Cosmos Holdings, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021. Cosmos Holdings imports, exports, and distributes branded and generic pharmaceuticals, OTC medicines, and nutraceuticals, principally in Europe, through SkyPharm, Decahedron, and Cosmofarm. Its Sky Premium Life nutraceutical line and Greek full-line wholesale operation are growth priorities.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $14.85 million | $12.82 million | $26.47 million | $24.75 million |
| Gross profit | $2.04 million | $2.35 million | $3.04 million | $3.54 million |
| Gross margin | 13.7% | 18.3% | 11.5% | 14.3% |
| Operating income (loss) | $(1.38) million | $0.99 million | $(3.11) million | $1.21 million |
| Net income (loss) | $(2.38) million | $1.38 million | $(4.55) million | $0.89 million |
| Operating cash flow | Not separately reported | Not separately reported | $(2.52) million | $(5.88) million |
At June 30, 2021, cash was $0.81 million, current assets $42.32 million, current liabilities $31.90 million, and working capital $10.42 million. Total assets were $45.16 million, total liabilities $44.77 million, and stockholders’ equity $0.38 million, versus a $4.16 million deficit at December 31, 2020. Accounts receivable, including related-party receivables, totaled approximately $28.68 million.
Debt remained significant: current notes payable were $9.34 million, long-term notes payable $10.24 million, lines of credit $5.04 million, and net convertible notes $0.77 million. These figures exclude other obligations, including related-party loans, accrued interest, leases, and the $1.55 million share-settled debt obligation. Interest expense for the first half was $1.51 million, plus $0.14 million of non-cash debt-discount amortization.
Changes versus the prior comparable period
- Revenue increased 15.8% in Q2 and 6.9% in the first half. Management attributed growth mainly to Cosmofarm’s local expansion and increased demand for Sky Premium Life and full-line wholesale products.
- Cost of goods sold increased faster than revenue: 22.3% in Q2 and 10.5% in the first half. Gross profit fell 13.3% and 14.2%, respectively; management cited a larger share of lower-margin full-line wholesale sales.
- General and administrative expense rose substantially, largely due to $3.16 million of stock-based compensation for a consulting agreement, as well as higher legal, consulting, and outsourced accounting costs. The company swung from operating profit and net income in 2020 to losses in 2021.
- First-half operating cash use improved from $5.88 million to $2.52 million, but financing provided $2.72 million of cash. Cash rose by $0.18 million to $0.81 million.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern for twelve months from the filing date. It cited first-half losses and operating cash use, accumulated deficit of $23.30 million, and the need for additional capital. Plans include increasing sales and raising debt or equity, but management gave no assurance of success.
- Financing and dilution: The company converted $3.0 million of CEO-related debt into 500,000 shares during Q2 and recorded a further $0.6 million related-party debt forgiveness as contributed capital. It also issued 1.8 million restricted shares under a consulting agreement, with $3.16 million recognized as compensation through June. Common shares issued increased to 16.57 million from 13.49 million at year-end.
- Debt maturity and terms: Convertible notes were classified as short-term and due during 2021; one lender forbearance was extended to November 16, 2021 with scheduled payments and potential prepayment requirements. Certain third-party notes had matured and were under extension negotiations; other debt bears interest as high as 18%. Review maturity dates, covenant compliance, guarantees, and refinancing needs.
- Subsequent financing activity: After quarter-end, the CEO exchanged additional debt for shares in July, and the company reported a $2.0 million demand convertible note with the CEO. In August, it agreed to exchange portions of a senior loan for shares, including a tranche contingent on NASDAQ listing approval. The company also entered into advisory and placement-agent agreements carrying fees, warrants, or share compensation.
- Geographic and operating concentration: Greece generated $25.96 million of first-half revenue out of $26.47 million. Management cited pandemic-related risks including supply interruptions, export restrictions, logistics delays, payment delays, and recession. It also identified competition, purchasing-cost increases, and stagnant selling prices as risks.
- Licensing and controls: SkyPharm’s Greek wholesale authorization was automatically extended through 2021 under COVID-related regulatory provisions; management expected a temporary license by year-end. Management assessed disclosure controls as only partially effective and reported ongoing remediation of internal controls.
- Related-party exposure: Doc Pharma, connected to the CEO, supplied inventory and manufactures Sky Premium Life products. The company also entered a €1.425 million plus VAT product research and development agreement with Doc Pharma, running through 2025. Assess pricing, payment terms, governance, and execution.
- Other items: No material pending or threatened litigation was reported as of June 30. The filing reports no off-balance-sheet arrangements. Management said COVID-19 had not required an adjustment to asset or liability estimates as of the filing date.
Investor verification priorities
- Confirm liquidity and cash conversion, especially collection of the substantial receivables and related-party balances, and the funding plan behind the going-concern warning.
- Reconcile debt balances, maturities, arrears, forbearance schedules, interest costs, guarantees, and the terms and status of post-quarter debt exchanges.
- Evaluate whether revenue growth can translate into improved gross margins, given the shift toward lower-margin wholesale products and the concentration in Greece.
- Review the scale, valuation, vesting or clawback terms, and dilution impact of consultant shares, debt conversions, and placement-agent compensation.
- Verify renewal and ongoing compliance of the Greek distribution authorization, and assess progress on the disclosed remediation of partially effective disclosure controls.