or at all. If we were to subject to such review in order to maintain the listing status of our ADSs on the Nasdaq, during such review, we may be required to suspend our operation and experience other disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to our company and diversion of our managerial and financial resources. Further, failure of cybersecurity, data privacy and data security compliance could subject us to penalties, damage our reputation and brand, and adversely harm our business and results of operations.

The Holding Foreign Companies Accountable Act

Our financial statements contained in this annual report on Form 20-F for the fiscal year ended December 31, 2021 have been audited by WWC Professional Corporation Limited, or WWC, P.C., an independent registered public accounting firm headquartered in the United States and is among the public accounting firms that are registered with the Public Company Accounting Oversight Board of the United States, or the PCAOB. Such PCAOB-registered accounting firm is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. On December 16, 2021, the PCAOB issued its determination that the PCAOB is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions, and the PCAOB included in the report of its determination a list of the accounting firms that are headquartered in the PRC or Hong Kong. This list does not include our auditor, WWC, P.C. As of the date of the annual report, our listing is not affected by the Holding Foreign Companies Accountable Act, or the HFCAA, and related regulations. However, the recent developments would add uncertainties to our listing and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as related to the audit of our financial statements. While our auditor is based in the U.S. and is registered with PCAOB and subject to PCAOB inspection, in the event it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause our securities to be delisted from the stock exchange. If, in the future, we have been identified by the SEC for three consecutive years as a commission-identified issuer whose registered public accounting firm is determined by the PCAOB that it is unable to inspect or investigate completely because of a position taken by one or more authorities in China, the SEC may prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the United States. Additionally, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two , and therefore reduce the time before our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges, and this ultimately could result in our ADSs being delisted.

On August 26, 2022, the PCAOB signed a statement of protocol agreement with the CSRC and the PRC Ministry of Finance, or the “Cooperative Agreement.” According to the fact sheets published by the PCAOB, the PCAOB has the sole discretion in selecting the subject of its inspections and investigations without input from the Chinese authorities, and that procedures are in place to allow PCAOB inspectors and investigators to review complete audit working papers of accounting firms located in mainland China and Hong Kong.

On December 15, 2022, the PCAOB determined that it was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and vacated its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB may consider the need to issue a new determination.

Risk Factors Summary

An investment in our ADSs is subject to a number of risks, including risks related to our business and industry, risks related to our corporate structure, risks related to doing business in China and risks related to our ADSs. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

Risks relating to our business and industry

Risks relating to our corporate structure

Risks relating to doing business in China

Risks relating to our ADSs

Financial Information Related to the VIEs

The following table presents the condensed consolidating schedule of financial position of our parent company, VIEs and their consolidated subsidiaries, Liandu WFOE that is the primary beneficiary of the VIEs, and other subsidiaries as of the December 31, 2020 and 2021.

The following table presents the condensed consolidating schedule of results of operations and cash flows of our parent company, VIEs and their consolidated subsidiaries, Liandu WFOE that is the primary beneficiary of the VIEs, and other subsidiaries for the years ended December 31, 2019, 2020 and 2021.

Cash and Asset Flows through Our Organization

The Company may (i) transfer the net proceeds into Liandu WFOE to pay in their initially subscribed registered capital, and (ii) provide loans to Liandu WFOE and the VIEs. The Company and Liandu WFOE may also establish and/or acquire new foreign-invested enterprises in China in order to facilitate our business expansion and make additional investments by the way of paying in their registered capital and providing loans to them. However, we cannot assure you that our intended investments in these entities will always succeed as we planned, or at all. According to the dividend policy, our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. See “Item 8. Financial Information—Dividend Policy.”

To the extent cash is generated in our PRC Subsidiaries, and may need to be used to fund operations outside of mainland China, such funds may not be available due to limitations placed by the PRC government. Furthermore, to the extent assets (other than cash) in our business are located in the PRC or held by a PRC entity, the assets may not be available to fund operations or for other use outside of the PRC due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer assets by the PRC government. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China— Restrictions on currency exchange under PRC laws may limit our ability to convert cash derived from our operating activities into foreign currencies and may materially and adversely affect the value of your investment.”

The cash management policies are a part of the Company’s internal control procedures. The cash management policies enable the Company to formalize the procedures on the handling, depositing, receiving, safeguarding and recording of cash transfers. The cash management policies provide reasonable assurance for the consolidated financial statements, rather than imposing any restrictions or limitations on the cash transferred among the Company, its subsidiaries, the consolidated VIEs and its shareholders, as the case may be. Each cash transfer requires approval of the financial manager. Cash transfer in excess of RMB0.5 million (US$0.08 million) but less than RMB1 million (US$0.16 million) shall be reviewed and approved by the Chief Financial Officer of the Company. Cash transfer in excess of RMB1 million (US$0.16 million) shall be reviewed and approved by both Chief Financial Officer and Chief Executive Officer of the Company. For the condensed consolidating schedule and the consolidated financial statement, see “Item 3. Key Information—Financial Information Related to the VIEs.”

The Company may plan to utilize part of the proceeds from our initial public offering by way of paying in the initially subscribed registered capital of Liandu WFOE. The amount of funds in the form of capital contribution into Liandu WFOE and other PRC subsidiaries the Company or Liandu WFOE may establish in the future is subject to the amount of their initially subscribed registered capital. Currently, the initially subscribed registered capital of Liandu WFOE is US$1 million which will be fully paid before the deadline prescribed in its articles of association. If the initially subscribed registered capital is not sufficient to allow our intended capital injection, under the current PRC laws and regulation, Liandu WFOE may increase the registered capital and complete the relevant procedures which include (i) altering our registration with local branch of the State Administration for Industry and Commerce of the PRC, or the SAIC, and (ii) filing the alteration report to local counterparts of the Ministry of Commerce of the PRC, or the MOFCOM. In addition, capital contribution to the schools must be approved by the Ministry of Civil Affairs of the PRC or the MCA or their respective local counterparts.

The Company may also plan to provide loans to Liandu WFOE and Lishui Mengxiang. According to the current PRC laws and regulations, the maximum amount of the loans provided to a PRC enterprise is up to 2 times (or the prevailing statutory multiples) of the borrower’s net assets set out in its latest audited financial statement. As a result, the loans that the Company may provide to Liandu WFOE and Lishui Mengxiang are in an amount of up to 2 times (or the prevailing statutory multiples) of their respective net assets set out in their latest audited financial statements. Liandu WFOE and Lishui Mengxiang are required to file the information of their cross-border financing arrangements with local branch of the State Administration of Foreign Exchange of the PRC, or the SAFE, after the loan agreements are signed and before three working days prior to the fund withdrawal. In addition, for loans carrying a term of more than one year, Liandu WFOE and Lishui Mengxiang may be required to complete the relevant filing and registration formalities to the National Development and Reform Commission of the PRC, or the NDRC. Currently, the Company’s business operation is conducted through Liandu WFOE’s contractual arrangements with the VIEs and Liandu WFOE does not engage in its own business. As such, Liandu WFOE’s current net assets are in close approximation to its paid-up registered capital. Pursuant to the relevant PRC laws and regulations, the estimated amount of loans the Company will provide to Liandu WFOE will be approximately US$30 million which is 2 times of its current enlarged registered capital, assuming that Liandu WFOE’s net assets set out in its latest audited financial statements equals to its paid-up registered capital at the time when the loans are made.

For the years ended December 31, 2019, 2020 and 2021, the cash flows that have occurred between the Company, the VIEs and their consolidated subsidiaries, Liandu WFOE which is the primary beneficiary of the VIEs, and other subsidiaries are summarized as the following:

From January 1, 2022 to the date of this annual report, cash is transferred among the Company, Liandu WFOE, the VIEs and their consolidated subsidiaries, in the following manners: (i) Liandu WFOE provided a total of RMB600,000 in cash to other subsidiaries; (ii) Liandu WFOE provided a total of RMB450,000 in cash to VIEs and their consolidated subsidiaries; (iii) VIEs and their consolidated subsidiaries provided a total of RMB1,900,000 in cash to Liandu WFOE; (iv) VIEs and their consolidated subsidiaries provided a total of RMB7,650,000 in cash to other subsidiaries; (v) Other subsidiaries provided a total of RMB8,400,000 in cash to VIEs and their consolidated subsidiaries. The aforementioned cash transfers were generally for working capital purpose among the Liandu WFOE, VIEs and their consolidated subsidiaries, and other subsidiaries.

As of the date of the annual report, other than the cash transfer described hereto, there were no transfer of other assets between the Company, Liandu WFOE, VIEs and their consolidated subsidiaries have never made any dividends or distributions to Lixiang. Similarly, the Company has not declared or made any dividend or other distribution to its shareholders, including U.S. investors to date. Furthermore, the Company, Liandu WFOE, the VIEs and their consolidated subsidiaries have not any plan to pay any dividends in cash in the foreseeable future. The service fees and expenses owed under the VIEs agreements would be settled by VIEs to Liandu WFOE through negotiation.

The Company, Liandu WFOE, the VIEs and their consolidated subsidiaries maintained cash management policies that dictate the purpose, amount, appropriate internal control procedures on the handling, depositing, receiving, transferring, safeguarding, and documentation and recording of cash transfers. Subject to the amounts of cash transfer and the nature of the use of funds, requisite internal approval shall be obtained prior to each cash transfer. Specifically, all transactions require the approval of the financial manager. As for the large quantity transactions, the Chief Financial Officer and Chief Executive Officer are required to conduct regular review and approve.

In considering any distribution of the earnings of the subsidiaries to their respective holding companies, we must consider their respective financial conditions before making a decision. There are no other significant restrictions and limitations on our ability to distribute earnings from our businesses, including our subsidiaries and the VIEs, to the holding company and U.S. investors or our ability to settle amounts owed. Except the aforementioned restrictions on our PRC Subsidiaries, there are no significant restrictions on foreign exchange or our ability to transfer cash between entities within our group, across borders, or to U.S. investors.

Restrictions and Limitations on Transfer of Cash and dividend distribution

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. The majority of our and the VIEs’ income is received in Renminbi and shortages in foreign currencies may restrict our ability to pay dividends or other payments, or otherwise satisfy our foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE as long as certain procedural requirements are met. Approval from appropriate government authorities is required if Renminbi is converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may, at its discretion, impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able to pay dividends in foreign currencies to our shareholders.

Our cash dividends, if any, will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax.

Relevant PRC laws and regulations permit the PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s PRC subsidiaries and the VIEs can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to the statutory reserves, subject to further restrictions applicable to non-profit private schools. Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up for previous years’ accumulated losses, if any, to fund certain statutory reserves, until the aggregate amount of such fund reaches 50% of its registered capital.

As a result of these and other restrictions under the PRC laws and regulations, the PRC subsidiaries and the VIEs are restricted to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and the VIEs for working capital and other funding purposes, the Company may in the future require additional cash resources from its PRC subsidiaries and the VIEs due to changes in business conditions, to fund future acquisitions and developments, or merely declare and pay dividends to or distributions to the Company’s shareholders. There are currently no restrictions on foreign exchange and our ability to transfer cash among our Company and our principal subsidiaries and the consolidated VIEs, as applicable, or to investors.

In addition, in recent years, the PRC government has adopted a number of policies to regulate the collection of education fees and related party transactions by private education institutions. If, in the future, the relevant PRC government authorities tighten control on fee collection and related party transactions or promulgate stricter laws and regulations governing private education, the VIEs’ ability to negotiate service prices and make payment of service fees to the Liandu WFOE may be affected.

The following summary consolidated statements of comprehensive loss for the fiscal years ended December 31, 2019, 2020 and 2021 and summary consolidated balance sheets as of December 31, 2020 and 2021 have been derived from our audited consolidated financial statements included in this annual report on Form 20-F beginning on page F-1. The following summary consolidated balance sheets as of December 31, 2019 have been derived from our audited consolidated financial statements not included in this annual report on Form 20-F. Our consolidated financial statements are prepared and presented in accordance with the generally accepted accounting principles in the United States of America, or US GAAP. Our historical results are not necessarily indicative of results expected for future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” below.

The following table presents our summary consolidated statements of comprehensive loss for the fiscal years ended December 31, 2019, 2020 and 2021.

The following table presents our summary consolidated balance sheet data as of December 31, 2019, 2020 and 2021.

Not applicable.

Not applicable.

An investment in our ADSs involves a number of risks, including risks relating to our business and industry, risks relating to our corporate structure, risks relating to doing business in China and risks relating to our ADSs. A description of factors that could materially affect our and the VIEs’ business, financial condition or operating results is provided below.

Risks Relating to Our Business and Industry

Significant uncertainties exist in relation to the interpretation and implementation of, or proposed changes to, the PRC laws, regulations and policies regarding the private education industry. In particular, our compliance with the 2021 Implementation Rules for Private Education Laws has materially and adversely affected and may materially and adversely affect our and the VIEs’ business, financial condition, results of operations and prospect.

The private education industry in the PRC is subject to various laws and regulations including among others the amended Law for Promoting Private Education of the PRC, or the Promotion Law, promulgated in December 2002, which are subject to changes to accommodate the development of the education industry, in particular, the private education industry from time to time. On November 7, 2016, the Decision of the Standing Committee of the National People’s Congress on Amending the Private Education Promotion Law of the PRC, or the Decision, amended the Promotion Law. On December 29, 2018, the Promotion Law was further amended. Under the Decision and the current Promotion Law, private schools may be established as non-profit or for-profit entities. The sponsor of a non-profit private school shall not receive proceeds from the running of the school and the cash surplus of the school shall be retained for the running of the school, while the sponsor of a for-profit private school may gain proceeds from the running of the school, and the cash surplus of the school may be distributed in accordance with applicable PRC laws.

The Opinions on Further Strengthening and Regulating the Administration of Education Fees, or the Opinions, which were issued on August 17, 2020 by the relevant authorities, reiterate the provision from the Decision that the sponsors of non-profit privately-run schools shall not gain proceeds from the running of schools. The Opinions further underline that the sponsors of non-profit privately-run schools and non-profit privately-run sino-foreign cooperative educators shall be prohibited from obtaining proceeds from the running of schools such as tuition income, distributing school balances (residual assets) or transferring proceeds from the running of schools through related-party transactions or affiliated parties or other means.

On May 14, 2021, the State Council promulgated the 2021 Implementation Rules for Private Education Laws, which became effective on September 1, 2021. The 2021 Implementation Rules impose restrictions on the operation and management of private schools and the capital operation of private education. Pursuant to the 2021 Implementation Rules, (i) foreign-invested enterprises established in China and social organizations whose actual controllers are foreign parties shall not sponsor, participate in or actually control private schools that provide compulsory education; (ii) social organizations or individuals shall not control any private school that provides compulsory education or any non-profit private school that provides pre-school education by means of merger, acquisition, contractual arrangements, etc.; (iii) private schools providing compulsory education shall not conduct any transaction with any interested related party; and (iv) for any change of school sponsor of a private school, an alteration agreement shall be entered into but shall not involve the legal property of the school, nor shall it affect the development of the school, or damage the rights and interests of teachers and students; the existing school sponsor may, in accordance with its lawful rights and interests, enter into agreements with the successional school sponsor to stipulate the income from the alteration.

The 2021 Implementation Rules have had significant impacts on our and the VIEs’ business operations and our results of operations. As a result of the effectiveness of the 2021 Implementation Rules, we have lost control over Lianwai School which primarily provides primary and middle education to the students. We had ceased to recognize revenues for all activities related to Lianwai School and had discontinued all business activities with Lianwai School by August 31, 2021. We deconsolidated Lianwai School commencing from September 1, 2021 and presented it as a discontinued operation in current and comparative period financial statements. To minimize disruptions to existing students enrolled in Lianwai School, we and the VIEs continued to offer essential services to the students. As a result, our and the VIEs’ ability to engage in the private not-for-profit education in China has been materially and adversely affected, and we cannot assure you that we will be able to restore such ability, which could materially and adversely affect our and the VIEs’ business, prospects, results of operations and financial condition. In November 2021, Lishui Mengxiang completed the acquisition of 100% of the sponsorship interest of Qingtian International School from Qingtian Zhongyi Education Investment Co., Ltd. (青田众亿教育投资有限公司), a company incorporated under the laws of the PRC, or Qingtian Zhongyi Education Investment. We expect that this acquisition will strengthen our competitiveness in the private education sector.

There are substantial uncertainties regarding the interpretation and application of the Decision, the current Promotion Law, the Opinions and the 2021 Implementation Rules, which affect or may affect our industry as a whole or the schools, including Lianwai School and Qingtian International School. Such uncertainties include, among others:

According to the Decision, upon liquidation of for-profit private schools, school sponsors can obtain the schools’ remaining assets after the settlement of the schools’ indebtedness. The Decision also states that, a private school established before the promulgation of this Decision registered as non-profit, shall give appropriate compensation out of the remains to the sponsors after its property is liquidated, at its termination, based on their applications and by taking into full account of the circumstances. After that, the remaining assets shall be used for the operation of other non-profit private schools. The Decision is silent on how or by whom the aforesaid rest of the remaining assets of a liquidated non-profit private school shall be dominated or disposed of. Accordingly, we may not be able to transfer all or part of the remaining assets and residual interests of our school to Liandu WFOE upon their liquidation. As a result, our and the VIEs’ business, our financial position and the market price of our shares may be materially and adversely affected.

According to the Decision, the fees charged by private schools shall be determined in accordance with costs and market demand. The level of fees charged by for-profit private schools is determined by the schools at their discretion, while the level of fees charged by non-profit private schools shall be regulated by the relevant local government authorities. The 2021 Implementation Rules state that the people’s governments of provinces, autonomous regions and municipalities directly under the Central Government may set a ceiling for the fees charged by non-profit private schools that the government-run schools participate in the establishment thereof, that use state-owned assets, or that receive government subsidies per student. There is uncertainty as to whether there will be any material adverse impact on the fees charged by non-profit private schools generally or our school. We and the VIEs may not be able to maintain our current tuition and boarding fees, and may not be able to raise any of such fees at our desired rates, times and places or at all in the future. As a result, our and the VIEs’ business, our financial position and the market price of our shares may be materially and adversely affected.

According to the Decision and the 2021 Implementation Rules, additional supportive measures will be provided for private schools. Non-profit private schools will enjoy more supportive measures than for-profit private schools, such as government subsidies, fund awards and incentive donations. Non-profit private schools will enjoy the same preferential tax policies as public schools, while for-profit private schools will not be expected to enjoy the same preferential tax policies as public schools or non-profit private schools. The Decision does not specify whether and how existing schools that choose to become for-profit private schools will be required to pay additional taxes during the transition process. As the relevant PRC tax laws have not been amended to distinguish between non-profit and for-profit private schools, there is currently uncertainty as to whether the tax treatments will change after the 2021 Implementation Rules became effective. According to the Decision and the 2021 Implementation Rules, non-profit private schools will enjoy the same treatment as public schools with respect to the supply of land, which will be supplied by the government through allocation or other means, and for-profit private schools are not expected to enjoy the same treatment as public schools and non-profit private schools. There is uncertainty as to whether and how our schools will be able to benefit from any of such additional supporting measures as contemplated or at all. We cannot assure you that the tax and other treatments will not change or that they apply or continue to apply to our school after the 2021 Implementation Rules became effective.

According to the 2021 Implementation Rules, private schools providing compulsory education shall not conduct any transaction with any interested related party. Where any other private schools conducts any transaction with any interested related party, it shall follow the principles of openness, fairness and impartiality, fix the price reasonably and regulate the decision-making, and shall not damage the state interests, the interests of the school or the rights and interests of the teachers and students. Private schools shall establish an information disclosure system for their transactions with interested related parties. The departments of education, human resources and social security, finance and other relevant departments shall strengthen the supervision over the agreements entered into by and between non-profit private schools and their interested related parties and review related-party transactions on an annual basis. The interested related parties as mentioned in the preceding paragraph refer to the founder, actual controller, principal, members of the council, director, supervisor, financial person-in-charge and other persons of a private school, and any organization or individual that has the relationship of mutual control and influence with the above-mentioned organization or individual, which may lead to the transfer of the interests of the private school.

Further, the founder or actual controller, any member of the decision-making body or supervisory body of a private school conducting related-party transactions with a private school providing compulsory education, or conducting related-party transactions with any other private school, thus damaging the interests of the State, of the school or of the teachers and students, shall be orderd by the relevant authorities to make corrections within a time limit, and the illegal gains, if any, shall be confiscated after the fees collected are returned; if the circumstances are serious the offender shall not become the founder or actual controller, a member of the decision-making body or supervisory body of another private school within one to five years; if the circumstances are especially serious with adverse social impact, the offender shall not become the founder, actual controller or a member of the decision-making body or supervisory body of another private school permanently.

After the 2021 Implementation Rules took effect, we have ceased related party transactions with Lianwai School, including relevant property lease contracts, etc. We have not received income from such transactions since September 1, 2021, which had a material adverse impact on our income. In order to support the daily operation of Lianwai School, we and the VIEs continue to provide Lianwai School with premises and other related facilities and services. The estimated annual expenses for providing these premises, facilities and services are approximately RMB 21 million. We have been unable to receive any revenue for providing these premises, facilities and services since the 2021 Implementation Rules came into effect. The situation will change when Lishui Mengxiang will be no longer defined as an affiliated entity of Lianwai School. We are also in active communication with the local competent authority in charge of education.

Furthermore, our contractual arrangements may be regarded as related party transactions of Qingtian International School and we may incur substantial compliance costs for establishing disclosure mechanisms and undergoing review by the relevant government authorities. Such process may not be in our control and may be highly complicated and burdensome and may divert management attention. Government authorities may, during their review process, compel us to make modifications to our contractual arrangements for whatever reason, which may in turn adversely affect the operation of our contractual arrangements. Government authorities may find that one or more agreements underlying our contractual arrangements do not comply with applicable PRC laws and regulations and may subject us to severe penalties, resulting in material adverse impact on our operation and financial condition.

Tuition and boarding fees are a significant part of our schools’ revenue whilst we rely on contractual arrangements to obtain further related service revenue from the school. If any law and regulation that may be promulgated in the future further defines the contractual arrangements, including ours, as related-party transactions transferring proceeds from the running of schools, we may not obtain the service revenue under our contractual arrangements that is funded by proceeds from the running of schools. As of the date of the annual report, however, we are not aware of any official administrative or judicial declaration on, or interpretation of, the Opinions, especially as applied to contractual or other similar arrangements under which we operate. We are also not aware of when official administrative or judicial declaration or interpretation on that matter will be released, if at all, and we cannot assure you that the Opinions will not be interpreted, or further laws and regulations will not be promulgated, in a way that would affect or impair our ability to retain the tuition and boarding fees under the contractual arrangements in the future. Our and the VIEs’ business, financial condition and results of operations would be materially and adversely affected if we are unable to obtain any or all of the tuition and boarding fees to be paid by our schools under the contractual arrangements.

The local governments and their education authorities will generally issue detailed rules, guidelines or opinions on the interpretation, application and implementation of the upper-level laws after they come into effect, and the local government and education authorities in Zhejiang Province have not yet issued such rules, guidelines or opinions on the interpretation, application and implementation of the 2021 Implementation Rules as of the date of this annual report on Form 20-F. We’ve been closely monitoring the developments of the 2021 Implementation Rules and are carefully evaluating the possible impact of the 2021 Implementation Rules on our and the VIEs’ business development and financial performance. There is no expected timeline for the local government and education authorities to release such rules, guidelines or opinions. We are also proactively seeking guidance from and cooperating with the local governments and their education authorities in connection with our efforts to comply with the 2021 Implementation Rules and any related rules and regulations.

We cannot assure you that we will always be deemed to be in compliance with the new laws and regulations, interpretation of which may remain uncertain and relevant PRC government authorities may take a different view or change their policy in the future, or that we will be able to efficiently change our and the VIEs’ business practice in line with the new regulatory environment. Any such failure could materially and adversely affect our and the VIEs’ business, financial condition and results of operations.

We and the VIEs are in the process of filing the relevant application pursuant to the national and local regulations (including Zhejiang Province and Lishui City) of classification registration of private schools. Loss of taxes and fees may incur in the process, which may have an adverse impact on Qingtian International School’s operations.

According to the Implementation Rules on Classification Registration of Private Schools (the “Classification Registration Rules”), which was issued jointly by the MOE, the Ministry of Human Resources and Social Security of the People’s Republic of China or the MOHRSS, the MCA, the State Commission Office of Public Sectors Reform and the SAMR, and became effective on December 30, 2016, if an existing private school chooses to register as a non-profit private school, it shall amend its articles of association in accordance with laws, continue its school operation, and complete the new registration formalities. If an existing private school chooses to register as a for-profit private school, it shall make financial settlement, clarify the ownership of the schools’ land, buildings and accumulations with the consent of the relevant departments of the people’s governments at or below the provincial level, pay relevant taxes and fees, obtain new school permits, carry out their re-registration and continue their school operation. The provincial people’s government is responsible for formulating the detailed measures on the alteration registration of the private schools in accordance with national laws and the local situation.

On April 4, 2018, eight departments of Zhejiang Province including the Department of Education of Zhejiang Province promulgated the Implementation Measures for Existing Private Schools to Change Registration Status, or the Zhejiang Implementation Measures, which took effect on June 1, 2018 and applies to all private schools established before November 7, 2016. According to the Zhejiang Implementation Measures, (i) any existing private school which chooses to register as a non-profit private school shall amend and file its articles of association and complete the corresponding registration accordingly, and (ii) any existing private school that chooses to register as a for-profit private school, shall obtain a new Permit for Operating a Private School and be re-registered so as to continue its operation after completing its financial clearance and settlement, clarifying its ownership of assets, and paying relevant taxes and fees.

On June 16, 2021, Lishui Municipal Education Bureau, Lishui Municipal Human Resources and Social Security Bureau, Office for Public Sector Reform Commission of Lishui, Lishui Municipal Civil Affairs Bureau and Lishui Municipal Market Supervision Administration jointly promulgated the Administrative Measures for Classification Registration of Private Schools in Lishui, which took effect on the same day. According to the Administrative Measures, where an existing private school opts to be registered as a for-profit private school, it shall make financial settlement, and the ownership of the land, school buildings, school-running accumulation and other property shall be clarified by the relevant departments of the government of the jurisdiction and the relevant agencies according to law. The school shall pay the relevant taxes and fees, go through the formalities for a new permit for the establishment of the school and make a new registration. The school may continue running during the process of the liquidation, re-handling of the permit for the establishment of the school and registration as a legal person.

On November 22, 2021, Lishui Education Bureau promulgated the Work Plan for Classified Registration and Administration of Existing Private Schools (Kindergartens) of Lishui City, which stipulates that they shall adhere to the principles of voluntary selection, smooth classification, public welfare orientation, and compliance with laws and regulations, and strive to complete the classified registration of existing private schools by December 30, 2022. The Plan also provides a schedule for arranging the classified registration tasks, from January to October in 2022, the classified registration of the existing private schools providing compulsory education, private kindergartens and private schools providing senior high school education shall be completed.

The main registration procedures for non-profit private schools are selected as follows: (i) schools shall file an application for classified registration; (ii) the approval authority shall conduct verification and replacement of the certificate; (iii) the articles of association shall be ratified (filed for the record); and (iv) schools shall apply for registration as a legal person. In addition, the main registration procedures for for-profit private schools are selected as follows: (i) sponsors make a pre-application for classified registration; (ii) schools make financial settlement; (iii) sponsors apply for the pre-registration of corporate names; (iv) sponsors make a formal application for classified registration; (v) certificates are replaced upon the approval authorities; (vi) schools apply for the registration of legal persons; (vii) schools complete the amendment registration of assets; (viii) private non-enterprise entities apply for deregistration with the original registration authorities. See “Item 4. Information on the Company—B. Business Overview—Regulation—Implementing Rules on Classification Registration of Private Schools” for details.

With the approval of Education Bureau of Qingtian County, Qingtian International School is a non-state public institution providing non-profit social welfare services for senior high school education with the status of an independent legal person, whose sponsor is Lishui Mengxiang after the acquisition. In accordance with the Circular of the Lishui Municipal People’s Government on Carrying out Pilot Programs for Unified Registration Administration of Various Public Institutions, except that funds are not guaranteed and personnel are not supported by financial resources, Qingtian International School shall enjoy the same treatment as the public institutions of the same category, and enjoy the supportive policies of the government for private social undertakings.

As of the date of the annual report, we have not received any formal notification from the competent authorities of Qingtian County requiring us to complete the classified registration of Qingtian International School as a for-profit or non-profit school.

We and the VIEs may be unable to maintain or raise the tuition, meal and accommodation service fees as planned.

We derive the majority of our revenue from tuition, meal and accommodation service fees. We determine the rates of the tuition or other fees for our schools primarily based on limits, guidelines and requirements set by the authorities and commercial considerations such as the demand for our and the VIEs’ educational programs, cost of revenues, the tuition charged by our competitors, our pricing strategy, the economic conditions of Lishui City, Zhejiang Province and the general economic conditions in China.

Any increase in the tuition and accommodation service fees charged at our schools are subject to regulatory approval. Moreover, the Decision sets out certain specific requirements with respect to the level of fees charged by non-profit private schools. Therefore, we may face the risks that we can only maintain our current tuition and accommodation service fees, and may not be able to raise any of such fees for our schools at our desired rates, times and places or at all in the future.

Even if our intended rates of tuition and other fees are approved by the authority, we may fail to attract sufficient prospective students to apply for our schools at those levels. As a result, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

Our and the VIEs’ business depends on the market recognition of our brand and reputation that we and the VIEs may not be able to maintain.

The success of our and the VIEs’ business has depended and will continue to depend on our and the VIEs’ brand and reputation. Our and the VIEs’ brand and reputation may be affected by a number of factors, including student and parent satisfaction rates, teaching quality, our students’ academic performances and test scores, campus accidents, scandals involving our schools, negative publicity and failure to pass governmental inspections. Some of these factors are beyond our control. In addition, as we and the VIEs continue to grow in size, expand our programs and extend our geographic reach, it may become difficult to maintain quality and consistency in the services we and the VIEs offer, which may lead to diminishing confidence in our and the VIEs’ brand name and negatively affect our reputation. If our brand or reputation is damaged or negatively affected, students’ and parents’ interest in our schools may decrease and our and the VIEs’ business, financial condition and results of operations could be materially and adversely affected.

We have developed our student base primarily through word-of-mouth referrals. However, we cannot assure you that our marketing efforts will be successful or sufficient in further promoting our brand and reputation to help us maintain or increase student enrollment. Moreover, there can be no assurance that our brand and reputation will hold sufficient market recognition in the geographic areas where we plan to acquire or establish schools. If we and the VIEs are unable to further enhance the market recognition of our brand and reputation, or if we are required to incur excessive marketing expenses to promote our brand and reputation, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

We may fail to continue to recruit and retain students in our school.

The success of our and the VIEs’ business depends on the number of students enrolled in our school and in any school we and the VIEs may acquire or establish in the future. Our ability to attract and retain students depends on several factors, including the ability to:

On August 18, 2021, Lishui Mengxiang entered into a sponsorship interests transfer agreement with Qingtian Zhongyi Education Investment in respect of the acquisition of 100% of the sponsorship interests of Qingtian International School, with a total consideration of RMB 23 million. The alteration registration of Qingtian International School was completed on August 24, 2021. Qingtian International School is an educational institution specialized in providing high school education to returned overseas Chinese students, and the transaction was closed in November 2021. Qingtian International School had 524 students enrolled and recorded a utilization rate of 76.9% as of September 1, 2021. If Qingtian International School is unable to attract and retain students to fully utilize the campus, it may record lower operation efficiency and we may be unable to benefit from the acquisition of Qingtian International School. As a result, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

Our students’ academic performance may fall and satisfaction with our and the VIEs’ educational services may otherwise decline.

Our students’ academic performance may be affected by various factors, including teaching method and materials, personal efforts, learning environment, pressure and family influence, some of which may be beyond our control. If their academic performance fall or do not improve as expected, our students may be unable to achieve the test scores necessary for their desired progressions and satisfaction with our and the VIEs’ educational services may decline. Satisfaction with our and the VIEs’ educational services may also decline due to negative publicity on our schools, directors or management, lack of qualified teachers, unsatisfactory learning environment or other factors, which may result in, among others, a decrease in word-of-mouth referrals and reputation, students’ withdrawal from our schools and decreased application for our schools. If our student retention rate decreases substantially or if we otherwise fail to continue to attract and admit students due to decreased students’ or parents’ satisfaction with our and the VIEs’ educational services, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

We and the VIEs may fail to continue to attract and retain qualified and committed teachers and other school personnel.

We and the VIEs rely substantially on our teachers for the provision of educational services to our students. The teachers are critical to maintaining the quality of our programs and upholding our brand and reputation. We must continue to attract qualified teachers who are committed to teaching. We and the VIEs face competition from public schools, other private education providers and other institutions for high quality candidates and may have to incur additional costs for our recruitment efforts. We and the VIEs may not be able to recruit enough teachers to keep pace with the growth of our student enrollment while maintaining consistent teaching quality and the overall quality of our and the VIEs’ education programs. In addition, criteria such as dedication, capability and loyalty are difficult to ascertain during the recruitment process and we and the VIEs may fail to identify and select the desired candidates.

Furthermore, we and the VIEs may be unable to retain high quality teachers or have to incur significant expenditures for our retention efforts. Teachers may be dissatisfied with their workload, compensation, benefits, career path or working environment, which may disrupt our school operations and teaching activities, adversely affect our reputation and damage our ability to attract and retain teachers and students. Similarly, other school personnel such as administrators, counselors and financial staff also play an important role in the efficient and smooth running of our schools. There is no guarantee that we and the VIEs can recruit and retain quality personnel to perform these functions in the future without incurring significant costs or at all. If we and the VIEs are unable to attract and retain qualified and committed teachers and other school personnel at reasonable costs or at all, or if there is a significant decrease in teaching quality or educational experiences in our schools due to lack of qualified teachers or other school personnel, or if our teachers or other school personnel take disruptive actions to express their dissatisfaction with our school or us, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

We and the VIEs face intense competition in the education industry and we and the VIEs may fail to compete effectively.

The education sector in China is rapidly evolving, highly fragmented and competitive and we expect competition in this sector to persist and intensify. In the geographic market in which we and the VIEs operate the schools, we and the VIEs compete with public schools and other private schools that offer high school education. We and the VIEs compete with these schools across a range of factors, including program and curriculum offerings, tuition level, school location and premises, qualified teachers and other key personnel.

Our competitors that are private schools may offer similar or superior educational programs, with different pricing and service packages that are more appealing than those offered at our school. Some of our competitors that are private schools may have more resources than us and may be able to devote greater resources than we and the VIEs can to the development and promotion of their schools and respond more quickly than we and the VIEs can to changes in student demands, testing materials, admissions standards, market needs or new technology. Our competitors that are public schools may have access to resources that may not be available to private schools and may be able to offer quality educational programs at lower prices than our Qingtian International School. According to the Frost & Sullivan report, tuition charged by public schools is generally lower than tuition charged by private schools, especially premium private schools. In addition, the PRC public education system continues to improve in terms of resources, admission policies and teaching quality and approaches. If public schools relax their admission limitations, offer more diversified curriculum, upgrade their campus facilities or reforms the exam-oriented education approach, they may become more attractive to students, which may lead to increased competition in the education industry.

As a result, we and the VIEs may be required to reduce tuition or increase spending in order to retain or attract students or pursue new market opportunities. If we and the VIEs are unable to successfully retain and attract students, maintain or increase our tuition level, recruit and retain qualified teachers or other key personnel, enhance the quality of our and the VIEs’ educational services or control competition costs, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

We and the VIEs may not be able to obtain all necessary approvals, licenses and permits and to make all necessary registrations and filings for our and the VIEs’ educational and other services in China.

We and the VIEs are required to obtain and maintain various approvals, licenses and permits and fulfill registration and filing requirements in order to operate our schools and provide educational and other services to our students. For instance, we and the VIEs are required to obtain and/or renew a private school operation permit, obtain and/or renew a registration certificate for private non-enterprise entities, pass annual inspections conducted by the relevant government authorities and obtain approval from the relevant government authorities as to the scale and scope of our and the VIEs’ student recruitment activities. Currently, we and the VIEs have obtained and maintained all such approvals, licenses and permits required for our operation.

While we and the VIEs intend to obtain all requisite approvals, licenses and permits, and complete the necessary filings, renewals and registrations on a timely basis for our school, there is no assurance that our efforts will result in full compliance as there may be factors beyond our control, intention and anticipation, and the local PRC authorities may have significant discretion in interpreting, implementing and enforcing the relevant rules and regulations. If our PRC subsidiaries and the VIEs (i) do not receive or maintain required permissions or approvals, (ii) inadvertently conclude that such permissions or approvals are not required, or (iii) applicable laws, regulations, or interpretations change and our PRC subsidiaries or the VIEs are required to obtain such permissions or approvals in the future, we and the VIEs may be subject to fines, confiscation of the gains derived from our schools, suspension of some or all of our schools’ operations, be required to compensate the economic losses suffered by our students or other relevant parties, or be subject to other penalties or administrative actions, which may materially and adversely affect our and the VIEs’ business, financial condition and results of operations.

We and the VIEs may not be able to successfully integrate businesses operated by Qingtian International School and Vocational Training Institutions that we and the VIEs acquired, which may cause us to lose the anticipated benefits from such acquisitions and to incur significant additional expenses.

We and the VIEs plan to expand the business and school network by entering into cooperation with third-party school sponsors to establish new schools, in addition to establishing new schools ourselves or acquiring existing schools. We believe we will face challenges in integrating business operations and management philosophies of the schools we and the VIEs may acquire. We consider the benefits of our prospective acquisitions will mainly hinge on our ability to effectively and timely integrate the management, operations and personnel of these schools. The integration of the schools we and the VIEs acquire may be a complex, time-consuming and costly process that without proper arrangement and implementation, could seriously interfere with our and the VIEs’ business operations and damage our reputation. Our Directors consider the main challenges involved in integrating acquired entities to include the following:

We and the VIEs may not be able to successfully integrate our operations and the operations of the schools such as Qingtian International School and Vocational Training Institutions we and the VIEs acquire in a timely manner, or at all, and we may not realize the expected benefits or synergies of the acquisitions to the extent, or in the timeframe we anticipated, which may have a material adverse effect on our and the VIEs’ business, financial condition and results of operations.

We and the VIEs are subject to general conditions and the education industry of Qingtian County, Lishui City and/or Zhejiang Province as our main operations are currently located in a single city.

Qingtian International School and its operations are currently located in Qingtian County, Lishui City, Zhejiang Province. As of the date of the annual report, according to the seventh census report of Zhejiang Province, the population of Lishui City and Zhejiang Province in 2021 was 2.5 million and 64.6 million, respectively. If Lishui City or Zhejiang Province experiences an event that materially and adversely affects its education industry or us, such as an economic downturn, a natural disaster or an outbreak of a contagious disease, or if any governmental authorities governing Lishui City or Zhejiang Province adopt regulations that place additional restrictions or burdens on us and the VIEs or on the education industry in general, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected. In addition, given that we and the VIEs mainly offer the education services at Qingtian International school, any material negative development with respect to Qingtian International school could have a material adverse effect on our and the VIEs’ business, financial condition and results of operations as a whole.

Therefore, we and the VIEs hope to expand our and the VIEs’ business into other cities in China in the future. We expect that we will continue to generate the majority of our revenue from Qingtian International School in Lishui City and Langfang School upon the completion of the acquisition in April 2022 for the foreseeable future.

Misconduct of students and employees and improper activities and any negative publicity concerning our schools, our Company, our Controlling Shareholder, our directors or our employees may adversely affect us.

Misconduct of students and employees and improper activities may adversely affect our brand image, business and results of operations. In addition, any negative publicity concerning our school, our Company, our controlling shareholder, our directors, our employees or any of them, even if untrue, may damage our brand image and reputation, deter prospective students and teachers and take up excessive time of our management and other resources. As a result, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

Our and the VIEs’ business depends on our ability to promptly and adequately respond to changes in admission requirements for higher-level education, testing materials and technologies.

Our high school students are subject to the National Joint Entrance Examination for overseas Chinese students. The admission scores for the various college schools in China usually change from year to year and so do the admission requirements for overseas universities. Testing materials may also change in terms of focus areas, format and the manner in which such tests are administered. The new examination syllabus implemented in 2021 has greatly reduced the difficulty of the examination. These changes require us to continually update and enhance the courses we and the VIEs offer and to continually train our students to take standardized tests so as to maximize their performance on these tests. In order to enable our students get admission to the prestigious colleges in China, we and the VIEs are required to offer not only the ordinary PRC high school curriculum program but also the courses designed for the National Joint Entrance Examination for overseas Chinese students. If we and the VIEs fail to adequately prepare our students for admission tests in our everyday classroom teaching and any test preparation courses we and the VIEs offer, our students’ admissions rates to PRC colleges may decrease and our and the VIEs’ programs and services may become less attractive to students. Furthermore, if we and the VIEs fail to timely develop and introduce new education services and programs in Qingtian International School based on the changing education and test standards in China and abroad, our ability to attract and retain students may decrease. As a result, our reputation, business, financial condition and results of operations may be materially and adversely affected.

We and the VIEs may not be able to successfully implement our business strategies.

Our business strategies include organic growth, strategic alliance with reputable education institutes, acquiring and establishing schools. We may not succeed in implementing our business strategies due to a number of factors, including the following:

��

If we fail to successfully execute our growth strategies, we may not be able to maintain our growth rate and our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

We recorded net current liabilities as of December 31, 2021.

As of December 31, 2021, we had net current assets of RMB125 million , and net current liabilities of RMB113 million, respectively. We cannot assure you that we will not experience periods of net current liabilities in the future. We may record net current liabilities in future periods as we continue to expand. A net current liabilities position could expose us to liquidity risks, constrain our operational flexibility and adversely affect our ability to obtain financing and expand our and the VIEs’ business. There can be no assurance that we will always be able to generate sufficient cash flow from our operations or obtain necessary funding to meet our future financial needs, including repaying our loans upon maturity and finance our capital commitments. If we fail to meet our financial obligations, our and the VIEs’ business, liquidity, financial position and prospects could be materially and adversely affected.

We face risks related to health epidemics, natural disasters or terrorist attacks in China.

We and the VIEs offer accommodation service to our students of Qingtian International School. We also provide on-campus or nearby off-site accommodation to our teachers and staff. The boarding and accommodation arrangements make our students, teachers and staff vulnerable to outbreaks of health epidemics such as the COVID-19 virus, H1N1 flu virus, avian influenza and severe acute respiratory syndrome, or SARS, and Influenza A virus, such as H5N1 subtype and H5N2 subtype flu viruses, natural disasters, such as earthquakes, floods, landslides, as well as terrorist attacks, other acts of violence or war or social instability, especially when such health epidemics, natural disasters or terrorist attacks take place in our schools or in or near the regions where our schools are located. As a result, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

Since the worldwide outbreak of the COVID-19 pandemic in early 2020, all sectors have been severely affected with no exception to the education industry. In early 2021, WHO announced the variants of the coronavirus causing COVID-19 were discovered in Denmark, the United Kingdom, South Africa and Japan subsequently, which is considered highly contagious and may pose a serious public health threat. To respond to the continuing impact and recurrence of COVID-19 pandemic, the PRC government has imposed various strict measures with the aim to contain the virus and restore the business operation in an orderly manner including, but not limited to, mandatory vaccination requirements, travel restrictions, mandatory quarantine requirements, and postponed resumption of business operations. However, the relaxation of the restrictions on economic and social life may lead to development of new cases, which may result in the reimposition of further restrictions. The Baiyun Campus, Yijing Campus—Featured Division resumed normal operation from April 2020. No students withdrew from our schools due to the COVID-19 outbreak. We and the VIEs have taken a series of measures in response to the outbreak to protect our employees, students and teachers in the reopened campuses after the closedown in early 2020, including, among others, checking the temperature of our students, procurement and provision of hand sanitizers and other protective equipment for our employees. The campuses remained in normal operation during 2021, and the students and teachers continued with their on-campus courses. The COVID-19 did not interrupt the on-campus teaching activities, so we and the VIEs did not offer any online-courses to students during 2021. Also, as the students’ enrollment is conducted and the tuition is charged on a semester basis, it is anticipated that the COVID-19 outbreak will not have a material long-term impact on our and the VIEs’ financial condition and operation. The extent to which the COVID-19 outbreak impacts our and the VIEs’ financial condition and results of operations cannot be reasonably estimated at this time and will depend on future developments. In addition, in the event that we establish our own online platform or the legal requirements applicable to us change resulting from the changes in the regulatory environment in this area, we may be required to obtain all applicable permits, licenses, certificates and approvals. Any future outbreak of public health epidemics may restrict economic activities in affected regions, resulting in reduced business volume, disrupt our and the VIEs’ business operations and adversely affect our results of operations.

We and the VIEs are subject to extensive governmental approvals and compliance requirements for the construction and development of school and in relation to the land and buildings that we and the VIEs own.

For campuses and school facilities constructed and developed for our school, we and the VIEs must obtain various permits, certificates and other approvals from the relevant authorities at various stages of property development, including the land use right certificates, planning permits, construction permits, certificates for passing environmental assessments, certificates for passing fire control assessments, certificates for passing construction completion inspections and building ownership certificates.

In the event that if we and the VIEs lose the rights to any of our land or buildings, uses of such land or buildings may be limited, or we may be forced to relocate and incur additional costs, which may result in disruptions to the operations of our schools and materially and adversely affect our and the VIEs’ business, financial condition and results of operations. In addition, we and the VIEs may in the future encounter problems in obtaining the relevant permits, certificates and approvals for the construction and development of our schools, which may negatively affect our growth strategies. As a result, our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

Capacity constraints of our school facilities could cause us to lose students to our competitors.

The educational facilities of our school are limited in space and size which is also subject to regulatory approval from the competent departments in charge of urban and rural planning. We and the VIEs may not be able to admit all qualified students who would like to enroll in our school due to the capacity constraints of our current school facilities. Qingtian International School’s capacity was 681 as of September 1, 2021 and it recorded a utilization rate of approximately 76.9% as of September 1, 2021. We and the VIEs may not be able to expand our capacity at our current campus unless we and the VIEs relocate to other facilities in the local area with more space. If we and the VIEs fail to expand our capacity as quickly as the demand for our services grows, or if we and the VIEs otherwise fail to grow by acquiring or establishing schools and campuses, we and the VIEs could lose potential students to competitors, and our and the VIEs’ business, financial condition and results of operations may be materially and adversely affected.

Our historical financial and operating results may not be indicative of our future performance and our financial and operating results may be difficult to forecast.

Our financial and operating results may not meet the expectations of public market analysts or investors, which could cause the price of our ADSs to decline. Our revenue, expenses and operating results may vary from year to year in response to a variety of factors beyond our control, including: