Cosmos Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 17, 2022. The filing identifies the registrant as Cosmos Holdings, Inc. (Nasdaq: COSM).
Business context
The company distributes branded and generic pharmaceuticals, OTC products, medical devices and nutraceuticals through subsidiaries in Greece and the UK. Its proprietary Sky Premium Life nutraceuticals are manufactured by related party Doc Pharma. Almost all Q1 revenue was generated in Greece.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $13.07 million | $11.62 million; up 12.5% |
| Gross profit / margin | $1.89 million / 14.5% | $1.00 million / 8.6% |
| Operating income (loss) | $242,251 | ($1.73 million) |
| Net income (loss) | $203,347 | ($2.17 million) |
| Net loss attributable to common stockholders / diluted EPS | ($5.59 million) / ($0.31) | ($2.17 million) / ($0.14) |
| Cash used in operating activities | $2.34 million | $665,339 |
| Cash at quarter-end | $1.01 million | $286,487 at December 31, 2021 |
| Working capital | $11.83 million | $10.95 million at December 31, 2021 |
| Total assets / total liabilities | $49.77 million / $39.17 million | $49.43 million / $45.05 million at December 31, 2021 |
Gross profit rose 88.9%, while cost of goods sold increased 5.3%; management attributed the margin improvement to stronger nutraceutical sales. Operating expenses fell to $1.65 million from $2.73 million, partly because the prior-year quarter included stock-based consultant compensation and higher marketing costs. The $5.79 million deemed dividend on warrants issued with Series A preferred stock caused the common-stockholder loss despite positive net income.
At March 31, the balance sheet included $4.36 million of current lines of credit, $449,000 of net current convertible notes, $6.14 million of current notes payable and $6.89 million of long-term notes payable. The separate debt schedule reported $14.44 million of third-party debt before specified fair-value adjustments; these figures do not represent all liabilities. Series A preferred stock was recorded as $5.45 million of mezzanine equity. The company raised approximately $6 million gross in the preferred-stock and warrant private placement, with $5.45 million reported as net proceeds.
Material changes, outlook and risks
- Revenue growth was driven by Cosmofarm’s local sales and increased Sky Premium Life sales; management reported nutraceutical sales were $524,000 higher than in Q1 2021.
- In February 2022, the company issued 6,000 Series A preferred shares and 2 million warrants. The warrants are exercisable at $3.30 per share and expire five and a half years after the initial exercise date. Preferred shares have senior rights and are subject to conversion provisions. Common shares increased during the quarter through debt conversion and cashless warrant exercises.
- Debt changes included extensions of certain senior notes to June 30, 2023 and a March extension of a trade facility to January 2023. The senior-note restructuring generated a reported $787,544 gain on extinguishment; the quarter’s total gain on extinguishment of debt was $1.00 million.
- Going concern: Management stated that conditions raise substantial doubt about the company’s ability to continue as a going concern for twelve months from the filing date. It cited operating cash use, accumulated deficit of $34.14 million and dependence on additional capital. Potential responses include increasing sales, raising debt or equity, exchanging debt for equity and restructuring maturities; management gave no assurance these plans will succeed.
- Outlook: No quantified financial guidance was provided. Management plans to expand distribution and product lines, including a target of 150 Sky Premium Life products by year-end 2022, and pursue geographic expansion, e-commerce, R&D and potential acquisitions. It also cautioned that growth depends on market, pricing, competition, regulation, supply-chain and economic conditions, including the Ukraine conflict and COVID-19 effects.
- Regulatory and legal matters: SkyPharm’s Greek wholesale-license renewal was rejected in 2021, and the filing describes an unresolved matter with the National Medicines Agency concerning license status and sales. Other pending matters include a Solgar claim over product packaging and a Cosmofarm tax appeal involving €91,652 in tax and penalties already paid; management said the listed matters were not expected to have a material impact, while the tax-case outcome was uncertain.
- Controls: Management concluded disclosure controls were only partially effective and reported material weaknesses, including inadequate segregation of duties and internal-control review. Remediation efforts were underway.
Important facts for investors to verify
- Whether the company can fund operations and meet obligations without further financing, given $2.34 million of quarterly operating cash use and management’s going-concern warning.
- Receivable quality and collection, including $26.09 million of accounts receivable and $2.84 million due from a related party; also assess the $4.37 million related-party prepaid balance and Doc Pharma relationship.
- Debt maturities, interest costs, refinancing terms and compliance with lender covenants; confirm the effect of the extensions and restructuring fees on future cash requirements.
- Status and operational consequences of SkyPharm’s wholesale-license renewal and related agency matter, as well as the outcomes of the disclosed legal and tax proceedings.
- Potential dilution and preferred-stock terms, including warrant exercises, automatic conversion conditions and registration-rights penalties.
- Progress in remediating the disclosed control weaknesses and the reliability of subsequent financial reporting.
- The filing’s MD&A reports $94,550 of investing cash provided, while its cash-flow statement reports $87,223; verify the correct figure.