Lixiang Education Holding Co (LXEH) Risk Analysis

On March 15, 2019, the National People's Congress promulgated the Foreign Investment Law of PRC or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the Law of the PRC on Chinese-Foreign Equity Joint Ventures, the Law of the PRC on Chinese-Foreign Contractual Joint Ventures, and the Wholly Foreign-invested Enterprise Law. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. For instance, the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment. Conducting operations through contractual arrangements has been adopted by many PRC-based companies, and has been adopted by our Company to establish control of the VIEs. Since the Foreign Investment Law is relatively new, uncertainties still exist in relation to its interpretation and implementation, and failure to take timely and appropriate measures to cope with the regulatory-compliance challenges could result in material and adverse effect on us. For instance, although the Foreign Investment Law does not explicitly classify contractual arrangement as a form of foreign investment, it still leaves a leeway for future laws and if future laws, administrative regulations or provisions stipulates contractual arrangements as a way of foreign investment, then whether our contractual arrangements will be recognized as foreign investment, whether our contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how our contractual arrangements will be handled are uncertain. In the extreme case-scenario, we may be required to unwind the contractual arrangements and/or dispose relevant business operations, which could have a material and adverse effect on our and the VIEs' business, financial condition and result of operations.

Our contractual arrangements provide for the resolution of disputes through arbitration in accordance with the arbitration rules of the China International Economic and Trade Arbitration Commission in Beijing. Our contractual arrangements contain provisions to the effect that the arbitral body may award remedies over the shares and/or assets of the VIEs, injunctive relief and/or winding up of the VIEs. In addition, our contractual arrangements contain provisions to the effect that courts in the Cayman Islands are empowered to grant interim remedies in support of the arbitration pending the formation of an arbitral tribunal. Under PRC laws, an arbitral body granting any injunctive relief or provisional or final liquidation order to preserve the assets of or any equity interest in Chinese legal entities in case of disputes must submit the application to the court in China. Therefore, such remedies may not be available to us, notwithstanding the relevant contractual provisions contained in our contractual arrangements. PRC laws allow an arbitral body to award the transfer of assets of or an equity interest in China in favor of an aggrieved party. In the event of non-compliance with such award, enforcement measures may be sought from the court. However, the court may or may not support the award of an arbitral body when deciding whether to take enforcement measures. Under PRC laws, courts of judicial authorities in the PRC generally would not grant injunctive relief or the winding-up order against an entity as interim remedies to preserve the assets or shares in favor of any aggrieved party. As a result, in the event that the VIEs or any of the registered shareholders breaches any of the contractual arrangements, we may not be able to obtain sufficient remedies in a timely manner, and our ability to exert effective control over the VIEs and conduct the education business could be materially and adversely affected.

Investors in the ADSs are not purchasing equity securities of our subsidiaries that have substantive business operations in China but instead are purchasing equity securities of a Cayman Islands holding company. We are a Cayman Islands holding company that conducts all of its operations and operates its business in China through its PRC subsidiaries and VIEs through contractual agreements. Such structure involves unique risks to investors in the ADSs. Recently, the PRC government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to VIEs and private schools, which may challenge the validity of our contractual arrangements. In the event that the PRC government determines that the contractual arrangements constituting part of the VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, we may be unable to assert our contractual rights over the assets of the VIEs, and our ADSs or ordinary shares may decline in value or become worthless. Prior to August 31, 2021, we and the VIEs primarily operated primary and secondary school in Baiyun campus and Yijing campus-Featured Division of Lianwai School through a series of contractual arrangements with the VIEs. Under 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. Meanwhile, we and the VIEs have entered into a series of contractual arrangements with Qingtian International School, Lishui International School and Langfang School. The contractual arrangements enable us to: (i) exercise effective control over the VIEs; (ii) receive substantially all of the economic benefits of the VIEs in consideration for the services provided by us; and (iii) have an exclusive option to purchase all of the equity interests in the VIEs when and to the extent permitted under PRC law. Therefore, we are able to consolidate the financial results of the VIEs in our consolidated financial statements in accordance with U.S. GAAP. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, we cannot assure you that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with current or future PRC laws or regulations. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities may have broad discretion in interpreting these laws and regulations. If such regulations change or are interpreted differently, it may result in our inability to assert contractual control over the assets of our PRC subsidiaries or the VIEs that conduct all or substantially all of our operations. In the event we are unable to enforce the Contractual Arrangements or we experience significant delays or other obstacles in the process of enforcing these Contractual Arrangements, we may not be able to exert control over the VIEs and may lose control over the assets owned by the VIEs.

According to the applicable PRC laws, parties to a lease agreement are required to file the lease agreements for registration and obtain property leasing filing certificates for their leases. As of the date of the annual report, we and the VIEs have entered into seven lease agreements with third-party landlords for using the school buildings, facilities and dormitories and failed to register seven lease agreements under which we and the VIEs are tenant. The failure to register the lease agreements will not affect the validity of such agreements. However, we and the VIEs may be required by relevant government authorities to file the lease agreements to complete the registration formalities and may be subject to a fine for non-registration within the prescribed time limit, which may range from RMB1,000 to RMB10,000 per lease agreement. The imposition of the above fines could require us to make additional efforts and/or incur additional expenses, any of which could adversely affect our and the VIEs' business, financial condition and results of operations. The registration of these lease agreements to which we and the VIEs are a party requires additional steps to be taken by the respective other parties to the lease agreement which are beyond our control. We and the VIEs cannot assure you that the other parties to our lease agreements will be cooperative or that we and the VIEs can complete the registration of these lease agreements and any other lease agreements that we and the VIEs may enter into in the future.

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.

We 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. We may also establish and/or acquire new foreign-invested enterprises in China, pay in their registered capital and provide loans to them. We 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 we 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, we may increase the registered capital and complete the relevant procedures which include (i) altering our registration with local 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 our schools must be approved by the Ministry of Civil Affairs of the PRC or the MCA or their respective local counterparts. As of the date of the annual report, we have not increased, and plan to increase, the registered capital of Liandu WFOE to approximately US$15 million. We 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 3 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 we 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 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 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 we 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. Moreover, we intend to establish new foreign-invested enterprises in order to facilitate our and the VIEs' business expansion and make additional investments in the manners described above. However, we cannot assure you that our intended investments to these entities will always succeed as we planned, or at all. On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or Circular 19. Circular 19 stipulates that the use of capital by foreign-invested enterprises shall follow the principles of authenticity and self-use within the business scope of enterprises. According to the Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or Circular 28, promulgated on October 23, 2019 by SAFE, restrictions on the domestic equity investment by non-investment foreign-funded enterprises with their capital funds have been canceled. Non-investment foreign-funded enterprises are allowed to make domestic equity investment with their capital funds in accordance with the law on the premise that the existing Negative List for foreign investment access are not violated and the projects invested thereby in China are true and compliant. However, SAFE and competent banks may have different interpretations of SAFE Circular 28, resulting in uncertainties in practice. The aforementioned existing restrictions and future restrictions may significantly limit our ability to transfer the net proceeds from our initial public offering or any other offering of additional equity securities to Liandu WFOE or the VIEs or invest in or acquire any other companies in the PRC.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We and the VIEs receive our revenue in Renminbi. Under our current corporate structure, our income is primarily derived from dividend payments from Liandu WFOE. Shortages in the availability of foreign currency may restrict the ability of Liandu WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, conversion of Renminbi is permitted, without prior approval from the SAFE, for current account transactions, including profit distributions, interest payments and expenditures from trade-related transactions, as long as certain procedural requirements are complied with. However, any existing and future restrictions on currency exchange in China may limit our ability to convert cash derived from our operating activities into foreign currencies to fund expenditures denominated in foreign currencies. If the foreign exchange restrictions in China prevent us from obtaining U.S. dollars or other foreign currencies as required, we may not be able to pay dividends in U.S. dollars or other foreign currencies to our Shareholders. To the extent cash is generated in our PRC Subsidiaries or the VIEs, 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 or the VIEs' 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 and the VIEs to transfer assets by the PRC government. If certain PRC laws and regulations, including existing laws and regulations and those enacted or promulgated in the future were to become applicable to our Hong Kong Subsidiary in the future, and to the extent cash is generated in our Hong Kong Subsidiary, and to the extent assets (other than cash) in our business are located in Hong Kong or held by a Hong Kong entity and may need to be used to fund operations outside of Hong Kong, such funds or assets may not be available due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries and the VIEs to transfer funds or assets by the PRC government. Furthermore, there can be no assurance that the PRC government will not intervene or impose restrictions or limitations on our ability to transfer or distribute cash within its organization, which could result in an inability or prohibition on making transfers or distributions to entities outside of mainland China and Hong Kong and adversely affect its business. Saved as the foregoing limitations imposed by the PRC government as described hereto, there are currently no limitations on our or our subsidiaries' ability to transfer cash to investors.

Since 1979, newly introduced PRC laws and regulations have significantly enhanced the protections of interest relating to foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and regulations may not always be consistent, and enforcement of these laws and regulations involves significant uncertainties, any of which could limit the available legal protections. In addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules and contractual terms, and it may be difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we and the VIEs may enjoy in the PRC. These uncertainties may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating expenses and costs, and materially and adversely affect our and the VIEs' business and results of operations. In particular, PRC laws and regulations regarding the private fundamental education industry have been rapidly evolving in recent years. The relevant PRC government authorities may promulgate new laws and regulations or materialize draft laws and regulations or consultation papers regulating the private fundamental education industry in the future which may impose limitations and restrictions on our and the VIEs' business operation. Moreover, developments in the private fundamental education industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may impose limitations and restrictions on the private fundamental education market players, including us, which could materially and adversely affect our and the VIEs' business and operations.

Our high school students in Qingtian International School and Lishui International School 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, Qingtian International School and Lishui International School 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 Qingtian International School and Lishui International School fail to adequately prepare their students for admission tests in the everyday classroom teaching and any test preparation courses they offer, their students' admissions rates to PRC colleges may decrease and their 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 and Lishui 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.

Before the promulgation of the Decision in 2016, the principal regulations governing private education in China are the Promotion Law and the Regulations on the Implementation of the Non-State Education Promotion Law of the PRC. Under these regulations, a private school may elect to be a school that does not require reasonable returns or a school that requires reasonable returns. A private school that does not require reasonable returns cannot distribute dividends to its school sponsors. A private school whose school sponsor requires reasonable returns must consider factors such as items and criteria for the school's fees, the ratio of the funds used for education-related activities to the total fees collected, the school's operational level and educational quality when determining the percentage of the school's net income that would be distributed as reasonable returns. However, the Promotion Law in force at the time did not provide a formula or guidelines for determining what constitutes a "reasonable return". PRC laws and regulations require a private school the school sponsor of which requires reasonable returns to make an annual appropriation of 25% of its after-tax income to its development fund prior to payments of reasonable returns, while in the case of a private school that does not require reasonable returns, this amount is at least 25% of the annual increase in the net assets of the school, if any. Such appropriations are required to be used for the construction or maintenance of the school or for the procurement or upgrading of educational equipment. Furthermore, none of the current PRC laws and regulations set forth any requirements or restrictions on a private school's ability to operate its education business that differ based on whether such school's sponsor requires reasonable returns. On September 1, 2017, the Decision became effective. According to the Decision, private schools can be established as non-profit or for-profit entities, with the exception of schools providing compulsory education, which can only be established as non-profit entities. According to the Decision, there is no longer a distinction between schools of which the school sponsors require reasonable returns and schools of which the school sponsors do not require reasonable returns. The sponsor of a non-profit private-run school shall not gain proceeds from school running, and the cash surplus of the school shall be used for school running. There are uncertainties involved in interpreting and implementing the Decision with respect to various aspects of the operations of a private school. Therefore, we cannot assure that the detailed rules and regulations to be promulgated by local governmental authorities would not impose restrictions on the VIEs' ability to operate private schools or to make payments to Liandu WFOE under the contractual arrangements, which may have a material adverse impact on our and the VIEs' business operations and prospects.

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 high school or a vocational school in the PRC, we are required to obtain a private school operation permit from the local departments of education, human resources and social security, 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. After consulting with our PRC legal counsel, Beijing DeHeng Law offices, we are of the view that, as of the date of the annual report, except for the circumstances which would not in the aggregate have a material adverse effect on our financial conditions, Lixiang, 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. We cannot assure you that Lixiang, 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. As advised by our PRC legal counsel, Beijing DeHeng Law Offices, if Lixiang, our PRC subsidiaries or 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 Lixiang, 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. As of the date of the annual report on Form 20-F, the administrative procedures for changing the sponsor of Langfang School with the PRC governmental authorities, especially for renewing the Permit for Establishment of Privately-run Schools, have not been completed due to the internal procedures of the competent authorities and we and the VIEs are still in the process of active communication with such local authorities. If the above administrative procedures cannot be completed, Langfang School might be determined as changing its sponsor without authorization according to the Promotion Law and the 2021 Implementation Rules by the competent authorities, and thus Langfang School, the sponsor and actual controller and members of decision-making institution or supervisory institution of Langfang School shall be subject to administrative punishment. For Langfang School, any unlawful earning shall be confiscated, and if the circumstances are serious, it shall be ordered to stop enrolling students and its business license shall be revoked. In addition, since the former sponsor is still a Langfang School's registered sponsor with the relevant authorities, if it exercises the rights and interests of sponsor in accordance with relevant laws, regulations and the filed articles of association of Langfang School, the normal operation and management of Langfang School may be affected. The aforesaid rights and interests of the registered sponsor include knowing the operation and financial status of Langfang School, recommending council members and supervisors, and consulting the meeting minutes of the council and the financial/accounting statements of Langfang School. Although we believe that we can currently exert sufficient control over Langfang School, however, if the above situation occurs, we will have to spend additional time and cost to eliminate the relevant adverse effects. As of the date of this annual report, the adjustment of the cooperation arrangement between Beijing P.X. and Hainan Technical School for compliance purposes has not been completed. We and the VIEs cooperate with Hainan Technical School, a reputable vocational education school in Haikou City, Hainan Province, through Hainan Jiangcai, a subsidiary of Beijing P.X., to jointly design and develop curriculum programs based on the prevalent market trends and employer preferences. According to the cooperation arrangement made prior to the acquisition of Beijing P.X., Hainan Jiangcai would designate their staffs to teach courses in Hainan Technical School, and the tuition, accommodation and miscellaneous fees paid by the students would be charged by Beijing P.X. on behalf of Hainan Technical School and then transferred back to Hainan Technical School after deducting the service fees payable to Beijing P.X. However, as stipulated in relevant regulations, teachers shall be directly recruited by Hainan Technical School, and the tuition, accommodation and miscellaneous fees shall also be directly charged by Hainan Technical School. To comply with the relevant regulations, Beijing P.X. has deliberated with Hainan Technical School for the adjustment of the cooperation, while the parties have not yet agreed on any specific and detailed adjustment plans as of the date of this annual report. Beijing P.X. and Hainan Technical School may be ordered to return the tuition, accommodation and miscellaneous fees and be imposed fines, and the revenue from the cooperation may be adversely affected.

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 April 7, 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. We and the VIEs have established an education services network through Liandu WOFE and its subsidiaries in which Lixiang holds equity ownership interests, and their contractual arrangements, commonly known as the VIE structure, with the VIEs incorporated in China. For details regarding the changes of our subsidiaries and the VIEs, see "Item 4. Information on the Company-A. History and Development of the Company." 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 its subsidiaries, Qingtian International School, Lishui International School and Langfang School. Such uncertainties include, among others: - Uncertainties with respect to liquidation 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. - Uncertainties with respect to school fees 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. - Uncertainties with respect to supporting measures 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. - Uncertainties with respect to transactions with related parties 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 ordered 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 terminated the contractual arrangements with Lianwai School. To minimize disruptions to existing students enrolled in Lianwai School, we and the VIEs continued to offer essential services to Lianwai School without recognizing any revenue. Meanwhile, we deconsolidated Lianwai School commencing from September 1, 2021 and presented it as a discontinued operation in current and comparative period financial statements. 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 30 million. We have been unable to receive any revenue for providing these premises, facilities and services since the 2021 Implementation Rules came into effect. Lishui Mengxiang is no longer defined as an affiliated entity of Lianwai School. Furthermore, our contractual arrangements may be regarded as related party transactions of Qingtian International School, Lishui International School and Langfang 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 (in the case of Qingtian International School and Lishui International School) and Hebei Province (in the case of Langfang School) 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, the VIEs and our and the VIEs' directors, senior management and other employees who are PRC residents that have been granted options will be subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, or SAFE Circular 7, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. See "Item 4. Information on the Company-B. Business Overview-Regulation-PRC Laws and Regulations Relating to Foreign Investment in Education-Regulations on Stock Incentive Plans." We will try our best efforts to comply with these requirements upon the granting of the options under our 2020 Equity Incentive Plan. However, we cannot assure you that they can successfully register with SAFE in full compliance with the rules. If the participants or we fail to complete the SAFE registrations, the participants or we may be subject to fines and legal sanctions. It will adversely affect our ability to pay under the share incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises' ability to distribute dividends to us. Uncertainties also exist in our ability to adopt additional share incentive plans for our directors and employees under PRC law because of the regulatory restrictions.

The SAFE promulgated the Circular on the Management of Offshore Investment and Financing and Round Trip Investment By Domestic Residents through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch prior to making capital contribution in a special purpose vehicle in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents or entities' legally owned assets or equity interests in domestic enterprises or offshore assets or interests. On February 13, 2015, SAFE issued Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies, or Circular 13, which took effect on June 1, 2015, pursuant to which, the power to accept SAFE registration was delegated from local SAFE to local qualified banks where the assets or interest in the domestic entity was located. In addition, such PRC residents or entities must update such registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. Chinese residents may undertake subsequent operations (including repatriation of profits and dividends) upon completion of such registration change formalities. Ms. Fen Ye, Ms. Hong Ye and Ms. Fang Ye who are known to us as being PRC residents have completed the initial foreign exchange registrations as required by SAFE Circular 37 and Circular 13. The formalities for updating the registration to reflect the share transfer from Ms. Fang Ye to Ms. Fen Ye has been submitted to the qualified bank, and the amendment registration has been completed as of the date of this annual report. However, we cannot assure you that all existing and future shareholders or beneficial owners of ours who are PRC residents or entities will be able to update and/or obtain any applicable registrations or approvals required by SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of Liandu WFOE, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit Liandu WFOE's ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our and the VIEs' business and prospects.

The General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the "Opinions on Severely Cracking Down on Illegal Securities Activities According to Law," or the "Opinions," which were made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These Opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. The aforementioned policies and any related implementation rules to be enacted may subject us to additional compliance requirement in the future. The official guidance to act upon, and interpretation of the Opinions, remain unclear in several respects at this time. Therefore, we cannot assure you that we and the VIEs will remain fully compliant with all new regulatory requirements of the Opinions or any future implementation rules on a timely basis, or at all.

We are a holding company and rely principally on dividends paid by our subsidiaries in China for our cash needs, including paying dividends and other cash distributions to our shareholders to the extent we choose to do so, servicing any debt we and the VIEs may incur and paying our operating expenses. The income for our PRC subsidiaries, especially Liandu WFOE, in turn depends on the service fees paid by the VIEs. Current PRC regulations permit our subsidiaries in China to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Under the applicable requirements of PRC law, our PRC subsidiaries may only distribute dividends after they have made allowances to fund certain statutory reserves. These reserves are not distributable as cash dividends. Pursuant to the Law on the Promotion of Private Education, sponsors of for-profit private schools are entitled to retain the profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the PRC company law and other relevant laws and regulations. Sponsors of non-profit private schools are not entitled to any distribution of profits from their schools and all revenue must be used for the operation of the schools. According to 2021 Implementation Rules, a non-profit private school should allocate no less than 10% of its audited annual non-restricted net asset increase, or a for-profit private school should allocate no less than 10% of its audited annual net income, to its development, respectively. In addition, prior to the specific Implementation Rules of the Law on the Promotion of Private Education being promulgated by the State Council and other relevant regulations promulgated by other local and regional governments, at the end of each fiscal year, each of our schools that are private schools in China is required to allocate a certain amount to its development fund for the construction or maintenance of the school properties or purchase or upgrade of school facilities. In particular, our schools that require reasonable returns must allocate no less than 25.0% of their annual net income, and our schools that do not require reasonable returns must allocate no less than 25.0% of their annual increase in the net assets of the school for such purposes. However, the relevant authorities have yet to promulgate any detailed implementation rules and regulations under the 2021 Implementation Rules. We remain uncertain as to the timing and substance of the rules under the Law on the Promotion of Private Education and the 2021 Implementation Rules to be promulgated, and how such rules will impact our operation. Furthermore, if our subsidiaries or the VIEs in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any such restrictions may materially affect such entities' ability to make dividends or make payments, in service fees or otherwise, to us, which may materially and adversely affect our and the VIEs' business, financial condition and results of operations.

Pursuant to the Law on the Promotion of Private Education, sponsors of private schools may choose to establish schools as either non-profit or for-profit schools. Sponsors are not permitted to establish for-profit schools that provide compulsory education services. Sponsors of for-profit private schools are entitled to retain the profits from their schools and any operating surplus may be allocated to the sponsors pursuant to the PRC company law and other relevant laws and regulations. Sponsors of non-profit private schools are not entitled to any distribution of profits from their schools and all revenue must be used for the operation of the schools. As a holding company, our ability to generate profits, pay dividends and other cash distributions to our shareholders under the Law on the Promotion of Private Education, the 2021 Implementation Rules and other relevant laws and regulations are affected by many factors, including whether our schools are characterized as for-profit or non-profit schools, the profitability of our schools, and our ability to receive dividends and other distributions from our PRC subsidiary, Liandu WFOE, which in turn depends on the service fees paid to Liandu WFOE from the VIEs. Liandu WFOE has respectively entered into exclusive management services and business cooperation agreements with each of the VIEs, Ms. Fen Ye and Ms. Hong Ye, as the shareholders of the VIEs, pursuant to which Liandu WFOE has the exclusive right to provide comprehensive technical and business support services to the VIEs. As of August 2021, our right to receive the service fees from Lianwai School and other affiliated entities did not, to our knowledge, contravene any PRC laws and regulations then in force. Likewise, the payment of service fees under our contractual arrangements should not be regarded as the distribution of returns, dividends or profits to the sponsors of our schools under the PRC laws and regulations then in force. However, according to the 2021 Implementation Rules, private schools providing compulsory education shall not conduct any transaction with any related party. As a result, the clauses or provisions of the exclusive management services and business cooperation agreements, in relation to related party transactions between Lianwai School and Liandu WFOE, are not legally enforceable since September 1, 2021. Therefore, we executed an acknowledgment agreement on April 20, 2022 to confirm all the terms of rights and obligations relating to Lianwai School and the directors appointed by the sponsor under the contractual arrangements in relation to Lianwai School, which shall be terminated on August 31, 2021. Since September 1, 2021, we have stopped transacting with Lianwai School. However, to keep Lianwai School providing compulsory education in operations, we continued to provide essential services without recognizing any revenues relating to such activities to schools providing compulsory education in our discontinued operations, which are key to the normal daily operation of it. As of the date of the annual report, schools providing compulsory education to which we continue to provide services have not received any further rectification requirements or penalty notices from the relevant competent authorities, and the possibility and impact of illegal risks are still unable to be assessed clearly. We are continuously assessing the impact of relevant regulations on our and the VIEs' business and making necessary measures and efforts to comply with the requirements under these regulations and implementations. Furthermore, we and the VIEs entered into a series of contractual arrangements with respect to the operation of Qingtian International School, Lishui International School and Langfang School. The contractual arrangements enable us to receive substantially all of the economic benefits of the VIEs in consideration for the services provided by us. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, and we cannot assure you that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with current or future PRC laws or regulations. In particular, the validity of our contractual arrangements may be challenged, and our corporate structure may need to be restructured to comply with the new regulations, which may be time-consuming and expensive and impose additional restrictions on our and the VIEs' business expansion and may further adversely affect our and the VIEs' business operations and results of operations. See "-Risks Related to Our Corporate Structure-Our and the VIEs' private education service business is subject to extensive regulation in China. We and the VIEs may be subject to severe penalties if the PRC government finds that the agreements that establish the structure for operating our and the VIEs' business in China do not comply with applicable PRC laws and regulations."

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We and the VIEs could face material and adverse tax consequences if the PRC tax authorities determine that the Business Cooperation Agreement and Exclusive Technical Service and Business Consulting Agreement entered into, among others, the VIEs and Liandu WFOE does not represent an arm's-length price and adjust any of those entities' income in the form of a transfer pricing adjustment. A transfer pricing adjustment could increase our tax liabilities. In addition, PRC tax authorities may form the view that our subsidiaries or the VIEs have improperly minimized their tax obligations and we and the VIEs may not be able to rectify any such incident within the limited timeline required by PRC tax authorities. As a result, PRC tax authorities may impose late payment fees and other penalties on us for under-paid taxes, which may materially and adversely affect our and the VIEs' business, financial condition and results of operations.

The 2021 Implementation Rules state that private schools enjoy preferential taxation policies, in particular, non-profit private schools enjoy the same preferential taxation policies with those for government-run schools. However, Qingtian International School and Langfang School no longer enjoy the previous preferential policies on enterprise income tax since 2022, and the other preferential taxation policies shall remain unchanged for the time being. We cannot assure you that the preferential tax and other treatments contemplated by us will not change or that they will apply or continue to apply to Qingtian International School and Langfang School. The uncertainty in securing such preferential tax treatments could affect our results of operations. See "Item 10. Additional Information-E. Taxation-People's Republic of China Taxation."

The Standing Committee of the NPC enacted the Labor Contract Law in 2008, and amended it on December 28, 2012. The Labor Contract Law introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws. Under the Labor Contract Law, except where an employee under a fixed-term labor contract, an employer is obligated to sign a permanent labor contract with any employee who has worked for the employer for more than ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term, subject to certain exceptions. In addition, the PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law. Under the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately, to pay the social insurance premiums and housing funds for their employees. As of December 31, 2023, we and the VIEs had made social insurance contribution for the PRC-based employees based on the relevant PRC laws and regulations and practical measures. If we and the VIEs fail to, or are deemed to have failed to, make adequate social insurance and housing fund contributions in the future, we and the VIEs may be required to make supplemental contributions and/or subject to overdue fees and/or fines and our and the VIEs' business, financial condition and results of operations may be adversely affected. See "Item 4. Information on the Company-B. Business Overview-Regulation-PRC Laws and Regulations Relating to Labor Protection." These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our and the VIEs' employment practices may not be at all times be deemed in compliance with the regulations. As a result, we and the VIEs could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.

China's economy has experienced increases in labor costs in recent years and the overall economy and the average wages in China are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our employee costs, including salaries and welfare, will continue to increase. Unless we are able to pass on these increased labor costs to our students and their parents by increasing tuition, meal and accommodation service fees, our profitability and results of operations may be materially and adversely affected. In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits to designated government agencies for the benefit of our employees. Compared with its predecessors, the current Labor Contract Law of the PRC imposes stricter requirements on employers in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees' probation and unilaterally terminating labor contracts, further increasing our labor-related costs such as limiting our ability to terminate employment of some of our employees or otherwise change our employment or labor practices in a cost-effective manner. In addition, as the interpretation and implementation of labor-related laws and regulations are still developing, we cannot assure you that our employment practices have been or will at all times be deemed in compliance with the labor-related laws and regulations in China. If we are subject to severe penalties in connection with labor disputes or government investigations, our and the VIEs' business, financial condition and results of operations will be adversely affected.

New trends in the economy of China and rapid developments in the industries may change the type of skills required for vocational school graduates in the labor market. This requires us to continually develop, update and enhance our vocational education programs and course materials to adapt to the needs of the labor market in China. We may be unable to update our courses in a timely and cost-effective manner, or at all, to keep pace with changes in market requirements. Any inability to track and respond to these changes in a cost-effective and timely manner or to tailor our vocational education programs to the market demand in China would render our programs less attractive to students, which may materially and adversely affect our reputation and ability to continue to attract students and cause us to lose market share.

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.

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.

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.

The relation between China and the United States is constantly changing. There has been a "trade war" between the two countries during recent years, the United States imposed additional import tariffs on specified products imported from China. As a result, China has responded by imposing retaliatory tariffs on goods exported from the United States. Tensions exist in other areas such as political, social and health issues, including the disagreements in relation to the COVID-19 pandemic. In light of the ongoing tensions between China and the United States, there is a risk that our and the VIEs' business and our listing status may be adversely affected by trade restrictions, sanctions and other policies that may be implemented. As we and the VIEs operate in China, any deterioration in political or trade relations might cause a public perception in the United States or elsewhere that might cause our and the VIEs' education services to become less attractive. The United States lawmakers have introduced several bills intended to protect American investments in Chinese companies. The PWG criticized China's failure to uphold international commitment to transparency and called for recommendations to protect U.S. investors from China's failure to allow audits of U.S.-listed Chinese companies. The PWG may impact U.S.-listed Chinese companies if strict compliance with audit requirements and U.S. law or new listing rules or governance standards were imposed. Furthermore, there have been media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have a material and adverse impact on the performance of the stocks of the China-based issuers listed in the United States. In addition, political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, tensions over Taiwan, legislation passed by the U.S. Senate banning all imports from Xinjiang, sanctions imposed by the U.S. Department of Treasury on certain officials of Xinjiang's regional government, the Hong Kong Special Administrative Region and the central government of the PRC and the new executive orders issued by U.S. President Joe Biden in June 2021 that barring American investment into Chinese firms with purported ties to defense or surveillance technology sectors, which was expanded on an earlier investment blacklist issued by former U.S. President Donald J. Trump. Under President Joe Biden's administration, causes of US-China friction remains. Ongoing political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our and the VIEs' business, prospects, financial condition and results of operations. Changes in political conditions and changes in the state of China-U.S. relations are difficult to predict and could adversely affect our and the VIEs' business, operating results and financial condition. We cannot predict what effect any changes in China-U.S. relations may have on our ability to access capital or effectively operate our and the VIEs' business in China. Moreover, any political or trade controversies between the United States and China, whether or not directly related to our and the VIEs' business, could cause investors to be unwilling to hold or buy our ADSs and consequently cause the trading price of our ADSs to decline.

COVID-19 pandemic had a severe and negative impact on the Chinese and the global economy since 2019. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of the COVID-19, the global macroeconomic environment was facing numerous challenges. The economic, political and social conditions in the PRC differ from those in more developed countries in many respects, including structure, government involvement, level of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and trade balance position. Before the adoption of its reform and opening up policies in 1978, the PRC was primarily a planned economy. In recent years, the PRC government has been reforming the PRC economic system and government structure. For example, the PRC government has implemented economic reform and measures emphasizing the utilization of market forces in the development of the PRC economy in the past four decades. These reforms have resulted in significant economic growth and social prospects. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country. We cannot predict whether the resulting changes will have any adverse effect on our current or future business, financial condition or results of operations and the VIEs'. Despite these economic reforms and measures, the PRC government continues to play a significant role in regulating industrial development, allocation of natural and other resources, production, pricing and management of currency, and there can be no assurance that the PRC government will continue to pursue a policy of economic reform or that the direction of reform will continue to be market friendly. Our ability to successfully expand our and the VIEs' business operations in the PRC depends on a number of factors, including macro-economic and other market conditions, and credit availability from lending institutions. Stricter credit or lending policies in the PRC may affect our customers' consumer credit or consumer banking business, and may also affect our ability to obtain external financing, which may reduce our ability to implement our expansion strategies. We cannot assure you that the PRC government will not implement any additional measures to tighten credit or lending standards, or that, if any such measure is implemented, it will not adversely affect our future results of operations or profitability. Demand for our and the VIEs' services and our business, financial condition and results of operations may be materially and adversely affected by the following factors: - political instability or changes in social conditions of the PRC;- changes in laws, regulations, and administrative directives or the interpretation thereof;- measures which may be introduced to control inflation or deflation; and - changes in the rate or method of taxation. These factors are affected by a number of variables which are beyond our control.

From time to time, we and the VIEs could face allegations of trademark, copyright, patent and other intellectual property rights infringement of third parties. Such allegations of intellectual property right infringements could come from our competitors and third parties which operate in other industries. In the event that we or the VIEs are sued by the intellectual property owners or licensees, or we or the VIEs receive a cease and desist letter or a court order regarding alleged infringements, we and the VIEs may have to discontinue to use the brand name and may be subject to claims or other financial losses. In the event that any lawsuit is filed against us and the VIEs and such claims were to prevail, it could have an adverse effect on our and the VIEs' business, financial conditions and results of operations. In addition, we and the VIEs will have to invest in additional resources in establishing new brand names, which may take time and cause us significant costs and efforts, which in turn affects our ability to develop and grow.