mos Health (COSM) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Cosmos Holdings Inc., showing significant revenue growth, a shift to net income, and changes in financial position and cash flows Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets Summary | Metric | June 30, 2020 (Unaudited) ($) | December 31, 2019 ($) | | :-------------------------- | :------------------------ | :---------------- | | Assets | | | | Cash and cash equivalents | $2,406,508 | $38,537 | | Accounts receivable, net | $13,308,972 | $7,348,945 | | Total Current Assets | $31,218,037 | $21,178,735 | | Total Assets | $33,854,740 | $23,879,636 | | Liabilities | | | | Accounts payable & accrued | $9,628,512 | $8,561,681 | | Notes payable | $19,699,552 | $12,029,724 | | Total Current Liabilities | $37,291,838 | $28,241,255 | | Total Liabilities | $39,382,490 | $30,340,465 | | Stockholders' Deficit | | | | Accumulated deficit | $(18,677,609) | $(19,571,610) | | Total Stockholders' Deficit | $(5,527,750) | $(6,460,829) | - Total assets increased by approximately $10 million from December 31, 2019, to June 30, 2020, primarily driven by a significant increase in cash and accounts receivable[9] - Total liabilities also increased by approximately $9 million, with a notable rise in notes payable, indicating increased borrowing[11] - The accumulated deficit improved from $(19,571,610) to $(18,677,609), and the total stockholders' deficit decreased from $(6,460,829) to $(5,527,750), reflecting a positive change in equity[12] Condensed Consolidated Statements of Operations (Unaudited) Condensed Consolidated Statements of Operations Summary | Metric (Unaudited) | Three Months Ended June 30, 2020 ($) | Three Months Ended June 30, 2019 ($) | Six Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2019 ($) | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $12,819,972 | $8,513,956 | $24,753,220 | $18,197,297 | | Cost of Goods Sold | $10,471,841 | $8,044,963 | $21,211,918 | $17,102,142 | | Gross Profit | $2,348,131 | $468,993 | $3,541,302 | $1,095,155 | | Income (Loss) from Operations | $986,313 | $(525,888) | $1,211,877 | $(699,630) | | Net Income (Loss) | $1,377,311 | $(1,540,033) | $894,001 | $(1,757,206) | | Basic Net Income (Loss) per Share | $0.10 | $(0.12) | $0.07 | $(0.13) | | Diluted Net Income (Loss) per Share | $0.10 | $(0.12) | $0.07 | $(0.13) | - Revenue increased by 50.58% for the three months ended June 30, 2020, and by 36.03% for the six months ended June 30, 2020, compared to the respective prior year periods, primarily due to organic growth from the Cosmofarm acquisition and increased demand for medical equipment and nutraceuticals[13][294][304] - The company reported a net income of $1,377,311 for the three months ended June 30, 2020, a significant improvement from a net loss of $1,540,033 in the prior year period. For the six months, net income was $894,001, up from a net loss of $1,757,206[15][292][302] - Gross profit margin improved substantially, reaching 18.32% for the three months and 14.31% for the six months ended June 30, 2020, compared to 5.5% and 6% respectively in the prior year, driven by higher-margin products[296][306] Condensed Consolidated Statements of Cash Flows (Unaudited) Condensed Consolidated Statements of Cash Flows Summary | Cash Flow Activity (Unaudited) | Six Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2019 ($) | | :----------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $894,001 | $(1,757,206) | | Net cash used in operating activities | $(5,876,080) | $(2,791,266) | | Net cash (used in) provided by investing activities | $(86,378) | $542,423 | | Net cash provided by financing activities | $8,301,764 | $2,280,513 | | Net change in cash | $2,367,971 | $22,324 | | Cash at end of period | $2,406,508 | $886,667 | - Net cash used in operating activities increased to $5,876,080 for the six months ended June 30, 2020, from $2,791,266 in the prior year, primarily due to changes in accounts receivable and prepaid expenses[20][313] - Net cash provided by financing activities significantly increased to $8,301,764, driven by substantial proceeds from notes payable and lines of credit, which helped offset operating cash outflows[21][315] - Cash and cash equivalents at the end of the period saw a substantial increase to $2,406,508 from $38,537 at the beginning of the period, reflecting the impact of financing activities[21][313] Notes to Unaudited Condensed Consolidated Financial Statement NOTE 1 – BASIS OF PRESENTATION - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and do not include all information required for complete financial statements[22] - Operating results for the three and six months ended June 30, 2020, are not indicative of the full year 2020 or any other period[22] NOTE 2 – ORGANIZATION, NATURE OF BUSINESS AND GOING CONCERN - Cosmos Holdings Inc. is an international pharmaceutical wholesaler, importing, exporting, and distributing brand-name and generic pharmaceuticals, OTC medicines, vitamins, and dietary supplements, primarily in the EU[24] - The company operates through three wholly-owned subsidiaries: SkyPharm S.A. (Greece), Decahedron Ltd. (UK), and Cosmofarm Ltd. (Greece), leveraging price spreads within the EU market[24] - The company has expanded into vitamins and dietary supplements with its own brand, SkyPremium Life, and is monitoring the legal framework for cannabis product distribution in Europe[25][26][28] - As of June 30, 2020, the company had an accumulated deficit of $18,677,609, a working capital deficit of $6,073,801, and a stockholders' deficit of $5,527,750, raising substantial doubt about its ability to continue as a going concern[42] - Management plans to raise additional capital through increased sales and equity/debt financing to address the going concern uncertainty[45] Summary of Significant Accounting Policies - The company's consolidated accounts include its wholly-owned subsidiaries: SkyPharm S.A., Decahedron Ltd., and Cosmofarm Ltd.[49] - Inventory is stated at the lower-of-cost or net realizable value using the weighted average method, primarily consisting of finished goods and packaging materials[56] - Property and equipment are depreciated on a straight-line basis over their useful lives, with depreciation expense of $124,251 for the six months ended June 30, 2020[59] - Goodwill and intangible assets are reviewed for impairment annually or when triggering events occur, using fair value measurement techniques. Amortization expense for intangibles was $16,497 for the six months ended June 30, 2020[61][66][67] - Investments in equity securities are accounted for at fair value with changes recognized in net income, or at cost less impairment for those without readily determinable fair value[69] Marketable Securities (Fair Value) Summary | Marketable Securities (Fair Value) | June 30, 2020 ($) | December 31, 2019 ($) | | :--------------------------------- | :------------ | :---------------- | | ICC International Cannabis Corp. | $46,500 | $33,000 | | Diversa S.A. | $200,468 | $200,290 | | National Bank of Greece | $2,337 | $5,650 | | Total | $249,305 | $238,940 | - Revenue is recognized when performance obligations are satisfied by transferring control of a product to a customer, typically upon delivery[79] - The company accounts for income taxes under the asset and liability method, recognizing deferred tax assets and liabilities. A valuation allowance is maintained against all net deferred tax assets due to uncertainty of realization[85][88] NOTE 3 – INVESTMENTS - The company holds investments in ICC International Cannabis Corp., Diversa S.A., and National Bank of Greece, valued at $46,500, $200,468, and $2,080 respectively as of June 30, 2020[70][108] - A Distribution and Equity Acquisition Agreement with Marathon Global Inc. for cannabis products in Europe resulted in a 33 1/3% equity interest in Marathon and CAD $2,000,000 cash, with potential future variable consideration[99][100] - The Marathon shares were exchanged for 10 million shares of ICC International Cannabis Corp., with gains on exchange recognized in 2018[102][103] - The company also has a 30% equity ownership in CosmoFarmacy L.P., an investment recorded using the equity method, valued at $168,555 as of June 30, 2020[109] NOTE 4 – PROPERTY AND EQUIPMENT, NET Property and Equipment, Net Summary | Property and Equipment, Net | June 30, 2020 ($) | December 31, 2019 ($) | | :-------------------------- | :------------ | :---------------- | | Leasehold improvements | $510,248 | $548,000 | | Vehicles | $115,158 | $115,055 | | Furniture, fixtures and equipment | $1,443,232 | $1,439,839 | | Computers and software | $134,966 | $85,052 | | Less: Accumulated depreciation and amortization | $(528,608) | $(453,165) | | Total | $1,674,996 | $1,734,781 | - Total property and equipment, net, decreased slightly from $1,734,781 at December 31, 2019, to $1,674,996 at June 30, 2020[110] NOTE 5 – INTANGIBLE ASSETS, NET Intangible Assets, Net Summary | Intangible Assets, Net | June 30, 2020 ($) | December 31, 2019 ($) | | :--------------------- | :------------ | :---------------- | | License | $50,000 | $50,000 | | Trade name / mark | $36,997 | $36,997 | | Customer base | $176,793 | $176,793 | | Less: Accumulated amortization | $(66,303) | $(49,806) | | Subtotal | $197,487 | $213,984 | | Goodwill | $49,697 | $49,697 | | Total | $247,184 | $263,681 | - Total intangible assets, net, decreased from $263,681 at December 31, 2019, to $247,184 at June 30, 2020, primarily due to increased accumulated amortization[111] NOTE 6 – INCOME TAXES - The company is subject to income tax laws in Greece (29% corporate tax rate) and the United Kingdom (19% corporate tax rate)[114][115] - A valuation allowance is maintained against all net deferred tax assets in each jurisdiction due to uncertainty of realization[119] - A provision for tax charges of $79,787 (June 30, 2020) and $79,716 (December 31, 2019) is recorded in Other Liabilities, related to potential tax liabilities from unaudited fiscal years in Greece[120] NOTE 7 – CAPITAL STRUCTURE - As of June 30, 2020, the company had 13,225,387 shares of common stock issued and 12,860,059 shares outstanding[122] - The company purchased 83,341 shares of its common stock for $250,023 in February 2019, with 57,120 shares recorded in treasury as of the filing date[123] - No preferred shares, options, warrants, or other potentially dilutive securities were issued as of June 30, 2020[121][124] NOTE 8 – RELATED PARTY TRANSACTIONS - The company has significant transactions with Doc Pharma S.A., a related party due to the CEO's wife being Doc Pharma's CEO. This includes prepaid balances for inventory purchases and receivable balances[128][130] Related Party Notes Payable Summary | Related Party Notes Payable | 2020 ($) | 2019 ($) | | :-------------------------- | :---------- | :---------- | | Beginning Balance | $1,375,532 | $1,793,437 | | Payments | $(789,961) | $(382,055) | | Ending Balance | $586,796 | $1,375,532 | Related Party Loans Payable Summary | Related Party Loans Payable | 2020 ($) | 2019 ($) | | :-------------------------- | :---------- | :------------ | | Beginning Balance | $1,026,264 | $1,775,251 | | Proceeds | $586,759 | $585,915 | | Payments | $(102,257) | $(262,226) | | Ending Balance | $1,511,037 | $1,026,264 | - Grigorios Siokas, the Company's CEO and principal shareholder, is involved in related party notes and non-interest bearing, no-term loans to the company, with an outstanding balance of $1,511,037 as of June 30, 2020[131][132][141] NOTE 9 – LINES OF CREDIT Lines of Credit Summary | Lines of Credit | June 30, 2020 ($) | December 31, 2019 ($) | | :-------------- | :------------ | :---------------- | | National Bank of Greece | $2,915,226 | $1,940,045 | | Alpha Bank | $961,644 | $810,947 | | Total | $3,876,870 | $2,750,992 | - Total outstanding lines of credit increased to $3,876,870 at June 30, 2020, from $2,750,992 at December 31, 2019, primarily from National Bank of Greece[144] - Interest expense for lines of credit was $110,420 for the six months ended June 30, 2020, down from $125,466 in the prior year[147] - The company was in compliance with financial ratios and covenants for these lines of credit during the six months ended June 30, 2020[147] NOTE 10 – CONVERTIBLE DEBT Convertible Debt (May 2019 Note) Summary | Convertible Debt (May 2019 Note) | 2020 ($) | 2019 ($) | | :------------------------------- | :---------- | :---------- | | Beginning balance notes | $1,500,000 | $365,513 | | Payments | $(200,000) | $(365,513) | | Note payable net of discount | $1,300,000 | $1,470,491 | - The company has a Senior Convertible Note (May 2019 Note) with a principal balance of $1,300,000 as of June 30, 2020, after repaying $200,000 during the period[160] - The May 2019 Note is convertible at $6.00 per share, subject to adjustment, and has an alternative conversion price upon an Event of Default[155] - The note is senior to other indebtedness, except for permitted senior indebtedness, and is subject to a 9.99% beneficial ownership blocker provision[156][160] NOTE 11 – DEBT Third-Party Debt (June 30, 2020) Summary | Third-Party Debt (June 30, 2020) | Loan Facility ($) | Bridge Loans ($) | Trade Facility ($) | Third Party ($) | COVID Loans ($) | Total ($) | | :------------------------------- | :------------ | :----------- | :------------- | :---------- | :---------- | :------------ | | Beginning balance | $3,078,442 | $191,287 | $6,245,400 | $2,514,595 | - | $12,029,724 | | Proceeds | - | - | - | $7,510,000 | $398,955 | $7,908,955 | | Payments | - | $(165,995) | - | $(5,619) | - | $(171,614) | | Ending Balance | $3,033,990 | - | $6,247,400 | $10,019,207 | $398,955 | $19,699,552 | - Total third-party debt significantly increased to $19,699,552 at June 30, 2020, from $12,029,724 at December 31, 2019, primarily due to new proceeds from third-party notes and COVID loans[162] - The company recorded a gain on extinguishment of debt of $779,224 for the six months ended June 30, 2020, resulting from a settlement agreement for the Loan Facility and Bridge Loans[172] - Multiple Senior Promissory Notes were executed in 2019 and 2020, with interest rates ranging from 5% to 18% per annum, and most are personally guaranteed by the CEO, Grigorios Siokas[199][201][203][206][210][212][214][216][218][220][222][225][227] - The company received COVID-19 government loans totaling $398,955 from the Greek government, with low interest rates and specific repayment terms[229][230] NOTE 12 – LEASES - The company recognizes assets and liabilities from operating and finance leases based on the present value of remaining lease payments[233] Operating Lease Payments (June 30, 2020) Summary | Operating Lease Payments (June 30, 2020) | Amount ($) | | :--------------------------------------- | :---------- | | Remainder of 2020 | $65,622 | | 2021 | $81,636 | | 2022 | $53,938 | | 2023 | $53,938 | | 2024 | $53,938 | | Thereafter | $202,233 | | Total undiscounted operating lease payments | $511,305 | | Present value of operating lease liabilities | $404,718 | Finance Lease Payments (June 30, 2020) Summary | Finance Lease Payments (June 30, 2020) | Amount ($) | | :------------------------------------- | :---------- | | Total undiscounted finance lease payments | $183,845 | | Present value of finance lease liabilities | $163,654 | - Operating lease expense was $104,588 for the six months ended June 30, 2020, and finance lease interest expense was $5,251[236][242] NOTE 13 – COMMITMENTS AND CONTINGENCIES - As of June 30, 2020, there were no pending or threatened lawsuits expected to have a material effect on the company's operations[243] - The company has an Intellectual Property Sale Agreement for proprietary pharmaceutical formulas, entitling sellers to 200,000 common shares upon successful completion of preclinical and clinical trials (Phases I, II, III)[245][246][247][248] - An Advisory Agreement with Synthesis Management Limited requires annual payments of €104,000 for ten years to assist SkyPharm in securing corporate finance capital[252] NOTE 14 – STOCK OPTIONS AND WARRANTS Options Activity (June 30, 2020) Summary | Options Activity (June 30, 2020) | Number of Shares | Weighted Average Exercise Price ($) | | :------------------------------- | :--------------- | :------------------------------ | | Balance Outstanding, Dec 31, 2019 | 74,000 | $1.32 | | Balance Outstanding, June 30, 2020 | 74,000 | $1.32 | | Exercisable, June 30, 2020 | 74,000 | $1.32 | Warrant Activity (June 30, 2020) Summary | Warrant Activity (June 30, 2020) | Number of Shares | Weighted Average Exercise Price ($) | | :------------------------------- | :--------------- | :------------------------------ | | Balance Outstanding, Dec 31, 2019 | 1,164,673 | $6.41 | | Balance Outstanding, June 30, 2020 | 1,164,673 | $6.41 | | Exercisable, June 30, 2020 | 1,164,673 | $6.41 | - As of June 30, 2020, there were 74,000 stock options outstanding and exercisable, with a weighted average exercise price of $1.32 and a remaining contractual term of 0.97 years[254][255] - There were 1,164,673 warrants outstanding and exercisable, with a weighted average exercise price of $6.41 and a remaining contractual term of 3.52 years[256] NOTE 15 – DISAGGREGATION OF REVENUE Revenue by Country Summary | Country | June 30, 2020 ($) | June 30, 2019 ($) | | :-------- | :------------ | :------------ | | Croatia | $8,617 | $5,366 | | Denmark | - | $66,814 | | France | $1,091 | $90,145 | | Germany | $792,540 | $3,287,079 | | Greece | $22,657,446 | $11,205,579 | | Hungary | $36,240 | $167,088 | | Indonesia | - | $7,235 | | Ireland | $35,104 | $213,828 | | Italy | $22,048 | $112,386 | | Jordan | $9,322 | $20,322 | | Libya | $41,972 | - | | Netherlands | $38,252 | $550,986 | | Poland | $28,352 | $228,469 | | Turkey | - | $24,562 | | UK | $1,082,236 | $2,217,438 | | Total | $24,753,220 | $18,197,297 | - Greece accounted for the largest portion of revenue, significantly increasing from $11,205,579 in 2019 to $22,657,446 in 2020 for the six months ended June 30[260] - Revenue from Germany and the UK decreased substantially, while new revenue streams emerged from Libya[260] NOTE 16 – SUBSEQUENT EVENTS - On July 3, 2020, the company executed a Senior Promissory Note for $5,000,000 at 18% interest, maturing June 30, 2022, personally guaranteed by the CEO[261][262] - Proceeds from the July 3 Note were used to repay $5,000,000 in principal from other outstanding notes (May 5 Note, May 8 Note, and February Note)[262] - Maturity dates for the July 24, 2019, and August 1, 2019 Senior Promissory Notes were extended to July 24, 2021, and August 1, 2021, respectively, with prepayment allowed without penalty[263][264] - Cosmofarm M.S. was granted a €500,000 ($561,850) COVID-19 loan from the National Bank of Greece SA in June 2020, with disbursements received in July 2020[265] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses financial condition and results, highlighting revenue growth, improved margins, and liquidity challenges - The company's focus shifted to the healthcare and pharmaceutical industry in November 2013, with operations primarily in the EU through subsidiaries SkyPharm, Decahedron, and Cosmofarm[271][272] - COVID-19 has presented adverse risks such as drug shortages, supply chain problems, and logistics delays, but management anticipates positive long-term outcomes including increased sales of OTC products, nutraceuticals, and medical equipment[286][288] - Revenue for the three months ended June 30, 2020, increased by 50.58% to $12,819,972, and for the six months, it increased by 36.03% to $24,753,220, primarily due to organic growth from Cosmofarm and higher demand for medical equipment and SkyPremium Life nutraceuticals[294][304] - Gross profit margin improved significantly to 18.32% (three months) and 14.31% (six months) in 2020, up from 5.5% and 6% respectively in 2019, attributed to higher-margin product sales[296][306] - The company reported a net income of $1,377,311 for the three months and $894,001 for the six months ended June 30, 2020, reversing net losses from the prior year periods[292][302] - Liquidity remains a concern with a working capital deficit of $6,073,801 at June 30, 2020, despite an increase in cash to $2,406,508, largely due to financing activities[312][313] - Future plans include organic growth by entering new markets, expanding product portfolios (generic and nutraceuticals), pursuing business development activities (trading, alliances, acquisitions), and optimizing gross profit margins[320][321][324][325] Item 3. Quantitative and Qualitative Disclosures about Market Risk. As a smaller reporting company, Cosmos Holdings Inc. is exempt from providing quantitative and qualitative market risk disclosures - The company is a smaller reporting company and is not required to provide information on quantitative and qualitative disclosures about market risk[348] Item 4. Controls and Procedures. Management concluded disclosure controls were ineffective as of June 30, 2020, due to material weaknesses; remediation is ongoing - The company's disclosure controls and procedures were deemed not effective as of June 30, 2020[352] - Material weaknesses identified include a lack of segregation of duties, insufficient internal controls structure review, and inadequate documentation of internal policies[352] - An Internal Auditor was hired in October 2019 to remediate and strengthen existing procedures, define new policies, and implement SOX controls in 2020[353] PART II - OTHER INFORMATION Item 1. Legal Proceedings. As of the reporting period, there were no legal proceedings to disclose - No legal proceedings were reported for the period[356] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. No unregistered sales of equity securities or use of proceeds were reported, as previously disclosed on Form 8-K - No unregistered sales of equity securities or use of proceeds to report, as previously reported on Form 8-K[358] Item 3. Defaults Upon Senior Securities. There were no defaults upon senior securities to report for the period - No defaults upon senior securities were reported for the period[360] Item 4. Mine Safety Disclosures. There were no mine safety disclosures to report for the period - No mine safety disclosures were reported for the period[362] Item 5. Other Information. This section indicates that there is no other information to report for the period - No other information was reported for the period[363] Item 6. Exhibits. This section lists exhibits filed with the 10-Q report, including promissory notes, an agreement, and CEO/CFO certifications - Exhibits include forms of Senior Promissory Notes from May 18, 2020 ($2,000,000) and July 3, 2020 ($5,000,000), both with personal guaranties of Grigorios Siokas[365][373] - An agreement dated June 30, 2020, between Synthesis Peer-to-Peer Income Fund and SkyPharm S.A., with Grigorios Siokas as Guarantor, is also filed[365][373] - Certifications of the CEO/CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[365][366][373] - XBRL (eXtensible Business Reporting Language) instance documents and taxonomy extensions are furnished[366][367][374][375] SIGNATURES This section contains the signature of Cosmos Holdings Inc. by its CEO, Grigorios Siokas, certifying the report - The report is signed by Grigorios Siokas, Chief Executive Officer, Acting Principal Financial Officer, and Acting Principal Accounting Officer of Cosmos Holdings Inc. on August 12, 2020[369][371]