111 Inc. reported a sharp contraction in second-quarter revenue as the Nasdaq-listed Chinese healthcare platform continued restructuring its business away from asset-intensive pharmaceutical distribution and toward marketplace services, digital commercialization and a more technology-driven operating model. Net revenue for the three months ended June 30 was RMB2.300 billion, equivalent to approximately $339.0 million using the company’s reported exchange rate, down 28.3% from RMB3.206 billion in the same period of 2025.

The decline was broadly consistent with the strategy 111 has been outlining across recent reporting periods. The company has divested underperforming subsidiaries, reduced exposure to fulfillment operations that require more capital and operating resources, and placed greater emphasis on business models capable of producing marketplace commissions and other service-based revenue. Management argues that the result should ultimately be a more scalable platform with lower operating and capital risk, even though the transition is reducing reported revenue while legacy distribution volume is being removed from the business.

The second-quarter contraction nevertheless remained substantial. Gross segment profit fell 28.6% to RMB132.3 million from RMB185.4 million a year earlier, roughly matching the top-line decline. The company’s largest operation, its business-to-business segment, generated RMB2.242 billion of revenue, down 28.7%. B2B product revenue fell 28.9% to RMB2.221 billion, while B2B service revenue increased 2.8% to RMB21.4 million. That divergence illustrates the central issue in 111’s restructuring: the shrinking merchandise business still dominates the financial statements, while service revenue is growing from a much smaller base.

The consumer-facing business was more resilient but also weakened. B2C revenue declined 7.8% year over year to RMB57.9 million. B2C product revenue decreased 7.3% to RMB55.2 million and service revenue fell 17.5% to RMB2.7 million. Segment profit declined to RMB10.8 million from RMB13.0 million, with the segment-profit margin narrowing to 18.6% from 20.7%. B2B segment profit, meanwhile, fell 29.5% to RMB121.5 million and its margin edged down to 5.4% from 5.5%.

Management is placing increasing weight on marketplace activity as a measure of whether the new model is gaining traction. Total marketplace service revenue increased 18.2% year over year during the first six months of 2026. The figure follows a 24.7% increase reported for the first quarter, when 111 also described its marketplace operation as evidence that its revenue mix was moving toward more scalable and operationally efficient activity. The first-half increase therefore provides continued evidence of growth in the service layer even as consolidated revenue remains under pressure from the downsizing of traditional distribution operations.

A second area of growth came from products for which 111 has developed dedicated commercialization or distribution relationships. Revenue from what the company calls promotional products reached RMB60.7 million in the quarter, up 121% year over year, while gross profit from those products increased 120%. The category includes selected pharmaceuticals that 111 promotes or distributes through its digital network, particularly to small and medium-sized pharmacy chains.

Levofloxacin product Cravit was the most significant example disclosed with the results. Quarterly unit sales increased to 1.041 million boxes from 364,000 a year earlier, while revenue rose 157% to RMB28.1 million. 111 also reported sales of approximately 60,000 boxes each for Rivaroxaban Tablets marketed as Pusitong and Xinkeshu Tablets. The company is seeking additional pharmaceutical distribution relationships that can use its existing pharmacy network, digital marketing infrastructure and commercialization capabilities without rebuilding the same cost structure associated with its former distribution footprint.

That expansion is strategically important because promotional products remain relatively small compared with 111’s total revenue, but their rapid growth provides a potential bridge between the company’s historical role as a pharmaceutical distributor and its intended future as a technology-enabled commercialization platform. The earnings profile increasingly depends not simply on replacing every renminbi of lost distribution sales, but on generating sufficient gross profit and cash contribution from services, selected higher-value products and technology-supported operations.

Expense trends offered some evidence of the cost benefits management is targeting. Fulfillment expenses declined 29.5% to RMB63.6 million from RMB90.2 million, slightly faster than the decline in revenue. Fulfillment expense represented 2.76% of net revenue, compared with 2.81% in the prior-year quarter. Management attributed the improvement to network optimization and the selective exit from underperforming fulfillment centers.

Total operating expenses were RMB155.5 million, down 16.1% from RMB185.3 million a year earlier. Excluding share-based compensation and severance expenses, operating expenses represented 4.2% of total gross merchandise value, down from 4.5%. Selling and marketing expense decreased 12.2% to RMB58.1 million, while general and administrative expense was roughly flat at RMB17.6 million.

Technology spending moved in the opposite direction. Technology expense increased 28.0% to RMB19.0 million from RMB14.9 million. The increase is notable because 111 is simultaneously attempting to reduce its traditional operating cost base and expand its use of artificial intelligence. Management said AI-agent adoption is allowing workforce streamlining, particularly in back-end support functions, though those changes generated severance costs during the second quarter.

The company has identified demand forecasting, inventory optimization, fulfillment routing and merchant management as operating areas where AI capabilities are being deployed. It is also developing agent-based tools for pharmacy and healthcare-service customers. From an earnings perspective, the significance will depend on whether higher technology investment and near-term restructuring costs lead to durable reductions in labor, inventory and fulfillment expenses rather than simply shifting expenses between categories.

For the second quarter, the transition was not enough to preserve profitability. Operating costs and expenses totaled RMB2.323 billion, down 27.5% from a year earlier but declining slightly less rapidly than revenue. 111 consequently posted an operating loss of RMB23.2 million, compared with operating income of approximately RMB0.1 million in the second quarter of 2025. On a non-GAAP basis, which excludes share-based compensation, the operating loss was RMB20.5 million versus non-GAAP operating income of RMB3.0 million a year earlier.

Net loss widened to RMB31.7 million from RMB7.3 million. The quarterly net loss represented 1.4% of revenue compared with 0.2% a year earlier. Non-GAAP net loss was RMB28.9 million, up from RMB4.4 million, while net loss attributable to ordinary shareholders reached RMB39.1 million compared with RMB19.5 million. Basic and diluted loss per American depositary share doubled to RMB4.40 from RMB2.20, according to the company’s financial statements.

The first-half figures show how significantly the restructuring has altered 111’s financial scale. Revenue for the first six months of 2026 was RMB4.662 billion, down from RMB6.735 billion a year earlier. The company recorded an operating loss of RMB43.2 million for the period, compared with operating income of RMB0.2 million in the first half of 2025, while net loss widened to RMB58.4 million from RMB14.6 million.

Cash generation remains another closely watched component of the transition. Operating activities used RMB11.4 million of cash in the second quarter, substantially less than the RMB61.4 million used in the comparable quarter of 2025. On a six-month basis, however, operating cash outflow reached RMB103.2 million, reversing positive operating cash flow of RMB51.2 million in the first half of last year. Financing activities used another RMB124.9 million during the first half, contributing to the decline in cash balances.

At June 30, cash and cash equivalents, restricted cash and short-term investments totaled RMB381.1 million, or approximately $56.2 million, compared with RMB611.3 million at the end of 2025. Cash and cash equivalents alone stood at RMB295.2 million, with RMB25.9 million of restricted cash and RMB60.0 million of short-term investments. Inventories declined to RMB896.7 million from RMB998.5 million at year-end, consistent with a business seeking to reduce the amount of capital tied up in physical distribution.

The balance sheet also continues to include obligations connected with investors in 1 Pharmacy Technology. The company reported RMB956.7 million included in redeemable non-controlling interests and accrued expenses and other current liabilities associated with those investments. Approximately RMB282.2 million has been repaid following exercises of redemption rights, while investors representing 63.8% of the outstanding principal have agreed to arrangements that could extend repayment periods if additional redemption rights are exercised. Those obligations remain relevant when assessing the company’s liquidity alongside the reduced cash position.

The second-quarter results also provide a useful comparison with the beginning of the year. First-quarter revenue had declined 33.1% to RMB2.362 billion, meaning the year-over-year rate of contraction moderated somewhat in the June quarter to 28.3%. First-quarter promotional-product revenue grew 70.2%, compared with 121% growth in the second quarter, suggesting that the commercialization portfolio accelerated as the year progressed. Fulfillment expenses also declined sharply in both quarters as 111 reduced the cost of operating its logistics network.

Still, the financial statements show that the company has not yet reached the point where growth in marketplace services, promotional products and reduced fulfillment spending offsets the earnings impact from lost distribution scale. Gross segment profit remains lower, operating profitability has moved into negative territory, and technology and restructuring expenses are absorbing part of the savings being generated elsewhere.

The earnings debate therefore centers on the quality and economics of the revenue that remains rather than on headline revenue growth alone. Under an asset-light model, 111 is attempting to rely less on owning inventory, operating fulfillment infrastructure and generating large volumes of comparatively low-margin product sales. In their place, management is seeking commission income, digital commercialization revenue and selected pharmaceutical distribution relationships that can leverage the company’s existing technology and pharmacy connections.

Success would eventually be expected to appear in several financial indicators: marketplace services becoming a larger contributor to the business, promotional-product gross profit continuing to expand, fulfillment costs falling as a percentage of revenue, operating expenses becoming structurally leaner and cash consumption moderating. The second-quarter report provided progress on several of those operating measures, but the widening losses and lower liquidity show that the restructuring is still in an intermediate stage.

Management did not provide a numerical third-quarter or full-year revenue or earnings forecast in the September 17 results announcement. Instead, it reiterated the longer-term objective of using a leaner operating structure and greater AI adoption to expand margins and improve profitability. That leaves future quarterly results as the principal evidence investors will have for determining whether the company’s smaller revenue base is becoming financially stronger.

For 111, the second quarter therefore marks another step in a transformation that is intentionally reducing the scale of the legacy business faster than the new platform-oriented activities can replace it in reported revenue. The key favorable indicators were marketplace-service growth, rapid expansion in promotional products and continued fulfillment efficiencies. The counterweight was a return to operating losses, a wider net loss and a lower cash position. Whether the strategy ultimately improves shareholder economics will depend on the company converting those early mix and efficiency gains into recurring operating profitability and stronger cash generation.