Cosmos Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. The filing was signed November 20, 2017. The company reported as Cosmos Holdings Inc. and focused on pharmaceutical wholesale and product businesses through SkyPharm and newly acquired Decahedron.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $9.55 million | $1.41 million | $19.78 million | $3.51 million |
| Gross profit | $775,000 | $145,000 | $1.62 million | $314,000 |
| Gross margin | 8.1% | 10.2% | 8.2% | 9.0% |
| Operating income (loss) | $16,000 | $(31,000) | $(2.77) million | $(159,000) |
| Net loss | $(198,000) | $(95,000) | $(3.07) million | $(278,000) |
| Comprehensive loss | $(250,000) | $(111,000) | $(3.25) million | $(316,000) |
- Management attributed higher revenue principally to SkyPharm growth and Decahedron, acquired February 10, 2017. Decahedron contributed $2.62 million revenue from acquisition through September 30.
- Nine-month operating expenses were $4.38 million, including a $1.95 million goodwill impairment and approximately $455,000 in nonrefundable CC Pharma diligence/exclusivity costs. Interest expense was $573,000 for the nine months.
- Cash was $1.35 million at September 30, versus $717,000 at December 31, 2016. Operating activities used $5.74 million; financing activities provided $6.62 million; investing activities provided $27,000.
- Current assets were $10.06 million and current liabilities $13.60 million, producing a $3.55 million working-capital deficit. Total liabilities were $13.60 million, all classified as current. Balance-sheet notes payable, net of discount, were $9.27 million, in addition to related-party notes and loans.
Changes, outlook, and material risks
- Revenue grew substantially year over year, but gross margin declined in both the quarter and nine-month period. The nine-month net loss widened sharply, chiefly reflecting goodwill impairment, higher operating costs and interest expense.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing the nine-month loss, working-capital deficit and lack of sufficient ongoing revenue to cover operating costs. Management said it expected to rely on sales growth and additional equity or debt financing, but gave no assurance of success.
- Management’s next-12-month plans include growing SkyPharm and Decahedron, expanding European sales and product lines, and considering acquisitions and licensing. The filing gives no quantified revenue or earnings guidance. Risks include competition, purchase-cost increases, stagnant selling prices, foreign-exchange exposure, regulatory requirements and the need for capital.
- The CC Pharma transaction had not reached a definitive agreement by the October 31, 2017 deadline. Cosmos had expensed the €400,000 ($454,800) nonrefundable payment and was negotiating an extension; completion was uncertain.
- A SkyPharm trade-finance facility was drawn by €5.22 million ($6.16 million) at September 30, with about $202,000 in accrued monthly fees. The filing later reports a November 16 amendment increasing the facility maximum from €2 million to €6 million. Verify the draw, facility terms and related balance-sheet presentation.
- Subsequent to quarter-end, the company agreed to issue $3.35 million principal amount of senior convertible notes for $3 million, with conversion and warrant features, anti-dilution provisions, installment repayments and potential premium redemptions. The financing could materially dilute shareholders and adds repayment and covenant risks.
- A one-for-ten reverse split was approved by the company and filed in Nevada, but had not received FINRA approval as of the filing date. The company also reported that disclosure controls and procedures were not effective.
- The filing says no material pending or threatened lawsuits and no off-balance-sheet arrangements as of September 30.
Important facts for investors to verify
- Whether the company can fund operating needs and address the going-concern warning, working-capital deficit and cash burn.
- The amount, terms, maturity and current status of trade-finance and other debt, including the reported SkyPharm facility draw and November amendment.
- The dilution, repayment, default, redemption and registration implications of the November convertible-note and warrant financing.
- The status and accounting treatment of the failed CC Pharma deadline and the $454,800 expense.
- The goodwill impairment disclosure: the filing records a full $1.95 million impairment while also stating that its assessment concluded impairment was “not more likely than not”; the explanation is internally unclear.
- The effectiveness of remediation for ineffective disclosure controls and the status of FINRA approval and implementation of the reverse split.