Cosmos Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The company is an international pharmaceutical wholesaler operating primarily in Europe. Its subsidiaries distribute branded and generic medicines, OTC products and supplements. The December 2018 acquisition of Cosmofarm expanded the business into full-line pharmaceutical wholesaling in Athens, affecting comparability with Q1 2018.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $9.68 million | $11.97 million |
| Gross profit / margin | $626,162 / 6.5% | $609,996 / 5.1% |
| Operating loss | $173,742 | $149,548 |
| Net loss | $217,173 | $3.06 million |
| Net loss per share | $0.02 | $0.24 |
| Cash used in operations | $483,933 | $1.87 million |
- Revenue declined about 19%, while gross profit increased about 3%; gross margin improved. Greece revenue rose to $5.46 million from $760,000, while Germany and UK revenue fell substantially. The filing attributes the results generally to operations, but does not isolate the acquisition’s exact contribution.
- The lower net loss primarily reflects much lower non-cash debt-discount amortization and no repeat of 2018’s large debt-extinguishment loss; Q1 2019 also included a substantial gain on equity investments and a foreign-currency transaction loss.
- Cash fell to $309,656 from $864,343 at year-end. Operating cash use improved year over year, but investing activities used $129,531 and financing activities provided $145,808. Fixed-asset purchases were $462,545.
- At March 31, current assets were $19.12 million and current liabilities $23.15 million, producing a $4.02 million working-capital deficit. Total liabilities were $25.25 million versus assets of $21.71 million; stockholders’ deficit was $3.54 million.
- Balance-sheet borrowings included $9.76 million of notes payable and $2.13 million of lines of credit, in addition to related-party and other obligations. The three Greek bank credit lines carried rates of 6.0% to 8.55%; the company reported compliance with their covenants.
Material changes, outlook and risks
- Management stated that accumulated losses, the working-capital and stockholders’ deficits, and operating cash use raise substantial doubt about the company’s ability to continue as a going concern for the next 12 months. It expects to rely on sales growth and debt or equity financing; it gave no assurance these plans will succeed.
- Subsequent to quarter-end, the company issued three $250,000 senior promissory notes at 15% annual interest, maturing in April 2020, with the CEO personally guaranteeing them. On May 17, 2019, it issued a $1.5 million convertible note at 19% annual interest, due in 10 months, with conversion and redemption provisions.
- Management plans organic expansion, new markets and selective acquisitions, including growth in generic pharmaceuticals and dietary supplements. It estimated about $70,000 for evaluating geographic expansion and $500,000 to identify and assess potential acquisitions; it disclosed no binding acquisition agreements. It described its outlook as positive while identifying competition, purchase-price increases, stagnant selling prices, regulation, economic conditions and financing availability as risks.
- The company holds an equity investment in ICC International Cannabis Corp. Its fair-value gain is reported inconsistently across the filing: $663,711 in the statement of operations, $680,600 in the investment note, and $606,125 in MD&A. Management said no revenue was recognized from the related distribution arrangement because milestone consideration remained constrained.
- Management concluded that disclosure controls and procedures were not effective at period-end. It reported no material change in internal control over financial reporting during the quarter.
- No material pending or threatened litigation was reported. Other notable obligations include a 10-year advisory agreement at €104,000 annually and potential share issuances under an intellectual-property agreement tied to development milestones.
Important facts for investors to verify
- Liquidity, cash runway and the company’s ability to obtain financing, particularly given the going-concern warning and post-quarter borrowing costs and terms.
- Collection and recoverability of receivables and nearly $5.0 million of related-party prepayments reported as current assets, including supplier relationships and transactions.
- The correct ICC investment gain and valuation, and the reconciliation of the inconsistent figures in the financial statements, notes and MD&A.
- The status of ineffective disclosure controls, related-party governance, debt maturities and covenants, and potential dilution from convertible debt, warrants and other share obligations.