Form 20-F
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
20-F
 
 
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021.
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from              to             
Commission file number:
001-39838
 
 
Gracell Biotechnologies Inc.
(Exact name of Registrant as specified in its charter)
 
 
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Building 12
,
Block B
,
Phase II
Biobay Industrial Park
218 Sangtian St.
Suzhou Industrial Park, 215123
People’s Republic of China
(Address of principal executive offices)
Yili Kevin Xie, Chief Financial Officer
Telephone: +86
512
-6262-6701
Email: ir@gracellbio.com
Building 12, Block B, Phase II
Biobay Industrial Park
218 Sangtian St.
Suzhou Industrial Park, 215123
People’s Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
American depositary shares (one American depositary share representing five ordinary shares, par value US$0.0001 per share)
 
GRCL
 
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
Ordinary shares, par value
US$0.0001 per share*
     
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
 
*
Not for trading, but only in connection with the listing on The Nasdaq Global Select Market of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2021, 346,282,226 ordinary shares, par value of US$0.0001 per share, were outstanding on an
as-converted
basis.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐  Yes            ☒  No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐  Yes            ☒  No
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒  Yes            ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒  Yes            ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer ☐   Accelerated filer
  
Non-accelerated filer 
  Emerging growth company 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.    ☐  Yes      No
 
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☐  Yes      No
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP 
 
International Financial Reporting Standards as issued
 

by the International Accounting Standards Board ☐
   Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐  Item 17    ☐  Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
☐  Yes              No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

☐  Yes            ☐  No
 
 
 

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INTRODUCTION
Unless otherwise indicated or the context otherwise requires, references in this annual report to:
 
   
“ADSs” are to the American depositary shares, each of which represents five of our ordinary shares;
 
   
“CAR” are to chimeric antigen receptor;
 
   
“ADRs” are to the American depositary receipts that evidence the ADSs;
 
   
“CDE” are to the Center for Drug Evaluation of the National Medical Products Administration in China;
 
   
“China” and “PRC” are to the People’s Republic of China, excluding, for the purpose of this annual report only, the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan; “Greater China” does not exclude Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan;
 
   
“CR” are to complete response, which generally means the disappearance of all signs of cancer in response to treatment, with the exact criteria varying from indication to indication;
 
   
“CRi” are to complete response with incomplete hematologic recovery;
 
   
“CRS” are to cytokine release syndrome, a symptom complex and an expected adverse event associated with
CAR-T
cell therapies and measured by Lee grading system or ASBMT grading system. Grade 1 CRS is generally associated with
non-life
threatening symptoms and requires symptomatic treatment only, Grade 2 or Grade 3 CRS requires moderate to more aggressive intervention, and Grade 4 or higher CRS is associated with life-threatening symptoms that require ventilation support, or death;
 
   
“FDA” are to U.S. Food and Drug Administration;
 
   
“Gracell,” “we,” “us,” “our company,” or “our” are to Gracell Biotechnologies Inc. and its subsidiaries and, in the context of describing our operations and consolidated financial information, also include the VIE and its subsidiary;
 
   
“GvHD” are to graft versus host disease, where donor cells recognize the patient’s normal tissues as foreign and cause potentially lethal tissue damage;
 
   
“HvG” are to host versus graft rejection, where a patient’s immune cells recognize infused
non-HLA-matched
donor cells as foreign and reject them;
 
   
“ICANS” are to immune effector cell-associated neurotoxicity syndrome, a common adverse event and treatment-related toxicity observed after
CAR-T
cell therapies and measured by ASBMT grading system. Grade 1 ICANS is generally associated with low depressed level of consciousness where patients awaken spontaneously, Grade 2 or Grade 3 ICANS is generally associated with moderate depressed level of consciousness where patients still awaken to voice or tactile stimulus, and clinical seizure that resolves rapidly, and Grade 4 ICANS is generally associated more serious symptoms such as stupor, coma, prolonged seizure and deep focal motor weakness;
 
   
“MRD” are to minimal residual disease, the small number of cancer cells in the body after cancer treatment. An MRD positive or MRD+ test result means that disease was still detected after treatment; an MRD negative or
MRD-
result means that no disease was detected after treatment;
 
   
“NMPA” are to the National Medical Products Administration in China;
 
   
“Onset” are to the first appearance of any sign or symptom of an illness;
 
   
“ordinary shares” are to ordinary shares of our company, par value US$0.0001 per share;
 
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“ORR” are to overall response rate, percentage of patients achieving a response to therapy;
 
   
“Renminbi” and “RMB” are to the legal currency of the PRC;
 
   
“PFS” are to progression-free survival, the length of time during and after the treatment of a disease, such as cancer, that a patient lives without the disease getting worse;
 
   
“PR” are to partial response;
 
   
“Preferred Shares” are to the series A, series
B-1,
series
B-2
and series C preferred shares, par value $0.0001 per share;
 
   
“sCR” are to stringent complete response, a deeper response category than CR used in multiple myeloma;
 
   
“SOC” are to standard of care;
 
   
“TME” are to tumor microenvironment;
 
   
“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States;
 
   
“we,” “us,” “our company” and “our” are to Gracell Biotechnologies Inc., a Cayman Islands exempted company and its subsidiaries and, in the context of describing our operations and consolidated financial information, also include its consolidated PRC affiliated entities; and
 
   
“VGPR” are to very good partial response.
Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the exchange rate as of December 31, 2021 as 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 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.
 
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FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” Known and unknown risks, uncertainties and other factors, including those set forth in “Item 3. Key Information—D. Risk Factors,” 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,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” 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 statements relating to:
 
   
the ability of our investigator-initiated trials and clinical trials to demonstrate acceptable safety and efficacy of our product candidates, and other positive results;
 
   
the timing, progress and results of preclinical studies, investigator-initiated trials and clinical trials for product candidates we may develop, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available, and our research and development programs;
 
   
the timing, scope and likelihood of regulatory filings and approvals, including final regulatory approval of our product candidates;
 
   
our ability to develop and advance our current product candidates and programs into, and successfully complete, clinical trials;
 
   
our manufacturing, commercialization, and marketing capabilities and strategy;
 
   
our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;
 
   
the need to hire additional personnel and our ability to attract and retain such personnel;
 
   
the size of the market opportunity for our product candidates, including our estimates of the number of patients who suffer from the diseases we are targeting;
 
   
our expectations regarding the approval and use of our product candidates as first, second or subsequent lines of therapy or in combination with other drugs;
 
   
our ability to consistently maintain effective internal control over financial reporting;
 
   
our competitive position and the success of competing therapies that are or may become available;
 
   
our estimates of the number of patients that we will enroll in our clinical trials;
 
   
the beneficial characteristics, safety, efficacy and therapeutic effects of our product candidates;
 
   
our ability to obtain and maintain regulatory approval of our product candidates;
 
   
our plans relating to the further development of our product candidates, including additional indications we may pursue;
 
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our intellectual property position, including our ability to obtain, maintain, expand, protect and enforce our intellectual property rights covering product candidates we may develop, including the extensions of existing patent terms where available, the validity of intellectual property rights held by third parties, and our ability not to infringe, misappropriate or otherwise violate any third-party intellectual property rights;
 
   
our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;
 
   
our ability to obtain, and negotiate favorable terms of, any collaboration, licensing or other arrangements that may be necessary or desirable to develop, manufacture or commercialize our product candidates;
 
   
the pricing and reimbursement of our product candidates we may develop, if approved;
 
   
the rate and degree of market acceptance and clinical utility of our product candidates we may develop;
 
   
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
 
   
our financial performance;
 
   
the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements;
 
   
the impact of laws and regulations;
 
   
our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act;
 
   
the effect of epidemics and pandemics, such as the
COVID-19
pandemic, or other business disruptions on our business; and
 
   
our anticipated use of our existing resources and the proceeds from our initial public offering.
These forward-looking statements involve various risks and uncertainties. You should read thoroughly this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects” and other sections in this annual report. 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. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. 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 annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report, completely and with the understanding that our actual future results may be materially different from what we expect.
 
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PART I
 
Item 1.
Identity of Directors, Senior Management and Advisers
Not applicable.
 
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
 
Item 3.
Key Information
Investing in our securities involves a high degree of risk. Please carefully consider the risks discussed under “Item 3. Key Information—D. Risk Factors” in this annual report. We provide the following disclosure to help investors better understand our corporate structure, operations in China and the associated risks.
As used in this annual report, (i) “Shanghai Gracell Biotech” or the “ VIE” refers to Gracell Biotechnologies (Shanghai) Co., Ltd.; (ii) “Gracell Bioscience” or the “WFOE” refers to Gracell Bioscience (Shanghai) Co., Ltd., our wholly-owned subsidiary incorporated in the PRC; (iii) “Gracell HK” refers to Gracell Biotechnologies (HK) Limited, our wholly-owned subsidiary incorporated in Hong Kong; (iv) “Gracell Cayman” refers to Gracell Biotechnologies Inc., our Cayman Islands holding company; and (v) “Gracell,” “we,” “us,” “our company,” or “our” refer to Gracell Biotechnologies Inc. and its subsidiaries and, in the context of describing our operations and consolidated financial information, also include the VIE and its subsidiary.
Our Corporate Structure and Operation in China
Gracell Biotechnologies Inc., or Gracell Cayman, is a Cayman Islands holding company that conducts a significant portion of its operations through its wholly-owned subsidiaries in the United States, Hong Kong and China, as well as a variable interest entity, or VIE, and the VIE’s subsidiary. The VIE structure is used to provide investors with exposure to foreign investment in China-based companies where PRC law prohibits direct foreign investment in the operating companies in China. PRC laws and regulations restrict and impose conditions on foreign investment in development and application of human stem cell or gene diagnostic and therapeutic technologies. Accordingly, these businesses are operated by the VIE and the VIE’s subsidiary in China. Neither Gracell Cayman nor its subsidiaries own any equity interest or direct foreign investment in the VIE, Gracell Biotechnologies (Shanghai) Co., Ltd., or Shanghai Gracell Biotech, and the VIE’s subsidiary, Suzhou Gracell Biotechnologies Co., Ltd., or Suzhou Gracell Biotech. Instead, Gracell Cayman relies on contractual arrangements among its PRC subsidiary, the VIE and the VIE’s nominee shareholders, which allow Gracell Cayman to (i) exercise effective control over the VIE and the VIE’s subsidiary; (ii) receive substantially all of the economic benefits of the VIE and the VIE’s subsidiary; and (iii) have an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law, to consolidate the financial results of the VIE and VIE’s subsidiary in its consolidated financial statements in accordance with U.S. GAAP.
For a detailed description about these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the VIE and Its Shareholders.”
As a result, holders of the ADSs are not holding equity interest in the VIE or its subsidiary but instead are holding equity interest in Gracell Cayman, a Cayman Islands holding company whose consolidated financial results include those of the VIE and its subsidiary under U.S. GAAP.
Our corporate structure is subject to risks associated with our contractual arrangements with the VIE. These contractual arrangements have not been tested in a court of law in the PRC. If the PRC government finds that these contractual arrangements do not comply with PRC laws and regulations, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we and the VIE could be subject to severe penalties or be forced to relinquish our interests in the operations of the VIE and its subsidiary. This would result in the VIE and its subsidiary being deconsolidated. As of December 31, 2019, 2020 and 2021, 41%, 24%, 15% of our assets were held by the VIE, respectively. An event that results in the deconsolidation of the VIE would have a material adverse effect on our operations and result in the value of the securities diminish substantially or even become worthless. There are substantial uncertainties regarding potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIE and consequently, significantly affect the financial performance of the VIE and our company as a whole. For a detailed description of the risks associated with our corporate structure, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
In addition, we rely on contractual arrangements with the VIE and its shareholders for a portion of our business operations in China, and these contractual arrangements may not be as effective as direct ownership in providing us with control over the VIE. We rely on the performance by the VIE and its shareholders of their obligations under the contracts to exercise control over the VIE. The shareholders of the VIE may not act in the best interests of us or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with the VIE. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with the VIE and its shareholders to exercise control over our business, which may not be as effective as direct ownership in providing operational control.”
 
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We face various legal and operational risks and uncertainties related to doing business in China, including complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, the use of variable interest entities, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, as well as the lack of inspection by the Public Company Accounting Oversight Board, or PCAOB, on our independent registered public accounting firm, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a U.S. or other foreign exchange. These risks could result in a material adverse change in our operations and the value of the ADSs, significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause such securities to significantly decline in value or become worthless, as further explained below:
 
   
The PRC government has significant authority to regulate or intervene in the China operations of an offshore holding company, such as us, at any time. Therefore, investors in the ADSs and our business face potential uncertainty from the PRC government’s policy. The Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our ADSs. Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government has significant authority to regulate or intervene in the China operations of an offshore holding company, such as us, at any time. Therefore, investors in the ADSs and our business face potential uncertainty from the PRC government’s policy”;
 
   
We believe that our corporate structure and contractual arrangements with the VIE comply with the current applicable PRC laws and regulations. As of the date of this annual report, we believe that our PRC subsidiaries and the VIE are not required to obtain permission or approval from the Chinese Securities Regulatory Commission, or the CSRC, or the Cyberspace Administration of China, or the CAC, to operate their respective business in China or to approve our contractual arrangements with the VIE and its shareholders.
However, PRC laws and regulations governing the conditions and the requirements of such approval are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. Accordingly, the PRC regulatory authorities may take a different view. There can be no assurance that the PRC government authorities would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions regarding our corporate structure and contractual arrangements from the CSRC, CAC or any other PRC governmental agency. If we, our subsidiaries or the VIE inadvertently conclude that approvals are not required, or if these regulations change or are interpreted differently and we are required to obtain approval in the future, our ADSs may significantly decline in value or become worthless if we are unable to assert our contractual control rights over the economic benefits and assets of the VIE and its subsidiaries. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure”; and
 
   
Recently, the PRC government initiated a series of regulatory actions and released guidelines to regulate business operations in China with little advance notice, including those related to data security or anti-monopoly concerns, which may have an impact on our ability to conduct certain business in China, accept foreign investments, or list on a U.S. or other foreign exchange. For a detailed description of risks and regulations related to doing business in China, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”
The Holding Foreign Companies Accountable Act
Our auditor, an independent registered public accounting firm, is located in China, a jurisdiction where the PCAOB has determined on December 16, 2021 that it is unable to inspect or investigate completely PCAOB-registered public accounting firms. Pursuant to the Holding Foreign Companies Accountable Act, or the HFCA Act, our securities will be prohibited from trading on any national securities exchange and in the over-the-counter market in the United States if our auditor cannot be fully inspected by the PCAOB for three consecutive years, which could be reduced to two consecutive years if the Accelerating Holding Foreign Companies Accountable Act passed by the U.S. Senate on June 22, 2021 is passed by the U.S. House of Representatives and signed into law. The termination in or any restriction on the trading of our securities will significantly limit or completely hinder our ability to offer securities to investors, or cause such securities to significantly decline in value or become worthless. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
 
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Transfer of Cash Through Our Organization
Although we consolidate the results of the VIE and its subsidiaries under U.S. GAAP, we only have access to the assets or earnings of the VIE and its subsidiaries through our contractual arrangements with the VIE and its shareholders. The cash flows that have occurred between Gracell Cayman, its subsidiaries and the VIE and its subsidiaries are summarized as follows:
 
    
For the years ended December 31,
 
    
2019
    
2020
    
2021
 
    
RMB
    
RMB
    
RMB
    
US$
 
  
 
 
    
 
 
    
 
 
    
 
 
 
    
(in thousands)
 
Fees paid for services to the VIE and its subsidiaries
     6,604        16,906        16,226        2,546  
Restrictions and Limitations on Transfer of Cash
Gracell Cayman is incorporated in the Cayman Islands and its businesses in China are conducted mainly through its PRC subsidiaries and partly through the VIE and its subsidiary. We face various restrictions and limitations on foreign exchange, our ability to transfer cash between entities, across borders and to U.S. investors, and our ability to distribute earnings from our subsidiaries and/or the VIE and its subsidiaries, to Gracell Cayman and holders of the ADSs as well as the ability to settle amounts owed under the contractual arrangements with the VIE.
Uncertainties regarding the interpretation and implementation of the contractual arrangements with the VIE could limit our ability to enforce such agreements. If the PRC authorities determine that the contractual arrangements constituting part of the VIE structure do not comply with PRC regulations, or if current regulations change or are interpreted differently in the future, our ability to settle amount owed by the VIE under the VIE agreements may be seriously hindered.
Current PRC regulations permit our PRC subsidiaries, including the WFOE, to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, the VIE and its PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries and the VIE and its subsidiaries may also allocate a portion of their
after-tax
profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. Furthermore, if the WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect the WFOE’s ability to pay dividends and other distributions to us. Any limitation on the ability of our PRC subsidiaries, including the WFOE, to distribute dividends to us or on the ability of the VIE to make payments to the WFOE may restrict our ability to satisfy our liquidity requirements. See “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulation—Other PRC National- and Provincial-Level Laws and Regulations – Regulations Relating to Dividend Distributions.”
 
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Gracell HK may be considered a
non-resident
enterprise for tax purposes, so that any dividends paid by our PRC subsidiaries to Gracell HK may be regarded as China-sourced income and, as a result, may be subject to PRC withholding tax at a rate of up to 10%. If we are required under the PRC Enterprise Income Tax Law to pay income tax for any dividends we receive from PRC subsidiaries, or if Gracell HK is determined by PRC government authority as receiving benefits from reduced income tax rate due to a structure or arrangement that is primarily
tax-driven,
it would materially and adversely affect the amount of dividends, if any, we may pay to our shareholders and ADS holders. If the PRC tax authorities determine that Gracell Cayman is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% tax from dividends we pay to our shareholders and ADS holders, in each case that are
non-resident
enterprises. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Dividends we receive from our subsidiaries located in the PRC may be subject to PRC withholding tax, which could materially and adversely affect the amount of dividends, if any, we may pay our shareholders.”
In addition,
non-resident
enterprise shareholders, including our ADS holders, may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares if such income is treated as sourced from within the PRC. Furthermore, if Gracell Cayman were deemed to be a PRC resident enterprise, dividends paid to our
non-PRC
individual shareholders, including our ADS holders, and any gain realized on the transfer of ADSs or ordinary shares by such holders may be subject to PRC tax at a rate of 20% which in the case of dividends may be withheld at source. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—If we are classified as a “resident enterprise” of China under the PRC Enterprise Income Tax Law, we and our
non-PRC
shareholders could be subject to unfavorable tax consequences, and our business, financial condition and results of operations could be materially and adversely affected.”
Our offshore entities are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, subject to the approval of government authorities and limits on the amount of capital contributions and loans. This may delay or prevent us from using the proceeds from our offshore capital raising activities to make loans or capital contribution to our PRC subsidiaries. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiary.”
Additionally, the PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange of the PRC, or the SAFE, by complying with certain procedural requirements. Dividends payments to us by Gracell HK in foreign currencies are subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulations, such as the overseas investment registrations by our shareholders or the ultimate shareholders of our corporate shareholders who are PRC residents. Approvals by or registration with appropriate government authorities is required where RMB 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 also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, our PRC subsidiaries, including the WFOE, may not be able to pay dividends in foreign currencies to us and our access to cash generated from its operations will be restricted. See “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may affect the value of your investment.” and “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China—Fluctuation in exchange rates could have a negative effect on our results of operations and the value of your investment.”
Taxation on Dividends or Distributions
Gracell Cayman’ source of dividend partly comes from dividends paid by its PRC subsidiaries, including the WFOE, which in part depends on payments received from the VIE under the contractual arrangements with the VIE. None of our subsidiaries has declared or paid any dividend or distribution to us. We have never declared or paid any dividend on our ordinary shares and we have no current intention to pay dividends to shareholders or holders of ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to fund the research and development of our product candidates and the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future.
 
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Under the current laws of the Cayman Islands, Gracell Cayman is not subject to tax on income or capital gains. Upon payments of dividends to our shareholders, no Cayman Islands withholding tax will be imposed. For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid in Mainland China and Hong Kong, assuming that: (i) we have taxable earnings in the VIE, and (ii) we determine to pay a dividend in the future:
 
Hypothetical
pre-tax
earnings in the VIE
(1)
     100
Tax on earnings at statutory rate of 25% at WFOE level
     (25 )% 
  
 
 
 
Amount to be distributed as dividend from WFOE to Gracell HK
(2)
     75
Withholding tax at tax treaty rate of 5%
     (3.75 )% 
  
 
 
 
Amount to be distributed as dividend at Gracell HK level and net distribution to Gracell Cayman
(3)
     71.25
  
 
 
 
 
Notes:
 
(1)
For purposes of this example, the tax calculation has been simplified. The hypothetical book
pre-tax
earnings amount is assumed to equal Chinese taxable income.
 
(2)
China’s Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprise to its immediate holding company outside of Mainland China. A lower withholding income tax rate of 5% is applied if the Foreign Invested Enterprise’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with Mainland China, subject to a qualification review at the time of the distribution. There is no incremental tax at Gracell HK level for any dividend distribution to Gracell Cayman.
 
(3)
If a 10% withholding income tax rate is imposed, the withholding tax will be 7.5 and the amount to be distributed as dividend at Gracell HK level and net distribution to Gracell Cayman will be 67.5.
 
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A.    [Reserved]
Disaggregated Financial Information Relating to the VIE
For the years ended December 31, 2019 and 2020, the VIE and its subsidiaries accounted for a substantial portion of our financial position, results of operations and cash flows. For the year ended December 31, 2021, the VIE and its subsidiaries accounted for an increasing proportion of our financial position, results of operations and cash flows. Set forth below are the condensed consolidating schedule showing the financial position as of December 31, 2020 and 2021, the results of operations and cash flows for the years ended December 31, 2019, 2020 and 2021 for (i) Gracell Cayman, (ii) the VIE and its consolidated subsidiaries, (iii) the WFOE (which is the primary beneficiary of the VIE) and (iv) other consolidated entities, and eliminating adjustments and consolidated totals (in thousands of RMB).
We expect that the financial position, results of operations and research and development activities of the VIE and its subsidiaries will constitute a material portion of our consolidated financial information for the foreseeable future. Accordingly, we believe the risks associated with the contractual arrangement with the VIE and its shareholders, if materialized, could adversely affect our financial position, results of operations, prospects or the value of the ADSs.
 
10

Table of Contents
Condensed Consolidated Balance Sheets Data
 
    
As of December 31, 2020
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
ASSETS
            
Current assets:
            
Cash and cash equivalents
     683,565       448       20,546       49,749       —         754,308  
Short-term investments
     —         —         —         18,743       —         18,743  
Amounts due from Group companies
     —         —         270,885       48,505       (319,390     —    
Prepayments and other current assets
     —         7       13,259       29,152       —         42,418  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total current assets
  
 
683,565
 
 
 
455
 
 
 
304,690
 
 
 
146,149
 
 
 
(319,390
 
 
815,469
 
Investment in subsidiaries
     148,654       149,678       —         —         (298,332     —    
Amounts due from Group companies-long-term
     29,915       —         —         —         (29,915     —    
Property, equipment and software
     —         —         40,682       78,401       —         119,083  
Other
non-current
assets
     17,568       —         3,086       9,744       —         30,398  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
TOTAL ASSETS
  
 
879,702
 
 
 
150,133
 
 
 
348,458
 
 
 
234,294
 
 
 
(647,637
 
 
964,950
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (DEFICIT)
            
Current liabilities:
            
Amounts due to Group companies
     45,586       —         3,800       270,004       (319,390     —    
Accruals and other current liabilities
     14,453       1,479       15,312       11,157       —         42,401  
Short-term borrowings
     —         —         —         49,990       —         49,990  
Current portion of long-term borrowings
     —         —         —         970       —         970  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total current liabilities
  
 
60,039
 
 
 
1,479
 
 
 
19,112
 
 
 
332,121
 
 
 
(319,390
 
 
93,361
 
Deficit in subsidiaries
     —         —         —         —         —         —    
Deficit in VIEs
     —         —         179,668       —         (179,668     —    
Amounts due to Group companies-long-term
     —         —         —         29,915       (29,915     —    
Long-term borrowings
     —         —         —         51,926       —         51,926  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
TOTAL LIABILITIES
  
 
60,039
 
 
 
1,479
 
 
 
198,780
 
 
 
413,962
 
 
 
(528,973
 
 
145,287
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Mezzanine equity
  
 
1,407,536
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,407,536
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Shareholders’ equity (deficit):
            
Ordinary shares
     68       336       469,813       6,016       (476,165     68  
Additional
paid-in
capital
     —         552,447       72,150       66,134       (690,731     —    
Accumulated other comprehensive income
     (23,912     (1,408     —         —         1,408       (23,912
Accumulated deficit
     (564,029     (402,721     (392,285     (251,818     1,046,824       (564,029
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total shareholders’ equity (deficit)
  
 
(587,873
 
 
148,654
 
 
 
149,678
 
 
 
(179,668
 
 
(118,664
 
 
(587,873
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (DEFICIT)
  
 
879,702
 
 
 
150,133
 
 
 
348,458
 
 
 
234,294
 
 
 
(647,637
 
 
964,950
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
11

Table of Contents
    
As of December 31, 2021
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
ASSETS
            
Current assets:
            
Cash and cash equivalents
     1,517,362       106,790       82,634       122,220       —         1,829,006  
Short-term investments
     —         —         —         3,615       —         3,615  
Amounts due from Group companies
     —         50,000       487,676       65,705       (603,381     —    
Prepayments and other current assets
     26       11       11,454       40,968       —         52,459  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total current assets
  
 
1,517,388
 
 
 
156,801
 
 
 
581,764
 
 
 
232,508
 
 
 
(603,381
 
 
1,885,080
 
Investment in subsidiaries
     —         159,818       —         —         (159,818     —    
Investment in VIEs
     —         —         —         —         —         —    
Amounts due from Group companies-long-term
     372,092       —         —         —         (372,092     —    
Property, equipment and software
     —         —         62,874       60,944       —         123,818  
Operating lease
right-of-use
assets
     —         —         24,825       4,827       —         29,652  
Other
non-current
assets
     —         —         13,604       7,983       —         21,587  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
TOTAL ASSETS
  
 
1,889,480
 
 
 
316,619
 
 
 
683,067
 
 
 
306,262
 
 
 
(1,135,291
 
 
2,060,137
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
            
Current liabilities:
            
Amounts due to Group companies
     45,587       —         71,000       486,794       (603,381     —    
Accruals and other current liabilities
     6,989       5,096       21,350       35,685       —         69,120  
Short-term borrowings
     —         —         —         66,100       —         66,100  
Operating lease liabilities, current
     —         —         13,160       4,367       —         17,527  
Current portion of long-term borrowings
     —         —         —         2,376       —         2,376  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total current liabilities
  
 
52,576
 
 
 
5,096
 
 
 
105,510
 
 
 
595,322
 
 
 
(603,381
 
 
155,123
 
Deficit in subsidiaries
     1,069       —         —         —         (1,069     —    
Deficit in VIEs
     —         —         403,639       —         (403,639     —    
Amounts due to Group companies-long-term
     —         312,592       —         59,500       (372,092     —    
Operating lease liabilities,
non-current
     —         —         14,100       730       —         14,830  
Long-term borrowings
     —         —         —         54,349       —         54,349  
Other
non-current
liabilities
     8,464       —         —         —         —         8,464  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
TOTAL LIABILITIES
  
 
62,109
 
 
 
317,688
 
 
 
523,249
 
 
 
709,901
 
 
 
(1,380,181
 
 
232,766
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Shareholders’ equity (deficit):
            
Ordinary shares
     223       336       820,452       6,016       (826,804     223  
Additional
paid-in
capital
     2,902,856       787,791       80,034       67,812       (935,637     2,902,856  
Accumulated other comprehensive income
     (57,936     (321     —         —         321       (57,936
Accumulated deficit
     (1,017,772     (788,875     (740,668     (477,467     2,007,010       (1,017,772
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total shareholders’ equity (deficit)
  
 
1,827,371
 
 
 
(1,069
 
 
159,818
 
 
 
(403,639
 
 
244,890
 
 
 
1,827,371
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
TOTAL LIABILITIES, AND SHAREHOLDERS’ EQUITY (DEFICIT)
  
 
1,889,480
 
 
 
316,619
 
 
 
683,067
 
 
 
306,262
 
 
 
(1,135,291
 
 
2,060,137
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
12

Table of Contents
Condensed Consolidated Statements of Operations Data
 
    
For the year ended December 31, 2019
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Revenues
            
Other-intercompany(a)
     —         —         —         6,604       (6,604     —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     —         —         —         6,604       (6,604     —    
Expenses
            
Research and development expenses
     (2,289     —         (34,073     (82,856       (119,218
Administrative expenses
     (3,334     (2,812     (11,986     (9,230     —         (27,362
Other - intercompany(a)
         (6,604     —         6,604       —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
  
 
(5,623
 
 
(2,812
 
 
(52,663
 
 
(85,482
 
 
—  
 
 
 
(146,580
Interest income(d)
     2,904       —         61       991       (24     3,932  
Interest expense(d)
     —         —         —         (24     24       —    
Other income
     —         —         —         1,449       —         1,449  
Foreign exchange gain (loss), net
     —         —         2,556       —         —         2,556  
Equity in losses of subsidiaries and VIE(c)
     (135,924     (133,112     (83,066     —         352,102       —    
Others, net
     (21     —         —         —         —         (21
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
  
 
(138,664
 
 
(135,924
 
 
(133,112
 
 
(83,066
 
 
352,102
 
 
 
(138,664
Income tax expense
     —         —         —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
  
 
(138,664
 
 
(135,924
 
 
(133,112
 
 
(83,066
 
 
352,102
 
 
 
(138,664
Deemed contribution from convertible redeemable preferred shareholders
     (25,390     —         —         —         —         (25,390
Accretion of convertible redeemable preferred shares to redemption value
     (36,802     —         —         —         —         (36,802
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to Gracell Biotechnologies Inc.’s ordinary shareholders
  
 
(200,856
 
 
(135,924
 
 
(133,112
 
 
(83,066
 
 
352,102
 
 
 
(200,856
Other comprehensive income (loss)
            
Foreign currency translation adjustments, net of nil tax
     (3,159     (159     —         —         159       (3,159
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive loss attributable to Gracell Biotechnologies Inc.’s ordinary shareholders
  
 
(204,015
 
 
(136,083
 
 
(133,112
 
 
(83,066
 
 
352,261
 
 
 
(204,015
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
13

Table of Contents
    
For the year ended December 31, 2020
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Revenues
            
Other-intercompany(a)
     —         —         —         16,906       (16,906     —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     —         —         —         16,906       (16,906     —    
Expenses
            
Research and development expenses
     (1,753     (1,185     (53,356     (112,536       (168,830
Administrative expenses
     (13,745     (6,439     (18,463     (6,919     —         (45,566
Other - intercompany(a)
         (16,906     —         16,906       —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
  
 
(15,498
 
 
(7,624
 
 
(88,725
 
 
(102,549
 
 
—  
 
 
 
(214,396
Interest income(d)
     2,179       —         822       554       (685     2,870  
Interest expense(d)
     —         —         —         (2,840     685       (2,155
Other income
     —         —         54       4,653       —         4,707  
Foreign exchange gain (loss), net
     (1,551     —         (1,362     (1     —         (2,914
Equity in losses of subsidiaries and VIE(c)
     (197,030     (189,406     (100,195     —         486,631       —    
Others, net
     —         —         —         (12     —         (12
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
  
 
(211,900
 
 
(197,030
 
 
(189,406
 
 
(100,195
 
 
486,631
 
 
 
(211,900
Income tax expense
     —         —         —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
  
 
(211,900
 
 
(197,030
 
 
(189,406
 
 
(100,195
 
 
486,631
 
 
 
(211,900
Accretion of convertible redeemable preferred shares to redemption value
     (62,733     —         —         —         —         (62,733
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to Gracell Biotechnologies Inc.’s ordinary shareholders
  
 
(274,633
 
 
(197,030
 
 
(189,406
 
 
(100,195
 
 
486,631
 
 
 
(274,633
Other comprehensive income (loss)
            
Foreign currency translation adjustments, net of nil tax
     (20,754     (1,249     —         —         1,249       (20,754
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive loss attributable to Gracell Biotechnologies Inc.’s ordinary shareholders
  
 
(295,387
 
 
(198,279
 
 
(189,406
 
 
(100,195
 
 
487,880
 
 
 
(295,387
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
14

Table of Contents
    
For the year ended December 31, 2021
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Revenues
            
Licensing and collaboration revenue
     —         —         —         366       —         366  
Other-intercompany(a)(b)
     —         —         22,958       16,226       (39,184     —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     —         —         22,958       16,592       (39,184     366  
Expenses
            
Research and development expenses
     (15,245     (24,296     (82,651     (204,707     —         (326,899
Administrative expenses
     (58,594     (14,202     (46,337     (17,907     —         (137,040
Other-intercompany(a)(b)
         (16,226     (22,958     39,184       —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
  
 
(73,839
 
 
(38,498
 
 
(122,256
 
 
(228,980
 
 
—  
 
 
 
(463,573
Interest income(d)
     8,292       36       1,413       630       (1,255     9,116  
Interest expense(d)
     —         —         —         (6,318     1,255       (5,063
Other income
     —         —         45       9,075       —         9,120  
Foreign exchange gain (loss), net
     (55     691       (1,933     —         —         (1,297
Equity in losses of subsidiaries and VIE(c)
     (386,152     (348,381     (225,650     —         960,183       —    
Others, net
     —         —         —         (57     —         (57
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
  
 
(451,754
 
 
(386,152
 
 
(348,381
 
 
(225,650
 
 
960,183
 
 
 
(451,754
Income tax expense
     —         —         —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
  
 
(451,754
 
 
(386,152
 
 
(348,381
 
 
(225,650
 
 
960,183
 
 
 
(451,754
Accretion of convertible redeemable preferred shares to redemption value
     (1,989     —         —         —         —         (1,989
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to Gracell Biotechnologies Inc.’s ordinary shareholders
  
 
(453,743
 
 
(386,152
 
 
(348,381
 
 
(225,650
 
 
960,183
 
 
 
(453,743
Other comprehensive income (loss)
            
Foreign currency translation adjustments, net of nil tax
     (34,024     1,087       —         —         (1,087     (34,024
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive loss attributable to Gracell Biotechnologies Inc.’s ordinary shareholders
  
 
(487,767
 
 
(385,065
 
 
(348,381
 
 
(225,650
 
 
959,096
 
 
 
(487,767
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Notes to the Condensed Consolidated Statements of Operations Data
 
(a)
Reflects elimination of inter-company technical service fees charged by VIE to the WFOE subsidiaries. The VIE provided research and development related service to the WFOE and recognized revenue of RMB6.6 million, RMB16.9 million and RMB16.2 million in the years ended December 31, 2019, 2020 and 2021, respectively.
 
(b)
Reflects the elimination of the inter-company administrative expenses charged by WFOE to the VIE subsidiaries. The VIE received the business cooperation support from the WFOE and recognized the administrative expenses of RMB23.0 million in total in the year ended December 31, 2021.
 
(c)
Reflects the equity in loss of subsidiaries and VIEs which is eliminated in consolidation.
 
(d)
Reflects the elimination of the inter-company interest income and expenses.
 
15

Table of Contents
Condensed Consolidated Cash Flows Data
 
    
For the year ended December 31, 2019
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Net cash (used in) generated from operating activities
  
 
(5,499
 
 
(2,012
 
 
(40,605
 
 
(87,277
 
 
—  
 
 
 
(135,393
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Cash flows from investing activities:
            
Purchase of property, equipment and software
     —         —         (17,913     (38,519       (56,432
Investment in subsidiaries
     (174,739     (171,274     —         —         346,013       —    
Loans to Group companies and VIEs(e)(f)
     (23,000     —         (80,024     —         103,024       —    
Investments in short-term investments
     —         —         —         (80,200       (80,200
Proceeds from disposal of short-term investments
     —         —         —         178,000         178,000  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) generated from investing activities
  
 
(197,739
 
 
(171,274
 
 
(97,937
 
 
59,281
 
 
 
449,037
 
 
 
41,368
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Cash flow from financing activities
            
Repurchase of ordinary shares and preferred shares
     —         —         —         (44,705     —         (44,705
Proceeds from issuance of convertible redeemable preferred shares, net of issuance costs
     439,501       —         —         —         —         439,501  
Borrowings under loans from Group companies(e)(f)
     —         —         60       102,964       (103,024     —    
Capital contribution from parent
     —         174,739       171,274       —         (346,013     —    
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) generated from financing activities
  
 
439,501
 
 
 
174,739
 
 
 
171,334
 
 
 
58,259
 
 
 
(449,037
 
 
394,796
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Effect of exchange rate on cash and cash equivalents
     —         —         (603     —         —         (603
Net increase (decrease) in cash and cash equivalents
  
 
236,263
 
 
 
1,453
 
 
 
32,189
 
 
 
30,263
 
 
 
—  
 
 
 
300,168
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Cash and cash equivalents at the beginning of year
     —         —         —         11,890       —         11,890  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Cash and cash equivalents at the end of year
  
 
236,263
 
 
 
1,453
 
 
 
32,189
 
 
 
42,153
 
 
 
—  
 
 
 
312,058
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
16

Table of Contents
    
For the year ended December 31, 2020
 
    
Parent
Only
   
Other
Equity
Subsidiaries
   
WFOE
   
VIE and
VIE’s
Subsidiary
   
Eliminating
adjustments
   
Consolidated
Totals
 
    
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Net cash (used in) generated from operating activities
  
 
(13,309
 
 
(6,952
 
 
(93,026
 
 
(84,862
 
 
—  
 
 
 
(198,149
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Cash flows from investing activities:
            
Purchase of property, equipment and software
     —         —         (25,313     (54,087       (79,400
Investment in subsidiaries
     (305,734     (298,538     —         —         604,272       —    
Loans to Group companies and VIEs(e)(f)
     (6,915     —         (189,980     —         196,895       —    
Investments in short-term investments
     —         —         —         (28,055       (28,055
Proceeds from disposal of short-term investments
     —         —         —         13,514       —         13,514  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) generated from investing activities
  
 
(312,649
 
 
(298,538
 
 
(215,293
 
 
(68,628
 
 
801,167
 
 
 
(93,941
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Cash flow from financing activities
            
Repayment of convertible loans
           (138,695       (138,695
Proceeds from issuance of convertible redeemable preferred shares, net of issuance costs
     795,420       —         —         —         —         795,420  
Borrowings under loans from Group companies(e)(f)
     —         —         —         196,895       (196,895     —    
Capital contribution from parent
       305,734       298,538         (604,272     —    
Proceeds from bank borrowings
     —         —         —         103,008       —         103,008  
Repayments of bank borrowings
       —         —         (122     —         (122
Payment of initial public offering costs
     (2,645     —         (499     —         —         (3,144
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) generated from financing activities
  
 
792,775
 
 
 
305,734
 
 
 
298,039
 
 
 
161,086
 
 
 
(801,167
 
 
756,467
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Effect of exchange rate on cash and cash equivalents
     (19,515     (1,249     (1,363     —         —         (22,127
Net increase (decrease) in cash and cash equivalents
  
 
447,302
 
 
 
(1,005
 
 
(11,643
 
 
7,596
 
 
 
—  
 
 
 
442,250