| Organization and Basis of Presentation | 1. ORGANIZATION AND BASIS OF PRESENTATION Burning Rock Biotech Limited (the “Company”) is a limited liability company incorporated in the Cayman Islands on March 10, 2014 . The Company does not conduct any substantive operations on its own but instead conducts its business operations through its subsidiaries, the variable interest entity (“VIE”) and subsidiaries of the VIE. The Company, together with its subsidiaries, the VIE and the VIE’s subsidiaries (collectively, the “Group”) are principally engaged in developing and providing cancer therapy selection tests in the People’s Republic of China (the “PRC” or “China”). On June 12, 2020, the Company completed its initial public offering (“IPO”) on the NASDAQ Global Select Market. The Company sold 13,500,000 ADSs, each representing one ordinary share, at US As of December 31, 2021, the Company’s principal subsidiaries, VIE and VIE’s subsidiaries are as follows:
Entity Date of Place of Percentage of legal ownership Principal
Subsidiaries
BR Hong Kong Limited April 1, 2014 Hong Kong 100 % Investment holding
Beijing Burning Rock Biotech Co., Ltd. (the “WFOE”) June 13, 2014 PRC 100 % Trading
Burning Rock Biotechnology (Shanghai) Co., Ltd. July 4, 2016 PRC 100 % Research and development
Burning Rock Dx LLC August 28, 2019 United States 100 % Cancer therapy selection test
VIE
Burning Rock (Beijing) Biotechnology Co., Ltd. January 7, 2014 PRC Nil Holding
VIE’s subsidiaries
Guangzhou Burning Rock Dx Co., Ltd. March 18, 2014 PRC Nil Cancer therapy selection test and sales of reagent kits
Guangzhou Burning Rock Medical Equipment Co., Ltd. January 6, 2015 PRC Nil Facilitation of laboratory equipment sales
Guangzhou Burning Rock Biotechnology Co., Ltd. January 23, 2018 PRC Nil Cancer therapy selection test and sales of reagent kits To comply with PRC laws and regulations which prohibit and restrict foreign ownership of business involving the development and application of genomic diagnosis and treatment technology, the Group conducts its business in the PRC principally through the VIE and the VIE’s subsidiaries. The equity interests of the VIE are legally held by PRC shareholders (the “Nominee Shareholders”). Despite the lack of majority ownership, the Company through the wholly foreign owned entity (“the WFOE”) has effective control of the VIE through a series of contractual arrangements (the “VIE agreements”) and a parent-subsidiary relationship exists between the WFOE and the VIE since 2014. Through the VIE agreements, the Nominee Shareholders of the VIE effectively assigned all of their voting rights underlying their equity interests in the VIE to the WFOE, and therefore, the WFOE has the power to direct the activities of the VIE that most significantly impact its economic performance. The WFOE also has the right to receive economic benefits that potentially could be significant to the VIE. Therefore, the WFOE is considered the primary beneficiary of the VIE and consolidates the VIE in accordance with Accounting Standards Codification (“ASC”) Topic 810-10 , Consolidation: Overall. The following is a summary of the VIE agreements: Exclusive Business Cooperation Agreement Pursuant to the exclusive business cooperation agreement entered into amongst the WFOE and the VIE on June 20, 2014, the WFOE provides exclusive business support, technology services and consulting services in return for service fees, which is adjustable at the sole discretion of the WFOE. Without the WFOE’s consent, the VIE cannot procure services from any third party or enter into similar service arrangements with any other third party, except for the ones appointed by the WFOE. The agreement was effective for 20 years from June 20, 2014 and automatically renew for 10 years if all parties have no objection. Power of Attorney The Nominee Shareholders signed Power of Attorney on June 20, 2014 to irrevocably appoint the WFOE, or its designated party, as the attorney-in-fact Exclusive Option Agreement Pursuant to the exclusive option agreements entered into amongst the VIE, the Nominee Shareholders and the WFOE on June 20, 2014, the Nominee Shareholders irrevocably granted the WFOE an exclusive option to request the Nominee Shareholders to transfer or sell any part or all of its equity interests in the VIE to the WFOE, or its designees. The purchase price of the equity interests in the VIE is equal to the minimum price required by PRC law. Any proceeds received by the Nominee Shareholders from the exercise of the right shall be remitted to the WFOE, to the extent permitted under the PRC laws. Without the WFOE’s prior written consent, the VIE and the Nominee Shareholders may not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans or guarantees and request any dividends or other form of assets. This agreement is not terminated until all of the equity interest of the VIE has been transferred to the WFOE or the person(s) designated by the WFOE. Pursuant to the equity interest pledge agreements entered into amongst the WFOE, the VIE and the Nominee Shareholders on June 20, 2014, the Nominee Shareholders pledged all of their equity interests in the VIE to the WFOE as collateral to secure their obligations under the exclusive business cooperation agreement. The WFOE is entitled to all dividends during the effective period of the share pledge except as it agrees otherwise in writing. If the VIE or any of the Nominee Shareholders breaches its contractual obligations, the WFOE is entitled to certain rights regarding the pledged equity interests, including the right to receive proceeds from the auction or sale of all or part of the pledged equity interests of VIE in accordance with the PRC law. The Nominee Shareholders agree not to create any encumbrance on or otherwise transfer or dispose of their respective equity interests in the VIE, without the prior consent of the WFOE. The Power of Attorney, Exclusive Option Agreement and Equity Interest Pledge Agreement were amended and restated on August 27, 2015, July 1, 2016, April 19, 2018 and January 4, 2019 to reflect the new nominee shareholders appointed by the Series A, Series B and Series C preferred shareholders and the resulting equity ratio adjustments from the preferred shareholders’ investment. On October 21, 2019, the VIE Agreements were supplemented by the following terms:
(1) Exclusive option agreement
• The VIE irrevocably grants the WFOE an exclusive asset purchase option whereby the WFOE has the right to purchase or designate another party to purchase part or all of the assets of the VIE as permitted under the PRC laws. The purchase price of the VIE’s assets is equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher; and
• The WFOE has the right to unilaterally amendment, supplement and termination of this agreement.
(2) Exclusive Business Cooperation Agreement
• In exchange for these services, the VIE will pay a service fee, equal to the VIE’s profit before tax, after recovering any accumulated losses of the VIE and its subsidiaries from the preceding fiscal year, and deducting working capital, expenses, tax and a reasonable amount of operating profit according to applicable tax law principles and tax practice; and
• The agreement will be in effect for 10 years unless the WFOE unilaterally terminates the agreement by giving written notification at least thirty days prior to the expiration of the agreement. The WFOE may at its sole discretion unilaterally extend the term of this agreement prior to its expiration upon notice to the VIE.
(3) Equity Interest Pledge Agreement
• The Nominee Shareholders pledged all of their respective equity interests in the VIE to the WFOE as continuing first priority security interest to guarantee the performance of these Nominee Shareholders and the VIE’s obligations under the power of attorney, the exclusive option agreement and the exclusive business cooperation agreement; and
• This agreement will remain effective until all the contractual obligations have been satisfied in full under all the agreements mentioned above.
(4) Financial support undertaking letter
• Pursuant to the financial support undertaking letter, the Company is obligated and hereby undertakes to provide unlimited financial support to the VIE, to the extent permissible under the applicable PRC laws and regulations, whether or not any such operational loss is actually incurred. The Company will not request repayment of the loans or borrowings if the VIE or its Nominee Shareholders do not have sufficient funds or are unable to repay.
(5) Voting proxy agreement
• Pursuant to the voting proxy agreement, the WFOE irrevocably and unconditionally commits to execute its rights under the power of attorney in accordance with the instructions from the Company. As a result of the amended agreements on October 21, 2019, the power and the rights pursuant to the power of attorney have since been effectively reassigned to the Company which has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The Company is also obligated to absorb the expected losses of the VIE through the financial support as described above. The Company and the WFOE, as a group of related parties, hold all of the variable interests of the VIE. The Company has been determined to be most closely associated with the VIE within the group of related parties and has replaced the WFOE as the primary beneficiary of the VIE since October 2019. As the VIE was subject to indirect control by the Company through the WFOE immediately before and direct control immediately after the VIE Agreements were supplemented, the change of the primary beneficiary of the VIE was accounted for as a common control transaction based on the carrying amount of the net assets transferred. In the opinion of the Company’s legal counsel, (i) the ownership structure of the WFOE and its VIE is in compliance with PRC laws and regulations; (ii) the contractual arrangements with the VIE and their shareholders are valid and binding, and not in violation of current PRC laws or regulations; (iii) the voting proxy agreement between the Company and the WFOE is valid in accordance with the articles of association of the Company and Cayman Islands Law. However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current VIE Agreements and businesses to be in violation of any existing or future PRC laws or regulations and could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the nominee shareholders of the VIE may have interests that are different from those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the contractual agreements with the VIE. In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC laws or regulations, the Company may be subject to penalties, including but not be limited to, revocation of business and operating licenses, discontinuing or restricting business operations, restricting the Company’s right to collect revenues, temporary or permanent blocking of the Company’s internet platforms, restructuring of the Company’s operations, imposition of additional conditions or requirements with which the Company may not be able to comply, or other regulatory or enforcement actions against the Company that could be harmful to its business. The imposition of any of these or other penalties could have a material adverse effect on the Company’s ability to conduct its business. The following table sets forth the assets and liabilities of the VIE and subsidiaries of the VIE included in the Group’s consolidated balance sheets:
As of December 31,
2020 2021
RMB RMB US$
Cash and cash equivalents 149,736 185,850 29,164
Restricted cash 263 — —
Accounts receivable (net of allowances of RMB23,983 and RM38,922 (US$6,108) as of December 31, 2020 and 2021, respectively) 88,217 92,197 14,467
Contract assets (net of allowances of RMB3,494 and RM14,478 (US$2,272) as of December 31, 2020 and 2021, respectively) 22,534 42,391 6,652
Amounts due from related parities 212 — —
Inter-company receivables* 8,432 75,560 11,857
Inventories 61,374 119,257 18,714
Prepayments and other current assets 17,548 40,957 6,427
Total current assets 348,316 556,212 87,281
Property and equipment, net 32,342 42,623 6,688
Intangible assets, net 77 633 100
Other non-current 5,797 8,346 1,310
Operating right-of-use — 51,630 8,102
Total non-current 38,216 103,232 16,200
TOTAL ASSETS 386,532 659,444 103,481
Accounts payable 26,871 27,102 4,253
Deferred revenue 74,402 133,489 20,947
Inter-company payables* 495,526 897,633 140,858
Capital lease obligations, current 4,816 — —
Accrued liabilities and other current liabilities 54,271 89,976 14,117
Customer deposits 1,120 972 153
Short-term borrowings 7,370 2,370 372
Current portion of long-term borrowings 266 — —
Current portion of operating lease liabilities — 25,692 4,032
Total current liabilities 664,642 1,177,234 184,732
Deferred government grant 263 — —
Other non-current — 8,563 1,344
Non-current — 29,669 4,656
Total non-current 263 38,232 6,000
TOTAL LIABILITIES 664,905 1,215,466 190,732
* Inter-company receivables/payables represent balances of VIE and subsidiaries of the VIE due from/to the Company and the Group’s consolidated subsidiaries. The table sets forth the results of operations of the VIE and subsidiaries of the VIE included in the Group’s consolidated statements of comprehensive loss:
For the years ended December 31,
2019 2020 2021
RMB RMB RMB US$
Revenues 381,460 432,142 526,071 82,552
Net loss (72,015 ) (244,765 ) (508,803 ) (79,842 ) The table sets forth the cash flows of the VIE and subsidiaries of the VIE included in the Group’s consolidated statements of cash flows:
For the years ended December 31,
2019 2020 2021
RMB RMB RMB US$
Net cash ( ) generated from (46,993 ) 158,563 (257,506 ) (40,407 )
Net cash used in investing activities (14,052 ) (9,795 ) (11,265 ) (1,768 )
Net cash generated from (used in) 34,540 (30,880 ) 304,623 47,801 As of December 31, 2020 and 2021, there were no pledges or collateralization of the assets of the VIE and the VIE’s subsidiaries. The amount of the net liabilities of the VIE and subsidiaries of VIE was RMB278,373 and RMB556,022 (US$87,251) as of December 31, 2020, and 2021, respectively. The creditors of the VIE and subsidiaries of the VIE’s third-party liabilities did not have recourse to the general credit of the primary beneficiary in the normal course of business. The VIE holds certain assets, including detection equipment and related equipment for use in their operations. The Company did not provide nor intend to provide additional financial or other support not previously contractually required to the VIE and subsidiaries of the VIE during the years presented. |
