111, Inc. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018; the filing is an annual report, not a standalone 2018 Q4 filing. It does not provide a clear set of Q4-only financial results. Financial statements are prepared under U.S. GAAP, with amounts principally in RMB.
Business context
111 operates an online and offline healthcare platform in China, including the 1 Drugstore retail pharmacy, 1 Drug Mall wholesale pharmacy and 1 Clinic internet hospital. The business is shifting from consumer-focused online retail toward a broader “New Retail” platform serving consumers, pharmacies and pharmaceutical companies. Results are increasingly driven by B2B wholesale sales.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | RMB 1,786.0 million (US$259.8 million) | RMB 959.5 million |
| Operating loss | RMB 400.4 million | RMB 254.0 million |
| Net loss | RMB 382.0 million (US$55.6 million) | RMB 249.3 million |
| Net loss margin | 21.4% | 26.0% |
| Net cash used in operating activities | RMB 343.0 million (US$49.9 million) | RMB 204.4 million |
| Cash and cash equivalents, year-end | RMB 853.7 million | RMB 167.7 million |
| Short-term investments, year-end | RMB 252.8 million | RMB 293.5 million |
| Total liabilities, year-end | RMB 322.7 million | RMB 201.2 million |
Revenue rose 86.1%. B2B product revenue increased to RMB 922.8 million from RMB 86.9 million, accounting for 51.6% of total revenue; B2C product revenue declined 1.7% to RMB 847.5 million. Service revenue grew 52.4% to RMB 15.7 million but remained less than 1% of revenue.
Cost of products sold increased 93.6% to RMB 1,681.7 million. Revenue less cost of products sold was RMB 104.3 million, or about 5.8% of revenue, versus RMB 90.8 million, or about 9.5%, in 2017. Fulfillment, selling and marketing, general and administrative, and technology expenses totaled RMB 504.0 million. Operating loss widened, although operating loss margin improved to 22.4% from 26.4%; net loss increased in amount while net loss margin narrowed.
Year-end cash and short-term investments totaled RMB 1,106.5 million. The company reported no debt outstanding at year-end and had an undrawn revolving credit facility of up to RMB 475 million, with interest at the one-year loan prime rate plus 10% and advances maturing within six months. Management stated existing cash, investments and anticipated operating cash flows were expected to cover working capital and capital expenditure needs for the next 12 months.
Material changes and notable items
- The company completed its Nasdaq IPO in September 2018 and reported approximately US$101.2 million in net proceeds. It stated that these proceeds had not been used as of the filing date. Preferred shares converted into ordinary shares upon the IPO.
- Financing activities provided RMB 972.7 million in 2018, while operating activities used RMB 343.0 million. The year-end cash increase therefore reflected financing proceeds, rather than positive operating cash generation.
- Inventory rose to RMB 210.8 million from RMB 144.1 million, while accounts payable increased to RMB 212.3 million from RMB 128.1 million. The company attributed these movements mainly to stocking for increased demand; it reported no inventory write-downs in 2018.
- Share-based compensation increased to RMB 51.4 million from RMB 9.9 million. General and administrative expense also included higher management costs and IPO-related consulting expense.
- Management reported a material weakness in financial reporting controls: insufficient qualified accounting personnel with U.S. GAAP expertise to support formal close controls and complex accounting. Disclosure controls were deemed ineffective at December 31, 2018. Remediation was underway but was not confirmed complete.
- Operating lease commitments totaled RMB 104.9 million. The company expected adoption of the new lease standard in 2019 to result in recognized right-of-use assets of RMB 57–70 million and lease liabilities of RMB 56–69 million.
Outlook, risks and contingencies
No numerical revenue, earnings or margin guidance is provided. Management expects B2B and value-added services to expand, while continuing to invest in sales, technology and fulfillment. It anticipates ongoing losses and costs as the business grows; profitability is not assured.
Key risks include extensive and evolving Chinese regulation of online pharmaceutical sales and internet healthcare; prior warnings and administrative penalties related to prescription-drug sales and online advertising; uncertainty over permits and compliance; and reliance on a variable interest entity (VIE) structure for significant operations. The filing also highlights data privacy and cybersecurity, product and medical liability, inventory and delivery execution, competition, access to offshore cash, currency controls, and potential financing needs. The PRC auditor was not subject to PCAOB inspection at the time described in the filing.
The company reported no material pending legal or administrative proceedings and no significant off-balance-sheet arrangements. Its audited financial statements received an unqualified opinion; the auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- Confirm the relevant period: this filing reports full-year 2018, not Q4-only results.
- Track whether rapid B2B growth can sustain product economics as B2B becomes the majority of revenue, and monitor segment profit and cash conversion.
- Assess operating cash burn, working-capital needs, inventory quality and reliance on supplier payment terms; distinguish available liquidity from cash held in restricted jurisdictions or entities.
- Follow remediation of the material weakness and any later management or auditor conclusions on control effectiveness.
- Evaluate continuing compliance with prescription-drug, advertising, internet healthcare and data-protection rules, and the enforceability and regulatory treatment of the VIE arrangements.
- Check subsequent use of IPO proceeds, credit-facility drawdowns, share-based compensation and dilution, and lease-liability recognition.