Cosmos Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed April 14, 2020. The filing identifies the registrant as Cosmos Holdings, Inc. It operates pharmaceutical wholesale and distribution businesses through SkyPharm, Decahedron and Cosmofarm, primarily in Europe.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $39.68 million | $37.08 million |
| Gross profit / margin | $3.66 million / 9.2% | $2.41 million / 6.5% |
| Operating loss | $(0.26) million | $(1.23) million |
| Net loss | $(3.30) million | $(9.06) million |
| Net cash used in operations | $(4.79) million | $(1.56) million |
| Cash at year-end | $38,537 | $864,343 |
| Working capital deficit | $7.06 million | $3.93 million |
Revenue grew 7%, which management attributed mainly to Cosmofarm’s expansion. Gross profit rose 52%, with management citing growth in pharmaceutical trading and SkyPremium Life nutraceutical sales. The net loss narrowed substantially, but 2018 included much higher non-cash interest expense and other financing-related charges. In 2019, the company recorded a $1.22 million net loss on equity investments, including realized losses on ICC shares.
Gross margin improved to approximately 9.2% from 6.5%; operating margin was approximately negative 0.6% versus negative 3.3%, and net margin approximately negative 8.3% versus negative 24.4%.
Financial position, debt and liquidity
- Total assets were $23.88 million, total liabilities $30.34 million, and stockholders’ deficit $6.46 million at year-end. Current liabilities were $28.24 million.
- Reported current debt balances included $12.03 million of notes payable, $2.75 million of lines of credit, $1.47 million of convertible notes (net of discount), and $1.38 million of related-party notes payable. Related-party loans payable were another $1.03 million. The filing also reports a $1.55 million share-settled debt obligation.
- Cash used in operations increased to $4.79 million. Financing provided $3.59 million, while investing provided $0.59 million, largely from investment-sale proceeds. Cash fell by $0.83 million during the year.
- The company reported substantial doubt about its ability to continue as a going concern, citing recurring losses, a $7.06 million working capital deficit and the need for additional capital. Management said it expected to need additional financing in 2020 and gave no assurance it could obtain it.
Material changes, outlook and risks
- Cosmofarm, acquired in December 2018, expanded local Greek pharmacy distribution; management identified its organic growth as the principal driver of 2019 revenue growth. Greece accounted for 65.7% of revenue, compared with 8.0% in 2018; Germany’s share fell from 39.9% to 16.8%.
- Customer concentration eased: no customer represented 10% or more of 2019 revenue, compared with two customers contributing 26.5% combined in 2018. The 10 largest suppliers accounted for about 38% of 2019 purchases.
- Substantial related-party activity warrants attention. The company reported significant inventory prepayments and receivables involving Doc Pharma and Medihelm, both identified as related parties. The CEO also controls approximately 59% of common shares reported outstanding in April 2020.
- In March 2020, the company disclosed that it had not paid the $1.5 million May 2019 convertible note by its March 15, 2020 due date. The lender agreed to forbear through September 16, 2020, subject to terms that include scheduled prepayments and acceleration of repayment following specified new financing. The filing also describes additional 2020 promissory notes, including a $1 million note at 18% interest.
- COVID-19 risks included possible drug shortages, export restrictions, supply-chain and logistics disruptions, workforce restrictions, payment delays and recession. Management anticipated effects could continue for 18–24 months, while identifying potential demand for OTC products, supplements, antibacterial products and masks. The filing states the financial impact could not then be reasonably estimated.
- Management planned organic growth, broader product and geographic reach, acquisitions and nutraceutical expansion, but disclosed no binding acquisition commitments. SkyPharm’s wholesale license was due to expire July 22, 2020; renewal status is not clear in this filing.
- The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about going concern. Management concluded disclosure controls and internal control over financial reporting were ineffective, citing lack of segregation of duties and insufficient review and oversight.
- Other risks include competitive pricing pressure, foreign-currency exposure, dependence on suppliers and customers, debt maturities and lender rights to accelerate certain facilities. The common stock trades on OTCQB, with limited liquidity.
Important facts for investors to verify
- Available liquidity and financing after year-end, including satisfaction of the May 2019 note’s required payments and extensions or repayment of short-term notes.
- Cash conversion and receivable collectability: operating cash outflow rose, and related-party receivables and prepayments are material.
- Related-party transaction terms, balances and safeguards, particularly arrangements with Doc Pharma and Medihelm.
- Renewal of SkyPharm’s wholesale authorization and the actual operational and financial effects of COVID-19.
- Progress in remediating the disclosed material weakness in internal controls and reconciliation of the MD&A’s 2018 operating cash-flow figure, which differs from the audited cash-flow statement.