Cosmos Holdings Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The unaudited filing covers Cosmos Holdings Inc., which was expanding its pharmaceutical wholesale and trading operations through SkyPharm and its February 2017 acquisition of UK wholesaler Decahedron.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Revenue | $4.116 million | $1.136 million |
| Gross profit | $364,000; 8.8% gross margin | $88,000; 7.7% gross margin |
| Operating expenses | $2.349 million, including $1.950 million goodwill impairment | $129,000 |
| Net loss | $2.034 million; $(0.02) per share | $69,000; reported loss per share $(0.00) |
| Comprehensive loss | $2.049 million | $282,000 |
| Operating cash flow | $(659,000) | $83,000 provided |
| Cash | $397,000 at March 31 | $717,000 at December 31, 2016 |
| Working capital | $(2.913) million | $(2.235) million at December 31, 2016 |
| Total assets / liabilities | $4.391 million / $6.626 million | $3.119 million / $4.871 million at December 31, 2016 |
Revenue increased about 262% year over year, which management attributed to SkyPharm’s growth and Decahedron’s contribution. Gross margin improved by about 1.1 percentage points, but the substantially higher operating costs and goodwill impairment drove a much larger net loss. Financing activities provided $335,000; investing activities provided $37,000, including cash received in the acquisition. Current liabilities included $2.857 million of notes payable, $136,000 of related-party notes, $556,000 of loans and related-party loans, and $1.131 million of taxes payable. All reported liabilities were current.
Material changes, outlook and risks
- Decahedron acquisition: Completed February 10 for 1.7 million Cosmos shares valued at $1.479 million. The final purchase-price allocation included $50,000 of license intangibles and $1.950 million of goodwill. The filing records a full goodwill impairment charge in Q1; however, its goodwill note also says the assessment concluded impairment was “not more likely than not.” This is an apparent internal inconsistency that merits review.
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the Q1 loss, working-capital deficit, accumulated deficit of $3.036 million, and lack of sufficient recurring revenue to cover operating costs. Continued operations depend on obtaining capital and increasing sales; management gave no assurance its plans would succeed.
- Debt and financing: SkyPharm’s amended facility had a $2.665 million balance at March 31, bore 10% interest, and was secured by a guarantor’s pledge of 10 million shares, with lender consent required for certain new debt and share issuances. Two short-term Synthesis bridge loans were also outstanding. Their maturities were extended to May 16 and May 20; the company later failed to repay them and reported a technical default, though the lender had not declared default or accelerated payment as of the filing.
- Subsequent facilities: Decahedron entered into a €2.75 million receivables-backed trade facility in April, with no draw reported. SkyPharm entered into a €2.0 million facility in May and had drawn €1.404 million by the filing date. Both carried a 2% origination fee and a 1% monthly fee and were guaranteed by Cosmos. A proposed $500,000 convertible-note financing had no executed agreement or funds received as of filing.
- Management plans and risks: The company planned organic growth, new markets and products, and selective acquisitions, but provided no quantified revenue or earnings guidance. It cited pharmaceutical competition, regulation, pricing pressure, purchase-cost increases, customer spending changes, foreign-exchange exposure, and dependence on external capital. Several potential acquisitions described in the filing were nonbinding, expired, or uncertain.
- Controls and contingencies: Management concluded disclosure controls and procedures were not effective; it reported no material change in internal control over financial reporting during the quarter. The filing disclosed no other material pending litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the goodwill impairment charge with the contradictory impairment conclusion in the acquisition note, and assess the assumptions and valuation behind the charge.
- Confirm the current status, repayment terms, and any lender actions relating to the bridge-loan technical default and other debt; assess the effect of the trade facilities’ fees, guarantees, and drawdowns on liquidity.
- Review cash runway, working-capital needs, and the company’s ability to obtain financing or achieve cash-generating operations, given the going-concern disclosure and operating cash outflow.
- Verify revenue quality, customer and supplier concentration, receivable collectability, and margins as the acquired business is integrated.
- Reconcile the reported March 31 share count of 127,570,532 with the cover-page count of 127,870,532 as of May 22, 2017, and monitor potential dilution from equity financing and options.
- Evaluate remediation of ineffective disclosure controls and verify progress and funding for stated growth plans and proposed acquisitions.