Cosmos Holdings Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed April 17, 2018. This is an annual report, not a separate fourth-quarter report. The filing identifies the registrant as Cosmos Holdings Inc. The business is primarily pharmaceutical wholesale trading and distribution through SkyPharm in Greece and Decahedron in the UK, serving mainly European markets. Decahedron was acquired in February 2017.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $30.01 million | $6.76 million |
| Cost of revenue | $28.06 million | $6.15 million |
| Gross profit / margin | $1.96 million / 6.5% | $0.60 million / 8.9% |
| Operating expenses | $6.83 million | $0.80 million |
| Operating loss | $(4.87) million | $(0.20) million |
| Net loss | $(6.21) million | $(0.60) million |
| Operating cash flow | $(8.76) million | $(2.13) million |
| Cash at year-end | $0.78 million | $0.72 million |
Revenue rose about 344%, primarily from SkyPharm’s growth and the addition of Decahedron. Gross profit increased, but gross margin declined. The $6.21 million net loss included $1.95 million of goodwill impairment, $0.89 million of non-cash interest expense and $0.75 million of interest expense. Foreign-currency translation produced a $0.33 million other comprehensive loss; the income statement separately reports a $0.33 million foreign-currency transaction gain. Comprehensive loss was $6.54 million.
At December 31, 2017, current assets were $9.51 million and current liabilities $13.70 million, producing a $4.19 million working-capital deficit. Total liabilities were $13.70 million, against total assets of $10.68 million; stockholders’ deficit was $3.03 million. The balance sheet reports notes payable of $9.95 million net of discount and convertible notes payable of $0.12 million net of discount. Financing cash inflows were $9.29 million, substantially offsetting operating cash burn.
Material changes versus the prior year
- Decahedron contributed $4.22 million of revenue and a $0.44 million net loss from its acquisition date through year-end. The company issued 170,000 shares valued at $1.48 million for the acquisition, then impaired all $1.95 million of resulting goodwill.
- Operating expenses increased sharply, including the goodwill impairment, higher public-company and professional costs, stock-based compensation, acquisition-related costs and research and development spending.
- Debt and financing activity expanded substantially. In November 2017, the company issued $3.35 million face amount of senior convertible notes for a $3.00 million purchase price, receiving $2.69 million net proceeds after specified costs. The notes were convertible at $5 per share and were accompanied by warrants to purchase 536,000 shares at $7.50.
- A 1-for-10 reverse stock split became effective November 21, 2017. Reported share and per-share figures reflect the split unless stated otherwise.
Outlook, risks and unusual items
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, a working-capital deficit and dependence on additional capital. The auditor’s report also highlights substantial doubt. Management plans to increase sales and raise capital but gives no assurance of success.
- Funding and debt: Management said additional financing would be needed in 2018 to maintain expected operations and pursue acquisitions. A SkyPharm loan facility bears 10% interest and is repayable on demand after 75 days or by August 31, 2018; it is supported by the CEO’s personal guarantee and pledged shares. Trade-finance arrangements carry a 1% monthly fee and include company guarantees. The filing’s stated SkyPharm facility draw differs between sections; see investor checks below.
- Subsequent note amendments: On February 20, 2018, the convertible notes were exchanged for new notes with conversion deferred until April 20, 2018, cash installments priced at 112% of the installment amount, and an optional cash redemption right at 125% through June 20, 2018.
- Business plans: Management planned to expand pharmaceutical trading, enter additional markets, pursue acquisitions and develop nutraceutical products. Production of nutraceuticals was expected to begin in 2018, with first sales targeted for the second quarter. The filing also describes a March 2018 agreement appointing Cosmos exclusive distributor of certain cannabis/CBD products in Europe, subject to due diligence and performance conditions; anticipated equity and cash consideration is contingent and should not be treated as assured proceeds.
- Execution and concentration risks: Three customers accounted for 49.63% of 2017 revenue; Germany represented 49.66% of revenue. The ten largest suppliers accounted for approximately 93% of purchases. DOC Pharma and Medihelm are related parties and significant suppliers. The business is exposed to pharmaceutical regulation, pricing pressure, customer and supplier concentration, foreign exchange, competition and funding needs.
- Governance and controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing inadequate segregation of duties and insufficient review and oversight. The company had one full-time employee at the parent level, and no audit committee financial expert. The filing states that the auditor did not attest to internal-control effectiveness.
- Other items: The $454,800 non-refundable fee paid in connection with the CC Pharma acquisition LOI was expensed; no definitive acquisition agreement was reached by the stated deadline. The company reported no pending material litigation. It disclosed no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the filing’s 2016 revenue figures: the audited statements report $6,755,436, while MD&A elsewhere states $6,775,436.
- Reconcile the SkyPharm trade-facility draw: the MD&A gives $5,596,910, while the debt note gives €5,596,910, equivalent to $6,728,606. Confirm the actual outstanding balance, fees, guarantees and facility limits.
- Review near-term liquidity, scheduled convertible-note installments and the availability, cost and covenants of additional financing; cash was $0.78 million against a $4.19 million working-capital deficit.
- Assess the related-party nature and terms of purchases, prepayments and research and development services involving DOC Pharma, as well as transactions with Medihelm.
- Track remediation of the disclosed material weakness and confirm the status of nutraceutical launches, the cannabis/CBD distribution agreement, and any acquisition plans or contingent consideration.