Cosmos Holdings Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2022, compared with the same periods in 2021. Cosmos is an international healthcare group focused on pharmaceutical and healthcare distribution and proprietary nutraceuticals, including Sky Premium Life and Mediterranation. Nearly all reported revenue came from Greece.
Financial results and position
| Metric | Three months ended Sep. 30, 2022 | Three months ended Sep. 30, 2021 | Nine months ended Sep. 30, 2022 | Nine months ended Sep. 30, 2021 |
|---|---|---|---|---|
| Revenue | $12.02 million | $13.60 million | $38.30 million | $40.06 million |
| Gross profit | $1.78 million | $2.35 million | $5.52 million | $5.38 million |
| Operating income (loss) | ($0.34 million) | ($0.91 million) | ($0.18 million) | ($4.02 million) |
| Net income (loss) | ($1.97 million) | ($1.94 million) | ($3.01 million) | ($6.49 million) |
| Net loss attributable to common stockholders | ($1.99 million) | ($1.94 million) | ($25.84 million) | ($6.49 million) |
| Net cash used in operating activities | — | ($4.55 million) | ($5.55 million) |
- Q3 revenue fell 11.6%; nine-month revenue fell 4.4%. Nine-month gross profit rose 2.6%, while Q3 gross profit declined 24.0%.
- Based on reported Q3 revenue and gross profit, gross margin was approximately 14.8%, versus 17.3% in Q3 2021. The MD&A instead states 23.9% for Q3 2022; this does not reconcile with the reported amounts.
- Nine-month operating loss narrowed substantially as operating expenses fell, including lower general and administrative expense. Management attributed much of the comparison to stock-based compensation recorded in 2021.
- Nine-month loss attributable to common stockholders included approximately $22.46 million of deemed dividends related to warrants and preferred-stock terms. These items explain much of the gap between the $3.01 million net loss and $25.84 million loss attributable to common stockholders.
- Comprehensive loss was $28.30 million for the nine months, including a $2.46 million foreign-currency translation loss. Q3 translation loss was $1.03 million.
Balance sheet, debt and liquidity
- At September 30, cash was $312,385; current assets were $38.85 million and current liabilities were $36.90 million. Working capital was $1.95 million, down from $10.95 million at December 31, 2021.
- Total liabilities were $40.47 million and stockholders’ equity was $3.44 million; $1.71 million of Series A preferred stock was classified as mezzanine equity. Accounts receivable, including related-party receivables, totaled about $27.25 million.
- Reported current notes payable were $12.39 million, with $1.03 million of notes payable long term. The company also reported $5.12 million in lines of credit, $625,000 in convertible notes, $1.94 million in related-party notes and loans, and a $1.55 million share-settled debt obligation.
- Operating cash use was $4.55 million for the nine months. Financing provided $4.48 million, including $5.45 million from Series A preferred stock; cash ended at $312,385.
- Management stated that the accumulated deficit, operating cash use and financing needs raise substantial doubt about the company’s ability to continue as a going concern for twelve months from the filing date. Management cited possible new debt, debt-to-equity exchanges, debt restructuring and additional fundraising, but gave no assurance these plans will succeed.
Changes, outlook, risks and unusual items
- Management attributed improved nine-month gross profit to a shift toward higher-margin branded nutraceuticals. It planned to expand the portfolio to 150 SKUs by year-end 2022 and pursue geographic expansion, distribution partnerships, R&D and acquisitions. No quantified revenue or earnings guidance was provided.
- Debt maturities and extensions remain significant: the $3.95 million outstanding balance under a trade facility was deferred to January 2023, and $6.22 million of modified senior notes was due in 2023. The filing describes other short-term obligations and ongoing dependence on financing.
- Series A preferred-stock conversion-price resets and warrant anti-dilution terms generated large deemed dividends and potential dilution. Common shares issued increased from 17.54 million at December 31, 2021 to 26.37 million at September 30, 2022; 10.86 million warrants were outstanding at quarter-end.
- Subsequent events: a warrant exchange announced October 3 provided for new warrants exercisable at $0.12 and payments to existing holders from future financing; a $7.5 million public offering closed October 20 at a combined $0.12 per share and warrants. The company repaid a $525,000 convertible note on October 21.
- Nasdaq sent a delisting determination on November 10, 2022, after the quarter-end, citing a bid price below $0.10 for ten consecutive trading days. The company said it would appeal; shareholders were also asked to authorize a possible reverse split.
- Risks include foreign-exchange exposure, concentrated Greek revenue, supply-chain and regulatory conditions, and financing availability. The filing describes a pending Solgar claim seeking €20,000 in damages and restrictions relating to SkyPharm’s product packaging, as well as a Greek tax appeal concerning €91,652 already paid; management stated the listed litigation was not expected to have a material financial or operational impact.
- Management assessed disclosure controls as partially effective and cited material weaknesses involving segregation of duties and internal-control review. It said remediation efforts were underway.
Important facts for investors to verify
- Funding and going-concern status, including the timing and terms of debt maturities, extensions and any new financing.
- Status and outcome of the Nasdaq delisting appeal, continued listing compliance and any reverse-split action.
- Potential dilution and obligations under preferred-stock and warrant agreements, including the October warrant exchange and public offering.
- Collection of substantial receivables, related-party balances and customer concentration in Greece.
- Resolution of the Q3 gross-margin discrepancy and progress in remediating the reported control weaknesses.