Burning Rock Dx(US:BNR)2023-04-19 16:00PART I ITEM 3. KEY INFORMATION The company's operations face principal risks from PRC regulations, its VIE structure, and U.S. compliance requirements - The company's operations are subject to significant PRC legal and operational risks, including potential government intervention, evolving data security laws, and new regulations on overseas listings, which could materially impact business and security value151617 - Burning Rock operates through a VIE structure to comply with PRC restrictions on foreign investment; this structure relies on contractual arrangements that may not be as effective as direct ownership and face risks of being deemed non-compliant by PRC authorities28135136 - The company was identified as a "Commission-Identified Issuer" under the HFCA Act in May 2022 but does not expect to be identified as such after filing this annual report, following renewed PCAOB inspection access in China3233231 VIE and Subsidiaries - Results of Operations (RMB in thousands) | Year Ended December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Revenues | 432,142 | 526,071 | 557,667 | | Net loss | 244,765 | 508,803 | 605,934 | VIE and Subsidiaries - Financial Position (RMB in thousands) | As of December 31, | 2021 | 2022 | | :--- | :--- | :--- | | Total current assets | 556,212 | 917,663 | | Total assets | 659,444 | 1,016,259 | | Total liabilities | 1,215,466 | 1,897,909 | | Total shareholders' (deficit) equity | (556,022) | (881,650) | VIE and Subsidiaries - Cash Flows (RMB in thousands) | Year Ended December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash from/(used in) operating activities | 158,563 | (257,506) | (139,381) | | Net cash used in investing activities | (9,795) | (11,265) | (37,088) | | Net cash (used in)/from financing activities | (30,880) | 304,623 | 377,630 | ITEM 4. INFORMATION ON THE COMPANY Burning Rock is a leading NGS-based cancer therapy selection provider in China with a dual commercial model and a VIE structure A. History and Development of the Company Founded in 2014, the company established a VIE structure, went public on NASDAQ in 2020, and listed on the LSE in 2022 - Commenced operations in 2014 through a VIE structure to facilitate foreign investment287 - Completed its IPO on NASDAQ in June 2020, raising net proceeds of US$234.9 million, and concurrently raised US$25 million in a private placement288 - Listed on the London Stock Exchange in November 2022 and completed a US$10 million share repurchase program289 B. Business Overview The company leads China's NGS-based cancer therapy selection market through a dual central-lab and in-hospital model - The company operates a dual commercial model: a central laboratory that has served over 6,004 physicians from 802 hospitals, and an in-hospital model with 77 partner hospitals as of year-end 2022295366 - Key proprietary technologies include HS library preparation for low-quality samples, UMI technology for liquid biopsy sensitivity, and targeted DNA methylation-based technologies (brELSA™ and brMERMAID™) for early cancer detection300303311 - The early detection product, OverC™ Multi-Cancer Detection Blood Test, was granted Breakthrough Device Designation by the FDA in January 2023 for detecting five cancer types in average-risk adults294342 Central Laboratory Model - Key Operating Data | Year Ended December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Number of patients tested | 25,262 | 28,199 | 27,353 | | Number of ordering physicians | 1,318 | 1,105 | 949 | | Number of ordering hospitals | 312 | 339 | 272 | In-Hospital Model - Cumulative Partner Hospitals | As of December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Contracted partner hospitals | 29 | 41 | 49 | | Total number of partner hospitals | 52 | 64 | 77 | C. Organizational Structure A VIE structure enables operations by navigating PRC restrictions on foreign investment in genomic diagnosis technology - The VIE structure is necessary because foreign ownership is prohibited in businesses involving the development and application of genomic diagnosis and treatment technology in China466 - Key contractual arrangements that provide control include: Exclusive Business Cooperation Agreement, Exclusive Option Agreement, Equity Interest Pledge Agreement, and Power of Attorney467469473474 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS Revenue grew 10.9% in 2022, driven by in-hospital and pharma services, though net loss widened due to R&D investments A. Operating Results Revenues grew 10.9% in 2022, driven by in-hospital and pharma services, while gross margin declined and net loss increased Consolidated Results of Operations (RMB in thousands) | Year Ended December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Total revenues | 429,903 | 507,862 | 563,238 | | Gross profit | 313,922 | 364,146 | 380,039 | | Gross Margin | 73.1% | 71.7% | 67.5% | | Loss from operations | (412,405) | (797,064) | (980,407) | | Net loss | (407,235) | (796,697) | (971,233) | Revenue by Segment (RMB in thousands) | Year Ended December 31, 2022 | Revenue | % of Total | | :--- | :--- | :--- | | Central laboratory business | 314,770 | 55.9% | | In-hospital business | 175,296 | 31.1% | | Pharma research and development services | 73,172 | 13.0% | | Total | 563,238 | 100.0% | - Revenue growth in 2022 was driven by a 6.2% increase in in-hospital business and a 212.8% increase in pharma services, while central laboratory revenue decreased by 1.4%541 - Net loss for 2022 increased by 21.9% to RMB 971.2 million, primarily due to higher operating expenses for R&D, sales, and marketing551 B. Liquidity and Capital Resources The company maintains sufficient liquidity with RMB 905.5 million in cash, primarily from its 2020 IPO and operations - As of December 31, 2022, the company had cash and cash equivalents of RMB 905.5 million (US$131.3 million)562 Consolidated Cash Flow Summary (RMB in thousands) | Year Ended December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (73,543) | (477,886) | (456,808) | | Net cash (used in)/from investing activities | (109,312) | 81,697 | (7,463) | | Net cash from/(used in) financing activities | 2,165,719 | (52,899) | (86,239) | - Capital expenditures were RMB 70.5 million (US$10.2 million) in 2022, a decrease from RMB 206.9 million in 2021576 ITEM 6. DIRECTORS, SENIOR MANANGEMENT AND EMPLOYEES Company governance is characterized by a dual-class share structure granting the founder majority voting power - The company's founder, chairman, and CEO, Mr. Yusheng Han, beneficially owns shares representing 54.9% of the aggregate voting power due to the dual-class share structure636637 - The company implemented a 2022 Long-term Equity Incentive Plan, authorizing up to 11,775,525 Class A ordinary shares with vesting contingent on achieving market valuation targets of US$2 billion, US$4 billion, and US$10 billion606610611 - Total cash compensation paid to directors and executive officers in 2022 was approximately RMB 7.2 million (US$1.0 million)602 - The total number of employees decreased from 1,394 at the end of 2021 to 1,138 at the end of 2022, with Sales & Marketing being the largest functional group (35.9%)632633 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Key related party transactions involve the essential contractual arrangements with the VIE for China operations - The most significant related party transactions are the contractual arrangements with the VIE and its shareholders, which are essential for conducting business in China641 - The company has granted demand, piggyback, and Form F-3 registration rights to its former preferred shareholders, enabling them to have their shares registered for public sale642643645 ITEM 8. FINANCIAL INFORMATION The company reports no material legal proceedings and plans to retain earnings, forgoing dividends for business expansion - The company is not a party to any material legal or administrative proceedings651 - The company does not have any present plan to pay cash dividends and intends to retain future earnings to operate and expand the business652 ITEM 10. ADDITIONAL INFORMATION The corporate structure includes dual-class shares, with significant tax considerations and PFIC risk for U.S. shareholders - The company has a dual-class share structure where Class A ordinary shares have one vote per share, while Class B ordinary shares have six votes per share and are convertible into Class A shares661 - There is a significant risk that the company might be treated as a Passive Foreign Investment Company (PFIC) for the current taxable year, which could result in adverse U.S. federal income tax consequences for U.S. holders717719 - If the company is deemed a PRC resident enterprise, it could be subject to a 25% tax on its worldwide income, and dividends paid to non-PRC shareholders may be subject to a 10% withholding tax707710 ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Primary market risks include foreign currency exchange fluctuations and credit risk from PRC-based cash deposits - The company's primary market risk is foreign currency exchange risk, as most revenues and costs are denominated in RMB while a portion of cash is held in USD756 - Credit risk is concentrated with cash and cash equivalents, with 89% held at major financial institutions in the PRC as of December 31, 2022753 - The company is not exposed to significant interest rate risk as it had no outstanding borrowings as of December 31, 2022758 ITEM 15. CONTROLS AND PROCEDURES Management and the independent auditor confirmed the effectiveness of disclosure controls and internal financial reporting controls - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022773 - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022775 - The independent registered public accounting firm issued an unqualified attestation report on the effectiveness of the company's internal control over financial reporting as of December 31, 2022777 - The company completed a share repurchase program, buying back 3,023,138 Class A ordinary shares in the form of ADSs for a total of US$10 million785 PART III ITEM 17. FINANCIAL STATEMENTS The report includes audited consolidated financial statements with an unqualified opinion from the independent auditor Consolidated Balance Sheet Data (RMB in thousands) | As of December 31, | 2021 | 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 1,431,317 | 905,451 | | Total Assets | 2,278,587 | 1,587,467 | | Total Liabilities | 433,276 | 429,126 | | Total Shareholders' Equity | 1,845,311 | 1,158,341 | Consolidated Statement of Comprehensive Loss Data (RMB in thousands) | For the Year Ended December 31, | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Total revenues | 429,903 | 507,862 | 563,238 | | Gross profit | 313,922 | 364,146 | 380,039 | | Loss from operations | (412,405) | (797,064) | (980,407) | | Net loss | (407,235) | (796,697) | (971,233) | | Loss per share (basic and diluted) | (6.88) | (7.65) | (9.35) | - The independent auditor, Ernst & Young Hua Ming LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of December 31, 2022801802 - The auditor's report highlights a critical audit matter related to revenue recognition for the in-hospital business, specifically the complexity in determining the standalone selling price for bundled reagent kits809