Cosmos Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The unaudited consolidated results cover the company’s pharmaceutical wholesale, import/export and nutraceutical businesses, primarily through subsidiaries in Greece and the United Kingdom.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $13.60 million | $14.35 million | $40.06 million | $39.11 million |
| Gross profit | $2.35 million | $2.40 million | $5.38 million | $5.94 million |
| Gross margin | 17.3% | 16.7% | 13.4% | 15.2% |
| Operating income (loss) | ($0.91 million) | $1.08 million | ($4.02 million) | $2.29 million |
| Net income (loss) | ($1.94 million) | $0.76 million | ($6.49 million) | $1.65 million |
| Operating cash flow | Not presented for quarter | ($5.55 million) | ($10.34 million) |
For the nine months, revenue increased 2.4%, but gross profit declined 9.3% as higher sales from the lower-margin full-line wholesale business pressured margins. Q3 revenue fell 5.3%, which management attributed to reduced import/export activity. Greece generated $39.51 million, approximately 98.6% of nine-month revenue.
Q3 and nine-month operating results were burdened by general and administrative costs, including $5.15 million of stock-based compensation in the nine-month period. Nine-month interest expense was $2.18 million, with a further $0.49 million of non-cash debt-discount amortization. Other items included $0.80 million of debt-extinguishment gains and $0.21 million of derivative fair-value gains, partly offset by $0.39 million of foreign-currency transaction losses. Foreign-currency translation losses were $0.69 million for the nine months.
Liquidity, debt and capital
At September 30, cash was $1.03 million, working capital was $6.86 million, and the current ratio was approximately 1.18. Current assets were $44.28 million and current liabilities $37.43 million. Total liabilities were $43.03 million; stockholders’ equity was $4.65 million, compared with a $4.16 million deficit at year-end 2020. Accounts receivable, including related-party receivables, totaled $30.11 million.
Operating activities used $5.55 million of cash and investing activities used $0.84 million; financing activities provided $6.48 million. Cash increased by $0.41 million from year-end. Debt remains substantial, including $15.11 million of current notes payable, $3.02 million of long-term notes, $4.67 million of lines of credit, and convertible and related-party obligations. Certain senior notes had passed stated maturity dates; the company said they were not in default and was negotiating extensions.
Equity improved mainly through debt conversions, related-party debt forgiveness and equity compensation. Common shares issued increased to 17.33 million from 13.49 million at December 31, 2020; 17.04 million were outstanding at September 30. The company also recorded $5.15 million of stock compensation related to consultant shares.
Outlook, risks and unusual matters
- Going concern: Management stated that the net loss, operating cash outflows and accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern for 12 months from filing. Management is considering additional debt, debt-for-equity exchanges, restructuring short-term debt and other fundraising, but gave no assurance these plans will succeed.
- Plans: Management intends to grow full-line wholesale distribution and Sky Premium Life nutraceutical sales, expand digital and international channels, develop B2B/B2C platforms, add automation and pursue acquisitions. No quantitative financial guidance was provided.
- Financing contingency: A September 2021 agreement contemplated a $5 million Series A preferred-stock placement and warrants, but closing conditions had not been met as of the filing date and the funds had not been transferred. The company also described intended Nasdaq-listing plans.
- Related-party exposure: Doc Pharma is a related-party supplier and manufacturer; the company reported $2.25 million of related-party prepayments and $2.92 million of related-party receivables. Doc Pharma also supplies inventory and is developing products and licenses for the company.
- Other risks: Management cited supply-chain and logistics disruption, drug shortages, customer payment delays, competition, price pressure, foreign-exchange movements and uncertainty from COVID-19. SkyPharm’s wholesale authorization was extended under COVID-related regulatory measures through the end of 2021 while renewal was pending.
- Controls: Management assessed disclosure controls as partially effective and reported ongoing efforts to remediate control weaknesses, including adding internal-audit personnel.
Key facts for investors to verify
- Reconcile operating cash flow: the cash-flow statement reports $5.55 million used, while MD&A states $5.50 million.
- Track near-term maturities, lender negotiations, covenant compliance and the company’s ability to fund operations; the filing explicitly identifies substantial going-concern doubt.
- Confirm whether the proposed $5 million preferred financing closed, and review its conversion terms, warrants and potential dilution.
- Assess collection of large receivables and recovery or use of related-party advances, and review the terms and governance of Doc Pharma transactions.
- Monitor gross margins, the mix of full-line wholesale versus import/export revenue, and the substantial share of revenue generated in Greece.
- Follow remediation of partially effective disclosure controls and renewal of SkyPharm’s wholesale authorization.