111, Inc. Q3 FY2022 Earnings Call

Hello, everyone, and thank you for joining 111's Conference Call today. On the call today from the company are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of 111's Major Subsidiary; Mr. Harvey Wang, COO; and Ms. Monica Mu, Investor Relations Director. As a reminder, today's conference call is being broadcast live via webcast. The company's earnings press release was distributed earlier today, together with the earnings presentation, are available on the website. Before the conference call gets started, let me remind you all that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis. With that, I will turn the call over to 111's CEO, Mr. Junling Liu.

Good morning, and good evening. Thank you for joining our Q3 2022 earnings call. What we'll be discussing here is also provided in the slides posted earlier today on the company's website. I encourage you to download the presentation, along with the earnings report. In today's call, I will add some color to some of the latest regulatory developments in the health care industry and the latest development in COVID policies and how the company rose to the challenges and opportunities. I'll also cover our strategies for building growth momentum, improving operational efficiency and strengthening supply chain capabilities. Then Mr. Luke Chen will walk you through our financial results. COVID zero restriction policies in China continue to create tremendous challenges to our business in Q3. More and more cities are experiencing the rising numbers of infected people and consequently, the number of cities that had lockdown increased significantly. The supply chain in general was severely disrupted and the transportation and other logistics were tightly regulated in epidemic-hit areas. Our biggest challenge was to deliver the goods to our customers and replenish stock in time. I'm proud to report that our team truly stood out in dealing with those unprecedented challenges; they literally had to move mountains to fulfill badly needed medicine for our customers and patients. Our online and offline digital platform proved to be highly effective in dealing with the pandemic. We spared no efforts in meeting patients' demand in epidemic-hit cities for medical consultation and drugs. We have provided free online consultations for customers in over 370 cities and provided over 3,000 medicinal products covering more than 400 diseases in the last few months. Since the beginning of the COVID-19 pandemic, our online hospital 1 Clinic has been offering free online medical consultation services. Recently, we also received government approval for a dedicated delivery fleet for medical products for some provinces hit by the pandemic. Even with the approval, the fleet had to overcome cross-provincial logistic challenges due to different control policies to deliver drugs to patients staying in mobile field hospitals, quarantine hotels and other facilities. The last few weeks saw the number of infected people in quite a few provinces rising sharply, resulting in lockdowns. A few of our fulfillment centers are under lockdown right now, which is very disruptive to our business. We believe that COVID-19 will continue to create challenges for us in the near future, but I have very strong faith in our team and believe we will be able to serve customers with our utmost effort as we have done in the last few quarters. Please allow me to take a moment to brief you on the latest regulatory developments. As you know, China just finished its 20th National Congress of the Communist Party in October. One of the very important themes is its focus on the construction of a healthy China, which includes enhancing management of major chronic diseases, boosting preliminary disease control capabilities, and improving treatment and health management. Opening remarks from the 20th National Party Congress provided us a broad direction on where China's health care industry may be heading over the next few years. The following initiatives will create great regulatory tailwinds for the industry. One, encouraging innovation. The government is supportive of domestic innovation with the intention to bring in newer and better therapies to China and the world. The initiative will provide a better environment to allow China to act as a global innovation hub in the space of innovative drugs. This will mean that there will be more opportunities for 111 to launch and commercialize new drugs with its integrated digital platform. Two, strengthening infrastructure for preventative, chronic, and infectious diseases. The importance of early diagnosis, early treatment and early rehabilitation was stressed. The government pledged an increase in funding for routine health screening, chronic disease management, infectious disease control, and mental disease treatment. We anticipate that digital technologies can play a key role in the areas of disease prevention, chronic disease management and containment of infectious diseases. Three, revitalizing TCM or Traditional Chinese Medicine. In recent years, the government has set TCM as a strategic priority and has issued plenty of supportive policies, including relatively less price cuts compared to other types of drugs in the government-run VBP, where many drugs had to drop prices sharply, not to mention encouraging modernization and practice of TCM. Significant efforts have also been made to promote the standardization of Rx TCM granules, which should improve safety and efficacy as market penetration increases. The policy is already having an effect in the market as we have seen a gradual pickup in our sales of TCM. Four, focusing more on youth and elderly care. With the birth rate falling for the 5th year in a row in 2021, the government implemented policies to boost the birth rate such as the third-child policy, tax deductions, longer maternity leave, enhanced medical insurance, housing subsidies, and additional financial support for the third child. I'm happy to report that some of our private label products are specifically targeting infants and children. As we broaden our portfolio, we should have a range of products for use by the elderly. In addition, the State Council announced 20 prevention and control measures to further optimize the COVID-19 response, under which China will roll out and implement precise, reasonable, and efficient epidemic control measures for public needs. Although it's early days, and there have been various implementation approaches in different provinces and cities and even obvious deviations from the announced control measures are taking place, we see this as a very positive move. In fact, yesterday, we saw media quoting senior officials that with the decreasing toxicity of the Omicron variant, the increasing vaccination rate and the accumulating experience of outbreak control and prevention, China's pandemic containment faces a new stage and mission. This potentially indicates an adjustment of the current COVID measures. One of the major capital cities, Guangzhou, reported yesterday that the city has adjusted the designation of risk levels and pandemic containment measures to varying extents in all its 11 districts. We very much welcome the new development in the fight against COVID-19 and look forward to the time when the pandemic is behind China, allowing business to operate as usual. Despite the economic downturn and material adverse impact on the offline retail sector in general in the third quarter, we managed moderate growth in revenue and solid growth in gross margin. Our net revenue for the third quarter increased by 0.1% year-over-year to RMB 3.3 billion, while our gross segment profit increased by 22% year-over-year. Our efforts to improve our margin profile continued to deliver positive results during the quarter. Our overall gross segment margin as a percentage of net revenues improved to 6% from 5% in the same quarter of last year. Given the circumstances, this hard-earned margin growth is quite an accomplishment. This achievement came from optimized product assortments and smart pricing, as well as improved team efficiency and technical capabilities. Our B2B business remains the key contributor to our revenue growth, which reached RMB 3.25 billion. Gross profit of our B2B segment rose to RMB 180 million, an increase of 27% year-over-year. B2B segment margin improved to 5.5% from 4.4% in the same quarter last year. We also improved the B2C segment margin to 22.4% from 19.7% in the same quarter last year. We will continue reducing procurement costs as well as optimizing our product assortment and structure. We were able to leverage our digital capabilities to deliver more value-added services to our partners. The market continues to show strong demand for our diverse service offerings. Our value-added services include marketplace vendor services, digital marketing, supply chain management, online medical consultation, e-prescription services, patient education, drug commercialization tools, etc. Even during the pandemic, our service revenue reached RMB 32.57 million, representing a growth of 34% over the same quarter of last year. As our business continues to expand and as we position ourselves as an effective commercialization partner, we will continue to offer value-added services to pharmacies and pharmaceutical companies. In addition, we continued to enhance our operational efficiency. As a result, total operating expenses as a percentage of net revenues decreased to 8.4% in this quarter from 10.2% in the same quarter last year. Sales and marketing expenses were down to 3.2% from 3.9%. General and administrative expenses were down to 1.4% from 1.6%, and technology expenses were down to 0.9% from 1.7% in the same quarter last year. We expect this momentum to continue as we scale while we continue to focus on delivering superior services to our customers. Although the current macroeconomic environment has resulted in challenges to our business, we're still committed to executing our strategy to continue to grow our revenue and gross margin. I'm pleased to report that our non-GAAP loss from operations narrowed to 1.5% of net revenues as compared to 4.1% in the same quarter last year. We're getting closer to profitability. We're also pleased to see that our operating cash flow and overall cash flow were in the black for the quarter, which is a major milestone for our business. As of Q2 2022, 111's virtual pharmacy network reached approximately 413,000 pharmacies, covering more than 70% of the total number of pharmacies in China. As of September, our cold-chain service has deployed in over 270 cities, over 80% of which can complete orders within 48 hours. This capability has provided convenience for rural consumers in particular. In order to continuously improve gross profit, we have carried out a platinum product program. Currently, more than 400 pharmaceutical companies and over 1,000 SKUs have become part of this program. The revenue of B2B high-margin products in this quarter has increased by 15% year-on-year and contributed 0.9% increase to the overall B2B gross profit. I'm pleased to update the progress we have made on our private label initiative. As our network of pharmacies continues to grow, it's time we should introduce some private label products. Not only will this help our pharmacy customers improve their gross margin, but it will help with our own margin as well. We partnered with some pharmaceutical manufacturers to build a suite of products, which include medicines, health supplements, medical devices, etc. So far, we have already developed three brands, with over 90 SKUs launched or already in the production schedule, targeting specific market segments. Although this part of the business is still in its infancy and no conclusions can be drawn yet, we believe these proprietary products will significantly increase our gross profit and enhance downstream customer stickiness. As we deepen our relationship with upstream pharmaceutical companies, we can help them improve their digital marketing efficiency and drug commercialization efforts. Now let me provide a couple of examples. Since the recent launch in China of its innovative drug, which successfully completed clinical trials in China and abroad and is China's only approved targeted oral drug for treating atopic dermatitis in teenagers. We actively participated in the launch of the medicine, leveraging our patient management platform. We now offer a full life cycle closed-loop service for the drug, covering online plus offline consultation and post-diagnosis consultation and refill services, which effectively help patients control disease progression. In addition, we'll help patients improve medication compliance and effectively reduce dropout rates. We also provided full-time caring medical professionals to respond to patients' questions online in a timely manner. Within a span of one month, we have served patients in 16 provinces. Also, in November, Hua Medicine rolled out dorzagliatin, a first-in-class glucokinase activator in China, providing type 2 diabetes patients with a new treatment option. With a strategic partner in its national rollout of the drug, leveraging our advantages in the smart supply chain capabilities and digital platform, we were able to assist our partner in launching the drug across all channels. We have also enhanced the accessibility of the new drug through reservation registration by medical professionals and full life cycle patient management, thus providing more patients with convenience to access new therapeutic treatments. The launch was so successful that inventory was depleted so fast that Hua Medicine is scrambling to increase its manufacturing capacity to cope with the supply shortage. Looking ahead, we will continue to pursue the enormous market opportunities from the digital transformation of the healthcare market in China, which, given the country's massive population, provides us the opportunity to connect millions of people in lower-tier cities via our direct B2C platform and our broad network of pharmacies. In order to bridge the gap in consumer access, we will focus on strengthening every facet of our S2B2C model and advancing our strategic plan to expedite business expansion. On the infrastructure side, we will keep improving the AI and data processing capability of our technology, asking it to handle higher volumes with greater predictive ability. Our technology platform today can access point of sales data of over 10,000 pharmacies for those SKUs we are commercializing. We believe this network of pharmacies and the number of SKUs to be commercialized will grow at a fast pace in the near future. With this, we will be able to provide retail pharmacies greater control and cost efficiency to drive their store sales growth and at the same time, further deepen the share of wallet among our existing retail pharmacy customers. The platform's enhanced capability will also allow us to virtually deploy more digital modules and features, which will connect more upstream suppliers and result in better sales and margins for our pharmacy customers. On the supply side, the services we provide to pharmaceutical companies in support of their commercialization efforts help deepen our relationships with them, allowing us to source an even wider selection of medications and health-related products for our pharmacy customers, benefiting consumers. This commercialization service also represents a major growth opportunity for us. Globally and in China, medical innovations have been happening at an unprecedented rate. As more and more new medications and devices come onto the market, competition becomes increasingly intense. 111's support during product launches can improve our partners' market positions and increase the likelihood of successful launches. Ultimately, our integrated online and offline platform is a win-win for all. As we help to transform the healthcare system for the better, we believe that there are significant opportunities for us in the age of industrial Internet to expedite the digital transformation of the healthcare system in China. We will work relentlessly to strengthen this model and pursue growth opportunities post-COVID-19. Operationally, our priorities will be delivering revenue and margin growth, strengthening the supply network, reducing procurement costs, continuing to improve operational efficiency, optimizing fulfillment costs, and broadening our service offerings. We have come a long way since our IPO in 2018. From a new kid on the block four years ago, we have now established ourselves as one of the major players in the digital healthcare service industry. As we continue to expand the coverage of pharmacies and broaden our drug supplier network, along with our advanced digital capabilities and supply chain infrastructure, we're uniquely positioned to create value for all our partners in the value chain. 111 was certified by the Chinese Ministry of Science and Technology as a National High-tech enterprise again. We were also recently awarded the prize of National E-commerce Demonstration Enterprise by the China Ministry of Commerce. Our remote consultation and chronic disease prescription refill service platform has also been selected as a case study in digital solutions for economic control and production resumption by the Shanghai Pudong New Area Science and Technology Commission. We're very proud that our efforts have earned us such distinction and are committed to continuous innovation and implementation. Moreover, we have received critical acclaim from local governments, hospital specialists, and patients for our online hospital services and continued support for Tibetans living in Gansu City, Sichuan province, for hydatid disease control. All the ESG efforts carry our core values, and we will firmly fulfill our social responsibilities as we have done in the past. We wish to thank all the investors who have supported us all along. I will now hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Thank you, Junling. Good morning or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the third quarter 2022 results from Slide 11 to 14 in Section 2 of our presentation. Again, our comparisons are year-over-year and our numbers are in RMB unless otherwise stated. Let's start with the third quarter results. The third quarter has been very challenging for our business due to the negative impact from COVID lockdowns in many cities and provinces. We have tried our very best to work with local governments and logistical companies to fulfill our customer patient orders as these medicines are badly needed. Total net revenues for the quarter grew 0.1% to RMB 3.35 billion, and the total gross profit for the quarter grew at 22% to RMB 202 million, and the gross margin improved from 5% to 6%. The B2B segment was the major contributor to total gross profit and margin improvement. B2B segment revenue grew at 0.8% to RMB 3.25 billion, while the gross segment profit for B2B increased by 27%, with the gross segment margin up from 4.4% to 5.5%. This was attributable to our optimization of selection portfolio and competitive pricing. We had also focused on our sales on higher margin products and launched private label products with much better margins. Our B2C segment revenue decreased 20% to RMB 100 million, with gross segment margin improved from 19.7% to 22.4%. Total operating expenses for the quarter were down 17% to RMB 283 million. As a percentage of net revenue, total operating expenses for the quarter were down to 8.4% from 10.2%, which reflected continuous improvement in our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was around 3%, comparable to the same quarter last year. Sales and marketing expenses were RMB 108 million, representing a decrease of 18% year-over-year. As a percentage of net revenues, sales and marketing expenses for the quarter was 3.2%, down from 3.9% in the same quarter of last year. We believe this trend will continue as we further build up our scale and improve our sales team efficiency. General administrative expenses were RMB 46 million, representing a decrease of 13% year-over-year. As a percentage of net revenues, G&A expenses accounted for 1.4%, down from 1.6% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions. Technology expenses accounted for 0.9% of net revenue, down from 1.7% in the same quarter of last year. We completed major tech development programs, and we believe that current spending reflects an appropriate amount of our investment in technology. As a result, our non-GAAP loss from operations narrowed to RMB 48.7 million compared to RMB 135.9 million in the same quarter of last year. As a percentage of net revenues, the non-GAAP loss from operations decreased to 1.5% in the quarter from 4.1% in the same quarter of last year. The non-GAAP net loss attributable to ordinary shareholders was RMB 64.9 million compared to RMB 213 million in the same quarter of last year. As a percentage of net revenues, the non-GAAP net loss attributable to ordinary shareholders decreased to 1.9% in the quarter from 6.4% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter, and we are getting very close to profitability. We are also very pleased to report that we have achieved positive operating cash flow and overall cash flow for the quarter. Please refer to Slide 15 to 19 of the appendix section for selected financial statements. A quick note on our cash position as of September 30, 2022, we had cash and cash equivalents, restricted cash, and short-term investments of RMB 866 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Thank you. Your first question comes from Kathy Chen with CICC. Please go ahead.

Hi. This is Kathy from CICC. Thank you for taking my question and congratulations on your progress. I have two questions in total. The first one is that, looking forward, I'm wondering what will be the company's operational focus? And the second one is that as on the gross margin of the B2B business continuously increased and very appreciative if you can share with us the key factors for sustainability?

Junling, are you going to take the first question?

Sorry, I was on mute. I apologize, Kathy. So thank you for your question. I'll answer the first question. So looking ahead, if we look at our operational priorities, I would say the following. We're going to focus on top-line and client growth. We’re going to strengthen the supply network, reduce procurement costs and focus on improving operational efficiency in terms of sales and marketing, logistics, general and administrative, etc. We also want to grow the services. The last point I want to make is that we're going to continue to invest in innovation. There's a lot we can do with the assets that we have built so far, and we're going to continue to exploit our technology capabilities to deliver value for both our upstream and downstream customers. Thank you.

Yeah, this is Harvey. I would take your second question regarding the B2B margin. And yes, you are right. Our B2B gross profit increased 27% year-over-year. This improvement came from our continuous effort to reduce our procurement costs, as Junling just mentioned, and through either our direct sourcing from pharmaceutical companies, etc., and also our efforts to optimize our product assortment and our cost structure. Regarding your question about sustainability, as we can expect the overall economy and environment to get better, we will further tighten our partnership with pharmaceutical companies, and we will gain more room to promote our digital marketing capabilities. So I believe the B2B profit trend will continue. Thank you, Kathy.

Your next question comes from Lauren Cai with HSBC. Please go ahead.

Hi. Thanks, management for taking my question. Congratulations on your solid results, especially your positive operating cash flow this quarter. This brings me to my first question about cost control. Can management share more details on what has been done to contain costs? And can these measures or this trend sustain going forward when the macro environment turns better and we may need to increase investment to gain more growth? And for my second question, I want to ask about your outlook for next year. Is China gradually easing COVID control measures, and how would it impact our business? Thank you.

Yes, Lauren. I will take your first question regarding cost control. It is very encouraging to see that as a result of our continuous efforts, we are enhancing our operational efficiency, and our total operating expenses have decreased to 8.4% from 10.2% of Q3 last year. This is actually from all the single elements we are doing our best on. Our sales and marketing expenses decreased from 3.9% to 3.2%. Our technology expenses and also our G&A decreased from 1.7% and 1.6% to 0.9% and 1.4%, respectively. When the overall environment improves, definitely there will be even better news for us. When the overall economy and environment are getting better, we definitely expect this momentum to continue. As at that time, the demand of our customers will be released and increased with our volume growth, we will definitely see scale. Thank you.

Yeah, Lauren, let me just answer your second question about it. We're all anticipating that the COVID zero policies will be behind us. We saw some encouraging developments recently. However, that's still unknown because different provinces have different implementation approaches. As we speak, some of our warehouses are still under lockdown. We cannot ship goods out, and we cannot replenish inventory. There’s also the latest development starting from today that many of those drugs were not allowed to sell online anymore, especially those prescription drugs. Every customer has to register their real name, and there will be a verification process. Fortunately, for us, we are more focused on B2B, which is the majority of our business. So the impact on us is lot smaller than for others in the industry. We all hope that this is the first step towards a post-COVID restriction kind of containment measure. Of course, looking at the broader picture, we are in a multi-trillion-dollar market; the market was JPY 8 trillion in 2021 and is widely anticipated to hit JPY 16 trillion by 2030, which is more than $2 trillion. There are a lot of tailwinds for us, especially the transformation towards digitization in the industry. We are already playing a major role in this and will continue to play a more important role in the future. In terms of expectation, I foresee very good quality growth for the company, both top-line and bottom-line. In the past few years, we focused on revenue growth. Obviously, we needed that scale and for customers to know us and experience the services we deliver. In the future, I would like to see not only top-line growth but also better margin growth and improvements to the bottom line. I hope that answers your question, Lauren.

Yeah, thanks. That's very helpful. Thank you.

Thank you. Your next question comes from Zoe Bian with Citi. Please go ahead.

Good evening management. This is Zoe from Citi. I have one question here. May I ask what's the update on your potential privatization?

Sorry, the potential?

Privatization.

Junling, maybe let me answer Zoe's question on this one. The process is still ongoing. As we disclosed, the company has formed a special committee to work on the proposal, and the special committee has recruited legal and financial advisers. The company will make public information regarding the privatization as advised by the special committee. So now it is in the hands of the special committee, and we will disclose when advised by them according to SEC rules. That's the latest.

Thank you very much.

Thank you. Your next question comes from Gerald Hasten who is a private investor. Please go ahead.

Hello. Congratulations on your performance this quarter. I'm gratified to see that the operating cash flow and overall cash flow were in the black for the quarter, which I believe is a major milestone for your company. How do you plan to continue this trend going forward?

Yeah. We are pleased to see the positive operating cash flow and overall cash flow for the quarter. This is mainly attributed to our efforts to continuously reduce the operational loss, as well as improving our working capital efficiency. Our average accounts payable is about 40-45 days, and our average inventory turnover is about 25 days. So this gives us strong operating cash flow. We have strong confidence that when we continue to leverage our scale and improve our margins, we will get closer to operating profitability. So the overall cash flow will continue to be positive, and we're quite confident in that.

If you don't mind, may I ask a second question? How will your company achieve double-digit revenue and gross profit growth, especially in light of the COVID situation and possibly third-quarter economic uncertainties?

Yeah, let me try to answer that question. First of all, you mentioned the overall environment. The COVID-19 zero policy does cause a lot of disruptions to our business. Our fulfillment centers cannot operate as usual, and we couldn't replenish inventory. Some of the fulfillment centers were locked down, and we were not able to deliver orders. Many orders got stuck in transit because we don't know which city was locked down, and some of these cities are actually logistical hubs. Under such circumstances, it really proves the quality of our team, and it's extraordinary. We established an emergency response committee reporting to management on the logistical problems and the necessary measures that need to be taken. We made a decision that all our office personnel went to the warehouse to help with sorting and packaging, doing our best to deliver orders. Our GR team managed to work with various governments to get special delivery fleet permits, allowing us to work with different provincial governments to ensure goods crossed provincial boundaries. Under extraordinary circumstances, we still delivered a 22% margin growth. This is also related to our strategy, as we optimized our assortment, pricing, and reduced procurement costs while using technology to provide a strong selection of products at very competitive pricing. The pandemic is still pretty serious right now, and we anticipate that a lot of negative impact will continue. However, we have every confidence that we will overcome these challenges and continue to deliver growth in the future. Thank you, Gerald.

Thank you for your answer, and I really look forward to your report next quarter with great anticipation. So good luck going forward.

Thank you.

Thank you. Your next question comes from Felix Yang, a private investor. Please go ahead.

Thank you for the chance to raise questions. First of all, congratulations to you all for the 17th consecutive growth quarter. I have two questions regarding technology R&D progress and also the private label products. First, I would like to know, is there any progress in technology R&D in the past season, and what future advances will there be? Second, about private label products, I know they are a good way to raise margins. What can we expect in the next quarter and the coming year?

Thanks, Felix. Let me take the first question regarding our technology. We are continuously making significant resource investments in technology and innovation. As you know, we set our mission as applying digital technology to seamlessly connect patients with medical services. Everything is through digital technology. We have built various systems, including a smart sourcing system to manage our assortment, systems to improve the efficiency of our field teams, and effective supply chain management systems based on organization models and algorithms. All of this helps us speed up our inventory turns, improve our supply chain efficiency, and optimize our costs. The results are evident through our margin improvements. Various recognitions, some nationally and some locally, have validated our efforts. We are certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise and recently awarded the prize of a national e-commerce demonstration enterprise by the China Ministry of Commerce. These are significant national recognitions, and we are proud of the distinctions achieved by the local government, Shanghai government, and Pudong government.

Regarding your second question on private labels, yes, this is exciting. Currently, we have launched about 9 SKUs of our private label products, and these have been well received by our customers, especially those small and medium, individual B2B stores. In China, in those big trend stores, private label products contribute about 10% to 20% of the GMV and about 30% to 40% of their margin. Our B2B customers, including individual stores and small chains, are typically unable to develop their own brand due to their volume constraints. However, there are significant opportunities in this market, and our private label products will help them compete with the bigger players in the market. We currently have around 100 private label SKUs in our pipeline, with some already in production. We expect to see a rapidly increasing volume in this project in the coming quarters. Felix, I hope I’ve answered your questions.

Thank you. Your next question comes from Tom Craig, an investment analyst. Please go ahead.

Good afternoon. This is Tom Craig from an investment firm, and congratulations on your performance in the third quarter. I have three questions. The first one is, what services did the company provide to patients in COVID-hit regions? The second one is, what are the reasons behind contracting non-GAAP net loss from operation as a percentage of net revenue, and can this be sustained? The third one is, what is the status of the company's cash reserves? Thank you.

Hi, Tom. Let me answer your first question. It’s very hard to provide services in COVID-impacted regions. We made tremendous efforts despite all the difficulties. Currently, 5 of our 7 fulfillment centers are experiencing severe disruptions. Our headquarters were locked down for almost 80 days. On any given day, we have 1,000 orders blocked somewhere en route to customers—it is challenging. Since the first day of the pandemic, we established an emergency response center and conducted daily calls to troubleshoot. We launched free online consultations for patients in those COVID-impacted regions, serving customers in over 370 cities dealing with over 400 different diseases. We also worked with the government to obtain special licenses. For example, we've secured dedicated fleets for medical products in some provinces. We built a robust transitional network to deal with daily disruptions caused by the pandemic. This network includes partnerships with various vendors. We have multiple options, so if one link is broken, we can immediately transfer to another. Through all these efforts, we were able to deliver a significant amount of business throughout the pandemic.

Regarding your second question about the net loss, yes, we are seeing the contraction of our net loss from operations as a percentage of our net revenue. This is primarily due to the improvement in gross profit, as I just mentioned, which increased by 27% year-over-year. This is one side. On the other side, we have effectively reduced our operating expenses, down to 8.4% from 10.2% in the same quarter last year. The improvement came from optimized procurement sources, as well as our product assortment and various tools, for example, our new PRS or smart pricing tools. Moving forward, we will sustain this trend and continue our efforts on both fronts. We expect to see further improvements in our net loss and profitability in the near future quarters.

On the cash position, as disclosed in our earnings release, as of September end, we had total cash, including restricted cash and short-term investments amounting to RMB 860 million. As we've shared here, we've reported positive operating and overall cash flow for the quarter, and we believe that trend will continue. We have strong confidence that this cash position is sufficient to support our future operations as well as our growth. Tom, I hope we answered all your questions.

Thank you, management. Hope you have a great quarter. Thank you.

Thank you.

Thank you. There are no further questions at this time. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting 111 in Shanghai, China, please let the company know. Thank you for joining us today. The call has concluded.