Cosmos Holdings, Inc. — Q1 2020 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. The company is an international pharmaceutical wholesaler, with operations centered in Europe and sales of pharmaceuticals, OTC products, and nutraceuticals.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior period |
|---|---|---|
| Revenue | $11.93 million | $9.68 million; up 23.2% |
| Gross profit and margin | $1.19 million; 10.0% | $626,162; 6.5% |
| Operating income (loss) | $225,564 | ($173,742) |
| Net loss | ($483,310); ($0.04) per share | ($217,173); ($0.02) per share |
| Comprehensive loss | ($627,072) | ($155,544) |
| Cash from operations | ($1.14 million) | ($483,933) |
| Cash and cash equivalents | $984,881 | $38,537 at December 31, 2019 |
| Working capital | Deficit of $7.67 million | Deficit of $7.06 million at December 31, 2019 |
| Total assets / liabilities | $23.47 million / $30.56 million | $23.88 million / $30.34 million at December 31, 2019 |
Revenue growth was attributed principally to organic expansion at Cosmofarm and increased demand for supplements and SkyPremium Life products. Greece generated $10.69 million, approximately 90% of Q1 revenue. Gross margin improved, but higher interest and foreign-currency expense more than offset operating income: total other expense was $702,370, including $412,055 interest expense and $227,134 foreign-currency transaction loss.
Net financing cash inflow was $2.39 million, primarily reflecting increased line-of-credit use and new borrowing; it more than offset operating and investing cash outflows. Current liabilities were $28.50 million against current assets of $20.82 million. The balance sheet included $13.30 million of notes payable, $1.40 million of convertible notes, $3.44 million of lines of credit, and related-party notes and loans. Stockholders’ deficit was $7.09 million.
Material changes and notable items
- Revenue rose 23.2%, and gross margin improved from 6.5% to 10.0%; operating results swung from a loss to income. Net loss nevertheless more than doubled, and operating cash outflow also increased.
- Accounts receivable, net, increased to $11.02 million from $7.35 million at year-end. The filing attributes the cash-flow pressure in part to working-capital movements.
- The company had not repaid its $1.5 million May 2019 convertible note by its March 15, 2020 maturity. A March 23 agreement provided forbearance through September 16, 2020, subject to conditions, and required scheduled payments; $1.4 million remained outstanding at quarter-end. The note carries substantial default and redemption provisions.
- Several senior promissory notes were due around or shortly after quarter-end. The filing says the company was discussing extensions for certain matured notes and was not in default on those notes.
- After quarter-end, the company disclosed a $200,000 note issued April 23 and two notes totaling $4.0 million issued May 5 and May 8. The latter notes bear 18% interest; the May 8 note matures June 8, 2020. The CEO personally guaranteed these and other specified borrowings.
Outlook, risks, and controls
Management disclosed substantial doubt about the company’s ability to continue as a going concern for twelve months from the filing date, citing the $7.67 million working-capital deficit, accumulated deficit of $20.05 million, Q1 net loss, and operating cash outflow. Management’s plans include growing sales and raising capital through debt and/or equity, but it provided no assurance those plans will succeed. No quantified revenue or earnings guidance was provided.
COVID-19 had caused reported drug shortages and export restrictions, supply-chain constraints, logistics delays of 5–7 days, payment delays, and other liquidity risks. Management expected effects to continue for 18–24 months; it also identified possible increased demand for OTC products, supplements, antibacterial products, and masks, without assurance of that outcome. Other stated risks include competition, pricing pressure, regulation, access to financing, and foreign-exchange exposure.
Management reported disclosure controls and procedures were not effective at quarter-end, citing material weaknesses including inadequate segregation of duties and insufficient internal-control structure and documentation. A new internal auditor was hired in October 2019, with remediation and SOX-control work underway. The filing reported no pending or threatened litigation expected to have a material effect.
Investor verification priorities
- Confirm the status, payment schedule, and current balance of the convertible note in forbearance, and reconcile that disclosed existing default with the filing’s “Defaults Upon Senior Securities: None” item.
- Verify repayment, extensions, or refinancing of notes that matured in 2020, including subsequent-event borrowings, interest rates, guarantees, and near-term maturities.
- Assess collectability and timing of the $11.02 million receivables balance, including related-party balances, and whether operating cash flow can improve.
- Evaluate available liquidity, covenant compliance, and the company’s ability to obtain additional financing given the going-concern warning and working-capital deficit.
- Track COVID-19 effects on supply, customer payments, margins, and the concentration of revenue in Greece; review progress in remediating ineffective controls.
- Check the filing’s debt disclosures for inconsistencies, including the December 2019 note’s stated interest-rate wording, which appears unclear in the filing text.