Cosmos Holdings Inc. (Nasdaq: COSM) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The filing identifies the registrant as Cosmos Holdings Inc.; it began doing business as Cosmos Health, Inc. after the quarter. Financial statements are unaudited.
Business context
The company operates in pharmaceutical and healthcare distribution and sells proprietary nutraceutical brands, including Sky Premium Life and Mediterranation. Operations are concentrated in Greece, with business in the UK and other markets. Nearly all first-half 2022 revenue came from Greece.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $13.21 million | $14.85 million | $26.28 million | $26.47 million |
| Gross profit | $1.85 million | $2.04 million | $3.74 million | $3.04 million |
| Gross margin | 14.0% | 13.7% | 14.2% | 11.5% |
| Operating income (loss) | $(0.07) million | $(1.38) million | $0.17 million | $(3.11) million |
| Net loss | $(1.24) million | $(2.38) million | $(1.04) million | $(4.55) million |
| Net loss attributable to common stockholders | $(18.26) million | $(2.38) million | $(23.85) million | $(4.55) million |
Common-stockholder losses include large non-cash deemed dividends related to preferred stock and warrant down-round provisions: $17.02 million in Q2 and $22.81 million for the first half. These items substantially widened the reported loss attributable to common stockholders despite lower net operating losses. First-half total comprehensive loss was $25.28 million, including $1.43 million of foreign-currency translation loss.
- Cash flow: First-half operating cash use was $3.02 million, compared with $2.52 million in 2021. Investing activities used $0.16 million; financing activities provided $3.47 million. Cash increased to $0.56 million from $0.29 million at year-end.
- Liquidity: Working capital was $4.13 million, down from $10.95 million at December 31, 2021. Current assets were $40.00 million and current liabilities $35.87 million. Receivables, including related-party receivables, were substantial relative to cash.
- Debt: The balance sheet reported $12.12 million of current notes payable and $1.18 million long term, plus approximately $4.99 million of lines of credit, $0.62 million of net convertible notes, and other loans. Scheduled debt repayments disclosed were $3.14 million in the remainder of 2022 and $10.26 million in 2023. The filing describes maturity extensions and payment deferrals for certain facilities.
- Equity and potential dilution: The company issued Series A preferred stock for approximately $5.45 million gross proceeds and converted part of it into common shares. At June 30, 10.86 million warrants were outstanding; the filing also reports substantial warrant issuances tied to down-round protections.
Changes versus prior period
- Q2 revenue fell 11.0% year over year; first-half revenue was down 0.7%. Management attributed the first-half gross-profit improvement to a shift toward higher-margin own-brand nutritional supplements.
- First-half gross profit rose 23.0%, while operating results improved to $0.17 million income from a $3.11 million loss. Lower prior-year general and administrative expense was partly due to stock compensation recorded in 2021.
- Working capital declined by $6.82 million from year-end. Current notes payable increased while long-term notes payable fell, reflecting debt transactions and classification changes.
- Foreign exchange was a headwind: first-half foreign-currency transaction loss was $0.52 million, alongside a $1.43 million translation loss in comprehensive income.
Outlook, risks and unusual items
- Going concern: Management stated that losses, 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. Plans include growing sales and obtaining additional equity or debt financing, but management gave no assurance of success.
- Outlook: No quantified revenue or earnings guidance was provided. Plans include expanding nutraceutical products and geographic distribution, pursuing R&D and acquisitions, and increasing the portfolio to 150 SKUs by the end of 2022.
- Financing and dilution: Preferred-stock conversion and warrant terms were reset downward, resulting in material deemed dividends and additional potential share issuance. The company also disclosed registration-related liquidated damages.
- Controls: Management concluded disclosure controls were only partially effective and continued remediation of previously identified material weaknesses, including segregation of duties and internal-control review.
- Related parties: Doc Pharma, whose CEO is related to Cosmos’s CEO, manufactures the company’s nutraceuticals. At June 30, Cosmos reported $4.12 million prepaid to Doc Pharma and $2.30 million receivable from it.
- Contingencies and risks: Pending matters include a product-packaging dispute involving Solgar, a pharmaceutical wholesale-license renewal matter in Greece, and a tax-related claim. Management said the disclosed litigation was not expected to have a material financial or operational impact. COVID-related supply, logistics and liquidity risks, economic conditions, competition, regulation and foreign-currency movements remain risks.
- Subsequent events: After quarter-end, the company announced a product-portfolio acquisition and signed a letter of intent to acquire a Greek pharmaceutical company for cash and shares; completion and final terms were not established in the quarter-end statements.
Important facts for investors to verify
- Near-term debt maturities, extensions, covenant compliance and the company’s ability to fund operations without additional financing.
- Collections and credit quality of the large accounts-receivable balance, and recoverability of related-party receivables and prepayments.
- Actual gross margins and sales growth from proprietary products, given revenue concentration in Greece and management’s expansion plans.
- Conversion, reset and exercise terms for preferred stock and warrants, including their potential effect on common-share dilution.
- Progress in remediating control weaknesses, and outcomes of the Greek licensing matter and other disclosed legal proceedings.