Cosmos Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; financial statements are unaudited. The filing identifies the registrant as Cosmos Holdings Inc. The company is an international pharmaceutical wholesaler, with European cross-border and full-line distribution, generic medicines, and its Sky Premium Life nutraceutical brand.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $14.35m | $9.69m | $39.11m | $27.88m |
| Gross profit | $2.40m | $0.80m | $5.94m | $1.89m |
| Gross margin | 16.7% | 8.3% | 15.2% | 6.8% |
| Operating income (loss) | $1.08m | ($0.12m) | $2.29m | ($0.82m) |
| Net income (loss) | $0.76m | ($1.63m) | $1.65m | ($3.39m) |
| Basic earnings (loss) per share | $0.06 | ($0.12) | $0.12 | ($0.26) |
Revenue rose 48.2% in Q3 and 40.3% year to date, which management attributed chiefly to Cosmofarm’s growth and demand for COVID-related medical equipment and nutraceuticals. Management said higher-margin Sky Premium Life products and medical equipment helped gross profit grow faster than sales. Approximate net margin improved to 5.3% for Q3 and 4.2% year to date, from losses in the comparable periods.
- Cash flow: Operating cash use was $10.34m for the nine months, versus $3.57m used in 2019. Investing activities used $0.11m; financing activities provided $10.98m. Cash increased from $38,537 at year-end 2019 to $1.08m at September 30, 2020.
- Liquidity: Current assets were $35.88m and current liabilities $41.21m, a $5.33m working-capital deficit. Accounts receivable was $17.45m, plus $2.28m due from a related party; prepaid expenses and other current assets included $3.23m related-party prepayments.
- Debt and capital: Total liabilities were $43.34m, compared with $30.34m at December 31, 2019; stockholders’ deficit was $4.77m. Balance-sheet current borrowings included $22.86m notes payable, $4.25m lines of credit, $1.09m convertible notes, and related-party notes and loans. Interest expense for nine months was $1.85m. Cash-flow financing included substantial new borrowing and repayment activity.
Material changes, outlook and risks
- The company recorded a $795,418 gain on extinguishment of debt following a settlement with Synthesis; the restructured balance was reported at $3.08m at September 30. A separate $1.55m share-settled debt obligation remained recorded.
- The May 2019 $1.5m convertible note was in default after its September 16, 2020 due date. A September forbearance agreement extended the forbearance period to June 16, 2021 and specified required payments, including $63,000 at signing, $480,000 in monthly payments, and a remaining $607,000 due at maturity. The note carries conversion and default provisions.
- Management stated that the working-capital deficit, accumulated deficit of $17.92m, stockholders’ deficit, and operating cash outflows raise substantial doubt about the company’s ability to continue as a going concern for 12 months from the filing date. Management’s plans include growing sales and obtaining equity or debt financing; it gave no assurance of success and was not obligated to provide funds.
- Management described COVID-related risks including supply interruptions, export restrictions, and logistics delays, while expecting potential demand for medical equipment and supplements. It said operations continued, and planned organic expansion, more nutraceutical products, digital sales platforms, another robotic system, and potential NEO Exchange and OTCQX listings. These are plans, not assured outcomes.
- Management cited competition, purchase-price increases, pressure on selling prices, economic conditions, regulation, and customer and supplier risks. Greece generated about $36.06m of reported nine-month revenue, making geographic concentration relevant. Purchases from related-party Doc Pharma were about $3.99m for the nine months.
- Disclosure controls and procedures were found ineffective at period-end. Identified material weaknesses included segregation of duties, control-structure review, systems effectiveness, and documentation. Management described remediation steps, including hiring an internal auditor and IT professional.
- The filing reported no material pending or threatened litigation. It disclosed potential tax and Greek employee termination-benefit liabilities of approximately $83,000 and $81,000, respectively.
Key facts investors should verify
- Whether the company can meet its near-term debt payments, comply with note and credit-line terms, and secure sufficient financing to address the going-concern uncertainty.
- Collections and recoverability of the substantial receivables and related-party balances, including the Doc Pharma receivable and prepaid inventory balances.
- Whether operating cash use can improve as revenue and reported earnings grow, and how much profitability depends on foreign-exchange gains and debt-extinguishment gains.
- Progress in remediating ineffective disclosure controls, and whether future filings report effective controls.
- The revenue table contains an apparent inconsistency: the statements and MD&A report nine-month 2019 revenue of $27,883,147, while the country-disaggregation table totals $27,833,147. Investors should confirm the correct amount.