Burning Rock Biotech Ltd annual report, Q4 FY2023

Burning Rock Biotech Limited — 2023 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly operating data are disclosed for certain metrics. Financial statements are prepared under U.S. GAAP and reported primarily in RMB.

Business context

Burning Rock is a Cayman Islands holding company conducting substantially all operating activities in China through subsidiaries and a PRC variable interest entity, or VIE, under contractual arrangements. The company provides next-generation sequencing-based cancer therapy selection tests through central laboratories and in-hospital laboratories, and provides research and companion-diagnostics services to pharmaceutical companies. It is also developing minimal residual disease and early cancer detection products, including OverC.

Central laboratory model: 20,129 patients tested in 2023, compared with 27,353 in 2022.
In-hospital model: 87 partner hospitals in 40 cities at December 31, 2023, including 59 contracted hospitals and 28 pipeline hospitals.
OverC received FDA and NMPA Breakthrough Device Designations in 2023.
The company’s ADSs trade on Nasdaq and the London Stock Exchange under “BNR.”

Financial performance and position

Metric	2023	2022	Change
Revenue	RMB537.4 million	RMB563.2 million	Down 4.6%
Gross profit	RMB363.2 million	RMB380.0 million	Down 4.4%
Gross margin	67.6%	67.5%	Up 0.1 percentage point
Operating loss	RMB669.3 million	RMB980.4 million	Improved 31.7%
Net loss	RMB653.7 million	RMB971.2 million	Improved 32.7%
R&D expense	RMB347.0 million	RMB421.9 million	Down 17.7%
Selling and marketing expense	RMB247.7 million	RMB370.3 million	Down 33.1%
General and administrative expense	RMB437.8 million	RMB568.3 million	Down 23.0%
Net cash used in operating activities	RMB255.8 million	RMB456.8 million	Improved 44.0%
Cash, cash equivalents and restricted cash	RMB615.2 million	RMB925.3 million	Down 33.5%

2023 revenue consisted of RMB232.8 million from the central laboratory business, RMB188.7 million from the in-hospital business and RMB115.9 million from pharma research and development services. Product sales increased to RMB192.4 million from RMB171.7 million, while service revenue declined to RMB345.0 million from RMB391.5 million.

The company reported no long-term borrowings at December 31, 2023. Total liabilities were RMB271.6 million and shareholders’ equity was RMB768.4 million. Operating lease obligations totaled RMB12.9 million, including RMB9.1 million due within one year. The company stated that available cash and anticipated financing cash flows should cover current and anticipated general corporate needs for at least 12 months from issuance of the financial statements.

Material changes versus the prior comparable period

Central laboratory revenue fell 26.0%, primarily reflecting the reduction in patients tested and lower monitoring-package revenue.
In-hospital revenue increased 7.6%, supported by ten additional contracted hospitals; contracted hospitals increased from 49 to 59.
Pharma research and development revenue increased 58.4% to RMB115.9 million, increasing its share of total revenue to 21.6% from 13.0%.
Central laboratory gross margin increased to 78.7% from 73.9%, primarily due to lower inventory write-downs and royalty and license fees.
In-hospital gross margin decreased to 61.5% from 63.9%, principally due to higher laboratory depreciation.
Operating expenses declined by RMB327.9 million, reflecting reorganizations, lower professional fees, lower marketing and conference costs, and lower credit-loss provisions.
Share-based compensation remained material at RMB260.7 million, or approximately 48.5% of reported revenue.
Employees declined to 786 at year-end from 1,138 in 2022.
Cash declined by RMB310.1 million during 2023, despite lower operating cash burn. Financing cash outflows included RMB41.9 million of employee share incentive refunds and RMB7.0 million of treasury-share purchases.

Guidance, outlook, risks and unusual items

The filing does not provide numerical revenue, earnings or cash-flow guidance. Management expects to continue investing in early cancer detection, MRD, additional NMPA-approved products, automation and expansion of the in-hospital model. Central laboratory revenue is expected to remain significant but more stable, while the in-hospital model is viewed as the higher-growth channel.

Liquidity and going concern: The company remains loss-making and uses cash in operations. Management believes liquidity is sufficient for at least the next 12 months, but additional equity or debt financing may be required and could cause dilution or impose restrictions.
China and VIE exposure: The company does not own equity in the VIE. Its ability to consolidate the VIE and receive economic benefits depends on contractual arrangements whose enforceability and regulatory treatment under PRC law remain uncertain.
Regulatory risk: Medical-device approvals, NMPA renewals, human genetic resources requirements, data-security and privacy rules, cybersecurity review and overseas-listing filing requirements may affect operations or financing.
Market and product risk: Adoption depends on hospitals, physicians, patients and pharmaceutical partners. Product errors, clinical-validation failures, delayed approvals or inability to commercialize early-detection and MRD products could materially affect results.
Supplier concentration: Two suppliers represented 65% of equipment and raw-material purchases in 2023, increasing disruption risk.
Receivables and contract assets: Credit-loss allowances totaled RMB97.2 million at year-end, including RMB58.8 million against contract assets. The company recorded a RMB23.0 million contract-asset credit-loss provision in 2023.
Listing risk: Nasdaq notified the company in December 2023 that its ADS bid price had been below US$1 for 30 consecutive business days. The company planned to change the ADS ratio from one ADS representing one Class A ordinary share to one ADS representing ten Class A ordinary shares, subject to the stated compliance process.
Ownership and governance: Class B shares carry six votes per share. Founder and CEO Yusheng Han held approximately 55.0% of aggregate voting power as of March 31, 2024.
Auditing and controls: Ernst & Young Hua Ming LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective at December 31, 2023. The PCAOB stated in December 2022 that it could inspect accounting firms in mainland China and Hong Kong, but future access remains a disclosed risk.
Unusual accounting items: Revenue recognition for bundled in-hospital reagent kits relies on estimated standalone selling prices and was identified as the critical audit matter. Breakage revenue from monitoring packages was RMB10.9 million in 2023.

Most important facts for investors to verify

Whether the planned ADS ratio change restored Nasdaq minimum bid-price compliance and whether any subsequent listing action occurred.
Whether the decline in central laboratory testing volume stabilized after 2023 and whether in-hospital growth is translating into recurring reagent-kit revenue.
Cash-burn trends, remaining cash runway and the timing and terms of any future equity or debt financing.
The collectability of accounts receivable and contract assets, including the significant contract-asset allowance.
Progress toward NMPA approvals and renewals, OverC commercialization, MRD adoption and prospective early-detection studies.
Continuing compliance with PRC VIE, data-security, human-genetic-resources, medical-device and overseas-listing regulations.
Supplier diversification given the 65% concentration of equipment and raw-material purchases with two suppliers.
The potential dilution and expense impact of outstanding equity awards, including approximately 21.0 million outstanding options at December 31, 2023 and substantial unrecognized share-based compensation.