Cosmos Holdings Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2018. The filing identifies the registrant as Cosmos Holdings Inc. (the request metadata says Cosmos Health Inc.). Financial statements are unaudited.
Business context and financial results
The company distributes, sources and trades pharmaceutical products through subsidiaries in Greece and the UK. Management describes plans to expand pharmaceutical, OTC and nutraceutical operations and pursue selected acquisitions.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $8.86 million | $6.11 million | $20.82 million | $10.23 million |
| Gross profit | $702,334 | $480,098 | $1.31 million | $843,790 |
| Gross margin | 7.9% | 7.9% | 6.3% | 8.2% |
| Operating income (loss) | ($78,785) | ($796,640) | ($228,333) | ($2.78 million) |
| Net income (loss) | $782,389 | ($839,616) | ($2.27 million) | ($2.87 million) |
| Operating cash flow | Not stated separately | Not stated separately | ($1.32 million) | ($3.33 million) |
Q2 2018 net income included a $1.83 million gain associated with the Marathon/KBB investment exchange; it was not driven by operating profit. The six-month results also included $1.77 million of non-cash debt-discount amortization and a $1.46 million loss on debt extinguishment.
Liquidity, debt and capital
- At June 30, cash was $1.15 million, versus $783,000 at December 31, 2017. Current assets were $12.96 million and current liabilities $15.46 million, yielding a $2.50 million working-capital deficit. Total liabilities were $17.01 million; stockholders’ deficit was $3.43 million.
- Six-month financing activities provided $1.86 million, partly offsetting operating cash use. The filing attributes lower operating cash use year over year mainly to improved profitability and reduced inventory.
- Current liabilities include $10.72 million of notes payable, net of discount, and $170,000 of convertible notes payable, net of discount. The filing also reports a $1.55 million share-settled debt obligation tied to the Marathon distribution arrangement; the company could be required to issue a variable, potentially unlimited number of shares to settle it.
- Convertible notes had $2.11 million of principal outstanding at June 30, with monthly installments and conversion rights generally at $5 per share. Synthesis financing terms were amended, including maturity extensions to 2021 for certain facilities, but the trade facility allows the lender to terminate and demand repayment within six months after notice.
- Common shares outstanding were reported as 13,336,705 on the cover and balance sheet; a note gives a different June 30 outstanding-share figure of 13,321,705.
Changes, outlook and risks
- Six-month revenue approximately doubled year over year, which management attributed to growth at SkyPharm and additional Decahedron revenue. Germany and the UK were the largest reported country revenue sources.
- Six-month gross margin declined to 6.3% from 8.2%, despite higher revenue. Operating expenses fell largely because the prior-year period included a $1.95 million goodwill impairment; Q2 expenses also declined with lower stock-based compensation.
- The company acquired a 33⅓% interest in Marathon as distribution consideration, then exchanged Marathon shares for KBB shares. It recognized a net $1.83 million gain on the exchange and held 5 million KBB shares at June 30; a subsequent July exchange increased its KBB holding to 10 million shares, approximately 7% of KBB. No Marathon sales-milestone revenue was recognized by June 30.
- Management plans organic growth, expansion to new markets, nutraceutical product launches and selective acquisitions. It provided no specific revenue or earnings guidance. It estimated spending of about $70,000 to evaluate geographic expansion and about $500,000 to identify and assess potential acquisitions. The filing said nutraceutical sales were expected to start in the second half of 2018.
- Management expressly stated that substantial doubt existed about the company’s ability to continue as a going concern, citing losses, a working-capital deficit and the need for additional capital. Management plans to seek funding through sales growth and equity and/or debt, but gave no assurance of success. It warned that failure to obtain funds could force it to cease developing operations.
- Risks include competitive and regulated pharmaceutical markets, pricing and reimbursement pressure, foreign-exchange exposure, financing needs, and lender covenants and repayment rights. Management reported disclosure controls were not effective at quarter-end. It reported no pending or threatened material lawsuits and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the filing’s differing six-month net-loss figures: the statements report $2,273,413, while the going-concern note and pro forma table report $2,267,443.
- Confirm the correct June 30 share count, given the 13,336,705 and 13,321,705 figures in the filing, and assess potential dilution from convertible debt, warrants and the share-settled obligation.
- Review debt balances, installment requirements, maturities, security, lender termination and demand rights, and compliance with financing covenants.
- Assess the sustainability of revenue growth and thin gross margins, cash burn, related-party transactions and prepayments, and the company’s ability to raise capital and address the going-concern uncertainty.
- Distinguish recurring operating performance from the investment-exchange gain, debt-extinguishment loss and non-cash interest charges; monitor whether planned nutraceutical launches and acquisition plans proceed.