111, Inc. (YI) Q2 2022 Earnings Call Transcript

111, Inc. (NASDAQ:YI) Q2 2022 Earnings Conference Call August 25, 2022 7:30 AM ET

Company Participants

Monica Mu – Investor Relations Director

Gang Yu – Co-Founder and Executive Chairman

Junling Liu – Co-Founder, Chairman and Chief Executive Officer

Luke Chen – Chief Financial Officer, Major Subsidiary

Harvey Wangg – Chief Operating Officer

Conference Call Participants

Xipeng Feng – CICC

Zoe Bian – Citi

Operator

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 Wangg, 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, and together with the earnings presentation, are available on the company’s IR website at ir.111.com.cn.

Before the conference call gets started, let me remind you 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.

Junling Liu

Good evening and good morning everyone. Thank you for joining our Q2, 2022 earnings call. The information that we’ll be discussing here, is also provided in the slides that have been posted earlier today on the company’s website. I would encourage you to download the presentation along with the earnings report @ ir.111.com.cn.

In today’s call, I will talk about the general economic situation and how the company rose to the challenge of meeting the impact of both the COVID pandemic and the economic uncertainties. Secondly, I will also provide some color on our strategies in the areas of building momentum for margin growth, improving operational efficiency, and strengthening of supply chain capabilities. Then our CFO, Mr. Luke Chen will walk you through our results.

Although we have been in the COVID pandemic for three years, 2022 proved to be the most challenging year in China. The uncertainties in the international economic environment and the strict lockdown measures created significant challenges for many companies. As many of you are aware, COVID infections broke out in Shanghai in the spring and the pandemic subsequently [Technical Difficulty] cities in China.

The Chinese government instituted lockdowns in numerous cities to prevent the spread of the pandemic. And as a result, our Shanghai headquarters and several of our fulfillment centers were shut. Our headquarter office had to be shut down for [Technical Difficulty] in the second quarter and no one was able to return to office. Simple matters like [Technical Difficulty] permits with customers and suppliers talking contracts for normal business transactions became impossible.

The overall supply chain was severely disrupted and the transportation and other logistics were tightly regulated in pandemic hit areas. Logistics cost arose significantly. In many cities, our deliveries got stuck in transit, and we also experienced a severe shortage of medicinal supplies as our suppliers were not able to replenish inventories as usual.

This is the moment when companies are being truly tested. Despite the severe impact with pandemic, the company rose to the challenge. Through the team’s tremendous efforts, our company was appointed by the Shanghai Government as a supply guarantee enterprise and opened a special green channel, which enabled our vehicles to deliver from Kunshan fulfillment center to Shanghai on a daily basis.

We worked diligently and leveraged our online and offline digital platform capabilities to aid pandemic regions, and continuously provided medicine and online medical services for patients nationwide. We have provided free online consultations for customers in over 370 cities, and provided over 3000 medicinal products covering more than 400 diseases during the lockdown period.

Despite economic downturn and material detrimental impact on the offline retail sector, our Q2 revenue reached RMB3.04 billion achieving slight growth under extremely difficult circumstances at this. However, our gross profit grew 43% year-over-year reaching RMB192 million.

Gross profit margin rate of the company increased from 4.5% in Q2 2021 to 6.3% in Q2 2022. I had mentioned that we will be laser focused on our margin growth and we delivered on that. This achievement came from optimized product assortment and a smart pricing, as well as improved team efficiency and technical capabilities.

Our B2B business remains the key contributor of our revenue, which reached RMB2.9 billion. Gross profits of our B2B segment rose to RMB169 million or 65% year-over-year. Gross profit margin for our B2B segment rose to 5.8%, representing a growth rate of 53% year-over-year. Gross profit margin of our B2C segment rose to 22.5% representing a growth rate of 11% year-over-year. We will continue reducing procurement costs as well as optimizing our product assortment and structure.

I’m pleased to report the progress we have made on our private label initiative armed with its CRM, big data, and health management database, 111 cooperated with pharmaceutical manufacturers to build private label products, which include medicines, health supplements, medical devices, etcetera. So far, we have already developed three brands [indiscernible] and [indiscernible] targeting specific market segments. With our online and offline digital platform and nationwide distribution capabilities, this these proprietary products will improve gross profit and improve downstream customer stickiness significantly.

We were able to leverage our digital capabilities to deliver more value adding services to our partners. The market continues to show strong demand for our diverse service solutions. Even during the pandemic, our service revenue reached RMB22 million. Our operational efficiency is trending very nicely due to the improvement in business scale, team efficiency and technology advancement.

The operating expense as a percentage of net revenue decreased from 10.7% in Q2 2021 to 8.9% this quarter. The sales and marketing expenses were down to 3.3% from 4.4%. General and administrative expenses were down to 1.3% from 1.7% and technology expenses were down to 1.1% from 1.7% in the same quarter last year. The total amount of sales and marketing, general and administrative and technology expenses [indiscernible] have been reduced by 24%, 25% and 36% respectively.

Although the current 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 operating [indiscernible] as a percentage of net revenues decreased from 4.9% in Q2 2021 to 1.7% this quarter. This brings us another step closer to profitability.

As of Q2 2022, 111’s virtual pharmacy network reached approximately 410,000 pharmacists covering about 70% of the total in China. As we deepened our relationship with upstream pharmaceutical companies, 111 has also strengthened its relationship with downstream pharmacy customers. As a result, we were able to help those pharmaceutical companies to improve their drug commercialization efforts and digital marketing efficiency.

This quarter, we have also seen that our pharmaceutical coach [ph] and logistic capability improving rapidly. As of July our coach and service is deployed in over 270 cities, over 80% of which orders can be completed within 48 hours. This capability has provided convenience for rural users in particular. We always believe that innovation is the most important driver for growth and our efforts are rewarded with encouraging results.

One Health is a digital franchise model that effectively connects pharmaceutical companies with pharmacists and patients in order to empower more to midsized pharmacy chains. One Health provides both small and medium chains with more product selection while it will also improve their business decision making optimization by availing drug sale information and smart chain support.

One Health also helps its members to leverage data to optimize assortment and better customer relationship management. Through digital franchising, One Health has so far helped more than 11,000 pharmacies through AI technology, big data analysis technology and SaaS services such as CRM, O2O, et cetera.

This digital service made our S2B2C business model possible, which already covers over 67 million consumers and has opened up the digital marketing link for upstream pharmaceutical companies. One health members monthly users average revenue per user and a customer satisfaction metrics have been significantly increased over the past few quarters. Meanwhile, the average gross profit contribution by One Health members was 1.6x for that of numbers.

Cloud promotion is an innovative S2B2C management platform, which connects pharmaceutical companies with pharmacists, pharmacy managers, pharmacists, sales personnel, and the consumers, by facilitating the assignment, the specific tasks from pharmaceutical companies to the pharmacies.

These parties include training, taking exams, product display, promotion, patients education, et cetera for pharmacy managers, pharmacists and sales personnel. This platform enables pharmaceutical companies to precisely target sales channels and implement customized pharmacists and a sales personnel training. At present, dozens of pharmaceutical companies over 7,000 pharmacists and close to 10,000 pharmacists and sales personnel have joined this platform.

As a national high tech enterprise certified by the Chinese Ministry of Science and Technology and a specialized high end new technology Shanghai Enterprise selected by the Shanghai Municipal Commission of Economy and Information, 111 has proactively responded to the call for the three creations, i.e. innovation, invention, and the creativity, and the four news, i.e., new technology, new industry, new business formats, and new models, and are constantly devoted itself to scientific and technological innovation.

Since its establishment, 111 has pursued continuous technological innovation advancement. In July this year, we won the 2021 to 2022 China Pharmaceutical Retail Leader Award with our innovative business model and the leading digital technology capabilities. As the national health digitization drive gathers pace and the state provides more support for the development of platform businesses, we will continue to invest in research and development, aiming to achieve continuous incremental improvements for our business.

I would also like to brief you on 111’s ESG efforts during the pandemic. As a supply guarantee enterprise in Shanghai, we have proactively provided a timely boost to the ongoing fight against the pandemic. We collect purchase orders via proprietary purchasing channels and assigned special personnel to process them, thus ensuring timely delivery to patients.

1 Clinic, 111’s online hospital launched free online service since the pandemic began and provided free online consultations, free prescription renewal for chronic disease sufferers and other medical services to the public. The company has proactively organized donations and offered anti-pandemic PPEs for the enterprises resuming work and production. All the ESG efforts carry our core values and we will firmly fulfill our social responsibilities as we have done in the past.

We will make [indiscernible] efforts to pursue call growth opportunities, further consolidate and enhance our leading position, and to bolster our competitiveness in the medical service industry. Driven by digital technology, we will continue to deepen the digital transformation of the healthcare industry and upgrade platform services so that patients at large could gain access to high quality medical services and drug purchasing services. Our goal is to ultimately achieve profitability as soon as possible and to create value for our shareholders and society at large. We wish to thank all investors who have supported us all along.

I will now hand the call to Mr. Luke Chen to walk through our financial results. Thanks.

Luke Chen

Thank you, Junling and good morning or evening everyone. Moving to the financials, my prepared remarks will focus on a few key business and the financial highlights. You can refer to the details of the second quarter 2022 results from slides 13 to 16, section two of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated.

Let’s start with the second quarter results. Second quarter had been extremely difficult for our business due to COVID lockdowns in Shanghai and many other cities. Our head office in Shanghai had to be closed and operations in our regional fulfillment centers had been significantly disrupted for two full months. Despite all the challenges from pandemic lockdown, and thanks to our team efforts, we have managed to keep our revenue stable by continued to fast grow our gross profit and margin.

Total net revenues for the quarter grew 0.4% to RMB3.04 billion and the total gross profit for the quarter grew at 43% to RMB192 million and gross margin improved from 4.5% to 6.3%. B2B segment was the major contributor for the total gross profit and margin improvement. B2B segment revenue grew at 1.3% to RMB2.9 billion while gross segment profit for B2B segment increased by 55% with gross segment margin up from 3.8% to 5.8%. This was attributable to our optimization of selection portfolio and competitive pricing.

We had also focused ourselves on high margin products and launched private label products with much better margin. Our B2C segment revenue was negatively impacted by the lockdowns, which decreased 20% to RMB103 million with gross segment margin improved from 20.2% to 22.5%. Total operating expenses for the quarter were down 16% to RMB272 million. As a percentage of net revenue, total operating expenses for the quarter was down to 8.9% from 10.7%, which reflected continuous improvement in our operation efficiency.

Fulfillment expenses as a percentage of net revenue for the quarter was 2.9%, up from 2.8% in the same quarter of last year. The increase was mainly attributable to additional logistic cost incurred as a result of pandemic lockdown. Sales and marketing expenses as a percentage of net revenue for the quarter was 3.3% down from 4.4% in the same quarter of last year. We continued to leverage our sales automation tools to enhance the sales effectiveness and streamline the operation in the quarter.

General and administrative expenses as a percentage of net revenues accounted for 1.3%, down from 1.7% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions. Technology expenses accounted for 1.1% of net revenue, down from 1.7% in the same quarter of last year. We completed major tech development programs last year and believe that a current spending reflected the appropriate amount of investment in technology.

As a result, non-GAAP loss from operations narrowed to RMB52.8 million compared to RMB147.9 million loss in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations decreased to 1.7% in the quarter from 4.9% in the same quarter of last year. Non-GAAP net loss attributable to the ordinary shareholders was RMB68.3 million compared to RMB118 million loss in the same quarter of last year.

As a percentage of net revenue, non-GAAP net loss attributable to ordinary shareholders decreased to 2.2% in the quarter from 3.9% in the same quarter of last year. As you can see, we are improving our financial performance quarter-by-quarter, and we are very close to profitability. We have full confidence that we have the right strategy and the right team to steadily expand our revenue and gross segment profits. Please refer to Slide 17 to 20 of the appendix section for selected financial statements.

A quick note, our cash position as of June 30, 2022, we had cash and cash equivalent, restricted cash and short-term investment of RMB885.6 million.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from the line of Xipeng Feng from CICC. Please go ahead. Your line is open.

XipengFeng

Okay, thank you. Thank you for taking my questions and congratulations on the company progress. While I have three questions actually, and the first one is, how did your company achieve growth for both revenue and gross profit in the second quarter, especially amid such terrible circumstances such as COVID epidemic and the economic uncertainties?

And my second question is, what specific challenges did the company experience from the economic and COVID pandemic in the second quarter and how will these challenges affect the company in the second half of 2022?

And the last question is about the strategy. Could you please elaborate on the company’s strategies going forward? Thank you.

Junling Liu

Thank you, Xipeng. Let me just address your questions. And so first of all, in our last quarter it was extremely difficult for majority, for the three months, our head office was under lockdown and even after the lockdown was over and our staff gradually returned to office starting from second week of June, still no one from our head office can travel out of Shanghai to conduct the badly needed business. And also the supply chain was disrupted pretty badly as quite a number of cities experiencing outbreak of COVID. Many of our orders got stuck in transit causing tremendous problems in our customer experience and also a lot of customer frustration.

Some of our fulfillment centers were shut down and even the inventory replenishment became extremely difficult. And in the meantime, our pharmacy customers were also under tough challenges as you know, they were not allowed to sell fever and the cough related medicines. And, there were four type of medicines that they were not allowed to sell, which account for a substantial amount of their business. And as a result, we were not able to sell those drugs to them either.

Just under those difficult conditions, our team proved its true color. Given the extraordinary circumstances, we established a virtual command center with all the functional leaders dialing in every day to make decisions to deal with all kinds of issues popped up. And then they all have their own daily meetings and with their respective teams. I was deeply moved by the dedication our team members demonstrated during that tough period.

And I’ll give you an example, as you may know, once you leave your residential estate, it will be extremely difficult to re-enter as every estate is so strict on the inbound traffic. At that time, many customers placed orders online and they need to get the riders to collect those medicines from one of our collection centers. So, some of our staff used their own personal vehicle to dispatch some of the orders to customers who live far. And as we understand, once they leave their home, they couldn’t return home for many days. So end of the day, I think it’s the team’s spirit and our execution capability that contributed to the business results. We’re very pleased with the result given the extremely difficult circumstances.

With your second question, about impact and also how we’re going to deal with it in the second — third and fourth quarter, it is quite obvious. The pandemic created negative impact to our revenue and margin and therefore the overall business. The cost of conducting business also increased significantly. Imagine the orders stuck in transit, extra vehicles we had to hire. And even though some of the warehouses were under lockdown, we had to continue to pay our employees. And the pandemic is not over yet. Although we are able to work in the office now in Shanghai, many cities right now in China are going through what Shanghai went through.

As we speak right now, we have thousands of orders stuck in transit right now due to the lockdown in many cities, including some of the major logistical hubs. We anticipate Q3 and Q4 will remain very, very challenging for our business. The overall economic situation is not as encouraging as we would like it to be. This will add extra challenge to our business, but as you know, we have done in Q1 we will continue to operate with great vigilance and do the best we can.

With regards to your third question Xipeng, future strategy, we always had a three-step strategy. Our first step is to build the infrastructure and the ecosystem. As you all knew we started from a B2C business and then we had the Internet hospital with 1 Clinic and then we also had the B2B business. With that we actually completed a — closed the loop online and offline, and B2C to B2B, B2B2C model.

With that infrastructure, we were able to scale. As one can understand or one can appreciate in the Chinese market, scale matters a lot and without scale nobody takes you seriously. So we aggressively pursued the volume of the business over the last few years and we had an objective to really take on 50% of the 500 or so pharmacies market. And today, as you can tell, we already covered about 70% of the overall market. And with that scale, you obviously we’re in a much better position, either to deal with upstream suppliers or downstream pharmacy customers.

And of course our stage three of the strategy is to pursue profitability. As we have demonstrated the last few quarters, every single quarter we’re making substantial progress. We are a firm believer. If we look at the bigger picture level, we wanted to use digital technology to transform this healthcare industry and we are the firm believer that technology will be the key driver. Also technology will be the area that can give us the edge.

So, we will be pursuing both top line and bottom line growth and we believe that technology will be the best tool to give us that edge. And this is at least a trillion dollar market, and there is a lot we can do. Of course we want to establish, our leadership position in servicing the pharmacies first and then pursue other goals. So Xipeng, I thank you for the question. I hope, I answered your questions.

XipengFeng

Yes, sure. It’s very clear and helpful and thanks for the sharing. Thanks.

Operator

Thank you. [Operator Instructions] Next question is from the line of Fergus Macpherson from Octave. Please go ahead.

Unidentified Analyst

Yes, I’m an individual investor Fergus Macpherson. Congratulations on performance last quarter. I have also three questions, if you don’t mind. The first is, have you made any progress on the supply side upgrade? The second is, have you made any progress on technological innovation or development? And lastly, what is the status of the company’s cash reserves? Thanks.

Harvey Wangg

I can answer the first two questions. I didn’t hear the last one.

Luke Chen

It’s cash reserve.

Harvey Wangg

Oh, cash reserve. Okay, Luke, you answer the last one. Yes, we have made a lot of progress in Smart, in Smart Supply Chain as well in technology. Let me answer the two questions separately. In terms of supply chain, our Smart Supply Chain, we made progress in both systems and in our infrastructure. For example we launched our cloud B2B program about two and a half years ago. We didn’t have a coach and coverage. Starting from the beginning of this year we launched coach and coverage. This allowed us to deliver a lot of the new and innovative drugs to customers in remote areas. Right now, our coach and coverage can fulfill to 270 some cities and it provides tremendous convenience to our patients.

So that’s one. Second is about innovative idea for the franchising fulfillment center program. Okay? We through our own experience, we know that it’s so difficult, takes long time to build this fulfillment center. It takes effort in searching for the site and getting CFDA approval and build the internal processes essentially. A usually fulfillment center takes more than a year to launch. So we have a new innovative idea to have partners using our partner fulfillment centers we call franchising fulfillment center.

So we had this idea beginning of this year and by now we already assigned 11 fulfillment centers, eight of them are already in operations. These cloud fulfillment centers can be treated as our fully deployed fulfillment center. They are closer to customers so that they can shorten the delivery time and they also have a lower fulfillment cost, so really a tremendous help to us. And plus, we can have a much, much larger coverage.

Last example is about the inside our fulfillment center, we try to reduce our operational cost. One idea is to separate the bulk sales from unit sales. So a lot of cutting boxes, we fit them like one SKU are directly shipped to our B customers. And by separating the bulk from the units we lowered our fulfillment costs, especially the picking and packaging costs by almost 20%. So these are the improvements in our Smart Supply Chain.

Regarding to our technology, as you know that we are continuing to invest in our technology development, Junling mentioned that we are recognized by Chinese Ministry of Science and Technology as specialized high end new technology enterprise. And also we receive award, China Pharmaceutical Retail Leader Award. These awards are for, especially based on our digital technology capabilities.

And also, we built this patient lifetime management platform, which connect patients with doctors, pharmacists and medical assistants. Through usage of these platforms, patients gain tremendous convenience for accessing doctors, medication and disease education. Let’s take diabetes patient management as an example. The DOT duration of treatment, is a very — measure for adherence of your patient medical adherence, that index has been improved by more than 30%.

And also we provide a lot of tools, both for our marketplace vendors, help them improve product availability, timely fulfillment and post-sale customer services. And the marketplace CTO has dropped from 8% down now to 4.5%. So this help us to improve our customer experience tremendously. So through the few examples again, I hope I can demonstrate that our investment, our Smart Supply Chain, our new technology has been achieving, what I’ve seen the fruits.

Luke Chen

Yes. On the company’s cash reserve, as we disclosed as of June end 2022, we had cash and cash equivalents, restricted cash, and short term investment about RMB886 million. And you can also tell from our cash flow statements, the net cash outflow in the first half of this year is significantly lower than the first half year, last year. And we believe this trend will continue as we further lower our operation loss and getting closer to profitable. We believe our current cash reserves are sufficient to support our daily operation. I hope we answered your questions.

Unidentified Analyst

Yes, that’s very thorough. Thanks.

Harvey Wangg

Thank you.

Operator

Thank you. [Operator Instructions] Next question is from the line of Zoe Bian from Citi. Please go ahead.

Zoe Bian

Hi, thank you management. Good evening and good morning. This is Zoe from Citi. Thank you for taking my questions. I have two questions. The first is we saw a strong improvement in the gross margin in the second quarter. What are the reasons behind it and what level of gross margins you expect in near to long term? The second one is, could you give us more color margin product program? Thank you.

Junling Liu

Thank you, Zoe. I think I’ll take your first part of the question and then maybe my team can actually help out with the follow up question with a little more detail. Yes, we made a strategy to focus on margin delivery and in last few quarters we worked extremely hard on our product structure optimization, which is the main driver for better margin. And of course another driver is to reduce our procurement costs. We invested pretty heavily into our supply team and we negotiated pretty hard with our upstream suppliers.

With our technological capability, we’re getting better and better on our PIS system. If you are not familiar with that, that stands for Pricing Intelligence System. So what we do is, we use algorithms. We keep testing price elasticity, and we arrive at an optimized pricing for certain cohorts of SKUs. So this is really instrumental in helping us improving our margin and also project and image that you know, our selections has very competitive pricing.

And also, our product mix included the so-called gold label products, which means high margin products, which maybe high return, I can elaborate on. The revenue for this category of products is not very high, but the margin contribution is very, very pleasing.

And the last point I would like to make is that finally our private label has been launched. It’s early stage, but we are very excited by the potential for this line of business. So far, we have created three brands. They are [indiscernible]. The reason why we have those brands differently is we want to target our different market segments. So though, to conclude and I believe this is very sustainable, the second part of your question, and we should anticipate that our margin growth will continue to grow faster than revenue in the foreseeable future.

Luke Chen

Okay. Second question, for the second question regarding high margin products, actually, as Junling just mentioned, this is actually with our SaaS based digital marketing tools and our various platforms, like One Health, like cloud promotion platform that to promote those new products or special products from pharmaceutical companies. And margin is normally about 20% and average about 23%, 24%. And these products not only high margin products of, one, but also which is even more important, also those are high margin products for pharmacies. So this has been a transformation for our 111 sales teams to promote those high margin products. And we are pleased to see, we have successfully those rules and the transformation as we can see in quarter-by-quarter and the high margin product sales are increasing revenue. Thank you, Zoe.

Zoe Bian

Thank you, management. Look forward to your future development. Thanks again.

Operator

Thank you. [Operator Instructions] This is from the line of Lauren Kai [ph] from HSBC. Please go ahead.

Unidentified Analyst

Hi, thanks management for taking my questions and congrats on your solid results. I have two questions about your new initiative. The first one is on your One Health program. Can you share with us, how does the program improve active users in general? What’s your future plans for the program? Do you have targets for like how many pharmacies to cover in the future?

And my second question is, can you talk a bit more about your future plans for the cloud promotion program? What are the feedbacks from the pharma companies and pharmacies so far? What’s their satisfaction level with the new service? Thanks.

Junling Liu

Yes, thank you. Actually these two questions are all about our new initiatives. For One Health, One Health is becoming the first in the industry with the S2B2C model and our virtual franchise model enable over 10,000, those small or medium sized pharmacy chains to provide superior products and services to their customers. So for our next step also One Health actually currently I’m right now in Wuhan tomorrow, we will have a One Health member summit in for those members from Central China.

On our next step of this program, that is to set up a closer connection on our marketing on this, all of our members and marketing about those exclusive SKUs and also about our private label, like One Health is designed for One Health members, which basically all those are very high margin ones, so we can expect the margin percentage of this program is going to increase.

And for the next initiative, that is cloud promotion program and this is actually a SaaS based platform, connecting pharmaceutical companies with pharmacists in those pharmacies, and eventually with the end user or patients. Owning, we just launched in only a few months, and we have about, currently about 10,000 pharmacists and assistance in the pharmacies register in this platform. And we also have a number of pharmaceutical companies who are participating in this program. So we are expecting the cloud promotion program to become a very good digital marketing tool and also a platform to connecting pharmaceutical companies with the end user and with the patients. Thank you.

Unidentified Analyst

Thank you. Thank you for your answers.

Operator

Thank you. [Operator Instructions] Next question is from the line of Steve Lou. Please go ahead.

Unidentified Analyst

Thank you for taking my questions. I have two questions. The first one is, what are the reasons behind contracting non-GAAP loss from operation at percentage of net revenue? How is this sustainable? The second one is what is that supply guarantee and price? How does it apply to 111’s medical service during the epidemic? Thank you.

Luke Chen

Thank you, Steve. Let me answer your first question. Yes, our non-GAAP operating loss for the quarter is 1.7% of net revenue, which is significantly improved if you compared to 4.9% last — in the same quarter of last year. If you zoom in, you will see that the improvement was contributed by first of all, the gross market improvement, which is 6.3% this quarter versus 4.5% in the second quarter of last year.

And also the total operating — reduction contributed the rest, but just now Junling and Harvey is talking about our plan on the revenue and the margin expansion, if you look at our OpEx, you will see that in Q2 we have made great efforts to optimize our organization structure, streamline our operation process, and make full utilization of automated digital tools to improve into operation effectiveness and efficiency. And as a result, all of the expensive line items, such as selling marketing expenses decreased by 24%, G&A expenses down by 25%. And we also take a conservative approach on our R&D spending. And so we would believe that we will be able to keep this spending level in the rest of the year, while continuing to grow our top line and gross profit. So overall we are optimistic, positive, that we will continue the trend to narrow the loss until profitable. Junling, you want to answer the technical…?

Junling Liu

I’ll touch upon the supply guarantee enterprise and Steve, thank you for that question. I guess that is not a concept that everybody is familiar with. And as you can imagine, during the lockdown, all the logistics were suspended with the exception of government approved companies, which you know, can deliver essential goods, such as food to residential compounds to keep the citizens fed. And those companies are classified as supply guarantee companies. They are given special permits onto the road. Initially there were only companies which can deliver food and water which is the most essential for survival.

And our GR team proved its value. They approach relevant authorities repeatedly, as you can imagine how chaotic it can be when the city just got locked down initially and the system was literally in shock. And eventually it made sense to the authorities, that in addition to food and water many chronic patients will need drugs to survive. So they granted us the permit.

But unfortunately, our fulfillment center is in Kunshan, which is neighboring province. And we had to go through similar process in Kunshan which was governed by different decision makers. To put the long story short, we got it sorted and eventually made it work and both governments gave us the green light. And our vehicles were able to transport medicine to Shanghai on a daily basis to deliver the badly needed drugs to our consumers.

And as far as we knew, we were the only online company in Shanghai who were able to deliver this service to consumers. And what we did exactly was, we set up four collection centers across Shanghai and two in Puxi and two in Pudong, and the drugs will be delivered from our fulfillment center to those collection centers, where our people will have to work pretty hard to sort all the drugs out based on different suburbs and so on. And then the customers can get their riders to collect those orders.

As I said before, some customers were simply not able to get those riders because they lived little further away and some of our staff will have to use their own vehicle and leave their residential compound to deliver those drugs to consumers. We’re very proud of the fact that our customers can receive such services, received so many letters from customers and are calling that really life-saving services. Thank you, Steve. I hope that answers your question.

Unidentified Analyst

Yes. Thank you for answering my question. This information is very useful.

Junling Liu

Thank you.

Operator

Thank you. And that was the final question. So 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 on today’s call. This concludes the call.