| Organization and Principal Activities | 1. Organization
and Principal Activities
(a) Principal
activities Lixiang
Education Holding Co., Ltd. (formerly known as Lianwai Education Group Limited, the “Company”) was incorporated on September 6,
2018 under the law of the Cayman Islands as an exempted company with limited liability. The Company’s original name was Lianwai
Education Group Limited. The Company changed its name to Lixiang Education Holding Co., Ltd. on May 26, 2020. The Company, through
its subsidiaries and consolidated variable interest entities (“VIEs”) (collectively referred to as the “Group”)
is primarily engaged in providing education services including high school and vocational education services through Zhejiang Lishui
Mengxiang Education Development Company Limited, Qingtian Overseas Chinese International School (“Qingtian International School”)
and Langfang City Rail Transit Technical School (“Langfang School”), and comprehensive human resource service in the People’s
Republic of China (the “PRC”). On
May 14, 2021, the General Office of the State Council of the People’s Republic of China (the “PRC State Council”)
announced the Implementation Rules, which became effective on September 1, 2021. Under the Implementation Rules, social organizations
and individuals are prohibited from controlling a private school that provides compulsory education, referring to nine years of curriculum
education mandated by the PRC, 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. As a result of the effectiveness of the Implementation
Rules, the Company would no longer be able to use its power under the contractual arrangements as disclosed in Note 2(c) to direct the
relevant activities that would most significantly affect the economic performance of those schools and hence, has lost control on August 31,
2021 over Lianwai School “Affected Entity”. Accordingly, the carrying amount related to the net assets of the Affected Entity
were deconsolidated from the consolidated financial statements of the Group as of August 31, 2021. Significant
equity transactions On
October 1, 2020, the Company completed its IPO on the NASDAQ Global Market of 3,333,400 American Depositary Shares (“ADS”).
Each ADS represents 5 ordinary shares. The offering was at a price of US$9.25 per ADS for a total offering size of approximately US$30.8
million. The net proceeds raised from the IPO amounted to approximately RMB 170.7 million (US$26.2 million) after deducting underwriting
discounts and commissions and other offering expenses. On
August 31, 2021, the Company acquired 100% of the sponsorship interest of Qingtian International School from Qingtian Zhongyi Education
Investment Co., Ltd under the consideration of RMB23 million. On
January 1, 2022, the Group acquired 100% equity interest of Beijing P.X. from Beijing Shangkun Education Technology Development Co.,
Ltd. (“Beijing S.K.”) with the consideration of RMB53.4 million. As
of December 31, 2022, the Company’s major subsidiaries and VIEs are as follows:
Name
of subsidiaries and VIE Date of establishment
/ Place
of Percentage of Principal activities
Wholly
owned subsidiaries of the Company:
Lianwai
Investment Co., Ltd. (“Lianwai investment”) Established BVI 100 % Investment
Hong
Kong Mengxiang Education Development Group Limited (“HK Mengxiang”) Established Hong Kong 100 % Investment
Zhejiang
Mengxiang Consulting Services Co., Ltd. (“Liandu WFOE”) Established PRC 100 % Investment
Variable
Interest Entities (“VIEs”)
Zhejiang
Lishui Mengxiang Education Development Company Limited (“Lishui Mengxiang VIE”) Established PRC 100 % Operation of
Qingtian
Overseas Chinese International School (“Qingtian International School”) Acquired PRC 100 % Operation of
Langfang
City Rail Transit Technical School (“Langfang School”) Acquired PRC 100 % Operation of
Beijing
Chuangmei Weiye Enterprise Management Co., Ltd. (“Chuangmei Weiye”) Acquired PRC 100 % Comprehensive human resources service
Hainan
Jiangcai Vocational Skills Training School Co. Ltd. (“Hainan Jiangcai”) Acquired PRC 100 % Operation of
(b) Group
history The
Group started its business through Lishui Mengxiang VIE and Lianwai School VIE. To facilitate offshore financing, an offshore corporate
structure was formed in 2018, which was carried out as follows:
1) On
September 6, 2018, the Company was incorporated in the Cayman Islands by Ms. Fen
Ye, Ms. Fang Ye, and Ms. Hong Ye (the “founders.”).
2) On September 11, 2018, Lianwai investment was incorporated in British Virgin Islands with 100% ownership by the Company.
3) On September 20, 2018, Mengxiang HK was incorporated in Hong Kong with 100% ownership by Lianwai investment.
4) On October 10, 2018, Liandu WFOE was incorporated in the PRC with 100% ownership by HK Mengxiang.
5) On August 13, 2020, Lishui Xianke was incorporated in the PRC with 100% ownership by Liandu WFOE. In
order to comply with the PRC laws and regulations which prohibit or restrict foreign investments into companies involved in restricted
businesses, the Group provides education services in the PRC through certain PRC domestic companies, whose equity interests are held
by certain management members of the Company or onshore nominees of certain investors of the Company (“Nominee Shareholders”). The
Company obtained control over these PRC domestic companies by entering into a series of Contractual Arrangements in October 2018. After
that Lishui Mengxiang VIE, Lianwai Kindergarten and Lianwai School VIE became VIEs, whose primary beneficiary is Liandu WFOE, and the
shareholders of these affiliate Chinese entities became the Nominee Shareholders at that date. Contractual Arrangements were subsequently
revised in November 2018 and March 2019 (the “VIE Agreements”) with these PRC domestic companies and their respective shareholders.
As a result, Lianwai Kindergarten ceased to be VIE and the VIEs consisted of Lishui Mengxiang VIE and Lianwai School VIE (“affiliate
Chinese entities”). Reorganization is accounted for as a common control transaction under the pooling of interest method. Accordingly,
the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout
the periods. On
August 31, 2021, the ability of Group to use its power under the contractual arrangements with Lishui Mengxiang VIE to direct the
relevant activities that would most significantly affect the economic performance of the Affected Entity had ceased due to Implementation
Rules. The Group has executed the Acknowledgment Agreement on April 20, 2022 to confirm all the terms of rights and obligations relating
to Lianwai School and the director appointed by the sponsor under the VIE Agreements, which shall be terminated on August 31, 2021. Meanwhile,
the Group has entered into a series of Contractual Agreements through Liandu WFOE, Qingtian International School and the Council Members
of Qingtian International School. On March 28, 2023, the Group has entered into a series of Contractual Agreements through Liandu WFOE,
Langfang School and the Council Members of Langfang School, (together with Qingtian School Contractual Agreements, as “new VIE
Agreements”). After that Lishui Mengxiang VIE and Qingtian International School became VIEs on August 31, 2021, and Langfang School
became VIE (collectively, “new VIEs”) on March 28, 2023, whose primary beneficiary is Liandu WFOE, and the shareholders of
new VIEs became the Nominee Shareholders at that date. These
Contractual Agreements cannot be unilaterally terminated by the Nominee Shareholders, or the new VIEs. As a result, the Company maintains
the ability to control these new VIEs, and is entitled to substantially all of the economic benefits from these new VIEs. Accordingly,
the Group had consolidated the financial position and operating results of affiliate Chinese entities, new VIEs in the consolidated financial
statements of the Company during the year ended December 31, 2020, 2021 and 2022. The Company’s VIE includes (1) affiliate Chinese
entities, prior to August 31, 2021; and (2) the new VIEs after August 31, 2021. The
principal terms of the agreements entered into amongst the VIEs, their respective shareholders and the Liandu WFOE are further described
below.
(c) Contractual
Agreements with VIEs Loan
Agreements Pursuant
to the loan agreements entered into between Liandu WFOE and affiliate Chinese entities, and between Liandu WFOE and new VIEs, Liandu
WFOE can grant interest-free loans to Lishui Mengxiang VIE, or Beijing P.X. with the sole purpose of providing funds necessary for the
business operations and development of Langfang School and Qingtian International School. These business loan amounts can be injected
into Langfang School and Qingtian International School as capital or other operation means, and cannot be accessed for any personal uses.
There is no fixed term for each loan under the loan agreement except that Liandu WFOE can unilaterally decide when to recover the loan
and the loan agreements shall remain effective during the operation term of Langfang School and Qingtian International School and any
periods that are renewable pursuant to PRC laws. Liandu WFOE has the right to unilaterally terminate these agreements after giving notice
in advance, including that Liandu WFOE and/or its designated entities have fully exercised their options to purchase all the (direct
and indirect) equities held by Nominee Shareholders of the relevant VIE in accordance with the Exclusive Call Option Agreements (as described
in the following paragraph), while the shareholders of such consolidated affiliated Chinese entities have no right to unilaterally terminate
these agreements. As of December 31, 2021 and 2022, no loans have been granted yet. Exclusive
Call Option Agreements Under
the exclusive call option agreements, each Nominee Shareholders of the affiliate Chinese entities and new VIEs granted Liandu WFOE the
exclusive and irrevocable right to purchase or to designate entities at their discretion to purchase part or all of the equity interests
in the VIEs from the Nominee Shareholders, in the case that the PRC laws and regulations allows, at any time for a purchase price subject
to the lowest price permitted by PRC laws and regulations. Liandu WFOE or its designated representatives have sole discretion as to when
to exercise such options, either in part or in full. The affiliate Chinese entities and new VIEs (collectively the “VIEs”),
and their Nominee Shareholders have agreed that without Liandu WFOE’s prior written consent, their respective Nominee Shareholders
cannot sell, transfer, assign or dispose of or create any encumbrance on any of the VIEs’ equity interests, assets, and business.
Also, as agreed, the VIEs cannot declare any dividend or change the capitalization structure of the VIEs and cannot enter into any loan,
guarantee or investment agreements. Furthermore, the Nominee Shareholders have agreed that any proceeds but not limited to the sales
of the Nominee Shareholders’ equity interest in relevant VIEs should be gratuitously paid to Liandu WFOE or one or more person(s)
at their discretion. The agreements will remain in force during the operation terms of the relevant 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 exercise their options
to purchase all the equities held by Nominee Shareholders in accordance with the Exclusive Call Option Agreements. In addition, Liandu
WFOE has the right to unilaterally terminate these agreements after 30 days advance written notice, while the Nominee Shareholders and
relevant VIEs have no right to unilaterally terminate these agreements. Proxy
Agreements and Power of Attorney for Shareholders Pursuant
to the proxy agreements and power of attorney, each equity holder of Lishui Mengxiang VIE appointed the Liandu WFOE as their attorney-in-fact
to exercise all shareholder rights under PRC law and the relevant articles of association, including but not limited to, calling and
attending shareholders’ meetings, voting on their behalf on all matters requiring shareholder approval, including but not limited
to designating and electing the directors and other senior management of the VIEs, as well as liquidating and dismantling the VIEs. Each
power of attorney will remain in force during the operation term of Lishui Mengxiang VIE and any periods that are renewable pursuant
to the PRC laws, and will terminate automatically when Liandu WFOE and/or its designated entities fully exercise their options to purchase
all the equities held by the Nominee Shareholders in accordance with the Exclusive Call Option Agreements. In addition, Liandu WFOE has
the right to unilaterally terminate these agreements after 30 days advance written notice, while the Nominee Shareholders and Lishui
Mengxiang VIE have no right to unilaterally terminate these agreements. Proxy
Agreements and Power of Attorney for School’s Sponsors, Directors and Council Members Pursuant
to the proxy agreements and power of attorney, Lishui Mengxiang VIE has irrevocably authorized and entrusted Liandu WFOE to exercise
all its rights as sponsor of both Langfang School and Qingtian International School to the extent permitted by the PRC laws. The agreements
shall remain effective during the operation term of Qingtian International School and Langfang School, and any periods that are renewable
pursuant to PRC laws, and will terminate automatically when Liandu WFOE and/or its designated entities fully exercise their options to
purchase all the equities held by the Nominee Shareholders in accordance with the Exclusive Call Option Agreement. In addition, the Liandu
WFOE has the right to unilaterally terminate these agreements after 30 days advance written notice, while Langfang School, Qingtian International
School and their sponsors, council members and appointed directors have no right to unilaterally terminate these agreements. Business
Cooperation Agreement and Exclusive Technical Services and Business Consulting Agreement Pursuant
to the Business Cooperation Agreement and Exclusive Technical Services and Business Consulting Agreement, Liandu WFOE has agreed to provide
affiliate Chinese entities and new VIEs with technical services, management support services, consulting services and intellectual property
licenses required for the conducting of private education business activities, including but not limited to preparation, selection and/or
recommendation of schools textbooks, recruitment of teachers and other staff, training support, admissions support, public relations
maintenance, market research and development, management and marketing consulting and other related services. The affiliate Chinese entities
and new VIEs shall pay to Liandu WFOE service fees 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 Langfang School and 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 affiliate Chinese entities and new VIEs, provided that any adjusted amount shall
not exceed the amount mentioned above. The affiliate Chinese entities and new VIEs do not have any right to make any such adjustment.
Liandu WFOE, as appropriate, will exclusively own any intellectual property rights arising from the performance of these agreements.
The aforementioned agreements will terminate automatically when Liandu WFOE and/or its designated entities fully exercise their options
to purchase all the equities held by the Nominee Shareholders in accordance with the Exclusive Call Option Agreements. In addition, Liandu
WFOE retains the exclusive right to terminate the agreements at any time by delivering a written notice 30 days in advance to the applicable
consolidated affiliate Chinese entities and new VIEs. Equity
Pledge Agreements Pursuant
to the equity pledge agreements among Liandu WFOE, Lishui Mengxiang VIE and the Nominee Shareholders of Lishui Mengxiang VIE, the Nominee
Shareholders shall pledge all of their equity interests in Lishui Mengxiang VIE, and Beijing P.X. to Liandu WFOE as collateral for all
of their payments to direct, indirect and derivate losses and losses of predictable profits of the PRC subsidiaries (“Secured Debts”)
and to secure their obligations under the above agreements. In the event of a breach by the affiliate Chinese entities and new VIEs or
any of their Nominee Shareholders of their contractual obligations, Liandu WFOE has the right to deal with the equity interests pledged
in the following ways: i) purchasing or designating entities at their discretion to purchase part or all of the equity interests in the
affiliate Chinese entities and new VIEs from the Nominee Shareholders, subject to the lowest price permitted by PRC laws and regulations;
ii) selling the equity interests pledged through auction or discount, and preferentially compensated from the sales price; iii) other
means agreed between Liandu WFOE and the Nominee Shareholders, after giving written notice to the Nominee Shareholders. The equity pledge
agreements will expire when the Nominee Shareholders have completed all their obligations under the above agreements or the Secured Debts
are fully settled, or when Liandu WFOE unilaterally delivers a written notice 30 days in advance. Spousal
Undertakings Pursuant
to the Spousal Undertakings, each Nominee Shareholder, who is a natural person, and their spouses unconditionally and irrevocably agreed
that the equity interests in the affiliate Chinese entities and new VIEs held by and registered in the name of their spouse will be disposed
of pursuant to the equity pledge agreements, the exclusive call option agreements, the loan agreement and the proxy agreement and power
of attorney. Each of their spouses agreed not to assert any rights over the equity interests in the affiliate Chinese entities and new
VIEs held by their respective spouses. In addition, in the event that any spouse obtains any equity interests in the affiliate Chinese
entities and new VIEs held by their spouse for any reason, they agreed to be bound by similar obligations and agreed to enter into similar
contractual agreements.
(d) Combined
financial information of the VIEs The
following combined financial information of the Group’s VIEs as of December 31, 2021 and 2022 and for the years ended December
31, 2020, 2021 and 2022 was included in the accompanying consolidated financial statements of the Group as follows:
As of December 31,
2021 2022
RMB RMB US$
ASSETS
Current assets:
Cash 1,453,323 33,364,634 4,837,417
Amounts due from inter-company entities 51,536,540 57,331,944 8,312,351
Prepayments and other current assets 100,990,604 79,871,947 11,580,344
Accounts receivable, net - 430,960 62,483
Inventories - 7,148 1,036
Total current assets 153,980,467 171,006,633 24,793,631
Non-current assets:
Property and equipment, net 164,037,622 159,247,545 23,088,724
Land use rights, net 36,767,329 35,820,632 5,193,503
Intangible assets, net 6,667 1,666 242
Goodwill 26,644,407 70,369,837 10,202,667
Deferred tax assets - 2,349,291 340,615
Right-of-use assets - 7,580,536 1,099,074
Total non-current assets 227,456,025 275,369,507 39,924,825
Total assets 381,436,492 446,376,140 64,718,456
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings 77,000,000 67,500,000 9,786,580
Accounts payable 741,169 960,213 139,218
Deferred revenue, current 1,204,033 8,640,036 1,252,687
Salary and welfare payable 2,007,834 3,310,211 479,935
Amounts due to a related party 323,400 323,400 46,889
Tax payable 628,081 842,274 122,118
Income tax payable - 57,831 8,385
Amount due to inter-company entities 16,754,595 35,000,000 5,074,523
Accrued liabilities and other current liabilities 16,708,810 17,694,499 2,565,460
Amounts due to Affected Entity, current 288,261,447 21,225,707 3,077,438
Long-term loans and borrowings, current - 3,925,000 569,072
Operating lease liabilities, current - 3,866,910 560,649
Total current liabilities 403,629,369 163,346,081 23,682,954
Non-current liabilities
Amounts due to Affected Entities, non-current - 194,552,414 28,207,449
Operating lease liabilities, non-current - 3,558,380 515,917
Long-term loans and borrowings, non-current - 1,606,250 232,884
Total non-current liabilities - 199,717,044 28,956,250
Total liabilities 403,629,369 363,063,125 52,639,204
For
the years ended December 31,
2020 2021 2022
RMB RMB RMB US$ (Note 2(g))
Net revenues
from continuing operations 17,070,602 20,112,033 45,924,957 6,658,493
Net revenues from discontinued
operation 154,160,699 102,006,339 - -
Net income/(loss) from
continuing operations 7,894,293 (467,382 ) (6,777,710 ) (982,676 )
Net income/(loss) from
discontinued operation 29,638,700 (244,068,780 ) - -
Net cash provided by
operating activities 47,477,961 29,764,431 43,586,442 6,319,440
Net cash provided by/(used
in) investing activities 19,424,757 (153,593,942 ) (456,381 ) (66,169 )
Net cash (used in)/provided
by financing activities (81,928,356 ) 115,671,061 (11,218,750 ) (1,626,566 )
Net changes in cash (15,025,638 ) (8,158,450 ) 31,911,311 4,626,705 In
accordance with the aforementioned agreements, the Company has the power to direct the activities of the VIEs, and have the control of
their assets. Therefore, the Company considers that there is no other asset in the VIEs that can be used only to settle obligations of
the respective VIE, except for the education facilities assets, registered capital and the PRC statutory reserves, as of December 31,
2021 and 2022. As the VIEs are incorporated as schools and limited liability company under the PRC Company Law, the creditors of the
VIEs do not have recourse to the general credit of the Company. There is currently no contractual arrangement that would require the
Company to provide additional financial support to the VIEs. As the Group is conducting certain businesses in the PRC through the VIEs,
the Group may provide additional financial support on a discretionary basis in the future, which could expose the Group to a loss. The
VIEs’ assets comprise both recognized and unrecognized revenue-producing assets. The recognized revenue-producing assets mainly
include buildings, land use rights, computers and electronic devices. The unrecognized revenue-producing assets mainly consist of patents,
trademarks and assembled workforce which are not recorded in the financial statements of the VIEs as they do not meet the recognition
criteria set in ASC 350-30-25. There
is no VIE where the Company has a variable interest, but is not the primary beneficiary.
(e) Risks
associated with VIE arrangements Foreign
investment in the education industry in PRC is extensively regulated and subject to various restrictions. Specifically, high school is
restricted industries for foreign investors, and foreign investors are only allowed to invest in such industries in cooperative ways
with domestic investors, provided that domestic investors play a dominant role in such cooperation. In addition, foreign investment in
education institutions in the PRC must be in the form of cooperation between Chinese educational institutions and foreign educational
institutions and the foreign portion of the total investment in a Sino-foreign education institute must be below 50%. Although foreign
investment in high schools is not prohibited, based on the operation experience, Liandu WFOE in China is still ineligible to independently
or jointly invest and operate high schools, including Qingtian International School. To comply with PRC laws and regulations, the Group
have entered into a series of contractual arrangements pursuant to which Liandu WFOE receives the economic benefits from our VIEs. If
the contractual arrangements that establish the structure for operating our business in China are found to violate any PRC laws or regulations
in the future or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including
the Ministry of Education of People’s Republic of China, or the MOE, which regulates the education industry, the Ministry of Commerce,
or MOFCOM, which regulates the foreign investment in China, and the Civil Affairs Bureau, which regulates the registration of schools
in China, would have broad discretion in dealing with such violations, including:
● revoking
the business and operating licenses of the Company’s PRC subsidiaries or VIEs;
● discontinuing
or restricting the operations of any related-party transactions among Liandu WFOE or VIEs;
● imposing
fines or other requirements with which the Company or Liandu WFOE or VIEs may not be able
to comply;
● requiring
the Company to restructure operations in such a way as to compel the Company to establish
new entities, re-apply for the necessary licenses or relocate the businesses, staff
and assets;
● imposing
additional conditions or requirements with which the Company may not be able to comply; or
● restricting
the use of proceeds from our additional public offering or financing to finance the business
and operations in China. Similar
ownership structure and contractual arrangements have been used by many China-based companies listed overseas, including a number of
education companies listed in the United States. To the Company’s knowledge, none of the fines or punishments listed above has
been imposed on any of these public companies, including companies in the education industry. However, the Company cannot assure that
such fines or punishments will not be imposed on the Company in the future. If any of the above fines or punishments is imposed on the
Company, the Company’s business, financial condition and results of operations could be materially and adversely affected. If any
of these penalties results in the Company’s inability to direct the activities of the VIEs and their respective subsidiaries that
most significantly impact their economic performance, and/or our failure to receive the economic benefits from the VIEs and their respective
subsidiaries, the Company may not be able to consolidate the VIEs and their respective subsidiaries in our financial statements in accordance
with U.S. GAAP. However, the Company do not believe that such actions would result in the liquidation or dissolution of the Company,
the wholly-owned subsidiaries in China or the VIEs or their respective subsidiaries. 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 the Company to establish
control of 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 the Company’s contractual arrangements will be
recognized as foreign investment, whether the contractual arrangements will be deemed to be in violation of the foreign investment access
requirements and how the Company’s contractual arrangements will be handled are uncertain. In the extreme case-scenario, the Company
may be required to unwind the contractual arrangements and/or dispose relevant business operations, which could have a material and adverse
effect on the Company’s business, financial condition and result of operations. As
of December 31, 2021, based on all relevant facts and circumstances, the Company concluded that it no longer has a controlling interest
in the Affected Entity due to the effectiveness of the Implementation Rules, which resulted to the deconsolidation of the Affected Entity.
Nevertheless, the legal enforceability of the new VIE agreements are not impacted by the Implementation Rules. |
