Business context and reporting period
Cosmos Holdings, Inc. (the filing’s registrant name) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company is an international pharmaceutical wholesaler, principally distributing branded and generic medicines across Europe, with additional vitamins and dietary supplements and Greek full-line wholesale operations through Cosmofarm.
Financial performance and liquidity
Amounts are in U.S. dollars. Comparative periods are the three and nine months ended September 30, respectively.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $9.686 million | $8.508 million | $27.883 million | $29.331 million |
| Gross profit (margin) | $0.800 million (8.3%) | $0.794 million (9.3%) | $1.895 million (6.8%) | $2.106 million (7.2%) |
| Operating income (loss) | $(0.117) million | $0.041 million | $(0.816) million | $(0.187) million |
| Net income (loss) | $(1.633) million | $3.207 million | $(3.391) million | $0.934 million |
| Basic earnings (loss) per share | $(0.12) | $0.24 | $(0.26) | $0.07 |
| Cash from operating activities | Not presented quarterly | $(3.573) million | $(1.962) million |
At September 30, cash was $1.180 million, total assets were $21.280 million, total liabilities were $27.665 million, and stockholders’ deficit was $6.385 million. Current assets of $18.601 million were below current liabilities of $25.631 million; the reported working capital deficit was $7.029 million. Current liabilities included $11.693 million of notes payable, $1.434 million of convertible notes, and $2.469 million of lines of credit. The balance sheet also included $5.687 million of prepaid expenses and other current assets due from related parties.
Net cash used in investing activities was $0.617 million, primarily reflecting fixed-asset purchases offset by investment-sale proceeds. Financing activities provided $3.466 million, including new borrowings; cash increased by $0.316 million over the nine-month period. The filing describes 2019 borrowing that included a $1.5 million convertible note bearing 19% interest and senior promissory notes bearing 15% interest. Several of the senior notes were personally guaranteed by the CEO.
Material changes versus the prior comparable period
- Third-quarter revenue increased about 14% year over year, but nine-month revenue declined about 5%. Gross margin declined in both comparisons.
- The company moved from prior-year net income to a net loss in both the quarter and nine-month period. Prior-year results included a $6.275 million nine-month gain on exchange of equity investments; 2019 results included a $1.103 million loss on equity investments and a $0.457 million foreign-currency transaction loss.
- Nine-month operating cash use increased to $3.573 million from $1.962 million. The working capital deficit widened from $3.927 million at December 31, 2018.
- Cash rose despite operating cash burn, supported by financing inflows and proceeds from investment sales. The company sold 5 million ICC shares for $1.211 million; its reported ICC investment value declined from $2.500 million at year-end 2018 to $0.200 million at September 30, 2019.
Outlook, risks, and unusual items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern for twelve months from the filing date. It cited the nine-month net loss and operating cash use, accumulated deficit of $19.663 million, working capital deficit, and stockholders’ deficit. Management plans to grow sales and seek equity and/or debt capital but gave no assurance those plans will succeed.
- Business plans: Management plans organic growth, expansion of product lines and geographic reach, and selective acquisitions. It estimated spending approximately $70,000 to evaluate geographic expansion and $500,000 to identify and evaluate acquisitions; it reported no binding acquisition commitments. No quantified revenue or earnings guidance was provided.
- Risks: The filing identifies competition, purchase-price increases and stagnant selling prices, pharmaceutical pricing and distribution changes, regulation, foreign-exchange movements, availability of capital, and customer and market conditions as risks. Management also noted that future organizational optimization may entail extraordinary costs.
- Equity-investment and currency volatility: The quarter’s results included a $0.661 million loss on equity investments and a $0.376 million foreign-currency transaction loss. The prior-year comparison was affected by material investment-exchange gains and non-cash debt-discount amortization.
- Controls: Management concluded that disclosure controls and procedures were not effective as of quarter-end. It reported no material change in internal control over financial reporting during the quarter.
- Contingencies: The company reported no pending or threatened lawsuits expected to have a material effect and no defaults upon senior securities. It disclosed potential Greek tax exposure of $0.139 million and a $0.022 million potential retirement-benefit liability.
- Subsequent event: On October 23, 2019, the company issued an additional $250,000 senior promissory note at 15% interest, maturing in October 2020 and personally guaranteed by the CEO.
Important facts for investors to verify
- Whether Cosmos can obtain sufficient financing or generate operating cash to address the stated going-concern uncertainty and near-term liabilities.
- Debt maturity, repayment, interest, covenant, and guarantee terms, including the high-interest 2019 borrowings and the classification of debt on the balance sheet.
- Recoverability and settlement of the substantial related-party prepaid balances, and the underlying transactions and terms with related-party suppliers.
- The causes and sustainability of the margin decline, revenue mix shift toward Greece, and the company’s ability to convert revenue growth into operating profit and cash flow.
- Valuation, liquidity, and future exposure associated with equity investments, including ICC, and the sources and nature of unusual other-income items.
- Remediation plans and progress following management’s conclusion that disclosure controls were not effective.