Cosmos Holdings Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The filing identifies the registrant as Cosmos Holdings Inc. The business distributes pharmaceutical products through its SkyPharm (Greece) and Decahedron (UK) subsidiaries.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Revenue | $11.97 million | $4.12 million; up about 191% |
| Gross profit / margin | $610,000 / 5.1% | $364,000 / 8.8% |
| Operating loss | $150,000 | $1.98 million loss |
| Net loss | $3.06 million; $0.24 per share | $2.03 million; $0.16 per share |
| Operating cash flow | $1.87 million used | $659,000 used |
| Cash at quarter-end | $1.33 million | $783,000 at December 31, 2017 |
| Current assets / current liabilities | $12.05 million / $17.83 million | $9.51 million / $13.70 million at December 31, 2017 |
| Working capital | $5.78 million deficit | $4.19 million deficit at December 31, 2017 |
| Total assets / total liabilities | $13.41 million / $17.83 million | $10.68 million / $13.70 million at December 31, 2017 |
Revenue growth was attributed mainly to SkyPharm’s organic growth and Decahedron sales. Germany and the UK were the largest reported markets. Gross margin declined despite the increase in sales. Operating expenses fell largely because Q1 2017 included a $1.95 million Decahedron goodwill impairment. The 2018 net loss was higher mainly due to financing-related charges: $1.28 million of non-cash interest from debt-discount amortization and a $1.46 million loss on extinguishment of debt.
Cash used in investing activities was $12,000; financing activities provided $2.38 million, principally reflecting borrowing and repayments. Cash increased by $545,000 during the quarter. The balance sheet lists $12.42 million of current notes payable, net of discount, and $300,000 of current convertible notes, net of discount; all reported liabilities were current. Total debt across facilities and related obligations is not presented as one clear aggregate figure in the filing.
Material changes, financing and unusual items
- The company exchanged institutional investors’ senior convertible notes in February 2018. It reported $2.68 million of remaining principal at March 31, 2018, with monthly repayments, conversion provisions and redemption premiums. The exchange generated the $1.46 million extinguishment loss and substantial new debt discounts.
- New third-party borrowings included a €1.5 million note (about $1.85 million) due March 2019. The SkyPharm trade-finance facility had a reported March 31 balance of €5.87 million (about $7.23 million), with fees also accrued.
- Related-party balances and activity are significant. At March 31, 2018, the company reported $3.84 million of related-party prepaid expenses and other current assets, $538,000 of related-party receivables, $783,000 of related-party payables, and $899,000 of related-party loans payable. The filing describes substantial purchases and balances involving entities connected to company officers or directors.
- Q1 other comprehensive loss was $135,000, primarily from foreign-currency translation. The company adopted ASC 606 on January 1, 2018 and said adoption did not materially change revenue timing or amount.
Outlook, risks and contingencies
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the $3.06 million quarterly net loss, $5.78 million working-capital deficit and $10.27 million accumulated deficit. Management’s plans include growing sales and raising equity or other capital, but it gave no assurance those plans will succeed.
- Business plans: Management plans to expand pharmaceutical distribution, pursue new markets and products, and evaluate acquisitions and licensing opportunities. It estimated approximately $70,000 for evaluating geographic expansion and $500,000 for locating and evaluating potential acquisitions. No binding acquisition commitments were reported in the filing.
- Market and execution risks: The filing cites competition, pricing pressure, rising purchase prices, regulatory requirements, customer and supplier conditions, foreign exchange, and dependence on external capital. Management provided no quantified revenue or earnings guidance.
- Subsequent financing changes: An April 2018 amendment to Synthesis lending extended certain maturities to December 2021 and changed interest terms. In May, the SkyPharm trade-finance facility ceiling was increased to €15 million, but the lender made no commitment to provide future loans and could terminate the facility and demand repayment within six months of notice. The company agreed to pay €1 million of interest and principal on May 31, 2018.
- Other subsequent developments: Approximately 670,000 pre-delivery shares were issued in April under the convertible-note arrangements. A proposed Marathon transaction remained subject to due diligence and had not closed as of the filing; the initial CAD $2 million payment had not been received. The filing also disclosed a ten-year advisory agreement at €104,000 per year.
- Controls and contingencies: Management concluded disclosure controls and procedures were not effective; it reported no material change in internal control during the quarter. No material pending or threatened litigation was reported. Operating lease commitments totaled $403,003.
Important facts for investors to verify
- Whether the company can fund operations and address its working-capital deficit, going-concern uncertainty and near-term obligations.
- The complete debt schedule, facility balances, maturity and repayment terms, fees, collateral, guarantees, covenants and potential redemption or conversion dilution.
- Cash collection and recoverability of receivables and related-party prepayments, and the commercial terms and governance of related-party transactions.
- Whether revenue growth can translate into stronger gross margins and positive operating cash flow.
- Progress and final terms of the Marathon arrangement and other announced transactions, including whether promised payments or equity interests are received.
- Remediation of ineffective disclosure controls and the reliability of future financial reporting.