Cosmos Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The company, a Nevada corporation, operates in pharmaceuticals through its subsidiary SkyPharm S.A., which trades branded and generic medicines and OTC products. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2016 |
|---|---|---|
| Revenue | $1,414,503 | $3,506,804 |
| Cost of revenue | $1,269,553 | $3,192,472 |
| Gross profit / margin | $144,950 / approximately 10.3% | $314,332 / approximately 9.0% |
| Operating expenses | $175,919 | $473,249 |
| Operating loss | $(30,969) | $(158,917) |
| Net loss | $(94,613) | $(277,797) |
| Comprehensive loss | $(111,235) | $(315,982) |
At September 30, cash was $619,773, compared with $198,049 at year-end 2015. Current assets were $1.93 million and current liabilities $3.67 million, yielding a $1.74 million working-capital deficit. Total liabilities were $3.67 million, all classified as current; this included $1.94 million of notes payable, net of discount, $1.13 million in taxes payable, and related-party notes and loans. Stockholders’ deficit was $1.56 million. Common shares outstanding were 125,630,532, unchanged from December 31, 2015.
For the nine months, operating cash outflow was $1.24 million and investing cash outflow was $152,355. Financing provided $1.77 million, principally through note proceeds of $1.97 million, partly offset by debt repayments. Cash increased by $421,724, including a positive $38,377 foreign-exchange effect. Interest expense was $103,803 for the nine months; the tax note separately reports $65,368 of interest and penalties recorded as interest expense.
Changes versus prior comparable periods
- Revenue was zero in both the third quarter and first nine months of 2015. SkyPharm began operations and sales at the end of 2015, generating the 2016 revenue.
- Third-quarter net loss narrowed to $94,613 from $100,390 despite operating expenses rising to $175,919 from $75,152. Nine-month net loss narrowed to $277,797 from $341,663, while operating expenses increased to $473,249 from $269,237.
- Nine-month comprehensive loss improved from $735,811 to $315,982, largely reflecting a smaller foreign-currency translation loss: $38,185 versus $394,148.
- Working-capital deficit widened from approximately $1.36 million at December 31, 2015 to $1.74 million, which management attributed to increased borrowing to fund SkyPharm.
Outlook, risks and unusual items
- Going concern: The filing states that recurring revenue is not yet sufficient to cover operating costs and that the working-capital deficit, accumulated deficit of $679,014 and losses raise substantial doubt about the company’s ability to continue as a going concern. Management plans to rely on sales growth and additional equity or debt financing, but gives no assurance these plans will succeed.
- Debt facility: On August 4, SkyPharm entered a facility with Synthesis Peer-To-Peer Income Fund bearing 10% annual interest. At September 30, its reported outstanding balance was $1,533,020, with $22,650 accrued interest. Repayment is due on lender demand after three months or by August 31, 2018; prepayment is prohibited. The facility is guaranteed by CEO Grigorios Siokas and secured by his pledge of 10 million company shares. SkyPharm received a further $274,000 in October; the filing reports post-advance facility debt of $1,807,020.
- Plans: Management aims to expand SkyPharm’s customer base into additional European markets, develop generic, cosmetic and supplement products, and pursue licensing, trading and acquisitions. It estimated approximately $45,000 for evaluating geographic expansion and $50,000 for acquisition sourcing and due diligence. These are plans, not firm spending guidance.
- Potential acquisitions and other subsequent events: After quarter-end, the company signed nonbinding MOUs concerning Decahedron and Medihelm, and a further MOU concerning CC Pharma; each remains subject to definitive agreements and due diligence, and completion is not assured. The CC Pharma purchase price was not disclosed. The company also agreed to acquire pharmaceutical intellectual property for up to 2 million shares tied to trial milestones and €1,500 monthly payments before the first share issuance. An October employment agreement granted options at $0.20 per share to a finance manager.
- Related parties: The company reported a $107,832 prepaid balance to DOC Pharma, controlled by the CEO, and had related-party loans and other transactions. A nonbinding May MOU contemplated acquiring DOC Pharma, subject to due diligence.
- Key risks and controls: Management cited competition, pharmaceutical regulation, market and pricing conditions, access to capital, interest rates and foreign-currency exposure. Disclosure controls and procedures were concluded to be ineffective as of quarter-end. No material change in internal control over financial reporting was reported during the quarter. The filing reports no legal proceedings and no off-balance-sheet arrangements.
Investor verification priorities
- Reconcile the nine-month loss figures: the financial statements report net loss of $277,797, while MD&A describes $277,024 as net loss; $277,024 is reported in the statements as loss before income taxes.
- Confirm the Synthesis facility’s funded balance, accrued interest, repayment terms, collateral, guarantee and October advance; the filing describes the facility’s initial limit and advances in ways that should be reconciled to the stated balances.
- Assess cash needs, near-term maturities, tax liabilities and the feasibility of obtaining financing, given the going-concern warning and working-capital deficit.
- Review receivable and inventory collectability, gross-margin sustainability, and whether sales growth can cover operating and financing costs.
- Check progress and final terms for the post-quarter MOUs and IP agreement, including acquisition consideration, dilution, related-party conflicts and required audited financials.
- Understand remediation of ineffective disclosure controls and verify the $65,368 of tax-related interest and penalties and other significant related-party balances.