Cosmos Holdings Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited company is an international pharmaceutical wholesaler operating primarily through SkyPharm in Greece and Decahedron in the UK.
Financial performance and position
- Q3 revenue: $8.51 million, down 10.9% from $9.55 million a year earlier. Gross profit was $794,000 and gross margin was 9.3%, versus $775,000 and 8.1%.
- Q3 earnings: Net profit was $3.21 million, compared with a $198,000 loss. The profit was substantially affected by a $4.45 million gain related to the Marathon/ICC investment exchange and fair-value changes; it should not be read as underlying operating earnings. Operating profit was $41,000.
- Nine-month results: Revenue rose 48.3% to $29.33 million from $19.78 million; gross profit increased to $2.11 million from $1.62 million. The company reported net profit of $934,000 versus a $3.07 million net loss, but had an operating loss of $187,000. Other income included a $6.28 million investment-related gain, partly offset by $2.99 million of non-cash interest expense and a $1.46 million debt-extinguishment loss.
- Cash flow: Operating activities used $1.96 million over nine months, versus $5.74 million used in the prior-year period. Investing activities used $481,000, including a refundable $450,000 Cosmofarm deposit. Financing activities provided $3.05 million. Cash ended at $1.23 million, up from $783,000 at year-end 2017.
- Liquidity and balance sheet: Current assets were $19.22 million and current liabilities $14.68 million, for reported working capital of $4.55 million. Current assets include a $6.28 million ICC equity investment and $4.12 million of related-party prepayments. Total liabilities were $16.23 million; stockholders’ equity was $3.28 million, versus a $3.03 million deficit at year-end 2017.
- Debt: Current notes payable, net of discounts, were $10.68 million; the balance sheet also showed $284,000 of convertible notes, $946,000 of related-party loans, and a $1.55 million share-settled debt obligation. The company disclosed $5.66 million drawn on the SkyPharm trade facility at quarter-end. Convertible-note principal included $1.18 million outstanding under the 2017 notes and $2.23 million under notes issued in September 2018; substantial discounts reduce their balance-sheet carrying values.
Changes, outlook, and risks
- Nine-month revenue growth was attributed to SkyPharm’s expanding customer base and Decahedron’s contribution. Q3 revenue declined, which management attributed to lower SkyPharm shipments while it focused on gross profitability and sourcing efficiency. The company recorded its first nutraceutical sales in September.
- Management plans to grow pharmaceutical and nutraceutical sales, expand into additional markets, and pursue acquisitions. It gave no quantified revenue or earnings guidance and cautioned that plans depend on financing and execution.
- The filing states that operating cash use, a $6.28 million accumulated deficit, and insufficient established recurring revenue raise substantial doubt about the company’s ability to continue as a going concern. Management expects to rely on sales growth and possible equity or debt financing but gives no assurance it can secure adequate capital.
- Important financing terms include monthly repayment schedules, conversion and anti-dilution provisions, redemption premiums, and collateral or guarantees. The October 2018 trade-facility amendment, disclosed as a subsequent event, set outstanding balances at $4.0 million and €2.0 million, forgave accrued interest and fees outstanding as of October 1, and established repayment terms subject to facility continuation.
- The $6.28 million investment gain reflects exchange of Marathon shares for publicly traded ICC shares and subsequent fair-value changes. The ICC holding was approximately 7% at the time disclosed; its market value may fluctuate. The Amplerissimo sale for €5,000 also generated a reported $147,000 gain, largely reflecting liabilities extinguished in the transaction.
- Other risks include pharmaceutical-market competition and regulation, foreign-currency exposure, related-party transactions and balances, and uncertainty around acquisitions. The Cosmofarm acquisition had not closed at quarter-end; its $450,000 deposit was stated to be refundable. Management reported disclosure controls and procedures were not effective as of quarter-end.
Key facts for investors to verify
- How much of reported profit and working capital is attributable to the volatile ICC investment, rather than recurring pharmaceutical operations.
- Near-term cash needs, operating cash burn, debt maturities and repayment capacity, and the terms and availability of trade financing.
- Whether the Cosmofarm transaction closed, and whether its deposit remained refundable or was applied to the purchase.
- Performance milestones and potential share repayment obligations associated with the CAD $2 million Marathon-related payment, including possible dilution.
- Remediation of ineffective disclosure controls and the company’s ability to address the stated going-concern uncertainty.
- Share-count and financing disclosures: the cover reports 13,321,705 shares outstanding, while the balance sheet reports 13,321,704.