Berry Genomics Co.Ltd(000710) : Reply of Shanghai accounting firm (special general partnership) to the inquiry letter of Berry Genomics Co.Ltd(000710) ‘s annual report

Shanghui Certified Public Accountants (special general partnership)

About Berry Genomics Co.Ltd(000710)

Reply to the inquiry letter of the annual report

Shyhz (2022) No. 307 Shenzhen stock exchange company management department:

We have received the inquiry letter on the annual report of Berry Genomics Co.Ltd(000710) 2021 (annual report inquiry letter [2022] No. 165 of the Ministry of company) (hereinafter referred to as the “inquiry letter”) issued by your ministry. As the audit institution of Berry Genomics Co.Ltd(000710) (hereinafter referred to as “the company” or ” Berry Genomics Co.Ltd(000710) “) in 2021, we have checked the relevant issues item by item according to the requirements of the inquiry letter. The relevant information is explained as follows:

Question 1. During the reporting period, your company achieved an operating revenue of 1.422 billion yuan, a year-on-year decrease of 7.67%. The operating revenue fell for two consecutive years, and the net profit attributable to the shareholders of the parent company (hereinafter referred to as “net profit”) – 111 million yuan, a year-on-year decrease of 152.60%, which was your company’s first loss after the completion of backdoor listing in 2017. Our department is concerned that 20172019 is the performance commitment period of your company’s backdoor listing. After the expiration of the performance commitment period, your company’s net profit fell sharply in the first fiscal year, and your company’s net profit changed from profit to loss in the second fiscal year.

(1) The annual audit accountant is requested to explain in detail the audit procedures implemented for the opening balance of the financial report and whether the company’s early financial data are true and accurate in combination with the sharp decline of the company’s net profit and the conversion from profit to loss after the performance commitment period.

Reply of annual auditor:

In view of the main contents of the company’s early financial data, such as income, cost, expense and asset impairment provision, we have implemented the following verification procedures:

1. For the company’s early income, as of December 31, 2019, the company’s performance commitment period (2017)

(to 2019) accounts receivable of 914 million yuan; As of December 31, 2021, the balance of accounts receivable formed during the above performance commitment period is 129 million yuan. During the performance commitment period, the company has recovered 85.85% of the accounts receivable and 14.15% of the uncollected part, as follows:

Unit: 10000 yuan

Project amount, including

20192018 2017

As of December 31, 2021, the remaining 129328808 20962028 in the performance commitment period

Original book value of accounts receivable

Operating income during performance commitment period 422862161764143979117119

By December 31, 2021, 3.06% 5.45% 1.46% 1.73% during the performance commitment period

Corresponding operating income / receivable balance of the year

By December 31, 2021, 14.15% 9.64% 2.29% 2.22% during the period of performance commitment

Receivable balance / accounts receivable formed on December 31, 2019

We conducted the following verification procedures:

(1) For the main customers of hospitals, universities, scientific research institutes and other companies, we conducted on-site interviews or video interviews and implemented the confirmation procedures to understand the customer’s business background, transaction content, check the details of the contract, check the transaction data, etc; For other customers with small accounts receivable, we selected samples and implemented the letter of confirmation procedure. The amount of accounts receivable covered by the above interview and letter confirmation procedures accounted for 47.59% of the original book value.

The interview and correspondence are as follows:

Unit: 10000 yuan

Proportion of total customer type interview and letter of confirmation in the original book value

Universities and research institutes – 153153 39.99%

Hospital 21321390 352249.34%

Other customers 2124356248045.82%

Total 42561899 615547.59%

(2) We checked the collection after the period. As of the reporting date (April 15, 2022), the total collection was 28.79 million yuan, accounting for 22.26% of the book balance of accounts receivable formed in the performance gambling period. Combined with the interview results and reply results, we believe that the company’s early income data is true and accurate.

2. For the company’s early-stage expenses, we selected items from the bank statement or payment voucher for testing, checked the supporting documents (such as contract or invoice), paid attention to the invoice date and payment date, tracked the selected items to the relevant expense details, and checked the accounting period in which the expenses were included. Combined with the above work results, we believe that the company’s early expenses are true and accurate and recorded in the correct accounting period.

3. For the company’s early-stage cost, we implement the substantive analysis procedures related to inventory by analyzing the raw materials, labor and manufacturing expenses of each product line of the company, compare and analyze the data month by month, compare and analyze it with the data of previous years or standard cost, review whether there is inventory with long-term credit, evaluate and judge the analysis results, and analyze whether the causes of production cost fluctuation are reasonable; Combined with inventory counting, income cost matching analysis, etc., we believe that the company’s early-stage cost carry forward is timely and complete.

4. For the impairment provision of the company’s early assets, we checked whether the historical loss rate used was appropriate and sufficient by reviewing the determination method of historical loss rate for accounts receivable; We compare the defective, cold backed and sluggish inventory list of the previous year with the inventory list of the current year to determine whether it is necessary to make up the provision for falling price and whether there is insufficient provision in the previous period; We checked whether the goodwill impairment test method meets the requirements, whether the previous and subsequent periods are consistent, and whether the basis is sufficient.

In conclusion, we believe that the company’s early financial data are true and accurate.

(2) During the reporting period, the operating income of your company’s medical testing services was 507 million yuan, a year-on-year decrease of 15.20%, and the gross profit margin was 50.38%, a year-on-year decrease of 7.39 percentage points; The operating income of basic scientific research services was 315 million yuan, a year-on-year decrease of 24.08%, and the gross profit margin was 32.72%, a year-on-year decrease of 22.45 percentage points. Please describe in detail the operation of comparable companies in the contract industry, the changes in the operating income of your company’s medical testing services and basic scientific research services, whether there are significant differences in the level of gross profit margin compared with comparable companies in the same industry, and the reasons for the large changes in the gross profit margin of basic scientific research services. The annual audit accountant shall check and give clear opinions.

Company reply:

(I) analysis of medical testing service revenue and gross profit margin

Medical testing service is one of the main revenue modes of the company’s clinical business. The company provides medical products and services for hospitals at all levels, third-party medical laboratories and other medical institutions through the comprehensive scheme of “product + service”. The “product” mode mainly corresponds to the reagent sales revenue, and the “service” mode mainly corresponds to the medical testing service revenue.

During the reporting period, the company’s medical testing service revenue was 507 million yuan, a year-on-year decrease of 15.20%, mainly due to: 1) continuous transformation of business model: the company’s main product NIPT has entered the mature stage, medical institutions tend to independently purchase reagents for sample testing, and the clinical demand has gradually changed from service mode to product mode, resulting in a decline in medical testing service revenue; 2) The growth rate of mature products slowed down: the price of NIPT testing service of mature products of the company showed a downward trend, and the repeated covid-19 epidemic made the number of hospital diagnosis and treatment unstable; 3) Impact of covid-19 testing and other unconventional businesses: the company did not carry out covid-19 testing services and other businesses on a large scale in this period, and its revenue decreased compared with the same period last year.

During the reporting period, the gross profit margin of the company’s medical testing was 50.38%, a year-on-year decrease of 7.39 percentage points, mainly due to: 1) the decline in the price of mature products NIPT; 2) The company’s new products in the expansion and incubation period, such as NIPT plus, CNV SEQ, Wes and the third generation of land poverty, account for a relatively small proportion of income and have not yet formed a scale effect.

The company’s medical testing service revenue and gross profit margin during the reporting period are as follows:

Unit: 10000 yuan

20212020 operating revenue gross profit margin comparable companies and project changes operating revenue gross profit margin operating revenue gross profit margin

Dian Diagnostics Group Co.Ltd(300244) 66196252 48.64% 50822965 48.95% 30.25% – 0.31% of which: diagnostic service (Note 1)

Daan Gene Co.Ltd(002030) 1492626 38.06% 2007314 39.64% – 25.64% – 1.59%, including: provision of labor services (Note 2) Bgi Genomics Co.Ltd(300676) (Note 3)

Including: basic research on reproductive health 11924929 – 11778963 – 2.50% – research and clinical application services (Note 3)

Berry Genomics Co.Ltd(000710) 5074757 50.38% 5984086 57.77% – 15.20% – 7.39% of which: medical testing services

Note 1: Dian Diagnostics Group Co.Ltd(300244) annual report shows that its “medical testing service income” is included in “diagnostic service income”, and “diagnostic service income” also includes covid-19 epidemic detection income; It is impossible to accurately understand the gross profit margin of medical testing services after excluding covid-19 business through public data.

Note 2: Daan Gene Co.Ltd(002030) annual report shows that its “income from medical testing services” is included in “provision of labor services”, and “provision of labor services” also includes income from basic scientific research services. It is impossible to accurately understand its income and gross profit margin of medical testing services through public information.

Note 3: Bgi Genomics Co.Ltd(300676) annual report shows that its “medical testing service revenue ” is classified into “reproductive health basic research and clinical application service “, “reproductive health basic research and clinical application service ” includes reagent sales revenue, so it is impossible to accurately understand its medical testing service revenue through public data Bgi Genomics Co.Ltd(300676) did not disclose the gross profit of the business, and it is impossible to accurately understand the gross profit of Bgi Genomics Co.Ltd(300676) medical testing service through public information.

To sum up, due to the different caliber of income disclosure and the fact that some companies carry out nucleic acid testing, few companies in the field of medical testing services adopt the same caliber as the company, which is not comparable.

(II) analysis of basic scientific research service income and gross profit margin

During the reporting period, the company’s basic scientific research service revenue was about 314 million yuan, a decrease of 24.08% over the same period of last year. It is mainly due to the conclusion of preliminary research projects such as the company’s main customers, universities, scientific research institutes, Fujian Herui Gene Technology Co., Ltd. (hereinafter referred to as “Fujian Herui”), as well as the tightening of relevant scientific research funds and the slowdown of phased scientific research service procurement affected by the epidemic.

The company’s basic scientific research service income and gross profit margin in the reporting period are as follows:

Unit: 10000 yuan

20212020 operating revenue gross profit margin comparable companies and project income changes operating revenue gross profit margin operating revenue gross profit margin

Daan Gene Co.Ltd(002030) (Note 1) —-

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