Cosmo Communications (CSMO) 10-Q 2008 Q2 Quarterly report

10Q form10q 063008.htm REPORT FOR THE QUARTER ENDED June 30, 2008 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2008

o  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________to _______________________

Commission File No. 0-11968

COSMO COMMUNICATIONS

CORPORATION

(Name of Small Business Issuer in its Charter)

FLORIDA	59-2268025
(State or Other Jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No)

Unit 2 - 55 Travail Road, Markham, Ontario, Canada

(Address of Principal Executive Offices)

(905) 209-0488

(Issuer's Telephone Number)

________________________________________________________

(Former Name or Former Address, if changed since last Report)

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange

Act during the past 12 months (or for such shorter period that the Company was required to file such

reports), and (2) has been subject to such filing requirements for the past 90 days.

(1)     Yes    x      No   o     (2)     Yes    x      No o

(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Not applicable

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes      o         No     x

(APPLICABLE ONLY TO CORPORATE ISSUERS)

State the number of shares outstanding of each of the Issuer's classes of common equity, as of the latest practicable date:

August 14, 2008

Common – 40,467,636 shares

DOCUMENTS INCORPORATED BY REFERENCE

A description of any "Documents Incorporated by Reference" is contained in Item 6 of this Report.

Transitional Small Business Issuer Format         Yes      o        No     x

TABLE OF CONTENTS 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	§Consolidated Balance Sheets	1
	§Consolidated Statements of Operations	2
	§Consolidated Statements of Cash Flows	3
	§Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion & Analysis of Financial Condition and Results of Operations	6
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	13
Item 1A.	Risk factors	13
Item 2.	Unregistered Sales of Equity securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5	Other Information	16
Item 6.	Exhibits	17

COSMO COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30,			March 31,
	2008			2008
	(Unaudited)
ASSETS
Current Assets:
Cash	$	1,109,326		$	512,172
Accounts receivable		2,706,622			3,842,366
Inventories		12,614,986			11,029,996
Prepaid expenses and other		21,876			48,227
Total Current Assets		16,452,810			15,432,761
Equipment and Other Assets
Equipment, net of depreciation		41,396			44,847
Deferred taxes		8,317			8,317
Total Equipment and Other Assets		49,713			53,164
Total Assets	$	16,502,523		$	15,485,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities	$	824,210		$	630,563
Accounts payable to parent company		11,652,970			10,739,893
Advances and interest payable to parent company		604,627			604,627
Taxes payable		473,483			311,767
Total Current Liabilities		13,555,290			12,286,850
Stockholders' Equity:
Capital stock		2,023,382			2,023,382
Additional paid-in capital		27,704,592			27,704,592
Accumulated other comprehensive income		395,370			332,676
Accumulated deficit		(27,176,111	)		(26,852,575	)
Total Stockholders' Equity		2,947,233			3,199,075
Total Liabilities and Stockholders' Equity	$	16,502,523		$	15,485,925

The accompanying notes are an integral part of these financial statements.

1

COSMO COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30

	2008 (Unaudited)			2007 (Unaudited)
Sales	$	3,968,008		$	7,298,394
Cost of products sold		3,602,343			7,064,928
Gross profit		365,665			233,466
Commission income		219,142			205,029
		584,807			438,495
Expenses:
Salaries and wages		378,712			489,160
Selling and delivery		288,562			375,703
General and administrative		259,492			200,192
Financial		9,854			28,395
(Gain) loss on foreign exchange		(30,994	)		22,282
Depreciation		3,719			3,713
		908,345			1,119,445
-
Net loss before income taxes		(323,538	)		(680,950	)
Income taxes		-			13,882
Deferred income taxes (recovery)		-			(131,906	)
Net loss	$	(323,538	)	$	(562,926	)
Loss per weighted number of shares outstanding:
Basic and diluted	$	(0.01	)	$	(0.01	)
Weighted average number of shares outstanding:
Basic and diluted		40,467,636			40,467,636

The accompanying notes are an integral part of these financial statements.

2

COSMO COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30

	2008 (Unaudited)			2007 (Unaudited)
Cash Flows from Operating Activities:
Net loss	$	(323,538	)		(562,926	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation		3,719			3,713
Deferred income taxes		-			(131,906	)
		(319,819	)		(691,119	)
Changes in operating assets and liabilities:
Accounts receivable		1,135,744			5,017,522
Inventories		(1,584,990	)		(3,904,311	)
Prepaid expenses and other		26,351			(2,487)	)
Accounts payable and accrued liabilities		193,649			782,870
Taxes payable		161,716			(78,660	)
Accounts payable to parent company		913,077			(1,953,609	)
Net cash provided by (used in) operating activities		525,728			(829,794	)
Cash Flows from Investing Activities:
Acquisition of equipment		(268	)		(2,298	)
Effect of foreign currency translation		71,694			543,847
Net increase (decrease) in cash		597,154			(288,245	)
Cash - beginning of period		512,172			1,112,228
Cash - end of period	$	1,109,326			823,983

The accompanying notes are an integral part of these financial statements.

3

COSMO COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Operations

Cosmo Communications Corporation and subsidiaries (the "Company" or "Cosmo") market and distribute consumer electronic products. The Company has operations in Hong Kong, Canada and the United States of America.

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and the SEC instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended June 30, 2008 re not necessarily indicative of the results that may be expected for the year ending March 31, 2009 For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended March 31, 2008.

Principles of Consolidation

The Company includes, in consolidation, its wholly owned subsidiaries, Cosmo Communications Canada Inc. (“Cosmo Canada”), Cosmo Communications (H.K.) Limited (“Cosmo H.K.”) and Cosmo Communication USA Corporation (“Cosmo USA”). All significant intercompany transactions and balances have been eliminated upon consolidation.

4

COSMO COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position, and measure the amount of benefit to be recognized in the financial statements for a tax position that meets the more- likely-than-not recognition threshold. FIN 48 is effective for fiscal years beginning after 15 December 2006. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Defining Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after 15 November 2007. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.

In December 2006, the FASB issued FASB Staff Position Emerging Issues Task Force ("FSP EITF") 00-19-2, Accounting for Registration Payment Arrangements which addresses accounting for registration payment arrangements. FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of EITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after 15 December 2006 and interim periods within those fiscal years. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS No. 159 applies to reporting periods beginning after 15 November 2007. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 141 (R) Business Combinations. SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after 15 December 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after 15 December 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.

In January 2008, the FASB issued Statement No. 133 Implementation Issue No. E23, Hedging — General: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Issue No. E23). Issue No. E23 provides guidance on certain practice issues related to the application of the shortcut method by amending paragraph 68 of FASB Statement No. 133 with respect to the conditions that must be met in order to apply the shortcut method for assessing hedge effectiveness of interest rate swaps. The provisions of Issue No. E23 became effective for us for our hedging arrangements designated on or after January 1, 2008. Additionally, pre-existing hedging arrangements must be assessed on January 1, 2008 to determine whether the provisions of Issue No. E23 were met as of the inception of the hedging arrangement. We have evaluated the effects of the adoption of Issue No. E23 and have determined it to have no material impact on our consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. FASB Statement No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. FASB Statement No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. FASB Statement No. 161 permits, but does not require, comparative disclosures for earlier periods at initial adoption. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 161 on our consolidated financial position, results of operations, cash flows or disclosures related to derivative instruments and hedging activities.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. FASB Statement No. 162 defines the order in which accounting principles that are generally accepted should be followed. FASB Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 162 on our consolidated financial position, results of operations and cash flows.

5

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto appearing elsewhere in this quarterly report, and in conjunction with the Management's Discussion and Analysis set forth in (1) our annual report on Form 10-K for the year ended March 31, 2008.

As used in this quarterly report, to term “we”, “us”, our”, “Cosmo”, the “Company” or “our company refer to Cosmo Communications Corporation, a Florida corporation.

Preliminary Note Regarding Forward-Looking Statements

This quarterly report and the documents incorporated herein by reference contain forward-looking statements within the meaning of the federal securities laws, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors. You can identify forward-looking statements generally by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “intends,” “plans,” “should,” “could,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other variations of those terms, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as throughout this quarterly report. A number of factors could cause results to differ materially from those anticipated by forward-looking statements.

These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements.

Any of the factors described in this quarterly report, including in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.

In addition, readers are also advised to refer to the information contained in our filings with the Commission, especially on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.

6

Overview

Cosmo Communications Corporation (the “Company”, “Cosmo”, “we”, “us” or “our”) was incorporated in the state of Florida in 1983.

The Company is engaged in the development, production, distribution, marketing and sale of consumer electronic audio and video equipment, accessories and clocks. Our products are sold primarily in Canada and to selective customers in the United States, United Kingdom and South America through mass merchandisers, department stores, electronic stores, chains, and specialty stores.

Our products are currently sold in such stores as Wal-Mart, Super-Stores, Home Hardware, Bargain Shop, and Best buy/Future Shop.

Results of Operations for the Quarter Ended June 30, 2008 (“2008”) and For the Quarter Ended June 30, 2007 (“2007”)

The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net revenues for the three months ended June 30, 2008 and 2007.

	Three months ended			Three months ended
	June 30, 2008			June 30, 2007
Sales		100	%		100	%
Cost of products sold		90.8	%		96.8	%
Gross profit		9.2	%		3.2	%
Commission income		5.5	%		2.8	%
Expenses:
Salaries and wages		9.5	%		6.7	%
General and administrative		6.5	%		2.7	%
Selling and delivery		7.3	%		5.1	%
Financial		0.2	%		0.4	%
(Gain) loss on foreign exchange		(0.8	)%		0.3	%
Depreciation		0.1	%		0.1	%
Net loss before income taxes		(8.1	)%		(9.3	)%
Income taxes		-			1.6	%
Net loss		(8.1	)%		(7.7	)%

7

The following is a discussion and analysis of our results of operations for the above periods:

Net Sales:

Sales in 2008 decreased by approximately $3.3 million or 46% compared to the corresponding period in 2007. The quarter in 2007 was abnormally strong because the United States imposed an import deadline for NTSC TV’s and this accounted for close to $2 million difference in sales. We have also dropped the DVD player category as we found this category no longer profitable. Although we have lesser sales this quarter, our gross margin actually increased due to a more selective product mix we implemented.

Gross margin as a percentage of sales was approximately 9.2% in this quarter as compared to 3.2% for the same period in 2007. Our gross profit margin this quarter improved since the prior year period because we removed unprofitable product lines, and as well customers were placing more domestic sales orders than direct import orders. Selling prices of domestic orders are grossed up to include warehouse handling and freight costs and therefore have higher gross margins.

Commission income:

Commission income was comparable to the income reported in the same period of 2007.

Selling, Delivery and General and Administrative Expenses:

Salaries and wages decreased by $110,448 or 23% compared with the same period in 2007. We cut the staff in our Canadian subsidiary to help reduce the overall operating costs, in reaction to a slower Canadian economy and reduced consumer spending.

Our general and administrative expenses in this quarter increased $58,300 or 29% compared with the 2007 quarter. The increases were mainly in rent, insurance and repairs and maintenance. Other increase was in utilities and telecommunications which were affected by higher energy prices worldwide.

Selling and delivery expenses decreased $87,141 or 22% during this quarter compared with the 2007 quarter. The decrease was mainly in warehouse handling and storage costs for our inventory held at our US subsidiary. We incurred less sales compared with the quarter in 2007 due to the NTSC TV US import deadlines. We therefore incurred less warehouse handling and storage costs for our US inventory in 2008.

8

Interest Expenses:

Our interest and finance charges decreased $18,501 or 65% due to lower direct import sales which incurred interest and bank charges in letter of credit negotiation and collection.

Net Earnings:

The net loss in this quarter was $323,538, compared with net loss of $562,926 in the corresponding period in 2007. Our gross profit margin improved this quarter and we have reduced costs in payroll and in selling and distribution.

Both the US and Canadian economies have deteriorated affected by the surging energy costs and the sub-prime mortgage melt down. Although we are cautiously optimistic that our licensed products will improve sales in the ensuing year as new products lines are introduced, we believe sales in the other consumer electronics categories will continue to suffer because of adverse economic conditions.

Liquidity and Capital Resources

During the three months ended June 30, 2008, net cash provided by operating activities was $525,728. The ratio of current assets to current liabilities was 1.21 to 1, as compared to 1.26 to 1 on March 31, 2008. The main source of our working capital during this quarter came from collecting our trade receivables and financing from vendor payable including $913,000 from our parent company, the Starlight Group. Our ratio of current assets to current liabilities is consistent with the prior year and reflective of our normal operating activities by having to maintain high levels of inventory on hand to operate our domestic sales activities in the United States.

During the next quarter, we plan on financing our operation mainly from our parent company, the Starlight group. We also expect our vendors will continue to support us in financing our inventory.

Seasonal and Quarterly Results

Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for electronic audio and video equipment during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. The current trend is we will receive less direct import orders and more domestic sales orders from our customers. The effect of this is timing of placing orders will be delayed. Our results of operations often fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis.

Inflation

Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts.

9

Critical Accounting Policies and Estimates

The methods, estimates and judgments Cosmo uses in applying its accounting policies have a significant impact on the results reported in its consolidated financial statements. Cosmo evaluates its estimates and judgments on an on-going basis. Cosmo bases its estimates on historical experience and assumptions that Cosmo believes to be reasonable under the circumstances. Cosmo’s experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what Cosmo anticipates and different assumptions or estimates about the future could change its reported results.

Cosmo believes the following accounting policies are the most critical to Cosmo, in that they are important to the portrayal of Cosmo’s consolidated financial statements and they require Cosmo’s most difficult, subjective or complex judgments in the preparation of its consolidated financial statements:      

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known.

Revenue Recognition

Sales, net of estimated sales returns, are recognized upon passage of title to the customer. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Revenue is recognized if persuasive evidence of an agreement exists, the sales price is fixed or determinable, and collectability is reasonably assured.

Commission income is derived from reverse logistic services that consist of handling other distributor companies returned goods. In providing these services, the Company acts as an agent or broker without assuming the risks and rewards of ownership of the goods and therefore reports the commissions on a net basis. Revenue is recognized based on the completion of the contracted services.

Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Inventory is comprised of finished products that the Company intends to sell to its customers. The Company periodically makes judgments and estimates regarding the future utility and carrying value of its inventory. The carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from the inventory is less than its carrying value. The Company has inventory reserves for estimated obsolescence or unmarketable inventory which is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

10

Foreign Translation Adjustment

The accounts of the foreign subsidiaries were translated into U.S. dollars in accordance with the provisions of SFAS No. 52, Foreign Currency Translation. Management has determined that the Hong Kong dollar is the functional currency of the Hong Kong subsidiaries and the Canadian dollar is the functional currency of the Canadian subsidiary. Certain current assets and liabilities of these foreign entities are denominated in U.S. dollars. In accordance with the provisions of SFAS 52, transaction gains and losses on these assets and liabilities are included in the determination of income for the relevant periods. Adjustments resulting from the translation of the financial statements from their functional currencies to United States dollars are accumulated as a separate component of accumulated other comprehensive income and have not been included in the determination of income for the relevant periods.

Income Taxes

The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalents, receivables, payables, and advances from the parent company.

The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair value. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material changes in the Company’s market risk during the first quarter ended June 30, 2008. For additional information, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal controls over financial reporting identified in connection with the requisite evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. - LEGAL PROCEEDINGS

We are from time to time involved in routine litigation incidental to our business, most of which is adequately covered by insurance and none of which is expected to have a material adverse affect on our business, financial condition or results of operation.

ITEM 1A. - RISK FACTORS

We have significant working capital needs and if we are unable to obtain additional financing when needed, we may not have sufficient cash flow to continue operations.

As of August 14, 2008, our cash on hand is limited and we do not have credit facilities with banks. We will finance our working capital needs from the collection of accounts receivable and sales of existing inventory. As of June 30, 2008, our inventory was valued at $12.6 million. If these sources do not provide us with adequate financing, we will be seeking financing from our factories. If we are not able to obtain adequate financing from our factories when needed, it will have a material adverse effect on our cash flow and our ability to continue operations.

A small number of our customers account for a substantial portion of our revenues, and the loss of one or more of these key customers could significantly reduce our revenues and cash flow.

We rely on Starlight to manufacture and produce the majority of our products and if Starlight does not support our delivery schedule, it would affect our revenues and profitability.

We believe that because Starlight has a substantial investment in our operations they will support us unconditionally. In the event of disruption in its factory, Starlight will source outside factories to manufacture our products but we risk losing sales and goodwill to our customers.

We are subject to pressure from our customers relating to price reduction and financial incentive and if we are pressured to make these concessions to our customers, it will reduce our revenues and profitability.

Because there is intense competition in the consumer electronic market, we are subject to pricing pressure from our customers. Many of our customers have demanded that we lower our prices or they will purchase from our competitor's products. If we do not meet our customer's demands for lower prices, we will not sell as many products. We are also subject to pressure from our customers regarding certain financial incentives, such as return credits or advertising allowances, which effectively reduce our profit. We have historically offered advertising allowances to our customers because it is standard practice in the retail industry.

We experience difficulty forecasting the demand for our products and if we do not accurately forecast demand, our revenues, net income and cash flow may be affected.

Because of our reliance on manufacturers in China for our products, our production lead times range from one to four months. Therefore, we must commit to production in advance of customers orders. It is difficult to forecast customer demand because we do not have any scientific or quantitative method to predict this demand. Our forecasting is based on management's general expectations about customer demand, the general strength of the retail market and management's historical experiences. In the past, our experienced management team has been able to plan our production and inventory requirements without building excessively high inventory.

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Our gross profit margins are always under the pressure of a continued competitive market in the future.

Over the past year, our gross profit margins have generally decreased due to price competition. Although we have tried to lift our gross profit margin, we expect that our gross profit margin will come under downward pressure in fiscal 2009 as labor costs and operating costs in our factories continue to rise. We will face many challenges to deal with rising production costs and a slack consumer market in the remaining of this fiscal year.

Our business is seasonal and therefore our annual operating results will depend, in large part, on our sales during the relatively brief holiday season.

Sales of consumer electronics in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during the second quarter ended September 30 and the third quarter ended December 31. Sales in our second and third quarter, combined, historically accounted for approximately 64% of total sales in fiscal 2008.

If Cosmo does not continue to develop, introduce and achieve market acceptance of new and enhanced products, sales may decrease.

The consumer electronic industry is characterized by rapid technological change, frequent new product introductions and enhancements and ongoing customer demands for greater performance. In addition, the average selling price of an electronic product has historically decreased over its life cycle, and we expect that trend to continue. As a result, our products may not be competitive if we fail to introduce new products or product enhancements that meet evolving customer demands. The development of new products is complex, and we may not be able to complete development in a timely manner. To introduce products on a timely basis, we must:

· accurately define and design new products to meet market needs;

· design features that continue to differentiate our products from those of our competitors;

· update our manufacturing process technologies;

· identify emerging technological trends in our target markets;

· anticipate changes in end-user preferences with respect to our customers' products;

· introduce products to market on a timely basis at competitive prices; and

· respond effectively to technological changes or product announcements by our competitors.

We believe that we will need to continue to enhance our products and develop new merchandise to keep pace with competition, technological developments, and to achieve market acceptance for our products. At the same time, we are identifying other products which may be different from audio and video equipment.

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Our products are shipped from China and any disruption of shipping could prevent or delay our customers’ receipt of inventory.

We rely principally on independent ocean carriers to ship virtually all of the products that we import to our warehouse facility in Toronto, Canada and to Los Angeles, USA. Retailers that take delivery of our products in China rely on a variety of carriers to import those products. Any disruptions in shipping, whether in Toronto, Los Angeles or China, caused by labor strikes, other labor disputes, terrorism, and international incidents may prevent or delay our customers' receipt of inventory. If our customers do not receive their inventory on a timely basis, they may cancel their orders or return products to us. Consequently, our revenues and net income would be affected.

Our manufacturing operations are located in the People’s Republic of China, subjecting us to risks common in international operations. If there is any problem with the manufacturing process, our revenues and net profitability may be affected.

We are using nine factories in the People's Republic of China to manufacture the majority of our products. These factories will be producing all of our products in fiscal 2008. Our arrangements with these factories are subject to the risks of running business abroad, such as import duties, trade restrictions, work stoppages, and foreign currency fluctuations, limitations on the repatriation of earnings and political instability, which could have an adverse impact on our business. Furthermore, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by our third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our revenues, profitability and cash flow. Also, since we do not have written agreements with any of these factories, we are subject to additional uncertainty if the factories do not deliver products to us on a timely basis.

We depend on third party suppliers for parts for our products, and if we cannot obtain supplies as needed, our operations will be severely damaged.

Our growth and ability to meet customer demand depends in part on our ability to obtain timely deliveries of our electronic products. We rely on third party suppliers to produce the parts and materials we use to manufacture and produce these products. If our suppliers are unable to provide our factories with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. In the last several years, there have been shortages of certain components that we use in our DVD players and small screen TVs. If we are unable to anticipate any shortages of parts and materials in the future, we may experience severe production problems, which would impact our sales.

We are exposed to the credit risk of our customers who are experiencing financial difficulties, and if these customers are unable to pay us, our revenues and profitability will be reduced.

We sell products to retailers, including department stores, hardware stores and specialty stores. In the past, we have been diligent to screen credit worthiness of our customers and experience of bad debts has been insignificant. Deterioration in the financial condition of our customers could have a material adverse effect on our revenues and future profitability.

Our common stock currently is not actively traded on the OTC bulletin board.

Our common stock is inactive and has no bid and ask price. We believe that if we can establish a pattern of profitability in the near future, our common stock may be more actively traded.

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The loss of our largest customer or significant reductions in their purchases of Cosmo’s products would reduce sales.

This significant customer accounts for approximately 85% of Cosmo’s sales in this quarter. Cosmo anticipates that this customer will continue to account for a significant portion of Cosmo’s sales for the foreseeable future, but is not obligated to any long-term purchases. They have considerable discretion to reduce, change or terminate purchases of Cosmo’s products. Cosmo cannot be certain that it will retain this customer or maintain a favorable relationship.

If Cosmo fails to manage its inventory effectively, Cosmo could incur additional costs or lose sales.

Cosmo customers have many brands to choose from when they decide to order products. If Cosmo cannot deliver products quickly and reliably, customers will order from a competitor. Cosmo must stock enough inventories to fill orders promptly, which increases Cosmo’s financing requirements and the risk of inventory obsolescence. Because competition has forced Cosmo to shorten its product life cycles and more rapidly introduce new and enhanced products, while simultaneously sourcing more products overseas and carrying larger inventories, there is a significant risk that Cosmo’s inventory could become obsolete.

Currency fluctuations may reduce the profitability of Cosmo’s foreign sales.

Cosmo currently makes sales to Canadian and certain European dealers and distributors in their respective currencies. However, as part of the transition to local distributors, an increasing portion of Cosmo’s sales are denominated in U.S. dollars. If Cosmo is unsuccessful in its transition to distributors, Cosmo’s exposure to gains and losses on foreign currency transactions will continue. Cosmo does not trade in derivatives or other financial instruments to reduce currency risks. In some instances this will subject Cosmo’s earnings to fluctuations because Cosmo is not protected against substantial currency fluctuations.

ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. - OTHER INFORMATION

Not applicable.

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ITEM 6. - EXHIBITS

The following exhibits are being filed as part of this quarterly report:

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COSMO COMMUNICATIONS CORPORATION
By:	/s/ Peter Horak
	Name: Peter Horak
	Title: Chief Executive Officer
Date: August 14, 2008
By:	/s/ Carol Atkinson
	Name: Carol Atkinson
	Title: Chief Financial Officer
Date: August 14, 2008

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