Cosmos Holdings Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 11, 2017. The company operates pharmaceutical businesses through SkyPharm in Greece and, following its February 2017 acquisition, Decahedron in the UK. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $6.11 million | $10.23 million | $0.96 million Q2; $2.09 million six months |
| Gross profit / margin | $480,098 / 7.9% | $843,790 / 8.2% | $81,706 / 8.5% Q2; $169,382 / 8.1% six months |
| Operating loss | $796,640 | $2.78 million | $86,933 Q2; $127,948 six months |
| Net loss | $839,616 | $2.87 million | $114,078 Q2; $183,184 six months |
| Operating cash flow | Not separately reported | $(3.33) million | $(63,362) six months |
At June 30, cash was $779,943, versus $716,590 at year-end 2016. Current assets were $6.63 million and current liabilities were $9.88 million, a $3.25 million working-capital deficit and an approximate 0.67 current ratio. Total liabilities were $9.88 million, all classified as current; notes payable, net of discount, were $5.97 million, with additional related-party notes and loans. Financing activities provided $3.51 million in the first half, largely from borrowing. Stockholders’ deficit was $2.63 million.
Material changes and unusual items
- Revenue rose substantially, which management attributed to SkyPharm’s growth and Decahedron’s contribution. Decahedron contributed $1.34 million of revenue and a $176,785 net loss from its acquisition date through June 30.
- Six-month operating expenses included a $1.95 million goodwill impairment related to Decahedron. The filing’s goodwill discussion is internally inconsistent: it says the assessment concluded goodwill was not more likely than not impaired, but also says the full goodwill balance was recorded as impaired.
- Operating cash use increased as receivables, inventory and prepaid expenses grew. The company also reported $1.52 million in prepaid expenses and $2.08 million in accounts receivable at June 30.
- Common shares outstanding increased to 128.2 million from 125.9 million at year-end, including 1.7 million shares issued for Decahedron. The company also issued shares for consulting and raised $64,749 through a private placement of shares and warrants.
Outlook, risks and contingencies
- Management plans to grow through pharmaceutical sales, product expansion and selective acquisitions, while exploring cosmetics and food supplements. It provided no financial guidance or earnings targets.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern: it had a first-half net loss of $2.87 million, a working-capital deficit of $3.25 million and had not established adequate recurring revenue to cover costs. Management expects to rely on sales growth and additional equity or other financing, but gives no assurance these plans will succeed.
- The company entered a non-binding LOI to pursue CC Pharma, with exclusivity through October 31, 2017. It paid a non-refundable €400,000 fee on July 6, after quarter-end; completion was not assured. Management attributed approximately $434,000 of increased acquisition costs to this opportunity.
- SkyPharm’s trade-finance facility was stated to have a €2.0 million maximum, but its June 30 draw was reported as €2.72 million; the company said it was negotiating an amendment. The facility carries a 1% monthly fee and is guaranteed by the parent. Decahedron’s separate facility had no draw at quarter-end.
- The Synthesis loan facility bears 10% interest and includes a personal guarantee secured by a pledge of 10 million company shares, plus lender-consent covenants. Foreign-currency movements also affected results: first-half transaction gains were $202,971, while currency translation produced a $126,677 loss in other comprehensive income.
- No material pending or threatened litigation was reported. Disclosure controls and procedures were concluded to be ineffective; management reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile the goodwill impairment disclosures and confirm the accounting treatment and impact on Decahedron’s reported results.
- Confirm the actual amount, classification, terms and amendment status of the SkyPharm trade-facility borrowing, which exceeds the stated facility ceiling in the filing.
- Assess near-term liquidity, debt maturities and financing needs, including the effect of the post-quarter €400,000 CC Pharma payment.
- Check receivable collectability, inventory conversion and prepaid-expense details given the increase in operating cash use.
- Review the ineffective disclosure controls, related-party funding and potential share dilution from options, warrants and contemplated financings.
- Reconcile the MD&A’s Q2 2016 revenue figure of $995,895 with the financial statements’ $955,895.