Cosmos Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 12, 2020. The filing identifies the registrant as Cosmos Holdings, Inc. Financial statements are unaudited.
Business context
The company is an international pharmaceutical wholesaler, primarily operating in Europe through subsidiaries in Greece and the United Kingdom. It distributes branded and generic medicines, OTC products, and supplements, including its SkyPremium Life nutraceutical line. Cosmofarm, acquired in December 2018, serves pharmacies and wholesalers in the Athens region.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $12.82 million | $8.51 million | $24.75 million | $18.20 million |
| Gross profit (margin) | $2.35 million (18.3%) | $0.47 million (5.5%) | $3.54 million (14.3%) | $1.10 million (6.0%) |
| Operating income (loss) | $0.99 million | ($0.53 million) | $1.21 million | ($0.70 million) |
| Net income (loss) | $1.38 million | ($1.54 million) | $0.89 million | ($1.76 million) |
| Net cash used in operating activities | Not provided by quarter | Not provided by quarter | $5.88 million | $2.79 million |
- For the first half, operating expenses were $2.33 million, while interest expense was $1.06 million. Results included a $779,224 gain from extinguishing debt.
- At June 30, cash was $2.41 million, versus $38,537 at December 31, 2019. Current assets were $31.22 million and current liabilities $37.29 million, a $6.07 million working-capital deficit. Total liabilities were $39.38 million; stockholders’ deficit was $5.53 million.
- Current borrowings included $19.70 million of notes payable, $1.30 million of convertible notes, and $3.88 million of lines of credit. Related-party notes and loans were also outstanding. The filing’s balance sheet classifies substantial debt as current.
- Operating cash use increased year over year, largely alongside increases in accounts receivable and prepaid expenses. Financing provided $8.30 million in the first half, primarily reflecting borrowings and line-of-credit activity.
- Revenue was concentrated in Greece: $22.66 million, or approximately 92% of first-half revenue. The filing also reports related-party balances and transactions involving Doc Pharma, whose CEO is the spouse of Cosmos’s CEO.
Changes, outlook, and risks
- Revenue increased 50.6% in Q2 and 36.0% for the first half versus 2019. Management attributed growth principally to Cosmofarm’s expansion and higher demand for medical equipment, food supplements, and SkyPremium Life products. Gross margin improved substantially in both comparisons.
- The company reported a first-half net income of $894,001 in the financial statements. The MD&A contains an inconsistent statement calling this a net loss; investors should rely on and reconcile the financial statements and related disclosures.
- On June 30, the company settled its Synthesis loan facility and bridge loans. It recorded a $779,224 extinguishment gain; the replacement debt was recorded at approximately $3.03 million, with scheduled quarterly payments beginning in May 2021 and a final payment due in May 2022.
- After quarter-end, the company borrowed $5 million under an 18% senior promissory note and used the proceeds to repay $5 million of principal on three other notes. This refinanced near-term obligations but added high-cost debt; the CEO personally guaranteed the note. Certain other notes were extended after quarter-end.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern for twelve months from the filing date, citing the working-capital and stockholders’ deficits, operating cash outflow, and need for additional capital. Management plans to pursue sales growth and debt and/or equity financing, but gave no assurance of success.
- COVID-19 risks include potential drug shortages, export restrictions, supply-chain disruption, logistics delays, and recession. Management expected effects to persist for 18–24 months and cited possible increased demand for OTC, nutraceutical, and medical products, including COVID-19 tests; these expectations were not assured.
- Management said disclosure controls were not effective at quarter-end, citing material weaknesses including inadequate segregation of duties and insufficient control documentation and review. Remediation was in progress. The filing reported no pending or threatened litigation expected to have a material effect.
- Management’s plans include organic growth, product and geographic expansion, and possible acquisitions, but it reported no binding acquisition commitments. The filing also cites competition, purchase-price increases, stagnant selling prices, regulatory and reimbursement changes, and foreign-exchange exposure as risks.
Important facts for investors to verify
- Reconcile the MD&A’s “net loss” wording with the financial statements’ first-half net income of $894,001 and confirm the drivers of earnings, including the debt-extinguishment gain.
- Assess liquidity and near-term maturities, repayment capacity, borrowing costs, covenant compliance, and the terms and use of post-quarter-end financing.
- Evaluate the going-concern disclosure, dependence on further capital, and whether operating cash flow can improve as receivables and prepayments increase.
- Review revenue concentration in Greece, related-party balances and transactions, and collectability of receivables.
- Track remediation of the disclosed material weaknesses and management’s progress on COVID-19-related operating risks and forecasts.