111, Inc. — FY 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; quarterly Q4 results are not separately provided in the filing text. Financial statements are prepared under U.S. GAAP and reported primarily in RMB.
Business context
111 operates an integrated online and offline China healthcare platform, including the 1 Drugstore online retail pharmacy, 1 Drug Mall wholesale platform, offline pharmacies and 1 Clinic internet hospital. The business is increasingly weighted toward B2B pharmaceutical distribution.
Financial and operating performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | RMB 3,952.1 million (US$567.7 million) | RMB 1,786.0 million |
| Net loss | RMB 501.8 million (US$72.1 million) | RMB 382.0 million |
| Operating loss | RMB 493.5 million (US$70.9 million) | RMB 400.4 million |
| Net cash used in operating activities | RMB 512.4 million (US$73.6 million) | RMB 343.0 million |
| Cash and cash equivalents at year-end | RMB 581.3 million (US$83.5 million) | RMB 853.7 million |
| Short-term borrowings at year-end | RMB 95.1 million (US$13.7 million) | Nil |
- Revenue increased 121.3%. Product revenue was RMB 3,929.7 million, while service revenue was RMB 22.4 million.
- B2B product revenue rose 243.2% to RMB 3,166.4 million, or 80.1% of total revenue. B2C product revenue declined 9.9% to RMB 763.3 million.
- Cost of products sold was RMB 3,786.9 million, equal to 95.8% of revenue. Operating loss was 12.5% of revenue, versus 22.4% in 2018; net loss margin narrowed to 12.7% from 21.4%, although the net loss increased in RMB terms.
- Segment profit before unallocated expenses was RMB 108.5 million for B2C and RMB 34.4 million for B2B. These segment figures do not include the company’s substantial fulfillment, selling, administrative and technology expenses.
- Selling and marketing expense increased 31.0% to RMB 340.6 million but fell to 8.6% of revenue from 14.6%. Fulfillment expense rose 74.6% to RMB 129.0 million and declined to 3.3% of revenue from 4.1%. Technology expense fell 13.1% to RMB 61.9 million.
- Current assets were RMB 1,481.4 million and current liabilities RMB 773.4 million. In addition to cash and equivalents, the company had RMB 116.4 million in restricted cash and RMB 23.6 million in notes receivable; short-term investments were nil. Restricted cash and RMB 14.3 million of notes receivable were pledged as borrowing collateral.
- Year-end total assets were RMB 1,610.3 million and total liabilities RMB 836.4 million. Short-term borrowings were RMB 95.1 million; operating lease liabilities were RMB 88.1 million, including current and long-term portions.
Material changes versus FY 2018
- The B2B channel’s share of product revenue rose from 51.6% to 80.1%, while B2C product revenue contracted. The shift drove rapid top-line growth but also contributed to higher product costs and working-capital needs.
- Inventory increased to RMB 486.3 million from RMB 210.8 million. Operating cash use worsened to RMB 512.4 million, partly reflecting the RMB 276.2 million increase in inventory, offset in part by increases in accounts payable and accrued liabilities.
- Cash and cash equivalents fell by RMB 272.5 million. Cash, cash equivalents and restricted cash combined totaled RMB 697.7 million at year-end, compared with RMB 853.7 million a year earlier.
- The company drew on short-term credit facilities during 2019, ending the year with RMB 95.1 million of borrowings. It also adopted lease accounting that recognized RMB 87.9 million of right-of-use assets and lease liabilities at year-end.
- Inventory write-downs were RMB 0.8 million in 2019 versus nil in 2018. The company also recorded an RMB 11.0 million impairment of a long-term investment and an RMB 10.3 million foreign-exchange loss.
Outlook, commentary and risks
- Management expects B2B growth and continued development of pharmacy and value-added services, while seeking better supplier terms, operating leverage and improved efficiency. The filing gives no quantified revenue, earnings or cash-flow guidance.
- Management stated that cash and cash equivalents, short-term investments and anticipated operating cash flows should cover working capital and capital expenditure needs for the next 12 months, including consideration of COVID-19. It also cautioned that additional capital might be needed depending on the pandemic’s impact and financing conditions.
- The filing noted that COVID-19 had increased demand for certain drugs and medical equipment, but could also disrupt employees, customers, suppliers and logistics providers and reduce productivity. The ultimate impact was described as uncertain.
- Principal risks include extensive and changing Chinese regulation of online drug sales, healthcare and internet services; past prescription-drug and advertising compliance penalties; and uncertainty over future implementation of online prescription-drug rules.
- The company operates key activities through variable interest entities (VIEs) controlled by contract rather than direct ownership. Regulatory or legal challenges to these arrangements could impair control over, or access to the economics of, a material part of the business.
- Other significant risks include persistent losses and operating cash burn, inventory and fulfillment execution, product or medical liability, data privacy and cybersecurity, competition, foreign-exchange and capital-transfer restrictions, and reliance on third parties. The company reported no material pending legal proceedings.
- Management concluded internal control over financial reporting was effective as of December 31, 2019. A material weakness related to U.S. GAAP reporting expertise had been identified in 2018; management described recruiting experienced personnel and strengthening the accounting team as remediation. The auditor did not attest to internal controls because the company was an emerging growth company.
- The filing states that the China-based auditor was not then subject to PCAOB inspection. This may limit investor assurance over the audit process. The company had not paid dividends and did not expect to do so in the near future.
Most important facts for investors to verify
- Whether rapid B2B growth can produce sustainable operating cash flow, given the larger inventory balance, higher cash burn and continued net losses.
- Whether the reported 12-month liquidity assessment remains adequate after considering restricted cash, near-term borrowings, lease payments and COVID-19 effects.
- How B2B and B2C unit economics and segment profitability develop, particularly after fulfillment and corporate expenses are considered.
- Whether the company’s online prescription-drug practices and VIE arrangements remain compliant under evolving PRC rules and enforcement.
- Whether inventory quality, supplier concentration, customer credit and pledged collateral create additional working-capital or loss risks.
- Whether internal-control remediation is sustained and how the lack of PCAOB inspection affects audit oversight.