COSM - Cosmos Health: A Cash-Rich Small Cap With Significant Growth Ahead

Summary

• In 2022, Cosmos' share price plummeted more than 90% as it was caught in the midst of market turmoil.
• The completion of a reverse stock split and official compliance with Nasdaq listing requirements have improved investor perception.
• The CEO's ongoing personal investments and successful fundraising have improved the company's financial position. The CEO has never sold a single share and has invested $13M since 2019.
• Cosmos has a large cash balance (last round was funded at $11.5/share, more than double the current share price) and is decreasing debt, positioning the company for growth via acquisitions.
• The cash balance is c.$50M (same as current market cap) and debt is 50% lower due to exercise of warrants. A recent article incorrectly concluded the balance sheet is weak.

The global stock market has been facing significant declines recently, with even well-established companies like Meta ( META ) and Amazon ( AMZN ) seeing drops of around 50% in the past year. This situation is reminiscent of the stock market crash in 2008. Despite these challenges, there are plenty of opportunities for entrepreneurial investors who are willing to thoroughly research to identify and capitalize on opportunities that others have overlooked, especially in the small-cap space. Cosmos Health ( COSM ) may be one of these opportunities.

COSM is a healthcare company based in Chicago that was founded in 2009. The company operates in the nutraceuticals and pharmaceutical industries, selling its own products and branded generics and OTC medications. It also has subsidiaries in the EU and UK that distribute healthcare products to retail pharmacies and wholesale distributors. COSM is focused on R&D in the areas of patented nutraceuticals, specialized root extracts, proprietary generics, and innovative OTC products.

The past year has been a tumultuous one for COSM. The company's share price took a severe hit, plummeting more than 90% as it was caught in the midst of market turmoil.

This was a tough period for COSM investors and the company will need to navigate these challenging conditions in order to recover and move forward. The good news is that there are several catalysts in place.

Reverse Split Completed, COSM Achieves Nasdaq Compliance

COSM has successfully cured the deficiency in the minimum bid price required by Nasdaq. The company has regained compliance with Nasdaq's requirements by achieving a closing bid price above $1 per share for 10 consecutive business days, as a result of a 1 for 25 reverse stock split on its common stock on December 16, 2022.

While a reverse stock split does not change the underlying fundamentals of a company, it can impact investor sentiment. Currently, COSM's share price is around $5, well above the $1 danger zone, and this is alleviating concerns that the company would return to penny stock status. Arguably, this is a disappointment for short sellers, who regularly profit from the fear that a company may fall below $1 and violate Nasdaq's listing requirements. Reverse stock splits are often followed by pressure on a company's stock by short sellers in an attempt to bring the price back down to the $1 range. Personally, I don't expect the market to push the stock price back towards the $1 level, given the strong balance sheet and growth potential (more on this below).

CEO-led Significant Fundraising to De-risk the Balance Sheet

COSM announced that its CEO, Greg Siokas, participated in a financing round in December 2022 totaling approximately $32.5 million ( at a share price of $11.5 - more than double the current share price) , investing a personal sum of $3 million. This brings Siokas' total personal investments in the company to approximately $6 million for the year 2022, and $13 million since 2019. Having the CEO invest substantial amounts of his own funds is a crucial factor in the success and stability of the business. The CEO's personal investment demonstrates commitment and belief in the company's potential for growth and profitability, adding credibility to his actions and decisions.

Overall, for FY 2022, Cosmos completed 3 financing rounds which raised a total of $46 million. Additionally, there were notable exercises of warrants in November 2022. As a result, management expects that the company's debt will decrease by around 50% compared to the previous year by the end of 2022 .

Mr. Siokas stated:

I continue to be dedicated to the growth and future profitability of Cosmos Health. My personal financial interests are aligned with those of our loyal shareholders as evidenced by my total investments of approximately $13 million into COSM since 2019. With a firm belief that we have the products, the people and the strategy to establish Cosmos Health among the elite in the international health and wellness industry in the coming years, I have not sold any shares. I am appreciative of our loyal shareholders. I stand shoulder to shoulder with them and am committed to driving value on their behalf."

It is highly valuable that the CEO has not sold any shares of his company. This indicates that he has a long-term perspective and is committed, with "skin in the game". This is not the case with most micro or small-cap companies.

Company with Strong Cash Holdings and Low Valuation Relative to Market Cap

As a result of the aforementioned fundraising efforts, the company has a cash balance of almost $50 million. This amount is roughly equal to the company's current market cap , making the company an attractive, low-priced investment opportunity.

I believe the company is on strong financial footing, and disagree with the conclusions made by Manatee Research in a recent article which suggested liquidity concerns, without acknowledging the large cash balance, and an even going as far as to criticise the balance sheet as "weak" and the capital structure as a "mess" with "red flags abound that overshadow the core business". In fact, the company is in a uniquely favorable position, with a large cash balance, decreasing debt, positive adjusted EBITDA and a decreasing cash burn rate from operating activities (more on this below).

This puts the company in a strong position to pursue several strategic moves and acquisitions in the near future, which will help it generate meaningful cash flows and continue growing aggressively. The combination of these factors, along with the company's low valuation, make it a compelling investment opportunity.

Dedicated Investor Relations

COSM has demonstrated a strong commitment to IR (investor relations). The company has officially appointed Lytham Partners to carry out IR functions but has also hired, as a 3rd party consultant Mr. Frank Benedetto who plays a supporting role to retail investors. Benedetto is in constant communication with senior management and makes a point to regularly update shareholders through Twitter. This level of engagement is particularly beneficial for retail investors. The company's efforts to maintain open and frequent communication with its investors helps to build trust and confidence in the company's leadership and direction. The regular updates provided by Benedetto help keep retail shareholders informed and allow them to make informed decisions about their investments. Again, this is not the case with most micro or small-cap companies. This, in conjunction with regular press releases by the company, does the job, at least for me.

Risks: Operating Cash Flow is Still a Challenge

That said, investors should be aware of the typical risks associated with micro or small-cap stocks, such as higher volatility (small-cap stocks tend to be more volatile), dependence on a few key players (small-cap companies may be more reliant on a few key employees, customers, or suppliers, which can make them more vulnerable to changes in these relationships) and greater susceptibility to market conditions (small-cap stocks may be more sensitive to changes in economic trends, which can make them more vulnerable to market downturns). It is fair to argue that these are very generic risks and could apply to very many companies. Therefore, it is important to dig deeper to consider Cosmos-specific risks. It is a fact that the company has been posting net losses over the past few years, and the optics certainly don't look good. For instance, the company has been using (burning) cash from operating activities of $7.1 million for FY 2021, a slight improvement from $11.5 million for FY 2020.

The good news is that the burn rate is getting smaller. For the nine months ended 30 September 2022, the burn rate was $4.5 million versus $5.5 million for the comparable period in 2021.

The bad news is that the company is still burning cash, despite having reached the status of positive adjusted EBITDA.

One could also argue that the company is struggling on the revenue front. For instance, revenues were $12M in Q3 2022 versus $13.6M in Q3 2021. However, the decline in consolidated revenues was largely due to the high variation in foreign exchange differences between EUR/GBP relative to the USD, which had a strong year (most of COSM's revenue is in EUR and GBP). In other words, I see revenue as stable; it actually increased on a constant currency basis, and is certainly not falling off a cliff. In terms of profitability, the company seems to be on a solid path especially as it relates to the organic growth of their proprietary nutraceutical brand, Sky Premium Life . In fact, for the first half of 2022, COSM achieved positive income from operations of $0.2 million compared to a loss of $3.1 million in the same period last year, and positive EBITDA of $0.8 million compared to a loss of $2.8 million. Another driver of profitability is tight expense management. Operating expenses decreased by nearly 43.7% and 41.9% for the three and six months ended June 30, 2022, respectively. Disciplined expense management is set to continue, all else constant.

That said, all eyes are on operating cash flows, and the company is still burning cash, albeit at a decreasing rate. Importantly, as mentioned above, the company is sitting on almost $50M in cash, largely thanks to the recent $32.5 million capital raise at a share price of $11.5 (more than 2 times versus the current higher share price) as we as two smaller funding rounds in February and October of 2022 with combined proceeds of $13.5M. Looking at this differently, if the company doesn't splash its cash (e.g. for acquisitions, or other corporate priorities) and simply keeps it on the balance sheet, it has bought itself at least 5 years of life, based on the more pessimistic 2021 operating cash flow burn rate. In other words, its is fair to say that the company is financially strong right now. It is also fair to say that the recent capital raise has saved the company from economic strain. Sure, the CEO has had to jump in to make personal investments, and the company has had to do a reverse share split to avoid delisting, but all these things are now in the rear view mirror.

Regarding the future, it all depends on how COSM will use its cash. Investors know more or less that certain acquisitions are in the pipeline such as the acquisition of ZipDoctor from American International Holdings Corp ( OTCQB:AMIH ). AMIH will continue to manage all aspects of the day-to-day operations of ZipDoctor including product development, marketing and operational support. This will make COSM even more diversified. ZipDoctor is a direct-to-consumer subscription-based telemedicine platform, that expects to provide its customers affordable, unlimited, 24/7 access to board certified physicians and licensed mental and behavioral health counselors and therapists. ZipDoctor's online telemedicine platform will be available across the United States (English and Spanish coverage) with virtual visits via the phone or through a secured video chat platform. In addition to acquisitions, the company is making progress on other fronts as well over the past few months. For instance:

• COSM signed an agreement with Virax Biolabs to Distribute Monkeypox Virus Real-Time PCR Detections Kits in Europe
• COSM launched its Sky Premium Life Nutritional Supplement Products on Amazon in the US as well as in Germany and Austria Germany via both Amazon and eBay
• Cosmos obtained the exclusive rights to market and distribute Nickelodeon's SpongeBob and PAW Patrol Kids' Vitamins in Greece and Cyprus
• Cosmos and SMFL (Smart for Life) executed an LOI for a strategic global co-venture. The LOI calls for the provision of SMFL Pan-European access and COSM North American access for products and services
• COSM entered into an agreement to acquire LIFE NLB, Ltd.'s product portfolio, including Bone-Vio® and Bone-X, related to bone health targeting the human gastrointestinal microbiome

In my view, these are all steps in the right direction and I believe increasing exposure in the USA will a net positive for the company going forward (of course there are always risks involved). I believe this is why the CEO, Mr. Siokas, goes as far as stating that he "has no plans to sell any of his shares".

In many cases, when investors read that an unprofitable company is planning to make acquisitions to help it generate profits and cashflows, this could be warning flag. However, in my view, this is not the case here. The company is expanding its existing business lines (e.g. in the USA via the Sky Premium Life Nutritional Supplement products and in Greece/Cyprus with the distribution of Nickelodeon's SpongeBob and PAW Patrol Kids' Vitamins), and at the same time its is making acquisitions (e.g. ZipDoctor will boost subscription revenue) while significantly reducing operating expenses. If these trends continue, eventually, operating cash flow should turn positive, all else constant.

In conclusion, COSM has faced challenging conditions in recent months, but there are several catalysts in place that indicate the company is on track to recover and move forward. The completion of a reverse stock split and subsequent compliance with Nasdaq requirements has alleviated concerns about the company's stability, and the CEO's significant personal investment and successful fundraising efforts have strengthened the company's financial position. COSM currently has a large cash balance and is working to decrease its debt, positioning the company for future growth through acquisitions and the generation of meaningful cash flow. Revenues are poised to increase due to organic growth as well as M&A, the company is expanding its presence in the US market via the ZipDoctor acquisition, and the financial health has improved thanks to multiple fundraising rounds within 2022 which has transformed the balance sheet. It is important to reiterate that the company recently raised capital at a share price of $11.5, which is more than double the current share price, and the cash balance of ~$50 million more or less equates to the current market cap. That said, there are still risks. The company is still burning cash (albeit at a decreasing rate) and many of its strategic moves and acquisitions might not pay off. It is fair to say that the company has been de-risked (at least from a balance sheet perspective), but investors are still waiting for the operating profits to start flowing in, and most notably when the company will start generative positive cash flow from operating activities (so that it will avoid being caught up in an unpleasant situation in the future of relying on external capital).

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