Cosmos Holdings Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are to FY 2015. The filing describes Cosmos as a pharmaceutical wholesaler and trader operating mainly in Europe through SkyPharm, alongside plans to expand into generics, OTC products, cosmetics and supplements. Its pharmaceutical sales began in November 2015.
Financial performance and position
| Metric | FY 2016 / Dec. 31, 2016 | FY 2015 / Dec. 31, 2015 |
|---|---|---|
| Revenue | $6,755,436 | $533,802 |
| Cost of revenue / gross profit | $6,154,396 / $601,040 | $484,809 / $48,993 |
| Gross margin | About 8.9% | About 9.2% |
| Operating expenses / operating loss | $803,547 / $(202,507) | $491,452 / $(442,459) |
| Net loss | $(601,002) | $(6,687,912) |
| Interest expense | $206,014 | $90,379 |
| Cash from (used in) operating activities | $(2,126,081) | $(497,089) |
| Cash from financing activities | $2,744,179 | $329,122 |
| Cash and cash equivalents | $716,590 | $198,049 |
| Working capital | Deficit of about $2,234,720 | Deficit of about $1,358,236 |
Revenue rose sharply as SkyPharm expanded, while the net loss narrowed largely because FY 2015 included a $6,150,508 write-off of the B2H investment. FY 2016 included a $178,967 foreign-currency transaction loss and a $55,215 foreign-currency translation gain in other comprehensive income. The filing reports basic and diluted loss per share of $(0.00) for 2016, versus $(0.05) for 2015.
At year-end, current assets were $2,636,612 and current liabilities were $4,871,332, equivalent to a current ratio of about 0.54. Total liabilities were $4,871,332; stockholders’ deficit was $1,752,802. Balance-sheet debt included $2,872,472 of notes payable, net of discount, plus related-party notes and loans and other loans. Taxes payable were $1,080,590. The company reported $661,850 in accounts receivable and $464,219 in inventory.
Material changes and business developments
- Customer and geographic mix remained concentrated, though less so than in 2015: MPA Pharma generated 39.61% of 2016 revenue, versus 68.84% in 2015. Germany accounted for 49.42% of revenue, down from 68.84%; Greece rose to 19.07% from 2.90%.
- Two customers generated 52.49% of revenue in 2016, compared with 87.21% in 2015. The company depends on a limited number of pharmaceutical wholesalers and notes that customer consolidation increases their pricing leverage.
- SkyPharm obtained a lender facility in 2016. The filing reports a $2,509,444 outstanding balance at year-end, with 10% annual interest and a personal guarantee from CEO Grigorios Siokas, secured by a pledge of 10 million company shares. Subsequent amendments increased the facility to about $2.665 million and added restrictions, including lender consent for additional debt.
- The company signed a non-binding MOU with DOC Pharma, a company controlled by its CEO. It also agreed to acquire Medihelm subject to due diligence and audited financial statements; the filing does not report a completed closing.
- The company acquired Decahedron in February 2017 for 1.7 million Cosmos shares; the shares were issued in April 2017. The contemplated CC Pharma acquisition remained subject to definitive agreements and due diligence; the filing reports an LOI and no completed acquisition.
- A 2016 intellectual-property agreement for the “ProCure” formula provides for up to 2 million shares upon specified clinical milestones and monthly payments to one seller. The filing does not establish product efficacy or regulatory approval.
Outlook, risks and controls
Management planned to grow SkyPharm organically, develop customer relationships in additional European markets, and pursue product expansion and acquisitions. It projected approximately $45,000 to evaluate geographic expansion and $80,000 to identify and assess potential acquisitions. These are plans, not assured outcomes. Management said additional financing would be needed in 2017 to sustain expected operations and potential acquisitions; it also stated it believed year-end cash and working capital would cover estimated operating cash requirements for the next 12 months.
The company reported a $601,002 net loss, a $2.235 million working-capital deficit and a $1.002 million accumulated deficit. Management said it had not established recurring revenue sufficient to cover operating costs and planned to seek capital through sales growth and common-stock issuance, but gave no assurance of success. The auditor’s report also highlighted substantial doubt about the company’s ability to continue as a going concern.
Risks include intense competition, pharmaceutical regulation, pricing pressure, dependence on a small customer base, foreign-currency and cross-border exposure, financing needs, and acquisition execution. The filing states disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness involving inadequate segregation of duties and insufficient review and oversight. Management said it could not fully remediate the weakness until it hired additional employees. The auditor did not attest to internal control effectiveness. The filing reports no pending material litigation and no off-balance-sheet arrangements.
Governance and related-party matters merit attention: CEO Siokas controlled 79.85% of outstanding shares at year-end, provided services without reported salary, and had related-party loans outstanding; the company had no independent directors, separate audit committee, or audit committee financial expert. The CEO also controlled DOC Pharma, with which the company had an MOU.
Important facts for investors to verify
- Revenue discrepancy: The audited statements report FY 2016 revenue of $6,755,436, while the MD&A overview gives $6,775,436 in one passage. Confirm the correct figure and related growth calculation.
- Debt amounts and terms: Reconcile the MD&A statement that aggregate loans were $2,476,855 with the balance-sheet debt balances and the note’s $2,509,444 year-end facility balance; confirm maturities, accrued interest, collateral, guarantees and lender covenants.
- Liquidity and financing: Assess whether operating cash burn, the working-capital deficit and taxes payable can be funded, and whether additional financing is available on acceptable terms.
- Acquisition and related-party exposure: Verify the status, final consideration, audit readiness and financing of Decahedron, Medihelm and CC Pharma transactions, as well as the terms and approvals for arrangements involving CEO-controlled DOC Pharma.
- Revenue quality and controls: Review customer collections, receivable recoverability, customer concentration and remediation of the disclosed material weakness in financial reporting controls.
- Share dilution and ownership: Track the Decahedron share issuance, milestone-based ProCure shares, options and any proposed financing; consider the controlling shareholder’s voting power.