Cosmos Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 19, 2019. The company is an international pharmaceutical wholesaler, with operations in Greece and the United Kingdom and sales primarily across the EU. It also sells nutraceuticals and expanded into Greek full-line pharmaceutical distribution through its 2018 Cosmofarm acquisition.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $8.51 million | $8.86 million | $18.20 million | $20.82 million |
| Gross profit (margin) | $469,000 (5.5%) | $702,000 (7.9%) | $1.10 million (6.0%) | $1.31 million (6.3%) |
| Operating loss | $526,000 | $79,000 | $700,000 | $228,000 |
| Net income (loss) | $(1.54) million | $782,000 | $(1.76) million | $(2.27) million |
| Cash used in operations | Not separately provided | Not separately provided | $(2.79) million | $(1.32) million |
- Q2 revenue declined about 3.9% year over year; six-month revenue declined about 12.6%. Gross margin also contracted in both comparisons.
- Six-month net loss narrowed, but results included significant non-operating and non-cash items. Q2 included a $1.05 million equity-investment loss; the prior-year quarter included a $1.83 million gain on an equity exchange. Six-month 2018 results also included substantial debt-discount amortization and a debt-extinguishment loss.
- General and administrative expense rose to $1.65 million for the six months, while depreciation and amortization increased to $147,000, partly reflecting the expanded asset base and leases.
Financial position and liquidity
- At June 30, 2019, cash was $887,000, total assets $21.83 million, and total liabilities $26.61 million. Stockholders’ deficit was $4.78 million.
- Working-capital deficit widened to $5.51 million from $3.93 million at December 31, 2018. Current assets were $19.04 million versus current liabilities of $24.54 million.
- Current liabilities included $10.54 million of notes payable, $2.60 million of lines of credit, $1.41 million of convertible notes, $1.75 million of related-party notes, and $981,000 of related-party loans. These categories exclude lease liabilities and the $1.55 million share-settled debt obligation.
- Operating activities used $2.79 million of cash; financing activities provided $2.28 million, while investing activities provided $542,000, including proceeds from investment-share sales. Cash increased by only $22,000 during the half.
- Related-party prepaid expenses and other current assets were $5.74 million. The company disclosed substantial inventory purchases and balances with entities considered related parties.
Material changes, outlook, and risks
- Management stated that the accumulated deficit, working-capital deficit, stockholders’ deficit, operating loss, and operating cash outflow raise substantial doubt about the company’s ability to continue as a going concern for the next 12 months. Continued operations depend on revenue growth and additional equity or debt financing; management gave no assurance these plans will succeed.
- The company issued $750,000 of 15% senior promissory notes in April and a $1.50 million convertible note in May bearing 19% interest. After quarter-end, it borrowed an additional $1.25 million through 15% notes due in 2020; the CEO personally guaranteed these later notes.
- Management’s stated plans include organic growth, expansion of pharmaceutical and supplement sales, new geographic markets, and selective acquisitions. It estimated approximately $70,000 for evaluating geographic expansion and $500,000 for locating and assessing acquisitions; it reported no binding commitments with prospective acquisition targets. No quantified revenue or earnings guidance was provided.
- Management cited competition, purchase-price increases, stagnant selling prices, changing pharmaceutical pricing and distribution practices, reimbursement pressure, regulation, customer behavior, and foreign-exchange movements as risks. The filing also notes an approximately $144,000 potential tax liability related to Greek tax matters.
- Disclosure controls and procedures were reported as ineffective at period-end. Management reported no material change in internal control over financial reporting during the quarter. The filing reported no pending or threatened lawsuits expected to have a material effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company can obtain sufficient financing to address its working-capital deficit and operating cash burn, and the terms and availability of that financing.
- Debt maturities, interest costs, collateral, guarantees, covenant compliance, and the effect of the post-quarter borrowings.
- Drivers of declining revenue and gross margin, including country and customer mix, and whether acquired operations can produce sustainable cash flow.
- Valuation and future movements in the ICC investment, given the recorded investment losses and its $960,000 carrying value at June 30.
- The nature, collectability, and business terms of substantial related-party balances and transactions, alongside the ineffective disclosure controls.