424(B)(4)
Table of Contents

 

Filed Pursuant to Rule 424(b)(4)

Registration No. 333-234408

1,333,360 American Depositary Shares

 

LOGO

AnPac Bio-Medical Science Co., Ltd.

Representing 1,333,360 Class A Ordinary Shares

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of AnPac Bio-Medical Science Co., Ltd.

We are offering 1,333,360 ADSs. Each ADS represents one of our Class A ordinary shares, par value US$0.01 per share.

Prior to this offering, there has been no public market for the ADSs or our shares. The ADSs have been approved for listing on The NASDAQ Global Market, under the symbol “ANPC.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, have elected to comply with certain reduced public company reporting requirements.

We have and will maintain a dual-class share structure. Our outstanding ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one (1) vote, and each Class B ordinary share is entitled to ten (10) votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity who is not an affiliate of the holder, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares.

Our founder and chairman, Dr. Chris Chang Yu, together with Zhangjiang GU KE Company Limited and Zhijun Sihang Holdings Limited with respect to a portion of their ordinary shares, beneficially own all of our issued Class B ordinary shares. All Class B ordinary shares account for approximately 25.6% of our total outstanding shares immediately after the completion of this offering and 77.4% of the aggregate voting power of our total outstanding shares immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Jiaxing Zhijun Investment Management Co., Ltd. of its convertible loans to us. See “Principal Shareholders.”

An individual investor has subscribed for and been allocated 145,881 ADSs, or approximately 10.9% of the ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. The underwriters will receive the same underwriting discounts and commissions on any ADSs purchased by this investor as they will on any other ADSs sold to the public in this offering.

Investing in ADSs involves a high degree of risk. See “Risk Factors” beginning on page 14 to read about factors you should consider before buying the ADSs.

Neither the United States Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

PRICE US$12.00 PER ADS

 

     Price to
Public
     Underwriting
Discounts and
Commissions(1)
     Net Proceeds to
Us
 

Per ADS

   US$ 12.00      US$ 0.84      US$ 11.16  

Total

   US$ 16,000,320      US$ 1,120,022.40      US$ 14,880,297.60  

 

(1)

For additional information on underwriting compensation, see “Underwriting.”

The underwriters have a 30-day option to purchase up to an aggregate of 200,004 additional ADSs from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the ADSs against payment in New York, New York on February 3, 2020.

Joint Book-Running Managers

 

WestPark Capital, Inc.   Univest Securities, LLC

Prospectus dated January 28, 2020


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     14  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     57  

USE OF PROCEEDS

     59  

DIVIDEND POLICY

     60  

CAPITALIZATION

     61  

DILUTION

     62  

ENFORCEABILITY OF CIVIL LIABILITIES

     64  

CORPORATE HISTORY AND STRUCTURE

     66  

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     68  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     72  

INDUSTRY

     92  

BUSINESS

     97  

REGULATIONS

     123  

MANAGEMENT

     142  

PRINCIPAL SHAREHOLDERS

     149  

RELATED PARTY TRANSACTIONS

     151  

DESCRIPTION OF SHARE CAPITAL

     153  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     165  

SHARES ELIGIBLE FOR FUTURE SALE

     177  

TAXATION

     179  

UNDERWRITING

     186  

EXPENSES RELATED TO THIS OFFERING

     193  

LEGAL MATTERS

     193  

EXPERTS

     193  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     194  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until February 22, 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as the underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., or Frost & Sullivan, an independent market research firm, to provide information on the cancer screening and detection market and our market position in this industry.

Overview

We are a biotechnology company focusing on early cancer screening and detection. We market and sell a multi-cancer screening and detection test that uses our innovative, patented cancer differentiation analysis, or CDA, technology and our proprietary cancer-detection device, or CDA device. In addition to early cancer screening and detection, our CDA technology has demonstrated potential to assist physicians in cancer diagnosis, prognosis and recurrence.

Our CDA technology provides a comprehensive platform on which we have developed our cancer screening and detection test using our CDA technology, or CDA test, and our proprietary CDA device. Our CDA test can detect and assess an individual’s overall cancer risk with high accuracy, including early stage cancer. In addition, we also offer tests that combine our CDA test with auxiliary tests based on other cancer screening and detection technologies, such as biomarker-based tests, using our proprietary algorithm, which we refer to as combination tests. When we refer to our technology or tests as a “cancer screening and detection” technology or test in this prospectus, we refer to the detection and assessment of the risk of cancer occurrence, not to cancer diagnosis.

Our CDA technology focuses on biophysical properties in human blood. Recent studies have shown that there is a correlation between certain biophysical properties, including acoustical, electrical, magnetic, nano-mechanical and optical properties, and cancer occurrence. These studies have revealed that biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties’ physical expressions of information in the blood can indicate risks of pre-cancerous states and cancers. These biophysical signals change over time as cancer occurs, progresses or regresses. Our proprietary CDA device uses an integrated sensor system to detect certain biophysical signals in blood samples. After collecting data on these signals, we use our CDA technology and proprietary algorithm to measure and analyze these signals at multiple biological levels (including the protein, cellular and molecular levels) and with multiple parameters (including the overall CDA value, the protein tumor factor, or PTF value, and the cell tumor factor, or CTF value). According to Frost & Sullivan, we are one of the first biotechnology companies worldwide to focus on the detection and measurement of cancers’ biophysical properties. In our industry and related research fields, our CDA technology, as well as circulating tumor cell, or CTC, circulating tumor DNA, or ct-DNA, exosome, messenger RNA, or mRNAs and other emerging technologies, are known as “next-generation” cancer screening and detection technologies.

Our CDA technology provides a highly accurate, early-stage risk assessment of the occurrence of cancer. As of September 30, 2019, our CDA technology had been shown in numerous retrospective validation studies to be able to detect the risk of 26 cancer types with high sensitivity and specificity rates. These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. Our CDA technology requires only a standard blood sample from a tested individual, which minimizes the inconvenience and invasive procedures and avoids the harmful side effects that are inherent to many other technologies.



 

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We have established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. Our database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as of June 30, 2019, which represented the historical aggregate number of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the PRC National Medical Products Administration, or the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of volume of commercial cancer screening and detection tests conducted and fifth in terms of revenue from commercial cancer screening and detection tests, according to Frost & Sullivan.

We have established two clinical laboratories in China and one clinical laboratory in the United States. Our principal laboratory is a licensed biomedical clinical laboratory located in Lishui, Zhejiang Province, China, where we perform our commercial CDA-based tests, including our CDA tests and combination tests, as well as a variety of other tests including immunological and biochemical tests. Our laboratory in Haikou, Hainan Province, China is a licensed genomics clinical laboratory where we perform gene sequencing tests. In addition to these two clinical laboratories, we also have a research and development center located in Shanghai, China, where we develop our next-generation cancer screening and detection technology and tests. In the United States, we have a clinical laboratory located in San Jose, California for which we obtained a Certificate of Registration under the U.S. Clinical Laboratory Improvement Amendments of 1988, or CLIA, in March 2019. Our San Jose laboratory is equipped to perform our CDA tests and biochemical tests. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, contract research organizations, or CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology in this laboratory. We also plan to open a second U.S. clinical laboratory in Philadelphia, Pennsylvania in 2020.

As of September 30, 2019, we had filed 210 patent applications globally; among these, 121 patents had been granted, including 55 in greater China (including seven in Taiwan) and 16 in the United States, and 89 patent applications were pending in China, the United States and nearly 20 other countries and regions. Our patent applications broadly cover apparatus and methods for early stage disease detection, and they strategically encompass important specific embodiments of these apparatus and methods. Our patent portfolio is one of the world’s largest for early cancer screening and detection using next-generation technologies, according to Frost & Sullivan.

We performed our first commercial CDA-based test in China in 2015. Since then, we have generated revenue in China for four consecutive years. The number of commercial CDA-based tests we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from sales of cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from RMB6.1 million in nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019. Our total revenues increased by 80.3% from RMB5.7 million in 2017 to RMB10.3 million (US$1.4 million) in 2018 and increased by 22.3% from RMB6.6 million in nine months ended September 30, 2018 to RMB8.1 million (US$1.1 million) in the same period of 2019. In the United States, we plan to commence marketing our CDA-based test as a laboratory-developed test, or LDT, sometime in 2020 through our CLIA-registered laboratory in San Jose.



 

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Our Strengths

We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

 

   

novel patented early multi-cancer screening and detection technology;

 

   

expansive patent portfolio and proprietary test database;

 

   

fully commercialized operations in China—rolling out our China experience to the U.S.; and

 

   

an experienced management team with proven track records of success.

Our Strategies

The key elements of our strategy to grow our business include:

 

   

enlarge our total addressable market in China by obtaining additional regulatory approvals for our CDA device;

 

   

grow our customer base in China;

 

   

strengthen technological advantages with focused research and development; and

 

   

bring our tests to the U.S. market.

Risks Associated with Our Business

Our ability to realize our vision and execute our strategies is subject to risks and uncertainties, including those relating to:

 

   

we are a development-stage biotechnology company with a limited operating history, which makes it difficult to evaluate our prospects and may increase the probability that we will not be successful;

 

   

we have incurred losses each year since our inception, we expect to continue to incur losses for the foreseeable future, and we may not be able to achieve and maintain profitability;

 

   

our success depends heavily on the success of our CDA technology and related cancer screening and detection test;

 

   

our ability to grow our China business is substantially dependent on our ability to penetrate the Chinese hospital market;

 

   

our plans to enter the U.S. market may not be successful;

 

   

our industry is subject to rapid change, and other companies or institutions may develop and market novel or improved early cancer screening and detection methods, which may make our CDA technology less competitive or obsolete;

 

   

we require substantial funding for our operations; if we cannot raise sufficient capital on acceptable terms, our business, financial condition and prospects may be materially and adversely affected;

 

   

we have recorded net current liabilities and negative cash flows from operating activities historically and may continue to do so; and

 

   

our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.



 

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Corporate History and Structure

We began our operations by incorporating AnPac Bio-Medical Science Co., Ltd., or AnPac Bio, in January 2010 as a British Virgin Islands, or BVI, business company limited by shares under the BVI Business Companies Act. AnPac Bio was established primarily as a holding company and has established operating subsidiaries in China and the United States.

The chart below summarizes our corporate structure and identifies our principal subsidiaries as of the date of this prospectus. For more information regarding our principal subsidiaries, see “Corporate History and Structure.”

 

 

LOGO

Corporate Information

Our principal executive offices are located at 801 Bixing Street, Bihu County, Lishui, Zhejiang Province 323006, People’s Republic of China. Our telephone number at this address is +86-578-2051-666. Our registered office in the BVI is located at the office of Maples Corporate Services (BVI) Limited at Kingston Chambers, P.O. Box 173, Road Town, Tortola, BVI.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.anpacbio.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is AnPac Technology USA Co., Ltd., or AnPac US, located at Suite 127, 2260 Clove Drive, San Jose, CA 95128.

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements



 

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compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting, or ICFR. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of the extended transition period.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires in this prospectus:

 

   

“ADRs” refers to the American depositary receipts that evidence our ADSs;

 

   

“ADSs” refers to our American depositary shares, each of which represents one Class A ordinary share;

 

   

“CDA test” refers to our cancer screening and detection test using the CDA technology;

 

   

“CDA-based tests” refers to either or both of our CDA tests and combination tests;

 

   

“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

 

   

“Class A ordinary shares” refers to our Class A ordinary shares of par value US$0.01 per share;

 

   

“Class B ordinary shares” refers to our Class B ordinary shares of par value US$0.01 per share;

 

   

“combination test” refers to a test that combines our CDA test with an auxiliary test based on another cancer screening and detection technology, such as biomarker-based test, using our proprietary algorithm;

 

   

“detection” of cancers by our CDA-based device or tests refers to the detection of the risk of whether cancer may occur or has occurred, not to cancer diagnosis, and “detect” has the corresponding meaning;

 

   

“RMB” or “Renminbi” refers to the legal currency of China;

 

   

“shares” or “ordinary shares” refers to our ordinary shares, including Class A and Class B ordinary shares, par value US$0.01 per share;

 

   

“US$,” “U.S. dollars,” “$,” or “dollars” refers to the legal currency of the United States; and

 

   

“We,” “us,” “our company,” “our” or “AnPac Bio” refers to AnPac Bio-Medical Science Co., Ltd. and its subsidiaries.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.



 

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Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at RMB7.1477 to US$1.00, the noon buying rate on September 30, 2019 set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On January 24, 2020, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.9161 to US$1.00.



 

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The Offering

 

Public offering price

US$12.00 per ADS.

 

ADSs offered by us

1,333,360 ADSs (or 1,533,364 ADSs if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

1,333,360 ADSs (or 1,533,364 ADSs if the underwriters exercise their over-allotment option in full) excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Jiaxing Zhijun Investment Management Co., Ltd., or Zhijun, of our convertible loans from it.

 

Ordinary shares outstanding immediately after this offering

A total of 8,338,260 Class A ordinary shares and 2,863,100 Class B ordinary shares (or 8,538,264 Class A ordinary shares and 2,863,100 Class B ordinary shares if the underwriters exercise their over-allotment option in full to purchase additional 200,004 Class A ordinary shares), excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of our convertible loans from it. Class B ordinary shares issued and outstanding immediately after the completion of this offering will represent 25.6% of our total issued and outstanding shares and 77.4% of the then total voting power (or 25.1% of our total issued and outstanding shares and 77.0% of the then total voting power if the underwriters exercise their over-allotment option in full).

 

The ADSs

Each ADS represents one Class A ordinary share of par value US$0.01 per share.

 

  The depositary or its nominee will hold Class A ordinary shares represented by your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and all holders and beneficial owners of ADSs issued thereunder.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  Subject to the terms of the deposit agreement, you may surrender your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

 

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the



 

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deposit agreement, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Ordinary shares

We will issue 1,333,360 Class A ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs). Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. In respect of all matters subject to a shareholder vote, each Class A ordinary share is entitled to one (1) vote, and each Class B ordinary share is entitled to ten (10) votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity who is not an affiliate of the holder, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares. See “Description of Share Capital.”

 

Over-allotment option

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 200,004 additional ADSs.

 

Indication of interest

An individual investor has subscribed for and been allocated 145,881 ADSs, or approximately 10.9% of the ADSs in this offering at the initial public offering price and on the same terms as the other ADSs being offered in this offering. The underwriters will receive the same underwriting discounts and commissions on any ADSs purchased by this investor as they will on any other ADSs sold to the public in this offering.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$12.2 million from this offering, or approximately US$14.5 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We plan to use the net proceeds of this offering primarily for research studies in China and the U.S. and the development of new cancer screening and detection tests, the expansion of our marketing and sales channels in China, clinical laboratory expansion in the U.S. and China, and general corporate purposes. See “Use of Proceeds” for more information.


 

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Lock-up

We, each of our executive officers and directors and certain of our shareholders owning 1% or more of our ordinary shares issued and outstanding immediately prior to this offering have agreed with the representatives of the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Listing

The ADSs have been approved for listing on the NASDAQ Global Market under the symbol “ANPC.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on February 3, 2020.

 

Depositary

Citibank, N.A.

 

Risk Factors

See the section headed “Risk Factors” and other information included in this prospectus for a discussion of the factors you should carefully consider before deciding to invest in the ADSs.

Except as otherwise indicated, all information in this prospectus:

 

   

reflects the increase in the maximum number of authorized shares and 1-for-100 share subdivision of our ordinary shares, which became effective on November 12, 2019;

 

   

assumes the registration and effectiveness of our third amended and restated memorandum and articles of association, which will occur prior to the completion of this offering;

 

   

assumes no exercise by the underwriters of their over-allotment option to purchase up to an additional 200,004 ADSs representing 200,004 Class A ordinary shares from us; and

 

   

assumes no exercise of unexercised options or the warrants that we have agreed to grant to the representatives of the underwriters, nor conversion by Zhijun of the convertible loans that we borrowed from it.



 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of comprehensive loss data and summary consolidated cash flow data for the years ended December 31, 2017 and 2018 and summary consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary unaudited interim condensed consolidated statements of comprehensive loss data and summary unaudited interim condensed consolidated cash flow data for the nine months ended September 30, 2018 and 2019 and the summary unaudited interim condensed consolidated balance sheet data as of September 30, 2019 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Summary Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table sets forth our summary consolidated statements of comprehensive loss data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

     For the year ended December 31,     For the nine months ended September 30,  
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands, except for number of shares and per share data)  

Summary Consolidated Statements of Comprehensive Loss Data:

            

Revenues:

            

Cancer screening and detection tests

     5,203       9,557       1,337       6,106       7,677       1,074  

Physical checkup packages

     483       693       97       525       436       61  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     5,686       10,250       1,434       6,631       8,113       1,135  

Cost of revenues(1)

     (3,954     (5,672     (794     (3,634     (4,266     (597
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,732       4,578       640       2,997       3,847       538  

Operating expenses:

            

Selling and marketing expenses(1)

     (6,490     (9,827     (1,375     (7,202     (10,730     (1,501

Research and development expenses(1)

     (11,405     (10,106     (1,414     (7,746     (7,138     (999

General and administrative expenses(1)

     (24,938     (28,847     (4,036     (18,773     (50,181     (7,021

Other operating income

     178       593       84       475       138       19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (40,923     (43,609     (6,101     (30,249     (64,064     (8,964

Non-operating income and expenses:

            

Interest expense, net

     (338     (925     (129     (677     (1,897     (265

Foreign exchange gain (loss), net

     644       (2,776     (388     (1,970     (1,937     (270

Share of net loss (gain) in equity method investments

     (3     (441     (62     (224     442       62  

Other income, net

     1,309       5,256       735       484       (1,130     (158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (39,311     (42,495     (5,945     (32,636     (68,586     (9,595

Income tax (expense) benefit

     (9     199       28       177       (113     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (39,320     (42,296     (5,917     (32,459     (68,699     (9,611
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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     For the year ended December 31,     For the nine months ended September 30,  
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands, except for number of shares and per share data)  

Net loss attributable to non-controlling interests

     (244     (233     (32     (233     (194     (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

     (39,076     (42,063     (5,885     (32,226     (68,505     (9,584
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

            

Ordinary shares-basic and diluted

     (4.92     (4.93     (0.69     (3.78     (7.55     (1.06

Weighted average number of ordinary shares used in loss per share computation:

            

Ordinary shares-basic and diluted

     7,937,300       8,524,100       8,524,100       8,523,300       9,076,600       9,076,600  

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     —          317        44        237        246        34  

Selling and marketing expenses

     2,444        2,871        402        2,750        5,204        728  

Research and development expenses

     4,044        1,958        274        1,440        1,848        259  

General and administrative expenses

     4,270        2,790        390        2,008        20,809        2,911  

The following table sets forth our summary consolidated balance sheet data as of December 31, 2017 and 2018 and September 30, 2019:

 

     As of December 31,      As of September 30,  
     2017      2018      2019  
     RMB      RMB      US$      RMB      US$  
     (in thousands)  

Summary Consolidated Balance Sheet Data:

              

Current assets:

              

Cash and cash equivalents

     11,412        12,887        1,803        23,975        3,354  

Total current assets

     17,949        20,852        2,917        38,416        5,374  

Total assets

     60,148        52,762        7,382        72,017        10,075  

Current liabilities:

              

Short-term debt

     12,500        25,961        3,632        29,655        4,149  

Amounts due to related parties

     3,077        28,687        4,013        29,692        4,154  

Total current liabilities

     35,349        71,438        9,995        108,928        15,239  

Total liabilities

     50,651        75,155        10,515        111,975        15,666  

Total shareholders’ equity (deficit)

     9,497        (22,393      (3,133      (39,958      (5,591


 

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The following table sets forth our summary consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

     For the year ended December 31,      For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Summary Consolidated Statements of Cash Flow Data:

                 

Net cash used in operating activities

     (21,641      (31,147      (4,358      (23,031      (32,616      (4,561

Net cash used in investing activities

     (8,017      (2,680      (375      (7,890      (2,829      (396

Net cash generated from financing activities

     39,807        36,271        5,074        36,271        47,539        6,650  

Effect of exchange rate changes on cash and cash equivalents

     (2,893      (969      (136      (828      (1,006      (142
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

     7,256        1,475        206        4,522        11,088        1,551  

Cash and cash equivalents at beginning of year

     4,156        11,412        1,597        11,412        12,887        1,803  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of year

     11,412        12,887        1,803        15,934        23,975        3,354  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Financial Measure

In evaluating our business, we consider and use adjusted net loss, a non-GAAP measure, as a supplemental measure to review and assess our operating performance. The presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with U.S. GAAP. We define adjusted net loss as net loss adjusted to add back share-based compensation expenses.

We believe that adjusted net loss helps to identify underlying trends in our business that could otherwise be distorted by the effect of the expenses that we add back to net loss. We believe that adjusted net loss provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

The non-GAAP financial measure “adjusted net loss” is not defined under U.S. GAAP, is not presented in accordance with U.S. GAAP and has limitations as an analytical tool. One of the key limitations of using adjusted net loss is that it does not reflect all of the items of income and expense that affect our operations. Share-based compensation has been and may continue to be incurred in our business and is not reflected in the presentation of adjusted net loss. Further, the non-GAAP financial measure “adjusted net loss” may differ from the non-GAAP information used by other companies, including peer companies, and therefore their comparability may be limited.

We compensate for these limitations by reconciling the non-GAAP financial measure to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. This non- GAAP financial measure should be viewed in addition to, and not as a substitute for, our reported results prepared in accordance with U.S. GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP that are included elsewhere in this prospectus.



 

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The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     Year ended December 31,     Nine months ended
September 30,
 
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (39,320     (42,296     (5,917     (32,459     (68,699     (9,611

Add:

            

Share-based compensation expenses

     10,758       7,936       1,110       6,435       28,107       3,932  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net loss

     (28,562     (34,360     (4,807     (26,024     (40,592     (5,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Summary Operating Data

The following table sets forth our summary operating data for the periods indicated:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  

Number of commercial CDA-based tests(1) completed

     19,336        41,607        29,036        41,544  

Number of CDA-based tests(1) for research purposes completed

     6,004        4,873        3,791        4,947  

 

Note:

(1)

CDA-based tests, when used in this prospectus, refer to our CDA tests and our combination tests.



 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operation. In that case, the trading price of our ADSs could decline, and you may lose your entire investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects, financial condition, results of operations, cash flows and ability to pay dividends.

Risks Relating to Our Business and Industry

We are a development-stage biotechnology company with a limited operating history, which makes it difficult to evaluate our prospects and may increase the probability that we will not be successful.

We commenced our operations in 2010. We achieved commercialization of our CDA test and started generating revenue in China in 2015; we currently do not have commercial operations in the U.S. We are a development-stage biotechnology company with a limited operating history, and our history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects.

Furthermore, we may not have sufficient experience or resources to address the risks frequently encountered by development-stage biotechnology companies, which include our potential failure to:

 

   

achieve and maintain profitability;

 

   

acquire and retain customers and increase adoption of our cancer screening and detection tests—including primarily our CDA test and combination tests (namely a combination of our CDA test and, on an auxiliary basis, biomarker-based cancer screening and detection tests), as well as genomics tests—by physicians, key opinion leaders, or KOLs (including research scientists and doctors in the U.S. who are willing to validate our tests after research), patients, hospitals, medical institutions, healthcare payers and others in the medical community;

 

   

respond to competitive market conditions;

 

   

attract, train, motivate and retain qualified personnel;

 

   

protect our proprietary technologies and intellectual property rights;

 

   

secure a stable supply of blood samples to support our research and clinical studies;

 

   

keep up with evolving industry standards and market developments;

 

   

obtain and maintain the regulatory licenses, certifications, and approvals required for us to further market our cancer screening and detection tests and commercialize our CDA device in China and to commercialize our tests and CDA device in the United States;

 

   

increase the awareness of our tests and protect our reputation;

 

   

maintain adequate control of our operational costs; and

 

   

manage our relationships with our research partners.

If we are unsuccessful in addressing any one or more of these risks, they could adversely affect our business, financial condition and results of operations and increase the probability that we will not be successful.

We have incurred losses each year since our inception, we expect to continue to incur losses for the foreseeable future, and we may not be able to achieve and maintain profitability.

Although our revenue grew rapidly in recent years, we have incurred losses each year since our inception. For the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2019, we incurred

 

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net losses of RMB39.3 million, RMB42.3 million (US$5.9 million) and RMB68.7 million (US$9.6 million), respectively. As of September 30, 2019, we had an accumulated deficit of RMB242.9 million (US$34.0 million). To date, we have financed our operations primarily with capital contributions from our shareholders, short-term non-bank borrowings and loans from related parties. We have devoted and expect to continue to devote substantially all of our resources to the research, development and commercialization of our CDA technology, device and test. We expect to continue to incur losses for the foreseeable future. We cannot predict the extent of these future losses, or when we may achieve profitability, if at all. If we are unable to generate sufficient revenue from our business and control our costs and expenses to achieve and maintain profitability, the value of your investment in us could be negatively affected.

Our success depends heavily on the success of our CDA technology and related cancer screening and detection test.

We derive our revenue primarily from our CDA-based tests, which depend on our CDA technology. If we obtain relevant approvals from the NMPA to sell our CDA device, we also anticipate generating revenue from the sales of our CDA device. We believe that our commercial success will depend upon our ability to achieve and maintain market acceptance of our current or future cancer screening and detection tests, which will depend on a number of factors, including:

 

   

our ability to further validate the clinical utility and superiority of our CDA technology by increasing its sensitivity and specificity and through research studies and accompanying publications;

 

   

the timing and scope of additional approvals from the NMPA for our CDA device and test our ability to maintain these approvals;

 

   

acceptance of our CDA test by physicians, KOLs, patients, hospitals, medical institutions, healthcare payers and others in the medical community;

 

   

our ability to enter and develop the China hospital market for our CDA device and test;

 

   

sufficient coverage and reimbursement by third-party payers for our services, which may depend on multiple factors such as the enforceability of relevant laws that mandate the coverage of cancer or pre-cancer disease screening;

 

   

our ability to maintain and expand our customer base in China, especially among insurance companies, corporate customers and the hospital market;

 

   

our sales and marketing capabilities, including our success in expanding our sales and marketing team and establishing our own sales network in China;

 

   

the amount and nature of competition from other early cancer screening and detection products and procedures;

 

   

our ability successfully to penetrate the U.S. market; and

 

   

negative publicity regarding our or our competitors’ tests and technologies resulting from defects or errors.

If we are unsuccessful in addressing these or other factors that might affect the market acceptance of our tests, our business and results of operations will suffer.

Our ability to grow our China business is substantially dependent on our ability to penetrate the Chinese hospital market.

In China, we currently can only conduct our cancer screening and detection tests on our devices in our own certified laboratories. Given these restrictions, our customer base is primarily direct customers such as corporations and life insurance companies, as well as sales agents such as health management companies and

 

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medical device dealers. But China’s largest market for cancer screening and detection tests is the hospital market, in which patients go to Chinese hospitals for cancer screening and other medical tests. Currently we cannot conduct our tests in hospitals. We have applied for an NMPA Class III medical device registration certificate for our CDA devices to assist in multi-cancer diagnosis. If we receive this certificate, together with an updated medical device manufacture license, we would be permitted to place our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting in physicians’ diagnosis of specified multiple cancers. The timing for us to obtain this certificate or license is uncertain, but we expect it to take at least three years. Even if we obtain the certificate and license, we will need to successfully market our CDA device and test to Chinese hospitals. Our ability to grow our China business depends substantially on our ability successfully to penetrate the Chinese hospital market, and we cannot assure you as to when or whether we will be able to do so.

Our plans to enter the U.S. market may not be successful.

Currently, we conduct commercial operations only in China, and the substantial majority of our business, assets, management and employees are located in China. We have only recently started our efforts to enter the U.S. market. We obtained a California state license and a CLIA Certificate of Registration for our laboratory in San Jose, California in March 2019. We are seeking voluntary accreditation of our San Jose laboratory by the College of American Pathologists, or CAP. Our U.S. operations are currently focused on collaborating with U.S. health organizations to conduct research tests of our CDA technology. We plan to open a new laboratory in Philadelphia, Pennsylvania in 2020, and we will seek to obtain CLIA certification, a Pennsylvania state license, and accreditation from CAP for this laboratory. Although our strategy is to expand our U.S. operations and eventually commence commercial sales of our CDA-based tests in the United States, this strategy is subject to a number of risks and uncertainties, including:

 

   

our ability to secure research agreements with reputable U.S. hospitals, medical institutions and other health organizations to conduct research studies for our test;

 

   

our ability to obtain sufficient blood samples for our planned research tests;

 

   

the substantial costs and time required for U.S. research tests and clinical studies;

 

   

positive outcomes of our U.S. research tests sufficient to support the clinical validity, safety, and effectiveness of our test in the U.S. market;

 

   

U.S. federal and state regulatory risks, including our ability to commence marketing of our CDA test as an LDT, without premarket clearance, market authorization or approval from the United States Food and Drug Administration, or the FDA, and our ability to comply with all applicable FDA laws and other regulations, and costs and timing of obtaining relevant approvals;

 

   

development of a U.S. infrastructure, including sales and marketing resources, sufficient to commercialize our test;

 

   

substantial competition in the U.S. cancer screening and detection market, including from companies with substantially greater resources than we have; and

 

   

market acceptance of our test in the U.S.

Our ability to successfully address these factors and penetrate the U.S. market, as well as the costs and timing of these efforts, are highly uncertain. We expect that our commercial activities and revenues will continue to be derived solely from China for the foreseeable future.

Our industry is subject to rapid change, and other companies or institutions may develop and market novel or improved early cancer screening and detection methods, which may make our CDA technology less competitive or obsolete.

Our CDA-based tests depend on the effectiveness of our CDA technology, and we may be unable to maintain the competitiveness of this technology. Our industry is characterized by rapid changes, including

 

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technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current CDA-based test obsolete. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. We must continuously enhance our CDA technology and develop new tests to keep abreast of evolving standards of early cancer screening and detection. Other companies and institutions may possess significantly greater financial and other resources and research and development capabilities than we do. These other companies and institutions may devote significant resources to develop new methods of detecting cancers and pre-cancer symptoms, and these methods and related tests could represent significant competition for our CDA technology and cancer screening and detection test, or even render our CDA technology obsolete.

We may be unable to compete effectively against our competitors because their products and services may be superior. They may also have more expertise, experience, financial resources or stronger business relationships in developing and marketing their products and services, more mature technologies and products, greater market adoption and greater brand recognition than we do. Further, even if we do develop new marketable tests or services, our current and future competitors may develop tests and services that are more commercially attractive than ours and they may bring those tests and services to market sooner than we are able to.

We require substantial funding for our operations. If we cannot raise sufficient capital on acceptable terms, our business, financial condition and prospects may be materially and adversely affected.

We require substantial capital to expand our business, pursue strategic investments and for other reasons, including to:

 

   

increase our sales and marketing efforts to drive market adoption of our cancer screening and detection tests and address competitive developments;

 

   

expand our technologies into other types of cancer screening and detection products, such as our CDA test’s application in assistance in diagnosis, prognosis and recurrence;

 

   

acquire or invest in technologies;

 

   

seek regulatory and marketing approvals for our cancer screening and detection tests and devices;

 

   

conduct research studies for our CDA test and any additional cancer screening and detection tests;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

hire and retain additional personnel, such as scientific, quality control and marketing personnel;

 

   

develop, acquire and improve operational, financial and management information systems, including personnel to support our product development and help us comply with our obligations as a public company;

 

   

add equipment and physical infrastructure to support our research and development programs; and

 

   

finance general and administrative expenses.

We plan to use the net proceeds of this offering primarily to fund our research studies in China and the U.S., the development of new cancer screening and detection tests and technologies, the expansion of our marketing and sales channels in China and our clinical laboratory expansion in the U.S. The net proceeds of this offering and our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings or other sources. Further financing may not be available to us on acceptable terms, or at all. If we fail to raise capital as and when needed it would have a negative impact on our financial condition and our ability to pursue our business strategy. In addition, if we raise funds by issuing debt securities or incurring additional borrowings, the terms of the debt securities issued or borrowings could impose significant restrictions on our operations, and we may be unable to repay the indebtedness when due. If we raise funds by issuing equity securities, your investment in our company could be diluted.

 

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As of September 30, 2019, we had short-term debt of RMB29.7 million (US$4.1 million), including a short-term loan borrowed by our PRC subsidiary, AnPac Bio-Medical Technology (Shanghai) Co., Ltd., or AnPac Shanghai, from a third-party micro-loan company and our convertible loans from our related party, Zhijun. We believe that our cash and cash equivalents on hand, anticipated equity contributions of our shareholders, borrowings, our anticipated cash flows generated from our operating activities and financial support from our founder and chairman, Dr. Chris Chang Yu, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. However, our estimate as to how long we expect these financial resources to be sufficient to fund our operations is based on assumptions that may prove to be wrong. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate. Our present and future funding requirements will depend on many factors, including:

 

   

the scope, progress, timing, costs and results of the development of our CDA technology and our other product candidates;

 

   

the costs of expanding our laboratory operations and offerings, including our sales and marketing efforts;

 

   

our rate of progress in, and costs of the sales and marketing activities associated with, encouraging adoption of our cancer screening and detection tests;

 

   

our rate of progress in, and cost of research and development activities associated with, our CDA test and any additional cancer screening and detection tests;

 

   

the impact of competing technological and market developments;

 

   

costs related to entering the U.S. market;

 

   

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;

 

   

the costs, timing and outcome of obtaining regulatory approvals and changes in regulatory policies or laws that may affect our operations; and

 

   

the costs of operating as a public company.

We have recorded net current liabilities and negative cash flows from operating activities and may continue to do so.

We had net current liabilities of RMB17.4 million, RMB50.6 million (US$7.1 million) and RMB70.5 million (US$9.9 million) as of December 31, 2017 and 2018 and September 30, 2019, respectively. We cannot assure you that we will not continue to have net current liabilities positions in the future, which would expose us to liquidity risk. Our future liquidity and ability to make the additional capital investments necessary for our operations and business expansion will depend primarily on our ability to maintain sufficient cash generated from operating activities and to obtain adequate external financing. There can be no assurance that we will have such cash from operating activities or that we will be able to renew existing loan facilities or obtain other sources of financing.

We have experienced significant cash outflow from operating activities since our inception. We had net cash used in operating activities of RMB21.6 million, RMB31.1 million (US$4.4 million) and RMB32.6 million (US$4.6 million) in 2017, 2018 and the nine months ended September 30, 2019, respectively. Our cost of continuing operations could further reduce our cash position, and an increase in our net cash outflow from operating activities could adversely affect our operations by reducing the amount of cash we have available to meet the cash needs for operating our business and to fund our investments in our business expansion.

 

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Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

Our operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including:

 

   

the level of demand for our cancer screening and detection tests, which may vary significantly;

 

   

the timing and cost of, and level of investment in, research, development, regulatory approval and commercialization activities relating to our CDA technology and our cancer screening and detection tests and device, which may change from time to time;

 

   

the volume, customer mix and product mix for our cancer screening and detection tests;

 

   

the introduction of new cancer screening and detection tests and services by us or others in our industry;

 

   

expenditures that we may incur to acquire, develop or commercialize additional tests, devices and technologies;

 

   

coverage and reimbursement policies with respect to our cancer screening and detection tests and tests that compete with our test;

 

   

changes in government regulations or in the status of our regulatory approvals or applications;

 

   

future accounting pronouncements or changes in our accounting policies; and

 

   

general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

If our cancer screening and detection tests or our competitors’ comparable tests do not meet customer expectations, our operating results, reputation and business could suffer.

Our success depends on the market’s confidence in our ability to provide reliable, high-quality cancer screening and detection tests. We believe that our customers are likely to be particularly sensitive to defects or errors in our tests, in particular if our tests fail to accurately detect the risk of pre- and early-stage cancers from blood samples, and we cannot guarantee that our test will meet their expectations. We may be subject to legal claims arising from any defects or errors in our tests. Furthermore, if comparable tests offered by competing companies fail to perform to expectations, consumers may have lower confidence in cancer screening and detection tests in general. As a result, the failure of our tests or our competitors’ tests to perform as expected could significantly impair our operating results, business prospects and reputation.

We do not carry product liability or professional liability insurance. If we were to be sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.

We could face product liability claims if someone alleges that our cancer screening and detection tests gave inaccurate or misleading information regarding the patient’s risk of cancer or otherwise failed to perform as designed. A claimant could allege that our test results caused unnecessary treatment or other costs or resulted in the patient missing the best opportunity or timing for treatment. A patient could also allege other mental or physical injury or that our testing provided inaccurate or misleading information concerning the screening and detection, assistance in diagnosis, prognosis or recurrence of, or available therapies for, a cancer or other diseases. We may also be subject to liability for errors in, a misunderstanding of or inappropriate reliance upon,

 

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the information we provide in the ordinary course of our business activities. Product liability or professional liability claims could result in substantial damages and be costly and time-consuming for us to defend and could divert our management’s attention.

We do not carry product liability or professional liability insurance. Even if we purchase these kinds of insurance, the insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage. Additionally, any product liability or professional liability lawsuit could damage our reputation, or cause our research partners to terminate existing agreements and cause potential research partners to seek other partners, or cause us to lose our current or potential customers. Any of these developments could adversely impact our results of operations, business prospects and financial condition.

We may be subject to liability claims for defective services provided by third-party physical checkup centers, which could harm our reputation and adversely impact our results of operations.

In addition to our CDA-based tests, we also provide annual physical checkup packages to our customers. We typically outsource the physical checkup services in these packages (other than CDA-based tests) to third-party physical checkup centers. As a result, the administration of the physical checkup services by these third parties may subject us to litigation and liability for personal damages to consumers. Potential judgments, settlements or costs relating to these claims, complaints or lawsuits could subject us to significant fees and costs in defending ourselves, adversely affecting our results of operations. In addition, our business, reputation and growth prospects could suffer if we face negative publicity in connection with these liability claims.

We may be unable to support demand for our cancer screening and detection tests and manage our future growth effectively, which could make it difficult to execute our business strategy.

Since our inception, we have experienced rapid growth, and we anticipate further growth in our business operations. Our growth could strain our organizational, administrative and operational infrastructure. As the sales volume of our cancer screening and detection tests grows, we will face increased demands on our capacity and efficiency for sample intake, testing results analysis and other laboratory operations, quality control, customer service, and general workflow management processes. To effectively manage our future growth, we plan to continue to improve our technology, as well as our operational, financial and management controls. We also plan to hire, train and manage additional qualified scientists, laboratory technicians and sales and customer service personnel. We will also need to maintain the quality and expected turnaround time of our tests. The time and resources required for these improvements, and failure to achieve them in a timely and effective manner, could adversely affect our operations, making it difficult for us to execute our business strategy.

We have limited selling and marketing resources and limited sales, marketing, customer support, manufacturing and commercial laboratory experience, which may restrict our success in commercializing our cancer screening and detection tests.

To grow our business as planned, we must expand our sales, marketing, customer support, manufacturing and commercial laboratory management capabilities, which will require developing and administering our commercial infrastructure and/or collaborative commercial arrangements and partnerships. We have limited experience in these respects, and we may encounter difficulties in retaining and managing the specialized workforce that these activities require. For example, our customer base is large and diverse, which requires us to retain a sales team with established industry expertise and experience. We rely on third-party suppliers for the supply of blood samples for our tests and for reagents that we use in the auxiliary biomarker-based tests that form part of our combination tests. We engaged third-parties to conduct substantially all of the biomarker-based tests as part of our combination tests in 2017 and 2018. We have recently phased out this outsourcing arrangement and are performing our combination tests entirely in-house. We also rely on contract manufacturers that manufacture

 

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key components of our CDA device. While we primarily rely on our own sales and marketing personnel to market our tests, we also engage sales agents, including companies we invested in. However, we may not be able to effectively manage and maintain our relationships with these third parties, including ensuring their compliance with our controls and procedures. Our future growth will also impose significant added responsibilities on our management. If we fail to meet these demands, it would negatively affect our business growth and profitability. We may seek to partner with others to assist us with our sales, marketing and manufacturing functions. However, we may be unable to find appropriate third parties that meet our requirements, in a timely manner or on terms acceptable to us. In addition, our third-party business partners may not perform as we expect or our arrangements with them may otherwise prove to be detrimental to our results. Our third-party arrangements may also be terminated prematurely, including due to factors out of our control. As a result of such developments, our business and prospects may be harmed.

If we are unable to attract and retain qualified key management, scientists, staff and consultants, our ability to implement our business plan may be adversely affected.

We are highly dependent upon certain of our key management, scientists, staff and consultants, particularly Dr. Chris Yu, our founder and chief executive officer, and Dr. He Yu, our co-founder and chief medical officer. Dr. Chris Yu, Dr. He Yu and each of our key management and scientific personnel may terminate his or her employment with us. If we lose any of our key management and scientific personnel, we may be unable to find replacements suitable to us. The loss of their services could significantly delay or prevent our achievement of our technology development, sales and other business objectives. We do not carry any key-man life insurance. In addition, we face intense competition for qualified individuals from numerous biotechnology and pharmaceutical companies, universities, governmental entities and other research institutions. Our limited operating history and the uncertainties attendant to being a development-stage biotechnology company with limited capital resources could limit our ability to attract and retain personnel. We may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our business plan.

Our future success depends on our ability to promote our brand and protect our reputation.

We believe that enhancing and maintaining awareness of our “AnPac” brand is critical to achieving widespread acceptance of our cancer screening and detection tests, gaining trust for our testing services and attracting new customers. Successful promotion of our brand depends largely on the quality of the services we offer and the effectiveness of our branding and marketing efforts. Currently, we rely primarily on our own sales and marketing team to promote our brand and our cancer screening and detection tests, and we also engage sales agents, including companies we invested in. We expect our branding and marketing efforts will require us to incur significant expenses and devote substantial resources. We cannot guarantee that our marketing efforts will be successful. Brand promotion activities may not yield increased revenue in the near term, and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. Our failure to establish and promote our brand and any damage to our reputation will hinder our growth.

In addition, some companies that we established in China together with third parties—over which we do not have effective control—share with us the “AnPac” trading name and its Chinese characters that we use, and they at times act as sales agents for our CDA test. Given this shared use, any negative publicity related to these companies as well as their products and services, whether with merit or not and whether or not related to us, could adversely impact our brand and reputation. Furthermore, negative publicity about other market players or isolated incidents such as fraudulent behaviors, whether or not factually correct, may result in negative perception of the early cancer screening and detection industry as a whole and undermine the credibility we have established, which may negatively affect our business and results of operations.

If we are unable to effectively protect our intellectual property, our business would be harmed.

We rely on patent protection as well as trademark, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary devices, tests and technologies, all of which

 

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provide limited protection and may not adequately protect our rights. If we fail to effectively protect and/or maintain our patented devices, tests and technologies, our competitive position and prospects could be adversely affected. Furthermore, we could incur substantial litigation costs in our attempts to recover or restrict use of our patents and other intellectual property.

We cannot assure investors that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be issued, if at all. It is possible that, for any of our patents that have been issued or that may be issued in the future, our competitors may design their products around our patented technologies. Further, we cannot assure you that other persons will not challenge any patents granted to us or that courts or regulatory agencies will hold our patents to be valid, enforceable, and/or infringed. We cannot guarantee you that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge or challenges to our patents could result in the unenforceability or invalidity of these patents, or these patents being interpreted narrowly and/or in a manner adverse to our interests. Our ability to establish or maintain a technological or competitive advantage over our competitors and/or market entrants may be diminished because of these uncertainties. For these and other reasons, our intellectual property may not provide us with any competitive advantage. For example:

 

   

we might not have been the first to make the inventions claimed or disclosed by our pending patent applications or issued patents;

 

   

we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings or derivation proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us, and could possibly result in a loss or narrowing of our patent rights. We cannot assure you that our patent applications or granted patents will have priority over any other patent or patent application involved in such a proceeding, or will be held valid as an outcome of the proceeding;

 

   

other persons may independently develop similar or alternative products and technologies or duplicate any of our products and technologies, which can potentially impact our market share and revenue, regardless of whether our intellectual property rights are successfully enforced against these other persons;

 

   

it is possible that our pending patent applications will not result in granted patents, and even if these pending patent applications are issued as patents, they may not provide intellectual property protection of commercially viable products or product features, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties, patent offices, and/or the courts;

 

   

we may be unaware of or unfamiliar with prior art and/or interpretations of prior art that could potentially impact the validity or scope of our patents or pending patent applications, or patent applications that we intend to file;

 

   

we take efforts and enter into agreements with employees, consultants, collaborators, and advisors to confirm ownership and chain of title in intellectual property rights. However, an inventorship or ownership dispute could arise that may permit one or more third parties to practice or enforce our intellectual property rights, including possible efforts to enforce rights against us;

 

   

we may elect not to maintain or pursue intellectual property rights that, at some point in time, may be considered relevant to or enforceable against a competitor;

 

   

we may not develop additional proprietary products and technologies that are patentable, or we may develop additional proprietary products and technologies that are not patentable;

 

   

the patents or other intellectual property rights of others may have an adverse effect on our business; and

 

   

we apply for patents relating to our devices, tests and technologies, as we deem appropriate. However, we or our representatives or their agents may fail to apply for patents on important devices, tests and

 

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technologies in a timely fashion or at all, or we or our representatives or their agents may fail to apply for patents in potentially relevant jurisdictions.

To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct or indirect competition. If our intellectual property does not provide adequate coverage over our competitors’ products, our competitive position and our business could be adversely affected.

In addition to patent protections, we also try to protect our trade secrets, know-how and other proprietary information through non-disclosure and confidentiality provisions in our agreements with parties who have access to them, such as our employees, consultants and research partners. These agreements may not be enforceable or may not provide meaningful protection for our trade secrets, know-how and/or other proprietary information in the event of unauthorized uses or disclosure or other breaches of the provisions, and we may not be able to prevent such unauthorized uses or disclosure. Moreover, if a party having an agreement with us has an overlapping or conflicting obligation to a third party, our rights in and to certain intellectual property could be undermined. In addition, monitoring unauthorized disclosure and uses of our trade secrets is difficult, and we do not know whether the steps we have taken to prevent such disclosure and uses are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, and the outcome would be unpredictable, and any remedy may be inadequate. In addition, courts outside the United States may be less willing to protect trade secrets.

In addition, competitors could purchase our devices and tests and attempt to replicate and/or improve some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, and design their devices and tests around our protected technologies or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect our market share against competitors’ devices and tests, our competitive position could be adversely affected, as could our business.

We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe our patents. In the event of infringement or unauthorized use, we may file one or more infringement lawsuits, which can be expensive and time-consuming. An adverse result in any such litigation proceedings could put one or more of our patents at risk of being invalidated, being found to be unenforceable, and/or being interpreted narrowly. Adverse results of these types could also put our patent applications at risk of not being issued and/or impact the validity or enforceability positions of our other patents. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that part of our confidential information could be compromised by disclosure.

Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations, continue our internal research programs, pursue, obtain or maintain intellectual property rights, or enter into research and development partnerships that would help to validate and commercialize our tests.

In addition, patent litigation can be very costly and time-consuming. An adverse outcome in such litigation or proceedings may expose us or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all.

 

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We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could materially disrupt our business.

The validity, enforceability and scope of intellectual property rights protection in biotechnology industries, particularly in China, are uncertain and still evolving. We cannot be certain that our devices, tests and technologies do not or will not infringe patents, copyrights or other intellectual property rights held by third parties. From time to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks or copyrights, or misappropriation of creative ideas or formats, or other infringement of proprietary intellectual property rights. Any such proceeding and claims could result in significant costs to us and divert the time and attention of our management and technical personnel from the operation of our business. These types of claims could also potentially adversely impact our reputation and our ability to conduct business and raise capital, even if we are ultimately absolved of all liability. Moreover, third parties making claims against us may be able to obtain injunctive relief against us, which could block our ability to offer one or more devices or tests and could result in a substantial award of damages against us. In addition, since we may indemnify customers or collaboration partners, we may have additional liability in connection with any infringement or alleged infringement of third party intellectual property. Intellectual property litigation can be very expensive, and we may not have the financial means to defend ourselves or our customers or collaboration partners.

Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to us, that may result in issued patents upon which our devices, tests or proprietary technologies may infringe. Moreover, we may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by our technology or any of our devices or tests. There is a substantial amount of litigation involving patents and other intellectual property rights in our industry. If a third-party claims that we or any of our customers or collaboration partners infringe upon a third-party’s intellectual property rights, we may have to:

 

   

seek to obtain licenses that may not be available on commercially reasonable terms, if at all;

 

   

abandon any product alleged or held to infringe, or redesign our products or processes to avoid potential assertion of infringement;

 

   

pay substantial damages including, in exceptional cases, treble damages and attorneys’ fees, if a court decides that the device, test or proprietary technology at issue infringes upon or violates the third-party’s rights;

 

   

pay substantial royalties or fees or grant cross-licenses to our technology; and

 

   

defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.

We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties.

Some of our employees were previously employed at other life science companies, including our potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for us, and we are not currently subject to any claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties, we may in the future be subject to such claims. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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If our laboratories and other facilities become damaged or inoperable, our ability to conduct our laboratory analysis and our research and development efforts may be jeopardized.

We currently derive substantially all of our revenue from cancer screening and detection tests conducted at our laboratory located in Lishui, Zhejiang Province, China. We also intend to sell our CDA device in China after obtaining relevant approvals from the NMPA. We use our own facilities in Lishui to assemble our CDA device, in addition to engaging third-party contract manufacturers to manufacture its key components. In the United States, we plan to market our CDA test initially as an LDT, and we intend to perform all our research and commercial tests in our own laboratory in San Jose, as well as in our proposed new laboratory in Philadelphia after it is established. Our facilities and equipment, or those of our third-party contract manufacturers, could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, power loss, communications failure or terrorism. These types of developments could render it difficult or impossible for us to operate our cancer screening and detection tests and assemble our device for some period of time. If we are unable to perform our tests or to reduce the backlog of analysis that could develop if our facilities are inoperable, for even a short period of time, it could result in a loss of customers or harm to our reputation, and we may be unable to regain those customers or repair our reputation. We have not purchased any property insurance or business interruption insurance. Damages to, or interruptions in the operations of, our laboratories and other facilities could have a material adverse impact on our results of operations and financial condition. Furthermore, our facilities and the equipment we use to perform our research and development work could be unavailable or costly and time-consuming to repair or replace. It would be difficult, time-consuming and expensive to rebuild our facilities and purchase our equipment, to locate and qualify a new facility or equipment or to license or transfer our proprietary technology to a third-party, particularly in light of licensure and accreditation requirements. Even in the unlikely event that we are able to find a third party with such qualifications to enable us to conduct our test, we may be unable to negotiate commercially reasonable terms.

Security threats to our information technology infrastructure could expose us to liability and damage our reputation and business.

Because our testing services and research and development activities enable us to access customers’ and research partners’ proprietary information, it is essential to our business strategy that our information technology infrastructure remains secure and is perceived by our customers and research partners to be secure. Despite our security measures, we may face cyber-attacks that attempt to penetrate our network security, sabotage or otherwise disable our research, tests and services, misappropriate our or our customers’ and research partners’ proprietary information, which may include personally identifiable information, or cause interruptions of our internal systems and services. We have not purchased any cyber insurance. Any cyber-attacks could negatively affect our reputation, damage our network infrastructure and our ability to deploy our products and services, harm our relationship with customers and research partners that are affected, and expose us to significant financial liabilities.

We depend on third-party suppliers, sales agents, service providers and research partners for different aspects of our business.

We depend on third parties for different aspects of our business, including suppling blood samples for our research studies and reagents required for biomarkers used in our combination tests, performing a portion of auxiliary biomarker-based tests in our combination tests, sales of our cancer screening and detection tests to our customers, and collecting blood samples for our commercial cancer screening and detection tests. Selecting, managing and supervising these third-party suppliers, sales agents and service providers requires significant resources and expertise. Poor performance by these third parties, including their failure to provide services or products according to applicable legal and regulatory requirements, the terms of our contracts or otherwise below standard, could significantly and negatively affect the quality of our cancer screening and detection tests and damage our reputation. Decreases in the level of sales agents’ purchases of tests from us for resale to the end-customers could adversely affect our revenue growth. In addition, the service or cooperative agreements we have

 

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with third-party suppliers, sales agents and service providers are subject to a term, and are not on an exclusive basis. If these third parties do not continue to maintain or expand their cooperation with us, we would be required to seek new suppliers and sales agents, which could cause delays in services to us and negatively affect the quality and availability of our cancer screening and detection tests. Any of the above factors could adversely impact our results of operations and financial position.

In addition, certain of our research partners in China, which are primarily renowned hospitals and medical institutions, collaborate with us and provide blood samples that we use to conduct various research studies. These partners may cease cooperation with us in the future, especially if they enter into similar agreements or arrangements with our competitors. If we are unable to readily access sufficient blood samples to conduct our commercial tests and research studies, we may be unable to compete effectively with other laboratories that have greater access to blood samples, and our business, financial condition and results of operations may be harmed.

We rely on third-party contract manufacturers for the manufacturing of key components of our CDA devices.

We design and configure all of the key components of our CDA device and have outsourced the manufacturing of these components of our CDA devices to third-party contract manufacturers. Our revenue is generated primarily from our CDA tests conducted using our CDA devices. Our contract manufacturers may fail to deliver these key components for reasons beyond our control. For example, they may encounter financial difficulties or experience disruptions in their manufacturing operations due to equipment breakdowns, labor disputes or shortages, raw material shortages, cost increases or other similar reasons. If they fail to timely deliver those key components for us to assemble our CDA device or maintain the quality of their products, our ability to conduct our commercial CDA-based tests could be adversely affected. Currently, we do not have any long-term or exclusive supply contracts with any of our contract manufacturers. Our contract manufacturers may cease to provide us with the key components of our CDA devices. Since qualifying a new contract manufacturer could be costly and time-consuming, the termination of a contract manufacturer could cause disruption to our business and adversely impact our results of operations.

We rely on commercial courier delivery services to transport blood samples to our laboratory facilities in a timely and cost-efficient manner, and if these delivery services are disrupted, our business will be harmed.

Our business depends on our ability to quickly and reliably deliver test results to our customers. We rely on commercial courier delivery services to transport blood samples to our laboratory facilities timely and cost efficiently. Blood samples are typically received within a few days in China for analysis in our laboratories. Disruptions in third-party delivery service, whether due to labor disruptions, bad weather, natural disaster, terrorist acts or threats or for other reasons, could adversely affect specimen integrity and our ability to process blood samples and conduct tests in a timely manner and to service our customers satisfactorily, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.

If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our ICFR. However, in connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2017 and 2018, and the review of our interim condensed consolidated financial statements as of September 30, 2019 and for the nine months ended September 30, 2018 and 2019, we and our independent registered public accounting firm identified two “material weaknesses” in our ICFR and other control deficiencies. As defined in standards established by the United States Public Company Accounting Oversight Board, or the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of our annual or

 

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interim financial statements will not be prevented or detected on a timely basis. The material weaknesses and other control deficiencies identified were our company’s lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and the Securities and Exchange Commission, or SEC, rules, and a lack of financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements. Following the identification of the material weaknesses and other control deficiencies, we have taken measures and plan to continue to take measures to remediate timely these deficiencies. For details about remediation, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting” for more details. However, the implementation of these measures may not fully address the material weakness and deficiencies in our ICFR, and we may be unable to conclude that they have been remediated. Our failure to correct the material weakness and control deficiencies or our failure to discover and address any other material weakness or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Additionally, ineffective ICFR could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

Furthermore, had our independent registered public accounting firm conducted an audit of our ICFR, it might have identified additional material weaknesses and deficiencies. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 will require that we maintain effective ICFR and include a report from management on the effectiveness of our ICFR in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2020. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our ICFR. Our management may conclude that our ICFR is not effective. Moreover, even if our management concludes that our ICFR is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue an adverse opinion if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

In documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our ICFR. In addition, if we fail to maintain the adequacy of our ICFR, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective ICFR in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.

Our business may suffer if we are unable to collect payments from our corporate customers on a timely basis.

We typically offer credit terms of one to three months to our sales agents and other corporate customers. Any downturn in the businesses of our sales agents and other corporate customers could reduce their willingness or ability to pay us. The failure of any of our sales agents or other corporate customers to make timely payments could require us to recognize an allowance for doubtful accounts, For example, we had allowance for doubtful accounts receivable of RMB18,000, RMB198,000 (US$29,000) and RMB177,000 (US$25,000) as of December 31, 2017 and 2018 and September 30, 2019, respectively. We cannot guarantee that we will be able to collect these doubtful accounts. As a result, our results of operations and financial condition may be adversely affected.

 

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We have granted, and may continue to grant, stock incentive awards, which may result in increased share-based compensation expenses.

We have adopted our 2019 share incentive plan, or 2019 Plan, so that we can grant share-based compensation awards to our directors, officers, employees and consultants to incentivize their performance and align their interests with ours. The maximum number of Class A ordinary shares that may be issued pursuant to all awards under our 2019 Plan is 1,105,300. We have also separately issued options to our directors, officers, employees and consultants outside of our 2019 Plan. As of the date of this prospectus, options to purchase 1,163,500 Class A ordinary shares have been granted and are outstanding.

We believe the granting of stock incentive awards is of significant importance to our ability to attract and retain our management, employees and consultants, and we will continue to grant stock incentive awards to our management, employees and consultants in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations. In addition, the granting, vesting and exercise of the awards under these stock incentive plans will have a dilutive effect on your shareholding in our company.

We may be subject to litigation and other claims and legal proceedings, and may not always be successful in defending ourselves against these claims or proceedings.

We are subject to lawsuits and other claims in the ordinary course of our business. We have been, and may in the future be, subject to lawsuits and other legal proceedings brought by our customers, competitors, employees, business partners, investors, other shareholders of the companies we invest in, or other entities against us, in matters relating to intellectual property rights, contractual disputes, competition claims and employment disputes, among others. We may also be subject to regulatory proceedings, such as any non-compliance with licensing requirements, advertising practices, and protection of data privacy of the tested individuals. We may not be successful in defending ourselves, and the outcomes of these lawsuits and proceedings may be unfavorable to us. Lawsuits and regulatory proceedings against us may also generate negative publicity that significantly harms our reputation, which may adversely affect our customer base, market position and our relationships with our research partners and other business partners. In addition to the related costs, managing and defending litigation and other legal proceedings and related indemnity obligations can significantly divert our management’s attention from operating our business. We may also need to pay damages or settle lawsuits or other claims with a substantial amount of cash, negatively affecting our liquidity. As a result, our business, financial condition and results of operations could be adversely affected.

We have limited business insurance coverage.

Our business insurance is limited, and we do not carry business interruption insurance to cover our operations. We have determined that the costs of insuring for related risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical. Any uninsured damage to our facilities or technology infrastructures or disruption of our business operations could require us to incur substantial costs and divert our resources, which could have an adverse effect on our business, financial condition and results of operations.

Risks Relating to Government Regulations

PRC

As a biotechnology company, we are required to comply with extensive regulations and obtain and maintain a number of permits and licenses to carry on our business in China; future government regulation may place additional burdens on our efforts to commercialize our cancer screening and detection tests and device.

As a biotechnology company, we are subject to extensive government regulation and supervision in China. Violation of applicable laws and regulations may materially and adversely affect our business. For example, we

 

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are required to obtain a medical institution practice license from the PRC National Health Commission, or the NHC, for our laboratories to conduct cancer screening and detection tests in China. We also need to obtain a medical device manufacture license and a medical device registration certificate from the NMPA for the manufacturing and commercial use and sale of our CDA device.

Each of our current NHC medical institution practice licenses and our NMPA Class II medical device manufacture license and registration certificate has a five-year term. We are applying for a Class III medical device registration certificate from the NMPA. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture of Class III medical devices. If we are unable to renew our existing licenses and certificates or obtain the Class III medical device license or update our medical device manufacture license, or obtain or renew any other material permits or approvals required for our operations, we may be unable to continue to sell our cancer screening and detection tests or to commercialize our CDA device in China and, as a result, our business may be adversely affected.

In addition, China’s regulatory framework governing biotechnology companies is subject to change and amendment from time to time. Any such change or amendment could materially and adversely impact our business, financial condition and prospects. The PRC government has introduced various reforms to the Chinese healthcare system in recent years and may continue to do so, with an overall objective of expanding basic medical insurance coverage and improve the quality and reliability of healthcare services. The specific regulatory changes under the reforms still remain uncertain. The implementing measures to be issued may not be sufficiently effective to achieve the stated goals, and as a result, we may not be able to benefit from these reforms to the level we expect, if at all. Moreover, the reforms could give rise to regulatory developments, such as more burdensome administrative procedures, which may have an adverse effect on our business and prospects.

If we are unable to maintain our medical device or laboratory related licenses and certificates, our growth strategy may be compromised.

Pursuant to the Regulation on the Supervision and Administration of Medical Devices as amended by the PRC State Council in May 2017, medical devices are classified into three classes according to their risk levels. Class II medical devices are medical devices with moderate risks that must be strictly controlled and regulated to ensure their safety and effectiveness. Class III medical devices are medical devices with relatively high risks that must be strictly controlled and regulated through special measures to ensure their safety and effectiveness. In addition, the Measures for the Supervision and Administration of the Operation of Medical Devices as promulgated by the NMPA’s predecessor, the China Food and Drug Administration, or the CFDA, in November 2017 regulate entities that engage in business activities involving medical devices in the PRC in accordance with the medical devices’ risk levels. The Class II medical device registration certificate and the Class III medical device registration certificate are required for an entity to conduct business activities involving these medical devices.

We have obtained the Class II medical device registration certificate from the NMPA, which allows us to conduct our tests in our licensed laboratories. To perform our CDA test outside of our laboratories and market them to Chinese hospitals, in December 2018, we applied for a Class III medical device registration certificate from the NMPA for our CDA device. We believe it will likely take at least three years for us to obtain this license from the NMPA. After we obtain this license, we will update our medical device manufacture license, which we believe is a relatively straightforward procedure. However, there is no assurance that we will receive this NMPA approvals on a timely basis, or at all. If we fail to maintain and renew our Class II medical device registration certificate or if we are unable to obtain the Class III medical device license and update our medical device manufacture license, our ability to grow our business could be adversely affected.

We believe our NHC medical institution practice license and NMPA Class II medical device registration certificate and manufacture license are effective and cover our current commercialized CDA test, which provides a cancer risk assessment. However, the PRC laws and regulations governing cancer screening and detection

 

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devices and tests are subject to uncertainties and regulatory discretion, including changes in interpretation and application, such as in respect of restrictions on foreign investments in clinical laboratories. There is also a risk that the relevant regulatory authorities could disagree with our assessment of the commercial activities permitted by our certificates and licenses. For more information on this, see “Regulations—PRC Regulations—Other Significant PRC Regulations Affecting Our Business Activities in China.” Moreover, if we begin to commercialize our CDA test for other purposes such as assisting in diagnosis, prognosis and recurrence, this regulatory uncertainty and risk would be greater. If the relevant regulatory authorities were to assert that our current or future commercial cancer screening and detection tests were not permitted by our licenses or revoke any of our NMPA or NHC licenses and certificates and require us to take remedial actions to their satisfaction, or if we were unable to obtain amended or additional required licenses or approvals, then our business and financial results would be adversely affected.

We are subject to ongoing obligations and continued regulatory review and to future changes in laws, regulations or enforcement policies in China.

We are subject to ongoing obligations and continued regulatory review in relation to our laboratories and our medical devices. Even if the NMPA grants our application for a Class III medical device registration certificate and allows us to update our medical device manufacture license accordingly, or if we successfully maintain and renew our Class II medical device manufacture license and registration certificate, our CDA device will be subject to extensive and ongoing regulatory requirements.

In addition, there could be a subsequent discovery of previously unknown problems with our device (including problems with third-party manufacturers or manufacturing processes) or failure to comply with existing or future regulatory requirements (including in respect of our conducting of cancer screening and detection tests). For example, if we were found to have conducted any of these tests in premises other than a licensed laboratory, we could be subject to confiscation of revenue from the relevant tests as well as other penalties. For more information on this, see “Regulations—PRC Regulations—Regulation on Medical Devices and Medical Institutions—Medical Institutions Laws and Regulations.” Any government investigation of alleged violations of law could require us to expend significant time and resources and could result in adverse government actions (including penalties on us) and negative publicity on our brand.

Moreover, laws, regulations and enforcement policies in China, including those regulating medical institutions, devices and supplies, are evolving. Changes in these areas could impose more stringent requirements on us, including fines or other penalties, and increase our compliance and other operating costs. Changes in government regulations could also prevent, limit or delay regulatory approvals in relation to our CDA device. If we are unable to maintain regulatory compliance, any regulatory approval that has been obtained may be lost and we may not be able to achieve or sustain profitability. In addition, regulatory changes may relax certain requirements that could benefit our competitors or lower market entry barriers and increase competition. Further, regulatory agencies in China may periodically, and sometimes abruptly, change their enforcement practices. Any litigation or governmental investigation or enforcement proceedings against us in China may be protracted and may result in substantial costs and diversion of resources and management attention, negative publicity, damage to our reputation and decline in the price of our ADSs.

The absence of patent linkage, patent term extension and data and market exclusivity for NMPA-approved medical products could increase the risk of early generic competition against our tests in China.

The life of a patent and the protection it affords are limited under PRC law. Currently, while certain foreign laws regulate patent term extension, patent linkage to products to delay generic entry, or extension of data exclusivity (often referred to as regulatory exclusivity) in certain circumstances, China does not have any effective law or regulation in these aspects. Chinese regulators have set out a framework for delaying generic launches by adding patent linkage and data exclusivity into the Chinese regulatory regime, as well as for establishing a pilot program for patent term extension. However, these measures will require the adoption of

 

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specific regulations, and to date, no such regulations have been adopted. If we are unable to obtain patent term extension or if such extension is shorter in length than requested, our competitors may obtain approval of competing products prior to or following our patent expiration, and our business, financial condition, results of operations and prospects could be materially harmed.

Any change in the regulations governing the use of personal data in China, which are still under development, or any data leakage or unauthorized use of data by third parties could adversely affect our business and reputation.

We provide early cancer screening and detection services to tens of thousands of individuals in China. As a result, we have access to these tested individuals’ personal data, including their age, gender, disease status and medical records. We use this personal data internally to expand our test database and improve the clinical utility of our CDA technology. Chinese regulations governing the collection and use of personal data are still under development. We believe that there is no PRC legal restriction on our internal use of such data. Any change in the regulatory regime in this regard could potentially affect our ability with regard to the collection and use of these personal data, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Moreover, we may not be able to prevent third parties from illegally obtaining and misappropriating personal data of the tested individuals that we collect. Concerns about data leakage or unauthorized use of data by third parties, even if unfounded, could damage our reputation and negatively affect our results of operations.

United States

We conduct our business in a heavily regulated industry, and changes in regulations or violations of regulations may, directly or indirectly, reduce our revenue, adversely affect our results of operations and financial condition and harm our business.

The U.S. life sciences industry is highly regulated, and the regulatory environment in which we operate may change significantly and adversely to us in the future. Areas of the regulatory environment that may affect our ability to conduct business in the United States include, U.S. federal and state laws relating to:

 

   

laboratory testing, including the CLIA and state laboratory licensing laws;

 

   

the development, testing, use, distribution, promotion and advertising of research services, kits and clinical diagnostics, including certain LDTs which are regulated by the FDA under the U.S. Federal Food, Drug, and Cosmetic Act, or the FDCA;

 

   

test ordering, documentation of tests ordered, billing practices and claims payment under the U.S. Centers for Medicare & Medicaid Services, or CMS, and the U.S. Department of Health and Human Services, or HHS, Office of the Inspector General, enforcing those laws and regulations;

 

   

medical device and in vitro diagnostic, or IVD, clearance, marketing authorization or approval;

 

   

FDA’s enforcement discretion to not regulate the majority of LDTs as IVDs;

 

   

laboratory anti-mark-up laws (which are laws or regulations that can limit the prices of medical tests);

 

   

the handling and disposal of medical and hazardous waste;

 

   

fraud and abuse laws such as the U.S. Federal False Claims Act, or FCA, the Federal Health Care Program Anti-Kickback Statute, or AKS, the Criminal Health Care Fraud Statute and Stark Law (defined below), and state equivalents;

 

   

Occupational Safety and Health Administration rules and regulations;

 

   

the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and other U.S. federal and state medical data privacy and security laws;

 

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the Genetic Information Non-discrimination Act and similar state laws; and

 

   

coverage and restrictions on coverage and reimbursement for research services, kits, clinical diagnostics and cellular therapies and Medicare, Medicaid, other governmental payers and private insurers reimbursement levels.

In particular, the laws, regulations and policies governing the marketing of an LDT and clinical diagnostic tests and services are extremely complex, and in many instances there are no significant regulatory or judicial interpretations of these laws and regulations. Among other things, pursuant to the FDCA and its implementing regulations, the FDA regulates the research, design, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance, authorization or approval, marketing and promotion and sales and distribution of medical devices in the United States to ensure they are safe and effective. Medical devices are defined by the FDCA to include, among other things, instruments and in vitro reagents or other similar or related articles, which are intended for use in the diagnosis of disease or other conditions. In addition, the FDA regulates the import and export of medical devices. Most LDTs, however, are not currently regulated as medical devices under FDA’s current regulatory framework, although components of LDTs, including, for example, instruments, reagents, and sample collection devices, may be regulated as medical devices. If we are subject to these FDA requirements and do not comply, or later become subject to these requirements and fail to adequately comply, our business operations may be harmed. These requirements may additionally cause delays in our ability to market and sell our products or services, which may, directly or indirectly, reduce our revenue, adversely affect our results of operations and financial condition and harm our business.

We plan to market our CDA test initially as an LDT, and future changes in the FDA’s enforcement discretion for LDTs could subject our operations to much more significant regulatory requirements.

We plan to initially market our CDA test in the United States as an LDT. LDTs have generally been considered to be tests that are designed, developed, validated and used within a single laboratory. The FDA has a policy of enforcement discretion with respect to LDTs, whereby the FDA does not actively enforce its medical device regulatory requirements for these tests. However, in July 2014, the FDA notified Congress of its intent to modify, in a risk-based manner, its policy of enforcement discretion with respect to LDTs. In October 2014, the FDA issued two draft guidance documents stating that it intended to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the existing classification of medical devices. The FDA halted finalization of the draft guidance documents in November 2016 to allow for further public discussion on an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution. However, it is unclear if Congress or the FDA will modify the current approach to the regulation of LDTs in a way that would subject our CDA test to the enforcement of FDA regulatory requirements. The FDA Commissioner and the Director of the Center for Devices and Radiological Health, or CDRH, have expressed significant concerns regarding disparities between LDTs and IVDs that have been reviewed and cleared, authorized or approved by the FDA. The FDA has also determined that certain LDTs do not qualify for enforcement discretion because these tests pose higher risk to the public health. If we market our test initially as an LDT in the United States and the FDA were to determine that our test is not within the enforcement discretion policy for LDTs for any reason, including as a result of new rules, policies or guidance, or due to changes in law, our laboratory and test may become subject to extensive FDA requirements or otherwise impact our business. These types of changes could reduce our revenue or increase our costs and adversely affect our business, prospects, results of operations or financial condition. If required, the regulatory marketing authorization process required to bring our LDT into compliance may involve, among other things, successfully completing additional clinical validations and submitting to and obtaining from the FDA pre-market clearance (510(k)), authorization for a de novo petition, or approval of a Premarket Approval Application, or PMA. Furthermore, pending legislative proposals, if enacted, such as the Verifying Accurate, Leading-edge IVCT Development Act of 2018, or VALID Act, could create new or different regulatory and compliance burdens on us and could have a negative effect on our ability to keep products on the market or develop new products, which could have a material effect on our business. In the event that we market our test initially as an LDT in the

 

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United States and then the FDA requires marketing authorization of our LDT in the future, the FDA ultimately may not grant any clearance, authorization or approval requested by us in a timely manner, or at all.

Our proprietary CDA device is an analytical instrument used as part of our CDA test, which may increase our risk that the FDA concludes that our test does not qualify as an LDT.

While the FDA has historically exercised enforcement discretion over the majority of LDTs, there are certain factors that have led to increased regulatory oversight. One such factor is the use of customized equipment and reagents. If the FDA were to conclude that our CDA device requires clearance, market authorization, or approval to be used as part of an LDT, it could prevent us from being able to offer our test. Even if we submit our CDA device for clearance, authorization, or approval, the FDA ultimately may not grant such clearance, authorization or approval requested by us in a timely manner, or at all.

Offering our proprietary cancer screening and detection test from more than one laboratory may increase our risk that the FDA concludes that our test does not qualify as an LDT.

While the FDA has historically exercised enforcement discretion over the majority of LDTs, it has narrowly defined an LDT as a test that is designed, manufactured and used within a single laboratory. However, the FDA has not historically taken enforcement action against laboratories with multiple facilities that offer the same test. If we offer our CDA test from more than one of our laboratories, the FDA could conclude that our test no longer qualifies as an LDT because it is not used within a single laboratory. If the FDA were to conclude that our cancer screening and detection test is not an LDT, that could prevent us from being able to offer our test until we receive appropriate FDA clearance, authorization or approval. Even if we submit for clearance, authorization or approval, the FDA may not ultimately grant such clearance, authorization or approval requested by us in a timely manner, or at all.

Failure to comply with U.S. federal or state laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority or accrediting body, could cause us to lose the ability to perform our CDA test in the United States, experience disruptions to our business, or become subject to administrative or judicial sanctions.

We are subject to CLIA, a U.S. federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Any testing subject to CLIA regulation must be performed in a CLIA-certified laboratory. CLIA certification is also required in order for us to be eligible to bill U.S. state and U.S. federal healthcare programs, as well as commercial payers, for our tests. We have obtained a CLIA Certificate of Registration for our laboratory in San Jose, California. We are seeking voluntary accreditation of our San Jose laboratory by CAP, and are awaiting CAP inspection to receive CAP accreditation and a CLIA Certificate of Accreditation for this laboratory. We also plan to open a new laboratory in Philadelphia, Pennsylvania in 2020 and will seek to obtain CLIA certification and CAP accreditation for this laboratory. To maintain our CAP accreditation and CLIA certification, we are subject to survey and unannounced inspection every two years.

We are required to maintain a California clinical laboratory license for our San Jose laboratory to conduct testing. We will be required to maintain a Pennsylvania clinical laboratory license in order for our to-be-established Philadelphia laboratory to conduct testing. In addition, some other states may require our California and Philadelphia laboratories to be licensed there in order to accept blood samples from those states or may have such requirements in the future. To maintain our state licenses, we may be subject to survey and inspection every two years.

Failure to comply with applicable clinical laboratory certification and licensure requirements, including proficiency testing, may result in a range of enforcement actions, including suspension, limitation or revocation of our CAP accreditation, CLIA certificate and/or state licenses, imposition of a directed plan of corrective

 

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action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services. Any of these enforcement actions or our failure to renew our CLIA certificate, a state license or other accreditation could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.

If we are unable to obtain or maintain regulatory clearance or approvals in the United States, or if we experience delays in receiving clearance or approvals, our growth strategy may not be successful.

In the United States, we plan to initially offer our CDA test for clinical use as an LDT in our laboratory in San Jose, California. Because we developed this test and will offer this test solely for use within our laboratory, we believe that we may market the test as an LDT. Under current FDA enforcement policies, the FDA does not enforce its premarket clearance or approval requirements for certain LDTs before commercialization. The FDA could disagree with this assessment, however, in which case we would be required to obtain clearance, authorization, or approval for our device and/or test to continue marketing.

In addition, a key element of our longer term business strategy is to place our CDA device in other laboratories to broaden access to our technology and increase demand for our tests and any future tests that we may develop. In order to distribute our cancer screening and detection test and device outside of our laboratory, we will need to obtain FDA clearance, authorization, or approval for our test and device.

The FDA regulates medical devices, including IVDs, that are sold and distributed in U.S. interstate commerce. Unless an exemption applies, generally, before a new medical device or a new use for a medical device may be sold or distributed in the United States, the medical device must receive either a 510(k) premarket notification clearance, de novo marketing authorization, or a PMA approval from the FDA. As a result, before we can market or distribute our device and test in the United States for use by other clinical testing laboratories, we must first obtain FDA 510(k) clearance, de novo marketing authorization, or PMA approval. We have not yet applied for clearance, marketing authorization, or approval from the FDA, and need to complete additional validations before we are ready to apply. We believe it would likely take two years or more to conduct the clinical studies and trials necessary to obtain clearance, marketing authorization, or approval from the FDA to commercially launch our tests outside of our clinical laboratory. Once we apply, we may not receive the FDA clearance, marketing authorization, or approval for the commercial use of our device and test on a timely basis, or at all.

The FDA can delay, limit or deny clearance, authorization or approval of a device for many reasons, including:

 

   

inability to demonstrate to the satisfaction of the FDA that the products are safe or effective for their intended uses;

 

   

the FDA’s disagreement with the design, conduct or implementation of the clinical studies or the analysis or interpretation of data from preclinical studies, analytical studies or clinical studies;

 

   

serious and unexpected adverse device effects experienced by participants in clinical studies;

 

   

the data from preclinical studies, analytical studies and clinical studies may be insufficient to support clearance, authorization or approval, where required;

 

   

the inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

 

   

an advisory committee, if convened by the FDA, may recommend against approval of a PMA or other application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical studies, limitations on approved labeling or distribution and use restrictions, or even if an advisory committee, if convened, makes a favorable recommendation, the FDA may still not approve the product;

 

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the FDA may identify deficiencies in our marketing application, and in our or our collaborators’ manufacturing processes, facilities or analytical methods;

 

   

the potential for policies or regulations of the FDA to change significantly in a manner rendering clinical data or regulatory filings insufficient for clearance, authorization or approval; and

 

   

the FDA may audit clinical study data and conclude that the data are not sufficiently reliable to support a PMA application.

There are numerous FDA personnel assigned to review different aspects of marketing submissions, and uncertainties can be presented by their ability to exercise judgment and discretion during the review process. During the course of review, the FDA may request or require additional data and information, and the development and provision of these data and information may be time-consuming and expensive. The process of obtaining regulatory clearances, authorizations or approvals to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances, authorizations or approvals on a timely basis or at all for our proposed products. If we are unable to achieve clearance or approval or if other laboratories do not accept our device and test, our ability to grow our business could be compromised.

Clinical studies involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

In order to receive FDA clearance, marketing authorization, or approval for the commercialization of our CDA test and/or device in the United States, we must conduct, at our own expense, extensive analytical testing and clinical studies to demonstrate safety and effectiveness of our device and test for the intended indication of use. Clinical testing is expensive, can take many years to complete, if at all, and its outcome is uncertain. Failure can occur at any time during the clinical study process. Also, our CDA device and test may not prove to be safe and efficacious in the clinical studies, and they may not meet all the applicable regulatory requirements needed to receive the FDA approval. The results of our clinical studies may not support the clinical validation needed to offer our cancer screening and detection test in the U.S. In addition, clinical claims for our test that are supported by the clinical studies results may not be commercially viable.

If we receive FDA clearance, marketing authorization, or approval of our CDA device and test, we will continue to be subject to extensive FDA regulatory oversight.

Medical devices are subject to extensive regulation by the FDA in the United States. If our CDA device is cleared, authorized, or approved by the FDA, we will need to comply with applicable regulatory requirements and our failure to do so could result in enforcement action by the FDA or state agencies. Any of these enforcement actions could also result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action in the United States. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications. It is difficult to predict how these executive actions will be implemented and the extent to which they will affect the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

 

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Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees. Misconduct by our employees could include intentional failures to comply with the regulations of the FDA or non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, or report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We currently have a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and our code of conduct and the other precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant civil, criminal and administrative penalties, including, without limitation, damages, monetary fines, individual imprisonment, disgorgement of profits, possible exclusion from participation in Medicare, Medicaid and other U.S. federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and curtailment or restructuring of our operations, which could have a significant impact on our business. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

If we fail to comply with healthcare regulations, we could face substantial enforcement actions, including civil and criminal penalties and our business, operations and financial condition could be adversely affected.

We could be subject to healthcare fraud and abuse laws and patient privacy laws of both the U.S. federal government and the states in which we conduct our business. The laws include, but are not limited to:

 

   

the AKS, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for an item or service or the purchasing or ordering of a good or service, for which payment may be made under U.S. federal healthcare programs such as the Medicare and Medicaid programs;

 

   

the FCA which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other payers that are false or fraudulent, and which may apply to entities like us which provide coding and billing information to customers;

 

   

HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and

 

   

state law equivalents of each of the above U.S. federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by U.S. federal laws, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines

 

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and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable U.S. federal and state privacy, security and fraud laws may prove costly.

Our collection, use and disclosure of individually identifiable information, including health and/or employee information, is subject to U.S. state, U.S. federal and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.

The privacy and security of personally identifiable information stored, maintained, received or transmitted, including electronically, is a major issue in the United States and abroad. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, legal standards for privacy, including but not limited to “unfairness” and “deception,” as enforced by the FTC and state attorneys general, continue to evolve, and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose customers, which could have a material adverse effect on our business. Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about the activities of various government agencies and in the number of private privacy-related lawsuits filed against companies. Concerns about our practices with regard to the collection, use, retention, disclosure or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.

Numerous foreign, U.S. federal and state laws and regulations govern the collection, dissemination, use and confidentiality of personally identifiable health information, or PHI, including state privacy and confidentiality laws (including state laws requiring disclosure of breaches); U.S. federal and state consumer protection and employment laws; HIPAA; and European and other foreign data protection laws. These laws and regulations are increasing in complexity and number, may change frequently and sometimes conflict.

HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, including PHI by health plans, healthcare clearinghouses and healthcare providers that submit certain covered transactions electronically, or covered entities, and their business associates, which are persons or entities that perform certain services for, or on behalf of, a covered entity that involve creating, receiving, maintaining or transmitting PHI.

Penalties for violations of these laws vary. For instance, penalties for failure to comply with a requirement of HIPAA and the Health Information Technology for Economic and Clinical Health Act, or HITECH, vary significantly, and can include civil monetary penalties of up to $57,051 per violation, not to exceed $1.71 million per calendar year for each provision that is violated. A single breach incident can result in findings of violations of multiple provisions, leading to possible civil penalties in excess of $1.71 million in a single year. Violations of HIPAA may also result in criminal penalties. For example, a person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. In certain circumstances, criminal fines up to $250,000 per violation and/or up to ten years’ imprisonment may be imposed. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. Responding to government investigations regarding alleged violations of these and other laws and regulations, even if ultimately concluded with no findings of violations or no penalties imposed, can consume company resources and impact our business and, if public, harm our reputation.

 

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Further, various states, such as California and Massachusetts, have implemented similar privacy laws and regulations that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. These laws and regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state laws are more protective, we may have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. The interplay of U.S. federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our clients and potentially exposing us to additional expense, adverse publicity and liability. Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as PHI, or personally identifiable information along with increased customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our services, decrease demand for our services, reduce our revenue and/or subject us to additional liabilities.

We may be exposed to liabilities under the United States Foreign Corrupt Practices Act, or FCPA, and Chinese anti-corruption laws, and any determination that we have violated these laws could have a material adverse effect on our business or our reputation.

We are subject to the FCPA. The FCPA generally prohibits us from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We are also subject to the anti-bribery laws of China. Our current customers include state-owned enterprises and, after we obtain the Class III medical device registration certificate, we plan to sell our CDA tests and devices to hospitals in China, many of which are state-owned. As a result, we may engage with Chinese officials or persons of equivalent status during the ordinary course of our business. We do not fully control the interactions that our employees and sales agents have with those officials or persons, and they may try to increase sales volumes of our tests through means that constitute violations of the FCPA, the PRC anti-bribery laws or other related laws. As our business expands, the applicability of the FCPA and other anti-bribery laws to our operations will increase. Our procedures and controls to monitor anti-bribery compliance may fail to protect us from reckless or criminal acts committed by our employees or sales agents. If we, due to either our own deliberate or inadvertent acts or those of others, fail to comply with applicable anti-bribery laws, our reputation could be harmed and we could incur criminal or civil penalties, other sanctions and/or significant expenses, which could have a material adverse effect on our business, including our financial condition, results of operations, cash flows and prospects.

Risks Relating to Doing Business in China

Changes in China’s economic, political or social conditions or government policies and the current tensions in international economic relations could have an adverse effect on our business and operations.

Most of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, allocation of resources, evolving regulatory system and lack of sufficient transparency in the regulatory process.

While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on China’s overall economic growth. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our

 

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cancer screening and detection test and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

Recently there have been heightened tensions in economic relations between the United States and China. The U.S. government has recently imposed, and proposed to impose additional, new or higher tariffs on products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded by imposing largely commensurate tariffs on products imported from the United States. Amid these tensions, the U.S. government has imposed and may impose additional measures on entities in China, including sanctions. As a biotechnology company with operations primarily based in China as well as the United States, our plan to commercialize our CDA test in, and export our CDA device to, the United States after obtaining relevant approvals from the FDA could be adversely affected by these or future trade developments. In addition, increased protectionism and the risk of global trade war, which result in weaker global trade and lower levels of economic activity, could reduce the demand for our tests and adversely affect our business.

Uncertainties with respect to China’s legal system could have a material adverse effect on our business and operations.

We conduct our businesses in China primarily through our PRC subsidiaries. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. The PRC legal system is evolving rapidly, and the interpretation of many laws, regulations and rules may contain inconsistencies, and the enforcement of these laws, regulations and rules involves uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations. Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation of these policies and rules. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to continue our operations.

Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, which may impose new burdens on us.

The PRC Foreign Investment Law, or the FIL, was enacted by the National People’s Congress of the PRC on March 15, 2019 and became effective on January 1, 2020, which replaces the trio of previous laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. This law has become the legal foundation for foreign investment in the PRC. The FIL 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. The Implementation Rules to the Foreign Investment Law were promulgated by the State Council on December 26, 2019 and became effective on January 1, 2020. However, uncertainties exist with respect to interpretation and implementation of the FIL and its Implementation

 

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Rules, which may adversely impact our corporate governance practice and increase our compliance costs. For instance, we might be required by governmental interpretations or implementing rules of the FIL to adjust the corporate governance of certain of our PRC subsidiaries in a five-year transition period. In addition, the FIL imposes information reporting requirements on foreign investors or foreign invested enterprises. Failure to take timely and appropriate measures to cope with any of these or other regulatory compliance requirements under the FIL may lead to rectification obligations, penalties, or other regulatory sanctions on us.

PRC regulations of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of the offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiaries. We may make loans to our PRC subsidiaries or we may make additional capital contributions to our wholly foreign-owned subsidiaries in China. Any loans by us to our wholly foreign-owned subsidiaries in China to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the PRC State Administration of Foreign Exchange, or SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope.

In March 2015, SAFE promulgated the Circular on Reforming the Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested Enterprises, or SAFE Circular 19, which took effect and replaced certain previous SAFE regulations from June 1, 2015. SAFE further promulgated the Circular of the SAFE on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which took effective on June 9, 2016 and, among other things, amended certain provisions of SAFE Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope, or to provide loans to persons other than affiliates, unless otherwise permitted under its business scope. SAFE Circular 19 and SAFE Circular 16 may limit our ability to transfer the net proceeds from this offering to our PRC subsidiaries and convert the net proceeds into RMB.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our wholly foreign-owned subsidiaries in China. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

As a holding company, we conduct most of our business through our subsidiaries incorporated in China. We may rely on dividends paid by these PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. In addition, if any of our PRC

 

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subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

Our business benefits from certain financial incentives and discretionary policies granted by local governments. Expiration of, or changes to, these incentives or policies would have an adverse effect on our results of operations.

In the past, local governments in the PRC granted certain financial incentives from time to time to our PRC subsidiaries as part of their efforts to encourage the development of local businesses. The timing, amount and criteria of government financial incentives are determined within the sole discretion of the local government authorities and cannot be predicted with certainty before we actually receive any financial incentive. We generally do not have the ability to influence local governments in making these decisions. Local governments may decide to reduce or eliminate incentives at any time. In addition, some of the government financial incentives are granted on a project basis and subject to the satisfaction of certain conditions, including completion of the specific project therein. We cannot guarantee that we will satisfy all relevant conditions, and if we do not, we may be deprived of the relevant incentives. We cannot assure you of the continued availability of the government incentives currently enjoyed by us. Any reduction or elimination of incentives would have an adverse effect on our results of operations. Government grant and subsidies we recognized for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2019 was RMB1.4 million, RMB5.9 million (US$825,000) and RMB2.6 million (US$367,000), respectively.

Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a PRC resident enterprise for PRC income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders, and have a material adverse effect on our results of operations and the value of your investment.

Under the EIT Law and its implementation rules, an enterprise established outside China may be considered as a PRC resident enterprise provided that its “de facto management body” is located within China. According to the implementation rules, “de facto management body” is interpreted as a body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise. In April 2009, the PRC State Administration of Taxation, or the SAT, issued the Circular of the SAT on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the De Facto Standards of Organizational Management, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect SAT’s general position on how “de facto management body” rule should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder minutes, are located or maintained in China; and (iv) at least 50% of voting board members or senior executives habitually reside in China.

According to these rules and regulations, we may be considered as a PRC resident enterprise by the PRC tax authorities for tax purposes and a number of unfavorable tax consequences could follow. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain

 

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with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC tax at a rate of 25% on our worldwide income, which could materially reduce our net income, and we may be required to withhold tax from dividends we pay at a rate of 10% in case to non-PRC enterprise shareholders (including ADS holders) or 20% in case to non-PRC individual shareholders (including ADS holders); in addition, gains realized on the sale or other disposition of our ordinary shares or ADSs may be subject to PRC tax, at a rate of 10% in case of non-PRC enterprise shareholders (including our ADS holders) or 20% in case of non-PRC individual shareholders (including ADS holders), if such dividends or gains are deemed to be from PRC sources. Any such PRC tax liability may be reduced under an applicable tax treaty. However, it is unclear whether non-PRC shareholders (including our ADS holders) of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

In February 2015, the SAT issued the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only indirect transfers but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides certain criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity that directly owns the taxable assets, may report such indirect transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. However, according to the aforesaid safe harbor rule, the PRC tax would not be applicable to the transfer by any non-resident enterprise of ADSs of our company acquired and sold on public securities markets.

In October 2017, the SAT issued the Public Notice on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, which took effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority. If the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid the tax payable in time.

We face uncertainties on the reporting and consequences of future private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under SAT Public Notice 7 and SAT Public Notice 37, and may be required to expend valuable resources to comply with them or to establish that we should not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.

 

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Fluctuations in exchange rates could adversely affect our business and the value of our securities.

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB is no longer pegged to the U.S. dollar, and the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

Governmental control of currency conversion may limit our ability to utilize our cash balance effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our holding company incorporated in the BVI primarily relies on dividend payments from our PRC subsidiaries to fund our cash and financing requirements. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

In light of the flood of capital outflows, the PRC government may from time to time impose more restrictive foreign exchange policies and increase scrutiny of major outbound capital movements. More restrictions and substantial vetting processes may be required by SAFE or other government authorities to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

PRC laws and regulations have more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

PRC laws and regulations, such as the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, Anti-Monopoly Law of the PRC and the Rules of the PRC Ministry of Commerce, or the MOFCOM, on Implementation of the Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Rules, established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where offshore companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.

 

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According to these laws and regulations, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns, and for mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises that have “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction. The MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

We might grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to change their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.

SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration on Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing, referred to as “offshore special purpose vehicle.” In addition, such PRC residents must update their SAFE registrations when the offshore special purpose vehicle undergoes any change of basic information (including change of such PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. According to the Notice on Further Simplifying and Improving the Foreign Exchange Administration Policies on Direct Investment, or SAFE Notice 13, released on February 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the foreign exchange registration under SAFE Circular 37 from June 2015.

Due to the inherent uncertainty in the implementation of regulatory requirements by the PRC governmental authorities, SAFE Circular 37 registration might not be always practically available under all circumstances as prescribed in those regulations. In addition, we may not at all times be fully aware or informed of the identities of all the PRC residents holding direct or indirect interest in our company. We cannot assure you that all of our PRC resident registered or beneficial owners are in compliance and will comply with SAFE regulations, including those requiring them to make necessary applications, filings and amendments. To our knowledge, certain of our PRC resident individual shareholders who hold an insignificant number of our shares have not completed their SAFE Circular 37 registration yet. The failure or inability of our PRC resident shareholders to comply with the SAFE registrations, or failure by us to update the foreign exchange registrations of our PRC subsidiaries, may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC laws for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

Failure to comply with PRC regulations regarding the registration requirements for stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed

 

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Companies, or the Stock Option Rules. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. Certain of our directors, executive officers, employees and consultants who are PRC residents may participate in our 2019 Plan, and therefore will be subject to these regulations upon the completion of this offering. Failure of these PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.

In addition, the SAT has issued certain circulars concerning employee share incentives. Under these circulars, our employees working in the PRC who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.

Our business and our profitability may be negatively affected by the rising labor costs and potential obligations to make additional contributions of social insurance premium and housing funds.

In recent years, labor costs in China have continued to increase, driven by increased inflation, as well as enactment of new labor laws. As a result, we expect our labor costs, including wages and employee benefits, to continue to increase in the foreseeable future. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations may be adversely affected.

In addition, we are required by PRC laws and regulations to participate in various employee social security plans that are organized by municipal and provincial governments, including housing, pension, medical insurance, work-related injury insurance, employment injury insurance, maternity insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. The relevant government agencies may examine whether an employer has made adequate payments of these requisite statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We have historically failed to promptly make social insurance and housing fund contributions in full with respect to our employees. If the relevant PRC authorities determine that we shall make supplemental social insurance and housing fund contributions, and that we are subject to fines and legal sanctions, our business, financial condition and results of operations may be adversely affected.

Proceedings instituted by the SEC against five China-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

Starting in 2011 five China-based accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies

 

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operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against five China-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of certain China-based companies that are publicly traded in the U.S. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms, including our independent registered public accounting firm, from practicing before the SEC for a period of six months. Four of these China-based accounting firms appealed to the SEC against this decision and, on February 6, 2015, each of the four China-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The firms’ ability to continue to serve all their respective customers is not affected by the settlement. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative proceeding is restarted.

If the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies, and the market price of our ordinary shares may be adversely affected.

In December 2018, the SEC and the PCAOB issued a joint statement on regulatory access to audit and other information internationally that cites the ongoing challenges faced by them in overseeing the financial reporting of companies listed in the United States with operations in China, the absence of satisfactory progress in discussions on these issues with Chinese authorities and the potential for remedial action if significant information barriers persist.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as Nasdaq of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs

 

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from the Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

The audit report included in this prospectus is prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our prospectus filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Risks Relating to the ADSs and This Offering

An active trading market for our shares or the ADSs may not develop and the trading price for the ADSs may fluctuate significantly.

Our ADSs have been approved for listing on the NASDAQ Global Market. We have no current intention to seek a listing for our Class A ordinary shares on any other stock exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our Class A ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs has been determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading price of our ADSs may be volatile regardless of our operating performance.

The trading price of our ADSs could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. Furthermore, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our ADSs, regardless of our operating

 

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performance. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

variations in our revenues, earnings and cash flow;

 

   

announcements of new investments, acquisitions, business partnerships or joint ventures by us or our competitors;

 

   

announcements of new test and service offerings, solutions and expansions by us or our competitors;

 

   

failure on our part to realize monetization opportunities as expected;

 

   

changes in financial estimates by securities analysts;

 

   

detrimental adverse publicity about us, our technology, our tests or our industry;

 

   

additions or departures of key personnel;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

   

regulatory developments affecting us or our industry; and

 

   

potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade, and you may not be able to sell your shares at prices you deem acceptable. In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Our dual-class share structure with different voting rights will limit your ability to influence our corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Immediately after the completion of this offering, our ordinary shares will consist of 8,338,260 Class A ordinary shares and 2,863,100 Class B ordinary shares, assuming the underwriters do not exercise their option to purchase additional ADSs and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of its convertible loans to us. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one (1) vote per share, while holders of Class B ordinary shares will be entitled to ten (10) votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity who is not an affiliate of the holder, such Class B ordinary shares will be automatically and immediately converted into the same number of Class A ordinary shares. We sell Class A ordinary shares represented by our ADSs in this offering.

All of the outstanding ordinary shares held by Dr. Chris Chang Yu through CRS Holdings Inc. and a portion of our ordinary shares held by Zhangjiang GU KE Company Limited and Zhijun Sihang Holdings Limited, respectively, have been re-designated as Class B ordinary shares. Dr. Chris Chang Yu, Zhangjiang GU KE Company Limited and Zhijun Sihang Holding Limited beneficially own 63.5%, 12.3% and 8.7%, respectively, of the aggregate voting power of our company as of the date of this prospectus, and will beneficially own approximately 61.3%, 11.8% and 8.3%, respectively, of the aggregate voting power of our company immediately

 

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after the completion of this offering, due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their option to purchase additional ADSs and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of its convertible loans to us. As a result of the dual-class share structure and the concentration of ownership, these holders of Class B ordinary shares will have considerable influence over matters such as decisions regarding change of directors, mergers, change of control transactions and other significant corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

After this offering, share ownership will remain concentrated in the hands of our principal shareholders and management, who will continue to be able to exercise a direct or indirect controlling influence on us.

We anticipate that our directors, officers and current five percent or greater shareholders and affiliated entities will together beneficially own approximately 87.3% of the voting power of our ordinary shares issued and outstanding after this offering, assuming the underwriters do not exercise their option to purchase additional ADSs and excluding shares issuable upon exercise of unexercised options or the warrants we have agreed to grant to the representatives of the underwriters or upon conversion by Zhijun of its convertible loans to us. As a result, these shareholders, acting together, will have significant influence over all matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other shareholders, including those who purchase ADSs in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other shareholders may view as beneficial.

If securities or industry analysts do not publish research about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us, or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.

Substantial future sales or perceived potential sales of ADSs or ordinary shares, including upon the exercise of vested options, in the public market could cause the price of ADSs to decline.

Sales of substantial amounts of our ADSs or ordinary shares, including upon the exercise of vested options, in our company in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 11,201,360 ordinary shares (including 1,333,360 Class A ordinary shares represented by ADSs) outstanding immediately after this offering, assuming the representatives of the underwriters do not exercise their over-allotment option or the warrants we have agreed to grant to the representatives of the underwriters and excluding shares issuable upon the exercise of unexercised options or upon conversion by Zhijun of its convertible loans to us. In connection with this offering, we, our directors, executive officers, and our shareholders holding 1% or more of our ordinary shares outstanding prior to the

 

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effective date of this offering have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, at the request of the parties subject to the lock-up restriction, the representatives of the underwriters may exercise their discretion to release the lock-up restriction prior to the expiration of the lock-up period, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. Also, there may be perception that the parties subject to the lock-up restriction will sell the shares after the lock-up period. Sales of substantial amounts of ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs.

Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our memorandum and articles of association (the “M&A”) contain provisions which may have the effect of limiting the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our dual-class voting structure gives disproportionate voting power to the holders of our Class A and Class B ordinary shares. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

As we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

You may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of the ADSs has agreed that if it or the custodian receives any cash dividends or other distributions on Class A ordinary shares or other deposited securities underlying the ADSs, it will pay them to you after deducting its fees and expenses pursuant to the deposit agreement. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary or the custodian is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933 but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, Class A ordinary shares, rights or other

 

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securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying Class A ordinary shares which are represented by your ADSs.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote by giving voting instructions to the depositary. If we instruct the depositary to ask for your instructions, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary shares represented by your ADSs in accordance with your instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw the shares, and become the registered holder of such shares prior to the record date for the general meeting. Under our memorandum and articles of association, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting will be seven days. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our amended and restated articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we instruct the depositary to ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary how to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

 

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You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require a claim to be submitted to the U.S. federal or state courts in the City of New York have non-exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company.

We are a company incorporated under the laws of the British Virgin Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, certain of our

 

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directors and executive officers reside within China for a significant portion of a year or are PRC nationals and a substantial portion of their assets are within China. As a result, it could be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the British Virgin Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the British Virgin Islands and China, see “Enforceability of Civil Liabilities.”

In addition, BVI companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. For more information, see “Description of Share Capital—Differences in Corporate Law—Shareholders’ Suits”. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law, and to impose liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory enforcement in the BVI of judgments obtained in the United States, although the courts of the BVI will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary. For more information, see “Enforceability of Civil Liabilities.” This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

Lastly, under the provisions of the BVI Act, the memorandum and articles of association of a company are binding as between the company and its members and between the members. In general, members are bound by the decision of the majority or special majorities as set out in the articles of association or in the Act. As for voting, the usual rule is that with respect to normal commercial matters members may act from self-interest when exercising the right to vote attached to their shares.

If the majority members have infringed a minority member’s rights, the minority may seek to enforce its rights either by derivative action or by personal action. The BVI Act provides that any member of a company is entitled to payment of the fair value of his shares upon dissenting from certain matters. For more information, see “Description of Share Capital—Differences in Corporate Law—Shareholders’ Suits.”

Generally any other claims against a company by its members must be based on the general laws of contract or tort applicable in the BVI or their individual rights as members as established by the company’s memorandum and articles of association, which are more limited than the rights afforded investors under the laws of many states in the United States.

You may have difficulty enforcing judgment against us or our directors and officers.

We are a BVI holding company and most of our assets are located outside of the United States. In addition, certain of our directors and executive officers are residents of the PRC, and substantially all of their assets and our assets are located in the PRC. As a result, you may not be able to effect service of process upon us or these directors and executive officers, or to enforce against them judgments obtained in courts in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the BVI and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

 

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You must rely on the judgment of our management as to the use of the proceeds from this offering, and such use may not produce income or increase our ADS price.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in the application of the proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. The proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The proceeds from this offering may be placed in investments that do not produce income or that lose value.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

We are now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s ICFR. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of such extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies.

We may take advantage of the aforesaid exemptions for so long as we remain an emerging growth company until the fifth anniversary from the date of our initial listing. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

As we are a foreign private issuer and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.

The Nasdaq listing rules require listed companies to have, among other things, a majority of their board members be independent. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the BVI, does not require a majority of our board to consist of independent directors. Since a majority of our board of directors will not consist of independent directors, fewer board members may be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, the Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members each of whom must be an independent director (unless any exception under the Nasdaq listing rules applies). We, as a foreign private issuer, are not subject to these requirements, except for

 

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the aforesaid independence requirement for audit committee members (unless any exception under the Nasdaq listing rules applies). The Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of the Nasdaq listing rules in determining whether shareholder approval is required on such matters and to appoint a compensation committee and a nominating and corporate governance committee. However, we intend to follow home country practice to not have all members of our compensation committee and nomination and corporate governance committee composed entirely of independent directors. In addition, we may consider following home country practice in lieu of the requirements under the Nasdaq listing rules with respect to certain other corporate governance standards which may afford less protection to investors.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of Nasdaq Stock Market LLC. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could subject U.S. Holders of our Class A ordinary shares or ADSs to adverse U.S. federal income tax consequences.

A non-U.S. corporation will be a PFIC, if, in any particular year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) the average percentage of the value of its assets that produce or are held for the production of passive income, based on the average of four quarterly testing dates, is at least 50% (the “asset test”). Because the PFIC tests must be applied each year, and the composition of our income and assets and the value of our assets may change, it is possible that we may be a PFIC in the current or a future year. In particular, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC.

The asset test is generally applied using the fair market values of a non-U.S. corporation’s assets. The asset test is applied using adjusted tax bases of the assets, however, if the non-U.S. corporation is a controlled foreign corporation (“CFC”) and is not publicly traded for the year. We are likely to be a CFC following the transition to a dual class structure and will become publicly traded as a result of the offering. It is not entirely clear under current law how the asset test should be applied when a non-U.S. corporation is either a CFC or is not publicly traded for only part of the year. We believe, however, that it is reasonable for shareholders to apply the asset test using fair market values of our assets for each quarter that we either are not a CFC or are publicly traded, although the Internal Revenue Service (“IRS”) could take a different position.

 

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If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of our Class A ordinary shares or ADSs and on the receipt of distributions on our Class A ordinary shares or ADSs to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules, and such U.S. Holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our Class A ordinary shares or ADSs, we will generally continue to be treated as a PFIC for all subsequent years during which such U.S. Holder holds our Class A ordinary shares or ADSs, unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election on IRS Form 8621.

See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Status” for more details regarding the foregoing.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “would,” “could,” “should,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “seek,” “goal,” “objective,” “anticipate,” “assume,” “contemplate,” “predict,” “potential,” “continue,” “positioned” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements relating to:

 

   

the implementation of our business model and growth strategies;

 

   

trends and competition in the cancer screening and detection market;

 

   

our expectations regarding demand for and market acceptance of our cancer screening and detection tests and our ability to expand our customer base;

 

   

our ability to obtain and maintain intellectual property protections for our CDA technology and our continued research and development to keep pace with technology developments;

 

   

our ability to obtain and maintain regulatory approvals from the NMPA, the FDA and the relevant U.S. states and have our laboratories certified or accredited by authorities including the CLIA;

 

   

our future business development, financial condition and results of operations and our ability to obtain financing cost-effectively;

 

   

potential changes of government regulations;

 

   

general economic and business conditions in China and elsewhere;

 

   

our ability to hire and maintain key personnel; and

 

   

our relationship with our major business partners and customers.

You should read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors that could adversely affect our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This prospectus contains statistical data and information estimates that we obtained from various government and private publications, including industry data and information from Frost & Sullivan. Although we have not independently verified the data, we believe that the publications and reports are reliable. The market data contained in this prospectus involves a number of assumptions, estimates and limitations. The cancer screening and detection market may not grow at the rates projected by market data, or at all. The failure of this

 

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market to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$12.2 million, or approximately US$14.5 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon the initial public offering price of US$12.00 per ADS.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees and obtain additional capital. We plan to use the net proceeds of this offering primarily for the following purposes:

 

   

approximately 30% of the net proceeds for research studies in China and the U.S. and the development of new cancer screening and detection tests and technologies;

 

   

approximately 30% of the net proceeds for the expansion of our marketing and sales channels in China and our clinical laboratory expansion in the U.S.; and

 

   

the balance for general corporate purposes.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Relating to the ADSs and This Offering—You must rely on the judgment of our management as to the use of the proceeds from this offering, and such use may not produce income or increase our ADS price.”

In using the proceeds of this offering, under PRC laws and regulations as an offshore holding company we are only permitted to provide funding to our subsidiaries in China through loans or capital contributions, subject to the approval of government authorities and limits on the amount of loans. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulations of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of the offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” We expect that a portion of the net proceeds from this offering will be used in the PRC in the form of RMB and mainly by funding our wholly foreign-owned subsidiaries through capital contributions.

 

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DIVIDEND POLICY

Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under British Virgin Islands law, namely that our company may only pay dividends if our directors are satisfied on reasonable grounds that we are solvent immediately after the dividend payment in the sense that we will be able to pay our debts as they become due in the ordinary course of business, and the value of assets of our company will exceed our total liabilities. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We have never declared or paid dividends and do not have any plan to pay any cash dividends on our ordinary shares in the foreseeable future and after this offering. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the British Virgin Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Risk Factors—Risks Relating to Doing Business in China—We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”

If we pay any dividends on our Class A ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to the Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2019:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the re-designation of 100,000,000 authorized ordinary shares to 70,000,000 Class A ordinary shares and 30,000,000 Class B ordinary shares pursuant to the resolutions of our board of directors and shareholders on October 29, 2019; and

 

   

on a pro forma as adjusted basis to reflect (i) the re-designation of 100,000,000 authorized ordinary shares to 70,000,000 Class A ordinary shares and 30,000,000 Class B ordinary shares pursuant to the resolutions of our board of directors and shareholders on October 29, 2019, and (ii) the sale of 1,333,360 Class A ordinary shares in the form of ADSs by us in this offering at the initial public offering price of US$12.00 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of September 30, 2019  
     Actual     Pro forma     Pro forma as adjusted  
     RMB     US$     RMB     US$     RMB     US$  
     (in thousands)  

Shareholders’ deficit:

            

Ordinary shares (US$0.01 par value per share; 100,000,000 shares authorized and 9,046,000 shares issued and outstanding on an actual basis)(1)

     495       69       —         —         —         —    

Class A ordinary shares (US$0.01 par value per share; none authorized, issued and outstanding on an actual basis; 70,000,000 shares authorized, 6,310,700 issued and outstanding on a pro forma basis; 70,000,000 shares authorized, 7,644,060 issued and outstanding on a pro forma as adjusted basis)

     —         —         319       44       414       58  

Class B ordinary shares (US$0.01 par value per share; none authorized, issued and outstanding on an actual basis; 30,000,000 shares authorized, 2,735,300 issued and outstanding on a pro forma basis and on a pro forma as adjusted basis)

     —         —         176       25       176       25  

Additional paid-in capital

     201,522       28,194       201,522       28,194       288,855       40,412  

Accumulated deficits

     (242,858     (33,977     (242,858     (33,977     (242,858     (33,977

Accumulated other comprehensive income

     767       107       767       107       767       107  

Noncontrolling interest

     116       16       116       16       116       16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (39,958     (5,591     (39,958     (5,591     47,470       6,641  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1)

Includes shares that were repurchased and cancelled prior to September 30, 2019, and subsequently issued to the PRC shareholders for no consideration, which are contingently issuable shares and considered to be issued for accounting purposes in the September 30, 2019 unaudited interim financial statements.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of September 30, 2019 was approximately (US$6.6 million), or (US$0.73) per ordinary share and (US$0.73) per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our intangible assets, goodwill and total consolidated liabilities.

Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the initial public offering price of US$12.00 per ADS and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after September 30, 2019, other than to give effect to our sale of the ADSs offered in this offering at the initial public offering price of US$12.00 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2019 would have been US$5.6 million, or US$0.54 per ordinary share and US$0.54 per ADS. This represents an immediate increase in net tangible book value of US$1.27 per ordinary share and US$1.27 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$11.46 per ordinary share and US$11.46 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per ordinary share     Per ADS  

Initial public offering price

   US$ 12.00     US$ 12.00  

Net tangible book value as of September 30, 2019

   US$ (0.73   US$ (0.73

Pro forma net tangible book value after giving effect to this offering

   US$ 0.54     US$ 0.54  

Amount of dilution in net tangible book value to new investors in this offering

   US$ 11.46     US$ 11.46  

The following table summarizes, on a pro forma basis as of September 30, 2019, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent     Amount      Percent  

Existing shareholders(1)

     9,046,000        87   US$ 20,535,179        56   US$ 2.27      US$ 2.27  

New investors

     1,333,360        13   US$ 16,000,320        44   US$ 12.00      US$ 12.00  

Total

     10,379,360        100   US$ 36,535,499        100     

 

Note:

(1)

Includes shares that were repurchased and cancelled prior to September 30, 2019, and subsequently issued to the PRC shareholders for no consideration, which are contingently issuable shares and considered to be issued for accounting purposes in the September 30, 2019 unaudited interim financial statements.

 

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The discussion and tables above assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 1,163,500 ordinary shares issuable upon the exercise of outstanding share options, and there are 1,105,300 ordinary shares available for future issuance upon exercise of future grants under our 2019 share incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the BVI in order to enjoy the following benefits:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the British Virgin Islands. These disadvantages include, but are not limited to, the following:

 

   

the BVI has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

   

BVI companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our current operations are conducted in the PRC, and substantially all of our assets are located in the PRC. Certain of our current directors and officers are nationals and residents of the PRC and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to bring an action against us or them in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed AnPac US, located at Suite 127, 2260 Clove Drive, San Jose, CA 95128, as our agent to receive service of process with respect to any action brought against us in the courts of the State of Delaware under the federal securities laws of the United States or under the securities laws of the State of Delaware.

Maples and Calder (Hong Kong) LLP, our counsel as to BVI law, have advised us that the courts of the BVI will not necessarily enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. Additionally, there is no statutory enforcement in the BVI of judgments obtained in the United States, however, the courts of the BVI will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary provided that:

 

  (a)

the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;

 

  (b)

the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;

 

  (c)

in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the U.S. court;

 

  (d)

recognition or enforcement of the judgment in the BVI would not be contrary to public policy; and

 

  (e)

the proceedings pursuant to which judgment was obtained were not contrary to natural justice.

 

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Zhong Lun Law Firm, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of China would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Zhong Lun Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the BVI or the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of the BVI or the United States. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the BVI and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or our ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

We began our operations by incorporating AnPac Bio in January 2010 as a BVI business company limited by shares under the BVI Act. AnPac Bio was established primarily as a holding company and has established our operating subsidiaries in China and the United States. Below is a list of our operating subsidiaries:

 

   

Changhe Bio-Medical Technology (Yangzhou) Co., Ltd., or AnPac Yangzhou: our wholly foreign owned subsidiary established in the PRC in March 2010 to market and sell our cancer screening and detection tests and conduct biology related research and development activities.

 

   

Changwei System Technology (Shanghai) Co., Ltd., or AnPac Changwei: our wholly foreign owned subsidiary established in the PRC in March 2011 as our global research and development center.

 

   

AnPac Bio-Medical Technology (Lishui) Co., Ltd. or AnPac Lishui: our wholly foreign owned subsidiary established in the PRC in October 2012 as our headquarters and to manufacture our CDA devices.

 

   

Shanghai Xinshenpai Technology Co., Ltd., or Shanghai Xinshenpai: our wholly owned subsidiary established in the PRC in October 2013 to market and sell our cancer screening and detection tests.

 

   

AnPac Shanghai: our wholly owned subsidiary established in the PRC in April 2014 to market and sell our cancer screening and detection tests.

 

   

AnPac US: our wholly owned subsidiary established in the United States in September 2015 to conduct research studies and clinical studies for our research on cancer screening and detection tests.

 

   

Lishui AnPac Medical Laboratory Co., Ltd., or Lishui Laboratory: our wholly owned subsidiary established in the PRC in July 2016 to conduct cancer screening and detection tests.

 

   

Shiji (Hainan) Medical Technology Limited, or Shiji Hainan: our wholly owned subsidiary established in the PRC, which we acquired from third parties in November 2017 to conduct cancer screening and detection tests.

 

   

Penghui Health Management (Shanghai) Co., Ltd., or Penghui Health Management: our wholly owned subsidiary established in the PRC in May 2018 to market and sell our cancer screening and detection tests.

 

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The chart below summarizes our corporate structure and identifies our principal subsidiaries as of the date of this prospectus:

 

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive loss data and selected consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 and selected consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected unaudited interim condensed consolidated statements of comprehensive loss data and selected unaudited interim condensed consolidated cash flow data for the nine months ended September 30, 2018 and 2019 and the selected unaudited interim condensed consolidated balance sheet data as of September 30, 2019 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table presents our selected consolidated statements of comprehensive loss data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

    For the year ended December 31,     For the nine months
ended September 30,
 
    2017     2018     2018     2019  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for number of shares and per share data)  

Selected Consolidated Statements of Comprehensive Loss Data:

           

Revenues:

           

Cancer screening and detection tests

    5,203       9,557       1,337       6,106       7,677       1,074  

Physical checkup packages

    483       693       97       525       436       61  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    5,686       10,250       1,434       6,631       8,113       1,135  

Cost of revenues(1)

    (3,954     (5,672     (794     (3,634     (4,266     (597
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,732       4,578       640       2,997       3,847       538  

Operating expenses:

           

Selling and marketing expenses(1)

    (6,490     (9,827     (1,375     (7,202     (10,730     (1,501

Research and development expenses(1)

    (11,405     (10,106     (1,414     (7,746     (7,138     (999

General and administrative expenses(1)

    (24,938     (28,847     (4,036     (18,773     (50,181     (7,021

Other operating income

    178       593       84       475       138       19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (40,923     (43,609     (6,101     (30,249     (64,064     (8,964

Non-operating income and expenses:

           

Interest expense, net

    (338     (925     (129     (677     (1,897     (265

Foreign exchange gain (loss), net

    644       (2,776     (388     (1,970     (1,937     (270

Share of net (loss) gain in equity method investments

    (3     (441     (62     (224     442       62  

Other income (expense), net

    1,309       5,256       735       484       (1,130     (158
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (39,311     (42,495     (5,945     (32,636     (68,586     (9,595

Income tax (expense) benefit

    (9     199       28       177       (113     (16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (39,320     (42,296     (5,917     (32,459     (68,699     (9,611
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to non-controlling interests

    (244     (233     (32     (233     (194     (27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the year ended December 31,     For the nine months
ended September 30,
 
    2017     2018     2018     2019  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for number of shares and per share data)  

Net loss attributable to ordinary shareholders

    (39,076     (42,063     (5,885     (32,226     (68,505     (9,584
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

           

Ordinary shares-basic and diluted

    (4.92     (4.93     (0.69     (3.78     (7.55     (1.06

Weighted average number of ordinary shares used in loss per share computation:

           

Ordinary shares-basic and diluted

    7,937,300       8,524,100       8,524,100       8,523,300       9,076,600       9,076,600  

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     —          317        44        237        246        34  

Selling and marketing expenses

     2,444        2,871        402        2,750        5,204        728  

Research and development expenses

     4,044        1,958        274        1,440        1,848        259  

General and administrative expenses

     4,270        2,790        390        2,008        20,809        2,911  

The following table presents our selected consolidated balance sheet data as of December 31, 2017 and 2018 and September 30, 2019:

 

     As of December 31,      As of September 30,  
     2017      2018      2019  
     RMB      RMB      US$      RMB      US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

              

Current assets:

              

Cash and cash equivalents

     11,412        12,887        1,803        23,975        3,354  

Total current assets

     17,949        20,852        2,917        38,416        5,374  

Total assets

     60,148        52,762        7,382        72,017        10,075  

Current liabilities:

              

Short-term debt

     12,500        25,961        3,632        29,655        4,149  

Amounts due to related parties

     3,077        28,687        4,013        29,692        4,154  

Total current liabilities

     35,349        71,438        9,995        108,928        15,239  

Total liabilities

     50,651        75,155        10,515        111,975        15,666  

Total shareholders’ equity (deficit)

     9,497        (22,393      (3,133      (39,958      (5,591

 

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The following table presents our selected consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Selected Consolidated Statements of Cash Flow Data:

                 

Net cash used in operating activities

     (21,641      (31,147      (4,358      (23,031      (32,616      (4,561

Net cash used in investing activities

     (8,017      (2,680      (375      (7,890      (2,829      (396

Net cash generated from financing activities

     39,807        36,271        5,074        36,271        47,539        6,650  

Effect of exchange rate changes on cash and cash equivalents

     (2,893      (969      (136      (828      (1,006      (142
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

     7,256        1,475        206        4,522        11,088        1,551  

Cash and cash equivalents at beginning of year

     4,156        11,412        1,597        11,412        12,887        1,803  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of year

     11,412        12,887        1,803        15,934        23,975        3,354  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Financial Measure

In evaluating our business, we consider and use adjusted net loss, a non-GAAP measure, as a supplemental measure to review and assess our operating performance. The presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with U.S. GAAP. We define adjusted net loss as net loss adjusted to add back share-based compensation expenses.

We believe that adjusted net loss helps to identify underlying trends in our business that could otherwise be distorted by the effect of the expenses that we add back to net loss. We believe that adjusted net loss provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

The non-GAAP financial measure “adjusted net loss” is not defined under U.S. GAAP, is not presented in accordance with U.S. GAAP and has limitations as an analytical tool. One of the key limitations of using adjusted net loss is that it does not reflect all of the items of income and expense that affect our operations. Share-based compensation has been and may continue to be incurred in our business and is not reflected in the presentation of adjusted net loss. Further, the non-GAAP financial measure “adjusted net loss” may differ from the non-GAAP information used by other companies, including peer companies, and therefore their comparability may be limited.

We compensate for these limitations by reconciling the non-GAAP financial measure to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. This non- GAAP financial measure should be viewed in addition to, and not as a substitute for, our reported results prepared in accordance with U.S. GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP that are included elsewhere in this prospectus.

 

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The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     Year ended December 31,     Nine months ended
September 30,
 
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (39,320     (42,296     (5,917     (32,459     (68,699     (9,611

Add:

            

Share-based compensation expenses

     10,758       7,936       1,110       6,435       28,107       3,932  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net loss

     (28,562     (34,360     (4,807     (26,024     (40,592     (5,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Operating Data

The following table sets forth our selected operating data for the periods indicated:

 

     For the year ended
December 31,
     For the nine months ended
September 30,
 
     2017      2018      2018      2019  

Number of commercial CDA-based tests(1) completed

     19,336        41,607        29,036        41,544  

Number of CDA-based tests(1) for research purposes completed

     6,004        4,873        3,791        4,947  

 

Note:

(1)

CDA-based tests, when used in this prospectus, refer to our CDA tests and our combination tests.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Overview

We are a biotechnology company focusing on early cancer screening and detection. We market and sell a multi-cancer screening and detection test that uses our innovative, patented CDA technology and our proprietary CDA device. In addition to early cancer screening and detection, our CDA technology has demonstrated potential to assist physicians in cancer diagnosis, prognosis and recurrence.

Our CDA technology provides a comprehensive platform, on which we have developed our CDA test and our proprietary CDA device. Our CDA test can detect and assess an individual’s overall cancer risk with high accuracy. We also offer combination tests that combine our CDA test with auxiliary tests based on other cancer screening and detection technologies, such as biomarker-based tests, to detect the risk of specific cancer types.

Our CDA technology provides a highly accurate, early-stage risk assessment of the occurrence of cancer. As of September 30, 2019, our CDA technology had been shown in numerous retrospective validation studies to be able to detect the risk of 26 cancer types with high sensitivity and specificity rates. These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. Our CDA technology requires only a standard blood sample from a tested individual, which minimizes the inconvenience and invasive procedures and avoids the harmful side effects that are inherent to many other technologies.

We have established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. Our database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as of June 30, 2019, which represented the historical aggregate number of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of volume of commercial cancer screening and detection tests conducted and fifth in terms of revenue from commercial cancer screening and detection tests, according to Frost & Sullivan.

We have established two clinical laboratories in China and one clinical laboratory in the United States. Our principal laboratory is a licensed biomedical clinical laboratory located in Lishui, Zhejiang Province, China, where we perform our commercial CDA-based tests, including our CDA tests and combination tests, as well as a variety of other tests including immunological and biochemical tests. Our laboratory in Haikou, Hainan Province, China is a licensed genomics clinical laboratory where we perform gene sequencing tests. In addition to these two clinical laboratories, we also have a research and development center located in Shanghai, China, where we develop our next-generation cancer screening and detection technology and tests. In the United States, we have a clinical laboratory located in San Jose, California for which we obtained a CLIA Certificate of Registration in March 2019. Our San Jose laboratory is equipped to perform our CDA tests and biochemical tests. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to

 

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conduct research studies on our CDA technology at this laboratory. We also plan to open a second U.S. clinical laboratory in Philadelphia, Pennsylvania in 2020.

As of September 30, 2019, we had filed 210 patent applications globally; among them, 121 patents had been granted, including 55 in greater China (including seven in Taiwan) and 16 in the United States, and 89 patent applications were pending in China, the United States and nearly 20 countries and regions. Our patent applications broadly cover apparatuses and methods for detecting diseases at early stages, and they strategically encompass important, specific embodiments of these apparatuses and methods. Our patent portfolio is one of the world’s largest in early cancer screening and detection using next-generation technologies, according to Frost & Sullivan.

In 2015, we performed our first commercial CDA-based test in China. Since then, we have generated revenue in China for four consecutive years. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from sales of our cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from RMB6.1 million in the nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019. Our total revenues increased by 80.3% from RMB5.7 million in 2017 to RMB10.3 million (US$1.4 million) in 2018 and increased by 22.3% from RMB6.6 million in the nine months ended September 30, 2018 to RMB8.1 million (US$1.1 million) in the same period of 2019. In the United States, we plan to commence marketing our CDA test as an LDT sometime in 2020 at our CLIA-registered laboratory in San Jose.

Key Factors Affecting Our Results of Operations

Our business and operating results are influenced by certain general factors that affect China’s early cancer screening and detection market, including the increasing prevalence of cancer in China, growth of total healthcare expenditures, and technological trends in cancer diagnosis, treatment and management. Unfavorable changes in these general factors could adversely affect the results of our operations. In addition to these general trends, we believe that our results of operations are more directly affected by certain company-specific factors, including:

Market Adoption of Our CDA-Based Tests

We derive substantially all of our revenues from the sale of our CDA-based tests in China. We expect our business prospects to depend significantly on our ability to increase market adoption of our CDA-based tests in China, as well as our ability to commercialize our CDA-based tests in the U.S.

According to Frost & Sullivan, the market potential in China for early cancer screening and detection technologies increased at a CAGR of 20.7% from US$27.7 billion in 2014 to US$58.8 billion in 2018, and is expected to reach US$115.1 billion in 2023, representing a CAGR of 14.4% over this period. China’s large, aging population, favorable government policies, and relatively low labor costs represent substantial commercial opportunities for our business and enable us to cost-effectively conduct our cancer screening and detection tests at a large scale. However, compared to conventional, more widely accepted cancer screening and detection technologies, we face additional challenges in raising recognition and adoption of our CDA technology by physicians, patients, hospitals, medical institutions, healthcare payers and others in China’s medical community.

We believe that our CDA technology addresses many limitations of current early cancer screening and detection methods, such as its ability to detect the risk of multiple cancers early, cost-effectively and with high accuracy. We have conducted numerous research studies in cooperation with hospitals and medical institutions in China to validate our CDA technology, and we have published the results of 15 completed research studies at the American Society of Clinical Oncology, or ASCO, annual meetings and other medical conferences and medical

 

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journal supplements. To increase market adoption of our CDA-based tests, we intend to continue conducting research studies on our CDA technology on more cancer types and its applications in additional oncological areas, including assistance in diagnosis, prognosis and recurrence, and to present our study results at ASCO annual meetings and other medical conferences and publish them in important medical journals. We are also seeking to cooperate with universities and academic medical centers, hospitals and medical institutions, CROs, managed care companies and other health organizations in the U.S. to conduct research studies on our CDA technology, with a view to commercializing our CDA-based tests in the U.S. market. We plan to initially market our CDA test as an LDT in the U.S. We expect to invest significantly in research studies.

Regulatory Approvals for Our CDA Device by the NMPA

We are currently licensed to manufacture our CDA device and use it to perform our CDA-based tests at our own laboratories in China. To enlarge our total addressable market in China, in December 2018, we applied to the NMPA for a Class III medical device registration certificate for us to use our CDA device to assist in multi-cancer diagnosis. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture of Class III medical devices. With these licenses, we will be permitted to place our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting in physicians’ diagnosis of specified multiple cancers. We expect our revenues to grow substantially after our CDA devices are approved to access the Chinese hospital segment. However, it takes at least three years to obtain a Class III medical device registration certificate and the process is subject to regulatory and other uncertainties.

Our Customer Base and Customer Mix

Our business growth depends significantly on our ability to maintain relationships with our existing customers and attract new customers. Our existing customers in China consist primarily of life insurance companies and other corporations, which offer our CDA-based tests to their insured customers and/or employees. We also attract customers by offering our CDA-based tests as part of annual physical checkup packages and by engaging sales agents to market our tests. We plan to broaden our cancer screening and detection test offerings, including by expanding the range of genomics tests currently conducted at our Haikou laboratory, to attract more customers. If we are able to obtain the Class III medical device registration certificate and update our medical device manufacture license for our CDA device, we will seek to access the Chinese hospital market segment and provide our tests to more individual customers through Chinese hospitals. We expect our marketing expenses to continue to increase as we seek to increase market adoption of our technology and tests and build up our sales channels.

Since our business scale is currently relatively small and our customers are largely corporates, the availability and timing of large CDA-based test orders could cause our revenues to fluctuate significantly from period to period. This makes it difficult to compare our historical operating results or predict our future performance.

Cost Structure

Our results of operations are significantly affected by our cost structure. The largest component of our operating costs and expenses is staff costs, primarily related to our management as well as research and development, sales and marketing personnel. We have also incurred significant share-based compensation expenses to incentivize our directors, officers, employees and consultants, which were RMB10.8 million, RMB7.9 million (US$1.1 million) and RMB28.1 million (US$3.9 million) in 2017, 2018 and the nine months ended September 30, 2019, respectively. In addition, we have made substantial investments in customer acquisition, research and development, and patent applications to support our future growth and expansion. As we begin to conduct research studies in the U.S., we expect our research and development expenses to significantly increase.

 

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Funding for Our Operations

We have funded our operations primarily through capital contributions from our shareholders, short-term non-bank borrowings and loans from related parties. With the continuing expansion of our business, we will require further funding, possibly through public or private equity financings, debt financings, or other business arrangements. The availability and costs of funding could significantly impact our results of operations and financial position. Furthermore, debt financings could require us to agree to restrictive financial covenants, which could make it more difficult for us to achieve our goals.

Key Operating Data

We regularly review a number of operating metrics, including those set forth below, to evaluate our business, measure our performance and identify trends affecting our business.

The following table sets forth our key operating data for the periods indicated:

 

     For the year ended December 31,      For the nine months ended
September 30,
 
     2017      2018      2018      2019  

Number of commercial CDA-based tests(1) completed

     19,336        41,607        29,036        41,544  

Number of CDA-based tests(1) for research purposes completed

     6,004        4,873        3,791        4,947  

 

Note:

(1)

Including our CDA tests and combination tests.

Key Components of Results of Operations

Revenues

We drive our revenues from two sources: (i) revenue from sales of cancer screening and detection tests (predominantly commercial CDA-based tests) and (ii) net revenue from sales of physical checkup packages.

The table below presents our revenues by type in absolute amount and as a percentage of our total revenues for the periods indicated.

 

     Year ended December 31,     For the nine months ended
September 30,
 
     2017      2018     2018     2019  
     RMB      %      RMB      US$      %     RMB     %     RMB     US$     %  
     (in thousands, except %)  

Cancer screening and detection tests

     5,203        91.5        9,557        1,337        93.2       6,106       92.1       7,677       1,074       94.6  

Physical checkup packages

     483        8.5        693        97        6.8       525       7.9       436       61       5.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     5,686        100.0        10,250        1,434        100.0       6,631       100.0       8,113       1,135       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cancer Screening and Detection Tests

Our revenue from sales of cancer screening and detection tests consists predominantly of revenue from the sales of our commercial CDA-based tests; we also generated an insignificant amount of revenue from our commercial genomics tests. Our commercial CDA-based tests comprise our CDA tests and our combination tests, which combine our CDA test and, on an auxiliary basis, biomarker-based cancer screening and detection tests performed either by us or by third-party clinical laboratories. We also recognize revenue from sales of commercial CDA-based tests that we provide as part of the physical checkup packages we sell. We expect that

 

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our revenue generated from our commercial CDA-based tests will increase as our business grows, including by providing additional tailored CDA-based tests to meet customer demand and exploring other sources of revenue related to our CDA test. We also expect to recognize additional revenue from commercial genomics tests as we devote more resources to marketing and sales of these tests.

Physical Checkup Packages

Our net revenue from physical checkup packages represents our gross billing amount from physical checkup packages that we sell to our customers and have performed during a specified period, less (i) the portion of fees for the commercial CDA-based tests contained in the packages (which are recognized as part of our revenue from sales of CDA-based tests) and (ii) our cost of physical checkup services (other than CDA-based tests) contained in the packages, which are payments we make to third-party physical checkup centers to which we outsource these services. We believe that selling annual physical checkup packages can expand our customer base for commercial CDA-based tests, and we intend to devote more resources to selling physical checkup packages and expect our net revenue from these packages to continue increasing.

Cost of Revenues

Our cost of revenues is related to our sales of cancer screening and detection tests, predominantly our commercial CDA-based tests and, to a lesser extent, our genomics tests. It mainly consists of staff costs, outsourced testing costs, blood sample taking costs, medical consumable costs, share-based compensation, and depreciation and amortization of our CDA devices. Staff costs mainly include salaries and employee benefit expenses of personnel engaged in laboratory testing functions. Outsourced testing cost represents our cost of engaging third-party clinical laboratories for their performance of auxiliary biomarker-based cancer screening and detection tests, which are included as part of our combination tests. Blood sample taking costs mainly include our cost of engaging third-party nursing service providers who collect blood samples on our behalf for our commercial CDA-based tests. We expect our cost of revenues to continue to grow as we increase the volume of our commercial CDA-based tests.

Gross Profit and Gross Margin

Our gross profit represents our revenue from sales of cancer screening and detection tests minus our cost of revenue, plus our net revenues from sales of physical checkup packages. Our gross profit margin is affected primarily by the mix and relative prices of the cancer screening and detection tests that we sell within a specified period, as well as changes in net revenues from sales of physical checkup packages as a percentage of our total revenues.

Operating Expenses

Our operating expenses include selling and marketing expenses, research and development expenses, and general and administrative expenses. The following table sets forth a breakdown of these expenses for the periods indicated.

 

    Year ended December 31,     For the nine months ended September 30,  
    2017     2018     2018     2019  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Operating expenses:

           

Selling and marketing expenses

    6,490       9,827       1,375       7,202       10,730       1,501  

Research and development expenses

    11,405       10,106       1,414       7,746       7,138       999  

General and administrative expenses

    24,938       28,847       4,036       18,773       50,181       7,021  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    42,833       48,780       6,825       33,721       68,049       9,521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Selling and Marketing Expenses

Our selling and marketing expenses primarily consist of staff costs for personnel engaged in sales, marketing and customer support functions, share-based compensation, marketing expenses, travel expenses and office expenses. We expect that our selling and marketing expenses will increase as we continue to build out our sales and marketing teams and engage more sales agents and other channel partners to increase our market penetration.

Research and Development Expenses

Our research and development expenses primarily consist of staff costs for personnel engaged in research and development functions, share-based compensation, travel expenses, rental costs, costs of consumables and accessories, and depreciation and amortization (mainly related to our clinical laboratory facilities and CDA devices used for research and development purposes). We expect that our research and development expenses will increase significantly in the near future, because we not only have multiple on-going research studies in China, but have also entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology at our CLIA-registered laboratory in San Jose, California.

General and Administrative Expenses

Our general and administrative expenses primarily include staff costs for personnel engaged in general and administrative functions, share-based compensation, patent service fees, professional service fees, depreciation and amortization (mainly related to our land use rights for the land we acquired in Lishui, Zhejiang Province and the office facilities on that land), rental and property management fees and office expenses. We expect our general and administrative expenses to continue increasing to support our business growth, but we expect that they will eventually decrease as a percentage of our revenues once our business scale increases.

Other income, net

Our net other income primarily includes government grants we received, including for 2018 the price that the government in Lishui, Zhejiang Province of China paid us for repurchase of a portion of a parcel of land that we did not utilize.

Taxation

BVI

Our Company is incorporated in the BVI, and we conduct our business operations primarily through our subsidiaries in China and the U.S.

All dividends, interest, rents, royalties, compensation and other amounts paid by our company to persons who are not resident in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of our company by persons who are not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.

No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to any shares, debt obligation or other securities of our company.

All instruments relating to transfers of property to or by our company and all instruments relating to transactions in respect of the shares, debt obligations or other securities of our company and all instruments relating to other transactions relating to the business of our company are exempt from payment of stamp duty in the BVI. This assumes that our company does not hold an interest in real estate in the BVI.

 

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There are currently no withholding taxes or exchange control regulations in the BVI applicable to our company or its members.

China

Our subsidiaries in China are subject to the statutory enterprise income tax at a rate of 25%, in accordance with the EIT Law. Some of our PRC subsidiaries enjoy preferential enterprise income tax rates.

Dividends, interest, rent or royalties payable by our PRC subsidiaries to their non-PRC resident enterprise investors, and proceeds from any such non-resident enterprise investor’s disposition of assets (after deducting the net value of such assets) will be subject to withholding tax at a rate of 10%, unless the jurisdiction of incorporation of the respective non-PRC resident enterprise investor has a tax treaty or arrangements with the PRC that provides for a reduced withholding tax rate or an exemption from withholding tax. If our BVI holding company were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Relating to Doing Business in China—Under the PRC Enterprise Income Tax Law, we may be classified as a PRC resident enterprise for PRC income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders, and have a material adverse effect on our results of operations and the value of your investment.” For the foreseeable future, we intend to invest all the undistributed earnings of our subsidiaries incorporated in the PRC and do not plan to have our PRC subsidiaries distribute any dividend. Therefore, no withholding tax is expected to be incurred.

United States

Our U.S. subsidiary, AnPac US, is subject to U.S. federal corporate income tax at a rate of 21% for the nine months ended September 30, 2019, 21% for the year ended December 31, 2018 and 35% for the year ended December 31, 2017. AnPac US is also subject to state income tax in California for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2019.

 

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Results of Operations

The following table summarizes our results of operations for the periods indicated:

 

    Year ended December 31,     For the nine months ended September 30,  
    2017     2018     2018     2019  
    RMB     % of
Revenues
    RMB     US$     % of
Revenues
    RMB     % of
Revenues
    RMB     US$     % of
Revenues
 
    (in thousands, except %)  

Revenues:

           

Cancer screening and detection tests

    5,203       91.5       9,557       1,337       93.2       6,106       92.1       7,677       1,074       94.6  

Physical checkup packages

    483       8.5       693       97       6.8       525       7.9       436       61       5.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    5,686       100.0       10,250       1,434       100.0       6,631       100.0       8,113       1,135       100.0  

Cost of revenues

    (3,954     (69.5     (5,672     (794     (55.3     (3,634     (54.8     (4,266     (597     (52.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,732       30.5       4,578       640       44.7       2,997       45.2       3,847       538       47.4  

Operating expenses:

                   

Selling and marketing expenses

    (6,490     (114.1     (9,827     (1,375     (95.9     (7,202     (108.6     (10,730     (1,501     (132.3

Research and development expenses

    (11,405     (200.6     (10,106     (1,414     (98.6     (7,746     (116.8     (7,138     (999     (88.0

General and administrative expenses

    (24,938     (438.6     (28,847     (4,036     (281.4     (18,773     (283.1     (50,181     (7,021     (618.5

Other operating income

    178       3.1       593       84       5.8       475       7.2       138       19       1.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (40,923     (719.7     (43,609     (6,101     (425.5     (30,249     (456.2     (64,064     (8,964     (789.6

Non-operating income and expenses:

                   

Interest expense, net

    (338     (5.9     (925     (129     (9.0     (677     (10.2     (1,897     (265     (23.4

Foreign exchange gain (loss), net

    644       11.3       (2,776     (388     (27.1     (1,970     (29.7     (1,937     (270     (23.9

Share of net (loss) gain in equity method investments

    (3     (0.1     (441     (62     (4.3     (224     (3.4     442       62       (5.4

Other income (expense), net

    1,309       23.0       5,256       735       51.3       484       7.3       (1,130     (158     (13.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (39,311     (691.4     (42,495     (5,945 )      (414.6     (32,636     (492.2     (68,586     (9,595     (845.4

Income tax (expense) benefit

    (9     (0.2     199       28       1.9       177       2.7       (113     (16     (1.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (39,320     (691.5     (42,296     (5,917 )      (412.6     (32,459     (489.5     (68,699     (9,611     (846.8

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Revenues

Our revenues increased by 22.3% to RMB8.1 million (US$1.1 million) for the nine months ended September 30, 2019 from RMB6.6 million for the same period of 2018, due to an increase in our revenue from sales of cancer screening and detection tests, partially offset by a decrease in our net revenue from sales of physical checkup packages.

 

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Our revenue generated from sales of cancer screening and detection tests increased by 25.7% to RMB7.7 million (US$1.1 million) for the nine months ended September 30, 2019 from RMB6.1 million for the same period of 2018, due to an increase in the sales volume of our CDA-based tests, which was partially offset by a decrease in the average selling price of our CDA-based tests as we offered greater discounts to certain customers as a marketing strategy.

Our net revenue generated from sales of physical checkup packages decreased by 17.0% to RMB436,000 (US$61,000) for the nine months ended September 30, 2019 from RMB525,000 for the same period of 2018, primarily due to a substantial increase in the volume of physical checkup packages that we sold to a sales agent at prices lower than our costs as part of our customer acquisition strategy.

Cost of Revenues

Our cost of revenues increased by 17.4% to RMB4.3 million (US$597,000) for the nine months ended September 30, 2019 from RMB3.6 million for the same period of 2018. The increase was primarily attributable to our increased sales volume of CDA-based tests, which resulted in an increase in the testing cost for outsourced biomarker-based tests as well as increases in blood sample taking costs and medical consumables costs. The increase in our cost of revenues was also attributable to an increase in depreciation expense, as we put more CDA devices into use to meet the increased demand for our CDA-based tests.

Gross Profit

Our gross profit increased by 28.4% to RMB3.8 million (US$538,000) for the nine months ended September 30, 2019 from RMB3.0 million for the same period of 2018. Our gross margin increased to 47.4% for the nine months ended September 30, 2019 from 45.2% for the same period of 2018, primarily as a result of economies of scale.

Operating Expenses

Selling and marketing expenses

Our selling and marketing expenses increased by 49.0% to RMB10.7 million (US$1.5 million) for the nine months ended September 30, 2019 from RMB7.2 million for the same period of 2018, primarily due to (i) higher share-based compensation as we granted more options to our marketing and sales personnel, and (ii) higher marketing expenses as we increased our marketing efforts.

Research and development expenses

Our research and development expenses decreased by 7.8% to RMB7.1 million (US$1.0 million) for the nine months ended September 30, 2019 from RMB7.7 million for the same period the year before, primarily because we conducted less research and development activities under one of our research projects, as we came closer to the completion of the project, in the nine months ended September 30, 2019 compared to the same period of 2018. The decrease in our research and development expenses was also attributable to a decrease in our research and development related traveling expenses. These factors were partially offset by higher staff costs and share-based compensation for our research and development personnel.

General and administrative expenses

Our general and administrative expenses increased significantly to RMB50.2 million (US$7.0 million) for the nine months ended September 30, 2019 from RMB18.8 million for the same period of 2018, primarily due to (i) higher professional service fees, primarily related to this offering, and (ii) higher share-based compensation to personnel engaged in general and administrative functions.

 

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Interest Expenses

Our interest expense increased significantly to RMB1.9 million (US$265,000) for the nine months ended September 30, 2019 from RMB677,000 for the same period of 2018, primarily due to an increase in average borrowings.

Other Income, Net

We recognized net other income of RMB484,000 for the nine months ended September 30, 2018, which turned into net other loss of RMB1.1 million (US$158,000) for the same period of 2019, primarily due to an increase in fair value loss as a result of the increase in value of the convertible loans that we borrowed from Zhijun.

Net Loss

As a result of the foregoing, our loss for the year increased by 111.6% to RMB68.7 million (US$9.6 million) for the nine months ended September 30, 2019 from RMB32.5 million for the same period the year before.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenues

Our revenues increased by 80.3% to RMB10.3 million (US$1.4 million) for 2018 from RMB5.7 million for 2017, primarily due to an increase in our revenue from sales of cancer screening and detection tests.

Our revenue generated from sales of cancer screening and detection tests increased by 83.7% to RMB9.6 million (US$1.3 million) for 2018 from RMB5.2 million for 2017, primarily due to a substantial increase in the sales volume of our CDA-based tests, offset in part by more favorable prices at which we offered our CDA-based tests to certain large customers in 2018.

Our net revenue generated from sales of physical checkup packages increased significantly to RMB693,000 (US$97,000) for 2018 from RMB483,000 for 2017, primarily due to a significant increase in the volume of our physical checkup packages sold.

Cost of Revenues

Our cost of revenues increased by 43.4% to RMB5.7 million (US$794,000) for 2018 from RMB4.0 million for 2017. The increase was primarily attributable to our increased sales volume of CDA-based tests, which resulted in an increase in the testing cost for outsourced biomarker-based tests as well as increases in blood sample taking costs and medical consumables costs. The increase in our cost of revenues was also attributable to our share-based compensation of RMB317,000 (US$44,000) in 2018, while we did not recognize any share-based compensation in 2017.

Gross Profit

Our gross profit increased significantly to RMB4.6 million (US$640,000) for 2018 from RMB1.7 million for 2017. Our gross margin increased to 44.7% for 2018 from 30.5% for 2017, primarily because our revenue from sales of cancer screening and detection tests increased at a greater rate than our fixed costs, such as staff costs, as a result of economies of scale. This increase in gross margin is also because our net revenue from sales of physical checkup packages increased as a percentage of our total revenues.

 

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Operating Expenses

Selling and marketing expenses

Our selling and marketing expenses increased by 51.4% to RMB9.8 million (US$1.4 million) for 2018 from RMB6.5 million for 2017, primarily due to (i) higher marketing expenses as we increased our marketing efforts, (ii) higher staff costs as we increased our marketing and sales headcount, and (iii) higher share-based compensation as we granted more options to our marketing and sales personnel.

Research and development expenses

Our research and development expenses decreased by 11.4% to RMB10.1 million (US$1.4 million) for 2018 from RMB11.4 million for 2017, primarily because we granted fewer options to our research and development personnel. These factors were partially offset by higher staff costs as we expanded our research and development team.

General and administrative expenses

Our general and administrative expenses increased by 15.7% to RMB28.8 million (US$4.0 million) for 2018 from RMB24.9 million for 2017, primarily due to higher professional service fees, higher depreciation and amortization of property and equipment, higher staff costs (primarily due to an increase in headcount), higher patent service expenses, and higher rental costs. These factors were partially offset by a decrease in our share-based compensation, as we granted fewer options to personnel engaged in general and administrative functions.

Interest Expenses

Our interest expense increased to RMB925,000 (US$129,000) for 2018 from RMB338,000 for 2017, primarily due to an increase in average borrowings.

Other Income, Net

Our net other income increased significantly to RMB5.3 million (US$735,000) for 2018 from RMB1.3 million for 2017, primarily due to the price that the government in Lishui, Zhejiang Province of China paid us in 2018 for repurchase of a portion of a parcel of land that we did not utilize.

Net Loss

As a result of the foregoing, our loss for the year increased by 7.6% to RMB42.3 million (US$5.9 million) for 2018 from RMB39.3 million for the prior year.

Non-GAAP Financial Measure

In evaluating our business, we consider and use adjusted net loss, a non-GAAP measure, as a supplemental measure to review and assess our operating performance. The presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with U.S. GAAP. We define adjusted net loss as net loss adjusted to add back share-based compensation expenses.

We believe that adjusted net loss helps to identify underlying trends in our business that could otherwise be distorted by the effect of the expenses that we add back to net loss. We believe that adjusted net loss provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects, and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

 

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The non-GAAP financial measure “adjusted net loss” is not defined under U.S. GAAP, is not presented in accordance with U.S. GAAP and has limitations as an analytical tool. One of the key limitations of using adjusted net loss is that it does not reflect all of the items of income and expense that affect our operations. Share-based compensation has been and may continue to be incurred in our business and is not reflected in the presentation of adjusted net loss. Further, the non-GAAP financial measure “adjusted net loss” may differ from the non-GAAP information used by other companies, including peer companies, and therefore their comparability may be limited.

We compensate for these limitations by reconciling the non-GAAP financial measure to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. This non- GAAP financial measure should be viewed in addition to, and not as a substitute for, our reported results prepared in accordance with U.S. GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP that are included elsewhere in this prospectus.

The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     Year ended December 31,     Nine months ended
September 30,
 
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (39,320     (42,296     (5,917     (32,459     (68,699     (9,611

Add:

            

Share-based compensation expenses

     10,758       7,936       1,110       6,435       28,107       3,932  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net loss

     (28,562     (34,360     (4,807     (26,024     (40,592     (5,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Our principal sources of liquidity have been capital contributions from our shareholders, short-term non-bank borrowings and loans and advances from our related parties. As of September 30, 2019, we had cash and cash equivalents of RMB24.0 million (US$3.4 million), consisting of cash on hand and demand deposits placed with banks. As of September 30, 2019, we had an advance of RMB25.0 million (US$3.5 million) that Jiaxing Zhijun Sihang Investment Partnership Enterprises (Limited Partnership), or Zhijun Sihang, provided to one of our PRC subsidiaries in 2018 (Zhijun Sihang is in the process of making equity contribution of these funds in our company). As of September 30, 2019, our short-term debt included (i) convertible loans of RMB21.7 million (US$3.0 million) that we borrowed from Zhijun in 2018, which have been extended to April 30, 2020, and (ii) a short-term non-bank borrowing of RMB8.0 million (US$1.1 million), the maturity of which has been extended to June 12, 2020.

We believe that our cash and cash equivalents on hand, anticipated equity contributions of our shareholders, borrowings, our anticipated cash flows generated from our operating activities and financial support from our founder and chairman, Dr. Chris Chang Yu will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. After this offering, we may decide to expand our business through additional equity and debt financing. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

In utilizing the proceeds we expect to receive from this offering, we may make additional capital contributions or loans to our PRC subsidiaries. However, most of these uses are subject to PRC regulations.

Substantially all of our revenues in the foreseeable future are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in

 

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foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay dividends in U.S. dollars to us without prior SAFE approval by following these routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

The following table sets forth selected cash flow statement information for the periods indicated:

 

     Year ended December 31,     For the nine months ended September 30,  
     2017     2018     2018     2019  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net cash used in operating activities

     (21,641     (31,147     (4,358     (23,031     (32,616     (4,561

Net cash used in investing activities

     (8,017     (2,680     (375     (7,890     (2,829     (396

Net cash generated from financing activities

     39,807       36,271       5,074       36,271       47,539       6,650  

Effects of exchange rate changes on cash and cash equivalents

     (2,893     (969     (136     (828     (1,006     (142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     7,256       1,475       206       4,522       11,088       1,551  

Cash and cash equivalents at beginning of year

     4,156       11,412       1,597       11,412       12,887       1,803  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

     11,412       12,887       1,803       15,934       23,975       3,354  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2019 was RMB32.6 million (US$4.6 million), which was primarily attributable to our net loss of RMB68.7 million (US$9.6 million) for the same period, as adjusted to add back share-based compensation of RMB28.1 million (US$3.9 million), foreign exchange loss of RMB3.3 million (US$463,000), and fair value loss on convertible loans of RMB3.1 million (US$436,000) before changes in operating assets and liabilities. Our decrease in net operating liabilities of RMB65,000 (US$9,000) was primarily due to an RMB5.9 million (US$822,000) increase in accrued expenses and other current liabilities, an RMB2.4 million (US$340,000) decrease in advances to suppliers and an RMB2.3 million (US$325,000) increase in accounts payable. These factors were partially offset by an RMB5.4 million (US$750,000) increase in accounts receivable as we sold a relatively large amount of CDA tests on credit in the third quarter of 2019, an RMB3.2 million (US$444,000) increase in other current assets and an RMB1.6 million (US$224,000) decrease in advances from customers, primarily related to our CDA-based tests.

Net cash used in operating activities for 2018 was RMB31.1 million (US$4.4 million), which was primarily attributable to our net loss of RMB42.3 million (US$5.9 million) for the same period, as adjusted to deduct gains on disposal of land use right of RMB5.0 million (US$693,000) and a foreign exchange loss of RMB2.5 million (US$346,000) and to add back share-based compensation of RMB7.9 million (US$1.1 million) and depreciation and amortization of RMB3.1 million (US$440,000) before changes in operating assets and liabilities. Our increase in net operating liabilities of RMB874,000 (US$121,000) was primarily due to an RMB2.3 million (US$326,000) increase in advances from customers, primarily related to our CDA-based tests, and an RMB1.4 million (US$195,000) increase in accrued expenses and other current liabilities. These factors were partially offset by an RMB1.6 million (US$230,000) increase in advances to suppliers, and an RMB1.1 million (US$153,000) increase in accounts receivable.

Net cash used in operating activities for 2017 was RMB21.6 million, which was primarily attributable to our net loss of RMB39.3 million for the same period, as adjusted to add back share-based compensation of RMB10.8

 

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million and depreciation and amortization of RMB2.3 million and to deduct a foreign exchange gain of RMB1.8 million before changes in operating assets and liabilities. Our increase in net operating liabilities of RMB6.2 million was primarily due to an RMB5.5 million increase in accrued expenses and other current liabilities, an RMB1.1 million increase in advance from customers. These factors were offset in part by an RMB1.3 million increase in accounts receivable and an RMB1.0 million decrease in amounts due to related parties.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2019 was RMB2.8 million (US$396,000), which was primarily attributable to purchases of property and equipment of RMB2.6 million (US$367,000) and purchases of intangible assets of RMB206,000 (US$29,000).

Net cash used in investing activities for 2018 was RMB2.7 million (US$375,000), which was primarily attributable to payments (net of cash received) for our acquisition of our subsidiary, Shiji Hainan, of RMB3.5 million (US$495,000), purchases of property and equipment of RMB2.4 million (US$338,000), and purchases of long-term investments in certain investee companies of RMB1.6 million (US$217,000), partially offset by proceeds from disposal of land use rights of RMB5.3 million (US$735,000).

Net cash used in investing activities for 2017 was RMB8.0 million, which was primarily attributable to payments (net of cash received) for our acquisition of our subsidiary, Shiji Hainan, of RMB3.3 million, purchase payments for property and equipment of RMB2.6 million, and purchases of long-term investments in certain investee companies of RMB2.1 million.

Financing Activities

Net cash generated from financing activities for the nine months ended September 30, 2019 was RMB47.5 million (US$6.7 million), which was primarily attributable to (i) advances from investors of RMB26.4 million (US$3.7 million), and (ii) proceeds from issuances of ordinary shares of RMB21.0 million (US$2.9 million).

Net cash generated from financing activities for 2018 was RMB36.3 million (US$5.1 million), which was primarily attributable to (i) advances from Zhijun Sihang of RMB25.0 million (US$3.5 million) to one of our PRC subsidiaries in 2018, which constituted a step in the process of Zhijun Sihang making equity contributions of these funds in our company, and (ii) proceeds from short-term borrowings from Zhijun and a non-bank institution of RMB26.6 million (US$3.7 million), partially offset by payment for short-term borrowings from a non-bank institution of RMB14.7 million (US$2.1 million).

Net cash generated from financing activities for 2017 was RMB39.8 million, which was primarily attributable to proceeds from equity contributions of investors of RMB40.2 million.

Capital Expenditures

Our capital expenditures were RMB2.6 million, RMB2.8 million (US$398,000) and RMB2.8 million (US$396,000) for 2017 and 2018 and the nine months ended September 30, 2019, respectively. In these periods, these capital expenditures included the purchases of property and equipment and intangible assets. We will continue to make capital expenditures to meet the needs of our business’ expected growth.

 

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Contractual Obligations

Our contractual obligations include our operating lease commitments related to our business premises. The table below sets forth our contractual obligations as of September 30, 2019:

 

     Total      For the year ending December 31,  
     2019      2020      2021      2022  
     (RMB in thousands)  

Operating lease commitments

     2,220        498        1,236        474        12  

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting and financial reporting personnel and other resources to address our internal controls and procedures. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2017 and 2018, and the review of our interim condensed consolidated financial statements as of September 30, 2019 and for the nine months ended September 30, 2018 and 2019, we and our independent registered public accounting firm identified two material weaknesses in our ICFR. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, a “material weakness” is a deficiency, or a combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified are our company’s lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in application of U.S. GAAP and SEC rules, and our lack of financial reporting policies and procedures that are commensurate with U.S. GAAP and SEC reporting requirements.

We are in the process of implementing a number of measures to address these material weaknesses identified, including: (i) hiring additional qualified accounting and financial reporting personnel with U.S. GAAP and SEC reporting experience, (ii) obtaining advisory services from professional consultants with experience in the requirements of the Sarbanes Oxley Act of 2002 and internal audit guidance on SEC reporting, (iii) expanding the capabilities of our existing accounting and financial reporting personnel through continuous training and education in the accounting and reporting requirements under U.S. GAAP, and SEC rules and regulations, (iv) developing, communicating and implementing an accounting policy manual for our accounting and financial reporting personnel for our recurring transactions and period-end closing processes, and (v) establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of our company’s consolidated financial statements and related disclosures.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligation. See “Risk Factors—Risks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.”

 

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As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s ICFR. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions. However, pursuant to Section 404 and the related rules adopted by the SEC, we, as a public company after being listed, are required to maintain adequate ICFR and include our management’s assessment of the effectiveness of our company’s ICFR in our annual report.

Inflation

Since our inception, inflation has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent change in the consumer price index was 1.8% for December 2017, 1.9% for December 2018 and 3.0% for September 2019. Although we have not been materially affected by inflation, we may be affected if China experiences higher rates of inflation in the future.

Qualitative and Quantitative Disclosures about Market Risk

Concentration of credit risk

Financial instruments may subject us to significant concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts receivables. As of December 31, 2017 and 2018 and September 30, 2019, the aggregate amount of cash and cash equivalents of RMB8.9 million, RMB7.0 million (US$982,000) and RMB9.4 million (US$1.3 million), respectively, was held at major financial institutions located in the PRC, and RMB2.5 million, RMB5.9 million (US$821,000) and RMB14.6 million (US$2.0 million), respectively, was deposited with major financial institutions located outside the PRC. Our management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those Chinese banks in which we have deposits has increased. In the event of bankruptcy of one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since the bank is unlikely to be classified as a secured creditor based on PRC laws.

Accounts receivables, unsecured and denominated in Renminbi, derived from sales on our cancer screening and detection tests and physical checkup packages, are exposed to credit risk. As of December 31, 2017 and 2018 and September 30, 2019, we had three customers, one customer and three customers, respectively, each with a receivable balance exceeding 10% of the total accounts receivable balance. The risk is mitigated by credit evaluations that we perform on our corporate customers.

Currency convertibility risk

A significant portion of our expenses, assets and liabilities are denominated in Renminbi. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not

 

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imply that the Renminbi may be readily convertible into U.S. dollar or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by the PBOC or other institutions require submitting a payment application form together with relevant documents.

Additionally, the value of the Renminbi is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

Foreign currency exchange rate risk

Since July 21, 2005, Renminbi has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The U.S. dollar depreciated against Renminbi by approximately 6.3% in 2017 and appreciated against Renminbi by approximately 5.7% in 2018. As the trade war between the U.S. and China escalated, the U.S. dollar has appreciated against Renminbi to be 1:6.9161 as of January 24, 2020. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar.

The functional currency of our company and AnPac US is the U.S. dollar and the functional currency of our PRC subsidiaries and our reporting currency is Renminbi. Most of our revenues and costs are denominated in RMB, while a portion of cash and cash equivalents and convertible loans are denominated in U.S. dollars. It is difficult to predict how market forces or the PRC or U.S. government policy may impact the exchange rate between the Renminbi and the US$ in the future. Any significant fluctuation of the valuation of RMB may materially affect our cash flows, revenues, earnings and financial position, and the value of any dividends payable on the ADS in US$.

Liquidity risks

As of September 30, 2019, we had RMB24.0 million (US$3.4 million) of cash and cash equivalents and RMB70.5 million (US$9.9 million) of working capital deficit. For the nine months ended September 30, 2019, we incurred RMB32.6 million (US$4.6 million) of negative cash flows from operations and RMB2.8 million (US$396,000) of capital expenditures. We believe that our current liquidity resources, future operating cash flows generated and subsequent committed financing will be adequate to meet our obligations as they come due for a period of at least one year from December 5, 2019, the date at which the consolidated financial statements were available to be issued. In the event of any unexpected adverse change in our business, we have the ability and intent to obtain additional equity or debt financing and we have received financial support from our founder and chairman, Dr. Chris Chang Yu.

Critical Accounting Polices, Judgments and Estimates

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences could be material to the consolidated financial statements.

 

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The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of these policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Revenue Recognition

Effective from January 1, 2017, we early adopted ASC 606, Revenue from Contracts with Customers and subsequent amendments to the initial guidance or implementation guidance issued between August 2015 and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, “ASC 606”).

We derive our revenues principally from customers through our cancer screening and detection tests and physical checkup services. Revenue is recognized when we satisfy the performance obligations in an amount of consideration to which we expect to be entitled in exchange for those services. We evaluate the presentation of revenue on a gross or net basis based on whether we control the services provided to customers and are the principal (namely, on a gross basis), or we arrange for other parties to provide the service to the customers and are the agent (namely, on a net basis). We present value-added taxes as a reduction from revenues.

Revenue from Cancer Screening and Detection Tests

Our revenue from cancer screening and detection tests is primarily generated through the sales of the our proprietary CDA tests and our combination tests, which combines our CDA test and, on an auxiliary basis, tests based on other cancer screening and detection technologies, such as biomarker-based tests, to our customers including corporations and life insurance companies. A contract exists when the master service agreement has been executed and the customer submits a service request, which is a placed order. Our contracts have a single performance obligation which is satisfied upon provision of the CDA-based test(s) and delivery of the CDA-based test result to the customer. We act as the principal as we control the CDA-based test(s) before it is transferred to the customer and record revenue on a gross basis at the point in time when the CDA-based test(s) result is delivered to the customer. In particular, we record revenue generated from our combination tests on a gross basis, including the portion of revenue which we subsequently pay to third parties as consideration for their performance of outsourced auxiliary biomarker-based tests.

Revenue from Physical Checkup Packages

We facilitate corporations and life insurance companies to procure physical checkup services from third-party physical checkup service providers for their respective employees and policy holders. We enter into contracts with corporations and life insurance companies and physical checkup service providers. We consider both the corporations and life insurance companies and the third-party physical checkup service providers as our customers in this type of transaction. Our performance obligation is to facilitate the corporations and life insurance companies and the third-party physical checkup service providers to complete the purchase of physical checkup services, which is not controlled by us before the services are transferred to the corporations and life insurance companies. Therefore, we fulfill our performance obligation at the point in time when the employees of corporations and policy holders of life insurance companies complete the physical checkups and we record the net amount that we retain from these completed transactions as revenue.

We also enter into arrangements to deliver both CDA-based tests and physical checkup services. We are the principal for the CDA-based tests and the agent for the physical checkup services. Revenues for both services are recognized at the point in time when the performance obligation is satisfied upon delivery of the CDA-based test results to the end customers and completion of the physical checkup services, respectively. As we act as both the principal and agent in the arrangement, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis.

 

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Research and development expenses

Research and development expenses primarily are comprised of costs incurred in performing research and development activities, including related personnel and consultant’s salaries, benefits, share-based compensation and related costs, raw materials and supplies for internally-developed product candidates, and external costs of outside vendors engaged to conduct clinical development activities and trials. We expense our research and development expenses as they are incurred.

Share-Based Compensation

We account for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). In accordance with ASC 718, we determine whether an award should be classified and accounted for as a liability award or an equity award. All of our share-based awards were classified as equity awards and were recognized in the consolidated financial statements based on their grant date fair values.

In accordance with ASC 718, we recognize share-based compensation cost for equity awards to employees and non-employees with a performance condition based on the probable outcome of that performance condition—compensation cost is recognized if it is probable that the performance condition will be achieved and shall not be recognized if it is not probable that the performance condition will be achieved.

We have elected to recognize share-based compensation using the straight-line method for all share-based awards granted with graded vesting based on service conditions. We use the accelerated method for all awards granted with graded vesting based on performance conditions. We account for forfeitures as they occur in accordance with ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. With the assistance of an independent third party valuation firm, we determined the fair value of the stock options granted to employees.

Fair value of options

We use the binomial tree option pricing model to estimate the fair value of share options with the assistance of an independent third-party valuation firm. The assumptions used to value the share options granted to employees and nonemployee were as follows:

 

     2017      2018      Nine months ended
September 30, 2019
 

Risk-free interest rate

     2.20%-2.46%        2.46%-3.11%        1.58%-2.50%  

Expected volatility range

     58.59%-65.18%        62.14%-63.61%        60.37%-64.25%  

Exercise multiple

     2.5        2.5        2.5  

Fair market value per ordinary share as at grant dates (US$)

     9.38-9.46        9.46-9.61        9.80  

The estimated fair value of our ordinary shares at their respective grant dates was determined with the assistance of an independent third-party valuation firm. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected volatility is estimated based on the historical volatility of ordinary shares of several comparable companies in the same industry. The expected exercise multiple is based on management’s estimation, which we believe is representative of the future.

 

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The following table sets forth the amount of share-based compensation expense included in each of the relevant financial statement line items:

 

     For the year ended December 31,      For the nine months ended September 30,  
     2017      2018      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     —          317        44        237        246        34  

Selling and marketing expenses

     2,444        2,871        402        2,750        5,204        728  

Research and development expenses

     4,044        1,958        274        1,440        1,848        259  

General and administrative expenses

     4,270        2,790        390        2,008        20,809        2,911  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expenses.

     10,758        7,936        1,110        6,435        28,107        3,932  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recent Accounting Pronouncements

A list of recent relevant accounting pronouncements is included in Note 2 “Summary of Principal Accounting Policies” of our Consolidated Financial Statements.

 

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INDUSTRY

All information and data presented in this section have been derived from an industry report commissioned by us and prepared by Frost & Sullivan, or the Frost & Sullivan Report, unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion includes projections for future growth, which may not occur at the rates that are projected or at all.

Overview

Cancer is a leading cause of mortality and morbidity around the world. There were approximately 18.0 million new cases of cancer worldwide in 2018, and this number is projected to be 20.4 million in 2023. At the same time, China’s population is aging rapidly. The number of people in China over 65 grew at a CAGR of 4.9% from 137.6 million in 2014 to 166.6 million in 2018, and it is expected to grow at a CAGR of 5.2% from 2018 to reach 215.1 million in 2023. This demographic shift offers immense opportunities for China’s cancer screening and detection market, as elderly people generally have a greater risk of suffering from cancers.

Early Cancer Screening and Detection Saves Lives and Reduces Costs

Because early cancer screening and detection potentially shifts cancer diagnosis and treatment to earlier stages of the disease, it can improve patients’ treatment outcomes. Cancer researchers frequently refer to the five-year relative survival rate, which is the probability of being alive five years after cancer diagnosis, compared with the experience of the general population. The five-year relative survival rate of patients at the advanced stages of a cancer, namely stage III and stage IV, generally declines significantly compared with those diagnosed at the early stages, namely stage zero, stage I and stage II. For esophageal, colorectal, cervical and breast cancers, the five-year relative survival rates at the early stages are over 80%, emphasizing the importance of early cancer screening and detection.

Driven by the increasing effectiveness of oncology drugs, especially emerging targeted therapies, the total direct medical cost for cancers (including expenditures for treatment, as well as the cost of care and rehabilitation related to the illness) in China is estimated to increase at a CAGR of 13.1% from RMB411.5 billion in 2018 to RMB761.5 billion in 2023. Typically, the cost of treating cancer is lower when the disease is caught at an earlier stage. This is because if a cancer patient can be diagnosed earlier, that patient may be able to rely on surgical resection rather than drug therapies, or use standard, frontline drugs rather than aggressive experimental regimens. These early stage treatment regimens typically significantly reduce the patient’s lifetime direct medical cost for cancers. For example, the estimated lifetime cost of treatment for a cancer diagnosed at an advanced stage is roughly twice that of a cancer diagnosed at an early stage.

 

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Options for Early Cancer Screening and Detection

Overview

Because of its advantages, early cancer screening and detection represents huge market potential in both China and the United States. However, early cancer screening and detection remains one of the most challenging tasks in the medical field, due to the difficulties in finding cancers early, accurately and cost-effectively. Cancer screening is the use of a test among individuals with a population risk for, or higher probability of, cancer to detect the cancer sooner or prevent its complications. Major options for early cancer screening and detection currently include the following:

 

   

Tumor Markers. The two principal methods for tumor marker detection are immunoassays and molecular testing.

Immunoassays

Immunoassays are tests that detect the presence of a specific antibody or antigen in the body. Tumor markers used in immunoassays are proteins or other biomarkers produced by malignant cells and/or other cells of an organism in response to the onset of cancer. Because tumor markers can be observed in cancer-free subjects, immunoassays that are designed to detect tumor markers need to be used in combination with other tests to confirm cancer diagnoses. Immunoassays for tumor marker detection can be used for various purposes, including screening for cancer, assistance in cancer diagnosis, staging of disease, monitoring the effectiveness of therapy (or prognosis), providing evidence of cancer recurrence. Only a few tumor markers are useful for screening, while most can be used for prognosis or to provide evidence of cancer recurrence. Common tumor markers used in immunoassays include prostate-specific antigen, or PSA, for prostate cancer, cancer antigen 125, or CA-125, for ovarian cancer, and alpha-fetoprotein, or AFP, for hepatocellular carcinoma. Currently, there is no clinically validated tumor marker for esophageal cancer or brain cancer.

Molecular testing

Molecular testing analyzes biological markers associated with cancers in the genome. Two novel techniques of molecular testing are ct-DNA test, which detects circulating tumor DNA in the bloodstream, and CTC test, which detects cells in the bloodstream that have been shed from primary tumors. Neither of these techniques has been used in routine clinical practice. CTC tests can be used in the management of cancer by isolating tumor cells, which allows for morphologic identification and molecular characterization, while ct-DNA tests are currently limited to mutation detection.

 

   

Imaging. Screening for cancer using radiographic imaging, such as mammograms, X-rays and CT scans, has been available for decades, and numerous clinical studies have demonstrated its efficacy in specific instances. Breast cancer and lung cancer are the two cancers that benefit the most from early cancer screening and detection using imaging.

 

   

Biophysical-property based technologies. Biophysical-property based technologies, such as our CDA technology, focus on biophysical properties that exist in human blood and that regulate cell-surface differentiations and intercellular communications. These biophysical properties can signal risks of pre-cancer states and cancers, and they change over time as cancer occurs, progresses or regresses. According to Frost & Sullivan, we are one of the first biotechnology companies worldwide to focus on the detection and measurement of cancers’ biophysical properties.

 

   

Endoscopic exams. Endoscopy has a major role in the detection and characterization of neoplastic lesions along the digestive tract in all screening strategies. Typical endoscopic exams include cystoscopy, colonoscopy, endoscopic retrograde cholangiopancreatography, or ERCP, esophagogastroduodenoscopy, or EGD, and sigmoidoscopy, among others.

 

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In addition to the classifications of cancer screening and detection technologies above, our CDA technology, as well as CTCs, ct-DNAs, exosome, mRNAs and other emerging technologies, are also classified as “next-generation” cancer screening and detection technologies in our industry and related research fields.

Limitations of Current Options for Early Cancer Screening and Detection

Currently available early cancer screening and detection options have significant weaknesses that hinder their use, including:

 

   

Imperfect sensitivity and specificity for early-stage cancer screening and detection. There are currently no sufficiently sensitive tests to detect most cancers in their early stages. For example, there are no clinically validated tumor markers for esophageal or brain cancer, and the current tumor marker test for liver cancer, AFP, has low sensitivity when detecting liver cancer in early stages. Current screening options may also lead to high false positive rates. For example, over the course of ten years of annual mammography, more than 50% of women in the U.S. would experience a false positive mammogram. False positives can result in unnecessary interventions, increased costs and psychological burdens.

 

   

Invasiveness and side effects. Many established tests, such as colonoscopies and pap smears, are invasive. These tests can also result in negative health impacts, such as the risk of perforation with colonoscopies and the radiation exposure risk with mammograms.

 

   

Multiple screening modalities required across cancer types. Currently, there are often multiple detection options for a single type of cancer. Multiple screening modalities are generally required for detection of multiple cancer types, and the complex screening regimens required are difficult for both patients and providers to sustain.

 

   

Equipment for current screening options usually require significant capital expenditures, making screening difficult in resource-limited geographies. Hospitals and clinics must purchase expensive equipment, such as CT scanners, mammogram machines and gene sequencing machines, to perform many common cancer screening and detection tests. Many early cancer screening and detection tests, particularly ct-DNA- and CTC-based tests, are therefore quite expensive.

Market Opportunity

While early detection of cancers greatly improves clinical outcomes by providing clinical care and medical intervention at early stages, China’s early cancer screening and detection industry is still at the starting stage. Based on China’s large population, the market potential in China for early cancer screening and detection technologies increased at a CAGR of 20.7% from US$27.7 billion in 2014 to US$58.8 billion in 2018, and is expected to reach US$115.1 billion in 2023, representing a CAGR of 14.4% over this period. According to Frost & Sullivan, the percentage of people that conducted physical checkups in China in 2018 was estimated to be 31.2%, far below that of 77.0% in the U.S. for the same year. We believe that our CDA technology can address many of the limitations of current early cancer screening and detection methods, and that we are well-positioned to benefit from the expected rapid growth in China’s early cancer screening and detection market.

We believe that the advantages of our CDA technology summarized below can help us seize the tremendous market opportunity:

 

   

Numerous research studies have demonstrated our CDA technology’s ability to detect early-stage cancers with high sensitivity and specificity rates, including those cancers generally considered difficult for liquid-based technologies to test with high accuracy, such as lung and esophageal cancers.

 

   

Our CDA technology is liquid-based, and our tests require only a standard blood sample from a tested individual, which minimizes the invasive procedure required, making our tests side effect-free.

 

   

Retrospective validation studies have shown that our CDA technology, combined with our CDA device, can detect the risk of up to 26 types of cancer using a single blood test.

 

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We developed our CDA technology and our patented CDA device entirely in-house. Our CDA device is much less costly to manufacture than gene sequencing machines used by ct-DNA-based technologies and micro-electrical mechanical devices used by CTC-based technologies. The lower cost of our device substantially reduces our capital expenditure investment and operational costs compared to these other technologies. As a result, our CDA tests are much less expensive than a typical ct-DNA- or CTC-based test.

Early Cancer Screening and Detection Market in China and the United States

China

In China, early cancer screening and detection technologies are typically used in four segments of the market: hospitals, physical checkup centers, independent clinical laboratories and non-medical entities, such as general commercial enterprises and insurance companies.

 

   

Hospitals are the traditional segment of China’s early cancer screening and detection market and are still the market’s largest segment. However, to access the Chinese hospital segment, service providers must obtain the medical device registration certificates issued by the NMPA, which form a high barrier to entry.

 

   

Physical checkup centers are a less regulated market segment, and these centers are supplemental to hospitals in offering cancer screening and detection services to the public. Early cancer screening and detection service providers face intensified competition in this segment, resulting in low bargaining power for them.

 

   

Independent clinical laboratories also provide cancer screening and detection services to customers. However, unlike physical checkup centers, which typically provide immunoassay-based tests, independent clinical laboratories typically offer their customers more advanced technologies, such as ct-DNA- and CTC-based technologies. These laboratories are under strict supervision of the NHC and may require certificates, such as certificates for the compliance with the ISO standards and those issued by China National Accreditation Service for Conformity Assessment, or CNAS, to conduct their business. As a result, their laboratories typically place high demands on early cancer screening and detection service providers that they cooperate with, which moderates competition in this market segment.

 

   

Certain non-medical entities, such as general commercial enterprises and insurance companies, constitute a rapidly developing market segment with high growth potential, as they seek to provide cancer screening services to their employees or insured individuals. These entities may cooperate with early cancer screening and detection companies directly in developing related services. However, because this market segment is relatively disperse, cancer screening and detection service providers must spend more on marketing efforts to address this market segment.

The United States

In the United States, the market for early cancer screening and detection technologies primarily includes four segments: healthcare service providers, insurance companies, retail and enterprises.

 

   

Healthcare service providers include hospitals and independent physicians and clinics; they constitute a highly regulated market segment, like their counterparts in China.

 

   

There are many commercial insurance companies in the United States that purchase early cancer screening and detection services, resulting in a large market segment. For these companies, cost/price is often their principal criterion when selecting early cancer screening and detection services, which forms a barrier to entry into this market.

 

   

Individual consumers can also order cancer screening and detection kits directly from the relevant service providers’ websites. This retail model provides the most convenient way for many consumers to take cancer screening and detection tests.

 

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Similar to the situation in China, general commercial enterprises are also a rapidly developing market segment in the United States; the geographic dispersion of these purchasers requires companies attempting to serve them to expend substantial marketing efforts.

Competitive Landscape

According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies, in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as at June 30, 2019, which represented the historical aggregate of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of the volume of commercial cancer screening and detection tests provided and fifth in terms of revenue from commercial cancer screening and detection tests. We also ranked fourth, among companies that provide next-generation early cancer screening and detection technologies, in terms of the number of patents for inventions related to early cancer screening and detection issued in greater China and fifth in the U.S., both as of June 30, 2019.

 

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BUSINESS

Overview

We are a biotechnology company focusing on early cancer screening and detection. We market and sell a multi-cancer screening and detection test that uses our innovative, patented CDA technology and our proprietary CDA device. In addition to early cancer screening and detection, our CDA technology has demonstrated potential to assist physicians in cancer diagnosis, prognosis and recurrence.

Our CDA technology provides a comprehensive platform, on which we have developed our CDA test and our proprietary CDA device. Our CDA test can detect and assess an individual’s overall cancer risk with high accuracy, including early stage cancer. We also offer combination tests that combine our CDA test with auxiliary tests based on other cancer screening and detection technologies, such as biomarker-based tests, to detect the risk of specific cancer types. When we refer to our technology or tests as a “cancer screening and detection” technology or test in this prospectus, we refer to the detection and assessment of the risk of cancer occurrence, not to cancer diagnosis.

Our CDA technology focuses on biophysical properties in human blood. Recent studies have shown that there is a correlation between certain biophysical properties, including acoustical, electrical, magnetic, nano-mechanical and optical properties, and cancer occurrence. These studies have revealed that biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties’ physical expressions of information in the blood can indicate risks of pre-cancerous states and cancers. These biophysical signals change over time as cancer occurs, progresses or regresses. Our proprietary CDA device uses an integrated sensor system to detect certain biophysical signals in blood samples. After collecting data on these signals, we use our CDA technology and proprietary algorithm to measure and analyze these signals at multiple biological levels (including the protein, cellular and molecular levels) and with multiple parameters (including the overall CDA value, the PTF value and the CTF value). According to Frost & Sullivan, we are one of the first biotechnology companies worldwide to focus on the detection and measurement of cancers’ biophysical properties. In our industry and related research fields, our CDA technology, as well as CTCs, ct-DNAs, exosome, mRNAs and other emerging technologies, are known as “next-generation” cancer screening and detection technologies.

Our CDA technology provides a highly accurate, early-stage risk assessment of the occurrence of cancer. As of September 30, 2019, our CDA technology had been shown in numerous retrospective validation studies to be able to detect the risk of 26 cancer types with high sensitivity and specificity rates. These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. Our CDA technology requires only a standard blood sample from a tested individual, which minimizes the inconvenience and invasive procedures and avoids the harmful side effects that are inherent to many other technologies.

We have established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. Our database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019. For purposes of these rankings, we had approximately 35,000 clinical samples as of June 30, 2019, which represented the historical aggregate number of participants enrolled in our research studies that were developed in clinical sites qualified by competent authorities, such as the NMPA. In addition, among companies offering next-generation early cancer screening and detection technologies in China, in 2018 we ranked first in terms of volume of commercial cancer screening and detection tests conducted and fifth in terms of revenue from commercial cancer screening and detection tests, according to Frost & Sullivan.

We have established two clinical laboratories in China and one clinical laboratory in the United States. Our principal laboratory is a licensed biomedical clinical laboratory located in Lishui, Zhejiang Province, China,

 

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where we perform our commercial CDA-based tests (including our CDA tests and combination tests), as well as a variety of other tests (including immunological and biochemical tests). Our laboratory in Haikou, Hainan Province, China is a licensed genomics clinical laboratory where we perform gene sequencing tests. In addition to these two clinical laboratories, we also have a research and development center located in Shanghai, China, where we develop our next-generation cancer screening and detection technology and tests. In the United States, we have a clinical laboratory located in San Jose, California for which we obtained a CLIA Certificate of Registration in March 2019. Our San Jose laboratory is equipped to perform our CDA tests and biochemical tests. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology at this laboratory. We also plan to open a second U.S. clinical laboratory in Philadelphia, Pennsylvania in 2020.

As of September 30, 2019, we had filed 210 patent applications globally; among these, 121 patents had been granted, including 55 in greater China (including seven in Taiwan) and 16 in the United States, and 89 patent applications were pending in China, the United States and nearly 20 other countries and regions. Our patent applications broadly cover apparatus and methods for early stage disease detection, and they strategically encompass important specific embodiments of these apparatus and methods. Our patent portfolio is one of the world’s largest for early cancer screening and detection using next-generation technologies, according to Frost & Sullivan.

We performed our first commercial CDA-based test in China in 2015. Since then, we have generated revenue in China for four consecutive years. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from sales of cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from RMB6.1 million in the nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019. Our total revenues increased by 80.3% from RMB5.7 million in 2017 to RMB10.3 million (US$1.4 million) in 2018 and increased by 22.3% from RMB6.6 million in the nine months ended September 30, 2018 to RMB8.1 million (US$1.2 million) in the same period of 2019. In the United States, we currently plan to commence marketing our CDA test as an LDT sometime in 2020 through our CLIA-registered laboratory in San Jose.

Our Competitive Strengths

Novel Patented Early Multi-Cancer Screening and Detection Technology

Our CDA technology is a liquid-based technology. It focuses on biophysical properties in human blood. Recent studies have shown that there is a correlation between certain biophysical properties, including acoustical, electrical, magnetic, nano-mechanical and optical properties, and cancer occurrence. These studies have revealed that biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties’ physical expressions of information in the blood can indicate risks of pre-cancerous states and cancers, and they change over time as cancer occurs, progresses or regresses. Our proprietary CDA device uses an integrated sensor system to detect certain biophysical signals in blood samples. After collecting data on these signals, we use our CDA technology and proprietary algorithm to measure and analyze these signals at multiple biological levels (including the protein, cellular and molecular levels) and with multiple parameters (including the overall CDA value, the PTF value and the CTF value). In contrast, many other liquid-based cancer screening and detection technologies focus on biochemical signals (such as conventional biomarkers), genomic signals (such as ct-DNAs) and CTCs. These other liquid-based technologies typically can only determine whether or not cancer has occurred at a static point in time. In addition, conventional biomarkers have relatively low sensitivity and specificity rates and they are prone to be triggered by non-cancerous diseases.

 

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Some cancer types, such as esophageal cancer and brain cancer, do not have corresponding biomarkers. On the other hand, ct-DNAs and CTCs are only detectable after a tumor has formed, and as such, their physical expressions of information, or signals, are typically weak during the early stages of a cancer as their concentrations in the blood are relatively low. Moreover, ct-DNA- and CTC-based technologies typically require complex and expensive gene sequencing machines and micro-electrical mechanical devices, respectively, to amplify relatively weak signals for cancer screening and detection purposes.

We believe that our CDA technology has the following advantages compared to other cancer screening and detection technologies:

 

   

Ability to detect the risk of cancer with high accuracy. The accuracy of cancer screening and detection technologies can be measured by two key performance metrics—sensitivity and specificity. Sensitivity indicates the ability of a test to correctly identify those who have cancer among the population with cancer, whereas specificity indicates the ability of the test to correctly identify those who do not have cancer among the population without cancer. These two metrics are critical for effective treatment selection based on the results of liquid-based testing. Numerous retrospective validation studies have shown that our CDA technology can successfully detect the risk of cancers with high sensitivity and specificity rates. For example, as of September 30, 2019, in completed research studies our CDA technology had successfully detected the risk of (i) lung cancer in 2,277 cases, with the meta-analysis sensitivity of 82.4% and specificity of 83.0%; and (ii) esophageal cancer in 2,253 cases, with the meta-analysis sensitivity of 85.8% and specificity of 93.0%. According to Frost & Sullivan, these high sensitivity and specificity rates are generally considered difficult for liquid-based cancer screening and detection technologies to achieve for lung and esophageal cancers, and they represent a leading position in terms of testing accuracy in the early cancer screening and detection industry.

 

   

Ability to detect the risk of multiple cancers using one blood test. Our retrospective validation studies have shown that our CDA technology, combined with our CDA device, can detect the risk of 26 types of cancers in a single blood test. These 26 cancers accounted for over 80% of the cancer incidences in China from 2013 to 2018, according to Frost & Sullivan. While our CDA test alone does not indicate precisely which specific type(s) of cancer an individual may have, if it indicates a medium or high risk of cancer, the tested individual can use concurrent combinations of tests, or follow-up screening tests, performed by us or at hospitals or physical checkup centers, to determine the specific cancer type(s) that may exist or the location(s)of the cancer(s). For example, we offer our cancer-positioning services using a combination of our CDA technology and, on an auxiliary basis, biomarkers to indicate the risk of specific cancer type(s) in one blood test. This advantage of our CDA technology, as well as our CDA test’s ability to work in combination with other auxiliary tests using our proprietary algorithm, enable us to maintain a comprehensive and flexible test menu to meet different customers’ needs.

 

   

Proprietary technology supporting low-priced testing. We developed our patented CDA technology and our proprietary CDA device entirely in-house. Our CDA device is less costly to manufacture than the equipment used by many of our competitors, such as gene sequencing machines used by ct-DNA-based technologies and micro-electrical mechanical devices used by CTC-based technologies. In addition, we conduct cancer risk assessments using our proprietary algorithm. Furthermore, we do not rely on third-party licenses of intellectual property in developing our CDA technology and CDA device. These advantages reduce our operating costs, enabling us to offer our CDA tests at prices significantly lower than many of our competitors, such as typical ct-DNA- and CTC-based tests.

 

   

Minimally invasive, side effect-free and automated. Compared to conventional approaches to cancer screening and detection such as imaging technology and tissue biopsy, our CDA technology is liquid-based and requires only a standard blood sample from a tested individual. This minimizes the invasiveness of our tests and means they do not result in harmful side effects. In addition, our CDA device is highly automated, requiring minimal human involvement.

 

   

Potential for assistance in diagnosis, prognosis and recurrence. Our CDA technology can be used to track variations in cancer-related biophysical properties as a disease progresses, regresses or recurs.

 

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Our CDA technology can assist physicians in their cancer diagnosis by providing input complementary to pathologic information drawn from a tissue biopsy, which helps oncologists ensure that their cancer diagnoses are comprehensive and unbiased. Given these qualities, in addition to early cancer screening and detection, our CDA technology has demonstrated potential for assisting in diagnosis, prognosis and recurrence.

Expansive Patent Portfolio and Proprietary Test Database

According to Frost & Sullivan, we are one of the first biotechnology companies worldwide focusing on the detection and measurement of cancers’ biophysical properties. We have an expansive patent portfolio based on our technological innovations and substantial research studies, which is one of the world’s largest in early cancer screening and detection using next-generation technologies, according to Frost & Sullivan. As of September 30, 2019, we had filed 210 patent applications globally; among them, 121 patents had been granted, including 16 in the United States and 55 in greater China (including seven in Taiwan), and 89 patent applications were pending in China, the United States and nearly 20 countries and regions, including populous countries such as India and Brazil. Our patent applications broadly cover apparatus and methods for detecting diseases at early stages, and they strategically encompass important specific embodiments of these apparatus and methods. We believe that our expansive patent portfolio helps us to maintain and strengthen our technological advantages and market position. It also allows us to develop our patented CDA technology entirely in-house—without reliance on licenses of third-party technologies. Because we do not have to pay technology license fees, or purchase expensive testing equipment, the cost of our CDA test is significantly lower than that of many of our competitors; this cost advantage expands the total addressable market of our CDA test.

We have also established a test database that as of September 30, 2019, consisted of over 140,000 blood samples of various age, sex and disease groups. This database included approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies. According to Frost & Sullivan, based on approximately 35,000 clinical samples, we ranked first in China and second worldwide among companies offering next-generation early cancer screening and detection technologies, in terms of the number of clinical samples for cancer screening and detection as of June 30, 2019; and we ranked first in terms of the number of commercial cancer screening and detection tests conducted in 2018 among companies that offer next-generation early cancer screening and detection technologies in China. Our test database helps us to continuously refine our algorithm and provide high accuracy tests. Substantially all of the blood samples in our database were collected and tested in China. We have cooperated with a number of Chinese hospitals and medical institutions to conduct retrospective validation studies on our CDA technology for single or multiple cancers. Leveraging our relationships with these research partners, we anticipate having a relatively stable supply of blood samples to support our future research and further expand our test database in China. In addition, we have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology at this laboratory.

Fully Commercialized Operations in China—Rolling Out Our China Experience to the U.S.

China’s large, aging population, favorable government policies, and relatively low labor costs represent substantial commercial opportunities for our business that enable us to cost-effectively conduct our cancer screening and detection tests at a large scale. As a result, while many of our competitors that operate only in the United States are still working to make their first breakthrough in product development, we have commercialized our CDA-based tests in China and generated revenue for four consecutive years since selling our first commercial CDA-based test in 2015. The number of commercial CDA-based tests (inclusive of CDA tests and combination tests) we sold increased significantly from 19,336 in 2017 to 41,607 in 2018 and from 29,036 in the nine months ended September 30, 2018 to 41,544 in the same period of 2019. Our revenue from our cancer screening and detection tests (predominantly CDA-based tests, as well as genomics tests) increased by 83.7% from RMB5.2 million in 2017 to RMB9.6 million (US$1.3 million) in 2018 and increased by 25.7% from

 

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RMB6.1 million in the nine months ended September 30, 2018 to RMB7.7 million (US$1.1 million) in the same period of 2019.

With several years of operations, our China-based team has accumulated valuable know-how with respect to the research and development and commercialization of our CDA technology and tests. We believe that this experience and know-how will be of significant value in implementing our plans to develop our business in the U.S. through research studies and the commercialization of our CDA tests.

An Experienced Management Team With Proven Track Records of Success

We have an experienced management team with multi-disciplinary backgrounds and expertise, who have demonstrated the ability to develop and commercialize innovative technologies and products. This strong team has paved the way for us to develop our CDA technology for early cancer screening and detection.

Dr. Chris Chang Yu, our co-founder and chairman, has over 20 years’ experience in the semiconductor, integrated circuit materials, life sciences and environmental protection industries. He is the first or principal inventor of over 300 patent applications, among which over 100 are related to cancer diagnostics. His knowledge in weak signal detection, semiconductor manufacturing and life sciences helped him identify biophysical properties in blood through proprietary on-chip multiplexed measurements. He used biophysical properties—rather than biochemical and genomic signals—in peripheral blood to develop our CDA technology to detect the risk of cancers, and participated in the design of our CDA device, which, collectively, constitute the solid foundation for our current business. Dr. Yu was also an integral member of the team that led the spin-off of Cabot Microelectronics (NASDAQ: CCMP) from Cabot Corporation (NYSE: CBT) in 2000; and he was a co-founder of Anji Microelectronics (688019.SH), which he co-founded in 2004 and which completed its initial public offering in China’s science and technology innovation board market in July 2019. Our business development and growth have substantially benefitted from Dr. Yu’s experience in managing start-up technology companies.

In addition, Dr. He Yu, our co-founder and chief medical officer, is a renowned expert in molecular epidemiology, with training in medicine, epidemiology and clinical biochemistry. Dr. He Yu has served as a professor and program director of cancer epidemiology at the University of Hawaii Cancer Center and an adjunct professor at Yale School of Public Health since 2012. Relying on his over 20 years’ experience in leading-edge cancer research, Dr. He Yu has contributed to the development of our CDA technology. We also benefited from the expertise, experience and resources of our other key management members. For example, Mr. Xuedong Du, our vice president in charge of research and development, is the first or principal inventor of more than 100 patent applications, primarily for medical devices. Mr. Du has also made significant contributions to our CDA technology product development. Mr. Weidong Dai, our China president, has rich cross-disciplinary experience covering medical sciences and enterprise management. He has served as an adjunct professor at Anhui College of Traditional Chinese Medicine since 2004 and an executive director at the Hainan Branch of China Science Tsing Research Institute of Science and Technology since 2018.

Our Strategies

Our objective is to become the leading provider of highly accurate and cost-effective cancer screening and detection tests and to expand the application of our tests to other oncological areas, such as assistance in diagnosis, prognosis and recurrence. To achieve this, we intend to:

Enlarge Our Total Addressable Market in China by Obtaining Additional Regulatory Approvals for Our CDA Device

We intend to enlarge our total addressable market in China by obtaining additional regulatory approvals for our CDA device. We obtained a Class II medical device manufacture license from the NMPA in 2013 (renewed

 

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in 2018) and a Class II medical device registration certificate from the NMPA in 2015. These licenses allow us to manufacture our CDA device and use it to perform our CDA-based tests in our own laboratories in China. In December 2018, we applied to the NMPA for a Class III medical device registration certificate for our CDA device to assist in multi-cancer diagnosis. After we obtain this license, we will apply to update our medical device manufacture license to include the manufacture of Class III medical devices. With these Class III medical device licenses, we will be able to place our devices within Chinese hospitals’ laboratories to conduct commercial tests there or sell our devices to the hospitals for the purposes of assisting in physicians’ diagnoses of specified multiple cancers.

Grow Our Customer Base in China

Our existing customer base in China consists primarily of life insurance companies and other large corporations; we offer our CDA-based tests to their insurance customers and/or employees. We plan to acquire customers for our CDA-based tests through the annual physical checkup packages we offer; we largely outsource these physical checkups (other than CDA-based tests) to third-party physical checkup centers. In addition, we plan to further develop our non-CDA cancer screening and detection tests using other technologies, including expanding the genomics tests we currently conduct at our Haikou laboratory. After obtaining the Class III medical device registration certificate and updating our medical device manufacture license, we expect to provide our tests to more individual customers through Chinese hospitals. We will also seek to increase our market penetration by continuing to build out our sales and marketing teams and engaging more sales agents and other channel partners.

Strengthen Technological Advantages with Focused Research and Development

According to Frost & Sullivan, we are one of the first biotechnology companies worldwide focusing on the detection and measurement of cancers’ biophysical properties. We plan to strengthen our technological advantages through focused research and development. In particular, we plan to continuously make game-changing innovations by leveraging our management’s multi-disciplinary backgrounds and expertise. We have been collaborating with a number of hospitals and medical institutions in conducting research studies. Our collaborations allow us to validate the effectiveness and utility of our CDA tests in a clinical setting, explore new applications of our CDA technology, and provide us access to clinically well-characterized patient data. In the future, our research and development will continue to focus on:

 

   

exploring our CDA technology’s ability to dynamically monitor cancer progression, particularly for assistance in cancer diagnosis, prognosis and recurrence, and to improve our CDA technology’s ability to identify cancer types, our CDA technology’s signal-to-noise ratio and its testing throughput;

 

   

exploring our CDA technology’s ability to detect the risk of major non-cancerous diseases;

 

   

expanding our test offerings to include new genomics tests (such as those currently conducted in our Haikou laboratory), ct-DNA- and CTC-based tests, as well as new combination tests that combine our CDA test with other auxiliary cancer screening and detection technologies; and

 

   

expanding our CDA technology’s application to additional oncological areas.

Bring Our Tests to the U.S. Market

In the United States, we are currently permitted to conduct our CDA-based tests for research use. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other U.S. hospitals, medical institutions, CROs, managed care companies and other health organizations, to conduct research studies on our CDA technology in the U.S. We intend to commercialize our CDA-based tests for clinical purposes in the United States initially as an LDT performed at our laboratory in San Jose, California. As an LDT, under the FDA’s current enforcement discretion policy, we do not expect that our CDA-based test will require premarket clearance, market authorization, or approval from the FDA prior to marketing. Because

 

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we have received a CLIA Certificate of Registration for our San Jose laboratory, we may begin marketing our tests for clinical purposes as soon as we complete our validation studies and obtain any required state laboratory licenses or other required accreditations. Under CLIA, CAP and state licensing requirements, we are required to validate our CDA test with applicable analytical and clinical studies prior to marketing the test as an LDT. These studies are designed to demonstrate the performance of the test. We have entered into research agreements with U.S. universities and academic medical centers, and we are in discussions with other health organizations, to conduct these studies.

Our CDA Technology

Our CDA technology provides an innovative and comprehensive platform for us to develop multi-cancer screening and detection tests with high sensitivity, specificity and cost-efficiency.

Principal Mechanism

Focus on Biophysical Properties

Our CDA technology is a liquid-based technology. The critical difference between our CDA technology and other liquid-based cancer screening and detection technologies is that our technology focuses on biophysical properties rather than conventional biochemical or genomic properties. Specifically, our CDA technology is based on the correlations between biophysical properties and cancer occurrence. Recent studies have shown that there is a correlation between certain biophysical properties and cancer occurrence. These studies have revealed that certain biophysical properties could be important non-genetic aspects of the micro-environment regulating the balance between normal cell growth and carcinogenesis (cancerous growth), which may lead to cancer occurrence. Biophysical properties exist in all human beings, including healthy individuals, and the signals they express can be detected before a tumor has formed. Biophysical properties increase or decrease progressively in a statistically significant way from healthy state to non-cancerous disease, pre-cancer disease, early- and late-stage cancer states. The change in biophysical properties is a potential cause for the loss of immunity and increased occurrence of cancer. On the other hand, the strength of biophysical signals expressed by these biophysical properties—which our CDA technology is designed to detect—increase progressively from healthy through late-stage cancer states.

We have collected testing data on 26 types of cancer, including data on biophysical properties measured in multiple serial samples collected from the same person over time and corresponding pathological data. Our proprietary algorithm is based on this database, and it uses the testing data collected by our CDA device to determine the PTF value, CTF value and overall CDA value of a blood sample. The overall CDA value determined through our test factors in the PTF and CTF value, as well as other biophysical property characteristics of the blood sample. The overall CDA value, as the principal parameter for our CDA technology, is proportional to the cancer risk.

Based on the progressive changes of biophysical properties and their signals from healthy through late-stage cancer states, we believe that our CDA technology is ideally suited for early cancer screening and detection, as well as assistance in cancer diagnosis, prognosis and reoccurrence. Through tracking CDA values, we can obtain both static and dynamic (progression) of information on cancer risk.

Multi-level and Multi-parameter

Our CDA technology is designed to analyze biophysical properties that potentially influence body functions at multiple biological levels, including cellular, protein and molecular levels. By comparison, some other liquid-based cancer screening and detection technologies are based on detection signals that exist at only one of the cellular, protein and molecular levels—for example, conventional biomarkers at the protein level and CTCs at the cellular level. As a result of this multi-level analysis, we believe that our CDA technology is more comprehensive and that it can provide more dimensions of information, potentially making it more accurate in detecting cancers.

 

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Our CDA technology quantitatively measures biophysical properties that are collectively possessed by a biological specimen. These properties may vary by health status at the cellular, protein and molecular levels. At the cellular level, biophysical properties may not only change with a cell’s surface properties, but they may also alter when interactions occur between cells (for example, intercellular repulsions and attractions) as well as possibly cell-to-cell signaling. At the protein and molecular levels, certain biophysical properties may modify proteins’ surface phases and structures and affect the molecular mechanism that maintains the nuclear and genomic integrity of normal cells. Shifts and aberrations in these biophysical properties may potentially lead to alterations in cell interactions and possibly affect functioning and replication of DNA. These shifts and aberrations could therefore cause increased mistakes in gene replications and even increased frequency of gene mutations that result in various diseases, including cancer. In addition, different cancers may share certain common biophysical properties, and our CDA technology captures and quantifies the biophysical signals of malignant cells that are in general distinct from those in normal cells. As a result of these measurements, our CDA technology can detect the risk of multiple cancers in one test. In contrast, certain other liquid-based cancer signals only exist at one of the above three levels (cellular, protein or molecular) and normally a specific signal corresponds to only one cancer. For instance, AFP tumor marker, a protein biomarker, is typically used to screen exclusively for liver cancer; and PSA, another protein biomarker, is typically only used to detect prostate cancer.

Our CDA technology, together with our CDA device, deploys various measurement parameters, primarily PTF, CTF and CDA values, by detecting certain biophysical properties in blood. After testing a blood sample, our CDA device generates a series of testing data, including the PTF value, the CTF value and the overall CDA value. The PTF value refers to the measured level of protein cancer-related factor in the blood. The CTF value refers to the measured level of cellular cancer-related factors in the blood. Using our proprietary algorithm, we arrive at the overall CDA value based on the PTF and CTF values, as well as other biophysical property characteristics of the blood. This overall CDA value is the principal analysis parameter that we use to assess an individual’s overall cancer risk. Based on the results of these parameters, we assess the risk of cancer to be low (normal), medium or high.

Analytical Validation

We have conducted numerous research studies on our CDA technology’s utility and accuracy. Since 2015, we have completed 25 research studies on our CDA technology with hospitals and medical institutes in China. Among them, the results of 15 research studies on which we collaborated with five Chinese hospitals and medical institutes have been published at ASCO annual meetings and other medical conferences and in medical journal supplements. We have also completed an additional ten unpublished research studies with nine hospitals and medical institutes in China. Since 2015, we have tested more than 140,000 blood samples collected from various age, sex and disease groups, including approximately 100,000 samples from our commercial CDA-based tests and approximately 40,000 samples from our research studies.

 

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Our research studies have demonstrated that our CDA technology can detect the risk of multiple cancers with high sensitivity and specificity rates. We have used meta-analysis to analyze the resulting data of all completed research studies for a specific cancer type up to September 30, 2019 and calculated our CDA technology’s sensitivity and specificity rates for that cancer type. Meta-analysis is a statistical analysis of a large collection of analysis results from individual studies for the purpose of integrating the findings. The following table sets forth the sensitivity and specificity rates of our CDA technology in detecting 26 cancers based on our completed research studies up to September 30, 2019:

 

Cancer Type

   Aggregate
Sample Size
     Sensitivity     Specificity    

Publication Information(1)

Lung Cancer

     2,277        82.4     83.0  

2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 (co-author: Cancer Hospital of Chinese Academy of Medical Sciences); 2015 Nobel Prize Laureate Summit on Biomedical Sciences (co-authors: Shanghai Changhai Hospital and School of Life Science of Fudan University);

2015 Annual Congress of Chinese Thoracic Society; 2017 ASCO Annual Meeting, J Clin Oncol 35, e23131, 2017 (co-authors: Shanghai Changhai Hospital and School of Life Science of Fudan University); 2019 ASCO Annual Meeting, J Clin Oncol 37, e20673, 2019 (co-authors: Shanghai Changhai Hospital and Lishui Central Hospital)

Cerebral Cancer

     93        89.2     89.9   2019 ASCO Annual Meeting, J Clin Oncol 37, 2019 (suppl; abstr 2040)

Nasopharyngeal Cancer

     188        86.6     89.1   N/A

Oral Cancer

     60        78.3     90.8   N/A

Laryngeal Cancer

     61        93.4     88.0   N/A

Thyroid Cancer

     39        100.0     83.6   N/A

Esophageal Cancer

     2,253        85.8     93.0   2015 ASCO Annual Meeting, J Clin Oncol 33, e15059, 2015 (co-author: Shanghai Changhai Hospital); 2015 Nobel Prize Laureate Summit on Biomedical Sciences (co-authors: Shanghai Changhai Hospital and Fudan University Shanghai Cancer Center); 2017 Gastrointestinal cancers Symposium (San Francisco), J Clin Oncol 35, 2017 (suppl 4S; abstract 42)

Lymphoma

     528        87.1     92.4   N/A

Breast Cancer

     493        74.6     92.2   2015 San Antonio Breast Cancer Symposium (10.1200/JCO.2015.33.28_Suppl.13)

Liver Cancer

     804        92.3     93.2   2015 ASCO Annual Meeting, J Clin Oncol 33, e12578, 2015 and e22171, 2015 (co-author: Lishui Central Hospital, the Fifth Affiliated Hospital of Wenzhou Medical University)

Bile Duct Cancer

     26        87.5     94.0   N/A

Gallbladder Cancer

     28        100.0     63.4   N/A

Pancreatic Cancer

     162        89.3     90.6   N/A

 

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Cancer Type

   Aggregate
Sam