Cosmos Holdings Inc. — Q1 2021 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. The filing describes a multinational pharmaceutical business distributing branded and generic medicines, OTC products, and nutraceuticals, primarily in Europe, through SkyPharm, Decahedron, and Cosmofarm. The filing’s registrant name is Cosmos Holdings Inc.
Financial results and liquidity
- Revenue: $11.62 million, down 2.6% from $11.93 million. Greece accounted for $11.45 million of Q1 2021 revenue.
- Gross profit and margin: $1.00 million versus $1.19 million, a 16.1% decline. Gross margin was approximately 8.6%, down from 10.0%.
- Operating results: Operating loss was $1.73 million, compared with operating income of $226,000. Operating expenses rose to $2.73 million from $968,000, largely due to stock-based compensation under a consulting agreement.
- Net results: Net loss was $2.17 million versus $483,000; loss per share was $0.14 versus $0.04. Comprehensive loss was $2.65 million versus $627,000, including a $474,000 currency translation loss.
- Other items: Q1 2021 included a $446,000 gain on debt extinguishment and a $61,000 gain from changes in derivative fair value, partly offset by $732,000 interest expense and a $306,000 foreign-currency transaction loss.
- Cash flow: Operating activities used $665,000, compared with $1.14 million used in Q1 2020. Investing activities used $2,000. Financing activities provided $380,000, versus $2.39 million in Q1 2020. Cash fell from $628,000 at year-end to $432,000.
- Balance sheet and liquidity: Current assets were $38.60 million and current liabilities $31.78 million, for reported working capital of $6.82 million. Total assets were $41.69 million; total liabilities were $44.50 million, and stockholders’ deficit was $2.80 million. Accounts receivable, including related-party receivables, totaled approximately $25.09 million.
- Borrowings: The balance sheet reports $9.23 million of current notes payable, $10.30 million of long-term notes payable, $4.78 million of lines of credit, $860,000 of convertible notes net of discount, $482,000 of related-party notes, and $1.94 million of related-party loans. Accrued interest was $1.18 million. Some debt is high-interest, past maturity, or subject to forbearance or extension arrangements.
- Equity and dilution: During the quarter, 781,819 shares were issued in exchange for $3.01 million of debt, and 1.8 million restricted shares were awarded under a consultant agreement. The company reported 15.72 million shares outstanding at March 31 and 15.72 million at May 17, 2021; issued shares were 16.07 million at both dates.
Changes versus Q1 2020
- Revenue declined modestly, but gross profit fell faster, reflecting reduced demand for full-line wholesale products, according to management.
- Operating performance moved from income to loss as general and administrative and sales and marketing expenses increased. Management attributed much of the expense increase to the consultant stock award.
- Net loss widened despite debt-extinguishment and derivative fair-value gains. Interest expense and foreign-currency losses were higher than in the prior-year quarter.
- Operating cash use improved year over year, but cash on hand declined during Q1 2021.
Outlook, risks, and notable disclosures
- Going concern: Management stated that the accumulated deficit, Q1 loss and operating cash use, and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern for twelve months from the filing date. Plans include increasing sales and raising capital through debt, equity, debt-to-equity exchange, or restructuring; management gave no assurance these plans will succeed.
- Business plans: Management described aims to expand organic sales, grow Sky Premium Life nutraceuticals, develop B2B/B2C platforms, add warehouse automation, pursue acquisitions, and seek a NEO Stock Exchange listing within twelve months. No quantified revenue or earnings guidance was provided.
- Risks: The filing identifies COVID-related supply shortages, export restrictions, logistics delays, employee constraints, recession risk, and customer/supplier payment delays, alongside competition, pricing pressure, regulation, and foreign-currency exposure. Management said operations continued at a normal pace, but acknowledged uncertainty over the pandemic’s effects.
- Debt and refinancing risk: A $2 million note matured December 31, 2020 and remained under extension negotiations; another $2 million note also matured December 31, 2020 and was under negotiation. A convertible note had a June 16, 2021 forbearance deadline, and other convertible debt was due during 2021. Certain trade financing arrangements are secured by receivables and include lender termination or acceleration provisions.
- Related parties: The company had a $3.25 million receivable and approximately $3.52 million prepaid balance with Doc Pharma, a related party that manufactures its nutraceutical products. The CEO also provided related-party loans, with a $1.94 million balance at quarter-end.
- Subsequent event: A May 10, 2021 debt exchange agreement with CEO Grigorios Siokas relates to a settlement under which he agreed to reimburse the company $600,000 through cash payment of legal costs and relief of certain company debt. The filing describes the related lawsuit as settled, while stating that the settlement terms were set out in the agreement.
- Controls and licensing: Management concluded disclosure controls were partially effective and described plans to hire internal audit support to address identified weaknesses. SkyPharm’s Greek wholesale license was eligible to continue through the end of 2021 under COVID-related extensions, pending renewal/inspection processes.
Investor verification points
- Confirm the company’s near-term cash needs, access to financing, and progress on the stated going-concern plans.
- Review maturities, extensions, forbearance deadlines, interest rates, security, and default terms across the debt facilities, including the matured senior notes and convertible notes.
- Assess collectability and terms of related-party receivables and prepayments, and the company’s dependence on related-party suppliers and funding.
- Verify the consultant share award’s vesting, clawback provisions, accounting expense, and potential dilution; reconcile the filing’s stated award value with the amount expensed in the quarter.
- Track gross margin, operating expenses, receivable conversion, and cash generation, particularly given the concentration of revenue in Greece.
- Review the May 2021 CEO debt exchange and settlement documentation, and monitor the partially effective disclosure controls and Greek license renewal status.