Cosmo Communications (CSMO) 10-Q 2008 Q4 Quarterly report

10Q form10q 123108.htm REPORT FOR THE QUARTER ENDED December 31, 2008 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarter ended December 31, 2008

oTRANSITION 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 large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer oAccelerated Filer oNon-Accelerated FileroSmaller Reporting Company x

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:

February 17, 2009

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	2-3
	■       Consolidated Statements of Cash Flows	4
	■       Notes to Consolidated Financial Statements	5 - 8
Item 2.	Management’s Discussion & Analysis of Financial Condition and Results of Operations	9 - 14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 1A.	Risk factors	16 - 19
Item 2.	Unregistered Sales of Equity securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5	Other Information	19
Item 6.	Exhibits	20

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December31,			March31,
	2008			2008
	(Unaudited)			(Audited)
ASSETS
Current Assets:
Cash	$	1,561,903		$	512,172
Accounts receivable (net of allowance of $196,892 and $25,927 respectively)		6,021,934			3,842,366
Inventories (net of allowance of $461,839 and $554,224 respectively)		11,408,377			11,029,996
Prepaid expenses and deposits		23,810			48,277
Total Current Assets		19,016,024			15,432,761
Equipment and Other Assets
Equipment, net of depreciation		33,960			44,847
Deferred taxes		8,317			8,317
Total Equipment and Other Assets		42,277			53,164
Total Assets	$	19,058,301		$	15,485,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities	$	1,701,189		$	630,563
Accounts payable to parent company		15,658,982			10,739,893
Interest payable to parent company		604,627			604,627
Taxes payable		166,917			311,767
Total Current Liabilities		18,131,715			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 (loss) income		(538,839	)		323,676
Accumulated deficit		(28,262,549	)		(26,852,575	)
Total Stockholders' Equity		926,586			3,199,075
Total Liabilities and Stockholders' Equity	$	19,058,301		$	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 DECEMBER 31

(Unaudited)

	2008			2007
Sales	$	9,471,302		$	11,523,333
Cost of products sold		8,889,493			10,515,217
Gross profit		581,809			1,008,116
Commission income		125,656			227,144
		707,465			1,235,260
Expenses:
Selling and delivery		714,116			529,264
Salaries and wages		291,274			498,765
General and administrative		314,020			481,019
Loss (gain) on foreign exchange		695,206			(31,736	)
Financial		15,025			22,976
Depreciation		3,719			3,503
		2,033,360			1,494,341
Net loss before income taxes		(1,325,895	)		(256,081	)
Current income taxes		1,600			13,293
Net loss	$	(1,327,495	)	$	(272,374	)
Foreign currency translation adjustment		(755,831	)		114,932
Comprehensive loss		(2,083,326	)		(157,442	)
Net loss  per common share:
Basic and diluted	$	(0.03	)	$	(0.01	)
Weighted average 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 OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 31

(Unaudited)

	2008			2007
Sales	$	26,717,492		$	30,569,029
Cost of products sold		24,529,722			28,453,933
Gross profit		2,187,770			2,115,096
Commission income		356,161			630,694
		2,543,931			2,745,790
Expenses:
Selling and delivery		1,433,497			1,489,472
Salaries and wages		1,032,242			1,428,348
General and administrative		803,704			962,684
Financial		184,251			61,466
Loss on foreign exchange		816,135			6,443
Depreciation		11,156			10,484
		4,280,985			3,958,897
Net loss before income taxes		(1,737,054	)		(1,213,107	)
Income taxes (recovery)		(327,077	)		126,692
Deferred income taxes		-			(131,906	)
Net loss	$	(1,409,977	)	$	(1,207,893	)
Foreign currency translation adjustment		(862,515	)		1,204,994
Comprehensive loss		(2,272,492	)		(2,899	)
Net loss per common share:
Basic and diluted	$	(0.03	)	$	(0.03	)
Weighted average shares outstanding:
Basic and diluted		40,467,636			40,467,636

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

3

COSMO COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31

 (Unaudited)

	2008			2007
Cash Flows from Operating Activities:
Net loss	$	(1,409,977	)	$	(1,207,893	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation		11,156			10,484
Deferred taxes		-			(131,906	)
		(1,398,821	)		(1,329,315	)
Changes in operating assets and liabilities:
Accounts receivable		(2,179,568	)		1,339,866
Inventories		(378,381	)		(4,161,854	)
Prepaid expenses and deposits		24,417			(38,362	)
Accounts payable and accrued liabilities		1,070,626			(103,386	)
Taxes payable		(144,850	)		17,675
Accounts payable to parent company		4,919,090			4,571,938
Net cash provided by used in by operating activities		1,912,513			290,562
Cash Flows from Investing Activities:
Acquisition of equipment		(267	)		(2,298	)
Effect of foreign currency translation		(862,515	)		1,204,994
Net increase in cash		1,049,731			1,499,258
Cash - beginning of period		512,172			1,112,228
Cash - end of period	$	1,561,903		$	2,611,486

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

4

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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, United States of America and Canada.

BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the Securities Exchange Commission (“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 consolidated 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 and nine month periods ended December 31, 2008 are not necessarily indicative of the results that may be expected for the year ending March 31, 2009. For further information, refer to the consolidated 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.  As of December 31, 2008, the Company provided reserves for doubtful accounts receivable in the amount of $196,892 (March 31, 2008 - $25,927); provided inventory reserves for estimated obsolescence for $461,839 (March 31, 2008 - $554,224); and provided reserves for defective inventory returns of $188,270 (March, 2008 - $138,438).

5

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.  At December 31, 2008 and March 31, 2008, the carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities, and loans payable approximate their fair values due to the short-term maturities of these instruments.

Earnings or Loss Per Share

There were no anti-dilutive financial instruments for nine months ended December 31, 2008 and 2007.

EQUIPMENT

The components of equipment are as follows:

	Cost		Accumulated Depreciation			Net December 31, 2008		Net March 31, 2008
Furniture and fixtures	$	42,462	$	(40,147	)	$	2,316	$	3,147
Equipment		31,858		(29,746	)		2,112		2,844
Computer		53,295		(41,658	)		11,637		15,233
Warehouse equipment		68,575		(50,680	)		17,895		23,623
	$	196,190	$	(162,231	)	$	33,960	$	44,847

AMOUNTS PAYABLE TO PARENT COMPANY

As of December 31, 2008, the Company owed $16,263,609 (March 31, 2008 - $11,344,520) to The Starlight Group of Companies, the principal corporate shareholder of the Company ("Starlight").  Of this amount $15,658,982 (March 31, 2008 - $10,739,893) was owed in the form of trade payable and the remainder was in the form of advances and interest on advances.  The advances from Starlight were paid for by the issuance of shares in the fiscal year ended March 31, 2007, leaving only the accrued interest as payable.  These amounts are unsecured, payable on demand and Starlight has agreed not to charge further interest on the accrued interest payable.  Interest accrued as of December 31, 2008 was $604,627 (March 31, 2008 - $604,627).

6

COMMITMENTS

The Company leases premises under an operating lease with a five year term in Canada and shares the facilities for its Hong Kong operation.  In September 2008 the Company extended the current operating lease in Canada for five years commencing on October 1, 2008.  Minimum lease commitments under the leases at December 31, 2008 were:

2009 (3 months)	$	55,122
2010		220,484
2011		220,484
2012		223,028
2013		225,572
Thereafter		112,786
	$	1,057,476

CAPITAL STOCK

Authorized
30,000	preferred stock, cumulative, convertible at $0.01 par value
9,970,000	preferred stock, at $0.01 par value
50,000,000	common stock at $0.05 par value, voting, participating

		2008			2007
Issued
40,467,636	Common stock	$	2,139,132		$	2,139,132
2,314,567	Treasury stock		(115,750	)		(115,750	)
		$	2,023,382		$	2,023,382

RELATED PARTY TRANSACTIONS

Apart from those as disclosed in Amounts Payable to Parent Company, the Company's transactions with related parties were, in the opinion of the directors, carried out on normal commercial terms and in the ordinary course of the Company's business.

During the nine months ended December 31, 2008, the Company purchased $25,248,847 (nine months ended December 31, 2007 - $26,130,912) of goods from Starlight and received $86,146 (nine months ended December 31, 2007 - $214,494) in commissions.

7

ECONOMIC DEPENDENCE

The Company is economically dependent on its parent company for the supply of inventory products to its customers.  A mass-market merchandiser and chain store located in Canada and US is the Company's largest customer, which accounted for approximately 69% of sales for the nine months ended December 31, 2008 and 83% for the nine months ended December 31, 2007.  Economic dependence exists with this identified customer.  Loss of the customer may have significant adverse results to the financial position of the Company.

As of December 31, 2008, the accounts receivable from this customer amounted to approximately $4,501,594 (March 31, 2008 - $1,721,833) and claims payable for inventory returns amounted to approximately $52,078 (March 31, 2008 - $56,771).

OPERATING SEGMENT INFORMATION

The Company operated in one business segment and all of its sales are consumer electronic products.  The Company's customers are principally in Canada and in the USA.  Borrowings are principally in the United States.

	Canada			Hong Kong			United States			Total
December 31, 2008
Assets	$	5,884,452			1,724,551			11,449,298		$	19,058,301
Nine Months Ended December 31, 2008
Sales, net		9,706,278			4,015,014			12,996,200			26,717,492
Gross margin		988,019			1,155,107			1,044,645			3,187,771
Net loss		(1,268,804	)		(89,389	)		(51,784	)		(1,409,977	)
March 31, 2008
Assets		6,966,433			783,441			7,978,424			15,728,298
Nine Months Ended December 31, 2007
Sales, net		8,351,597			7,936,345			14,281,087			30,569,029
Gross margin		1,157,970			287,500			669,626			2,115,096
Net loss		(388,397	)		(242,446	)		(577,050	)		(1,207,893	)

SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended December 31, 2008 the Company paid interest of $45,434 (nine months ended December 31, 2007 - $63,611) and recovered income taxes of $327,077 (nine months ended December 31, 2007 - $Nil).

8

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.

9

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 USA, United Kingdom, and South America through mass merchandisers, department stores, electronic stores, chains, and specialty stores.

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

Results of Operations for the Quarter Ended December 31, 2008 (“2008”) and For the Quarter Ended December 31, 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 December 31, 2008 and 2007.

	Three months ended			Three months ended
	December 31, 2008			December 31, 2007
Sales		100	%		100	%
Cost of products sold		93.9	%		91.3	%
Gross profit		6.1	%		8.7	%
Commission income		1.3	%		2.0	%
Expenses:
Salaries and wages		3.1	%		4.6	%
General and administrative		3.3	%		4.3	%
Selling and delivery		7.5	%		4.5	%
Financial		0.1	%		0.1	%
Loss (gain)on foreign exchange		7.3	%		(0.2)	%
Depreciation		-			-
Net loss before income tax		(14)	%		(2.2)	%
Income tax (recovery) expense		-			0.1	%
Net income		(14)	%		(2.3)	%

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

10

Net Sales:

Sales for the three months ended December 31, 2008 decreased by approximately $2 million or 18% compared to the corresponding period in 2007.   Sales were down across all categories of our product lines due to a poor holiday season as a result of the economic downturn in US and Canada.

Disney electronics comprises 28% of our net sales in this quarter.  Sales of Disney products were down by 35% compared with the corresponding period in 2007.

Cost of Sales and Gross Margin:

Gross margin was 6.1% for the three months ended December 31, 2008 as compared to 8.7% for the same period in 2007.  The decrease was due to fierce price competition in an economic downturn during the holiday selling season.

Commission Income:

Commission income decreased by $101,488 or 45% for the three months ended December 31, 2008 compared to the corresponding period in 2007.  The loss in revenue was mainly from the loss of our reverse logistics customers.  Since we do not have any minimum fee contracts with our reverse logistic customers, the amount of defective returns we handle will always fluctuate outside of our control.   One major customer set up its own facility to handle returns so we expect the decrease will be permanent until we find a new major customer.

Selling, General and Administrative Expenses:

Salaries and wages decreased by 41% for the three months ended December 31, 2008 compared with the same period in 2007.  The decrease was due to rearranging the sales force structure in July 2008 and changed two salaried sales staff to sales representatives.   Their commission was paid to an affiliated company which agreed to rehire them as their sales staff.  Commission was payable at 2.8% of net sales in the US territory.

Our general and administrative expenses decreased by 34.7% for the three months ended December 31, 2008 compared with the same period in 2007.  We reduced our expenses in travel, rent, insurance and professional fees as a result of new measures to reduce our costs and these reductions were partially offset by a write off of bad debt expense of $130,373.

11

Selling and delivery expenses increased by 35% for the three months ended December 31, 2008 compared with corresponding quarter in 2007.   The major increase was in providing advertising allowances to retail stores and commissions we paid to an affiliated company in lieu of hiring permanent sales staff.    We have entered into a fixed fee agreement with our affiliated company to use its warehouse for storage and order fulfillment in the US.  The fee is fixed at $455,000 per annum renewable and renegotiated every twelve months.  We commenced the new warehouse service in August 2008.

Financial:

Interest and finance charges decreased by $7,951 for the three months ended December 31, 2008 compared with the same quarter in 2007.   The decrease was due to reduction in Letter of Credit facility charges in the direct import activities.

Net Earnings:

The net loss for the three months ended December 31, 2008 was $1,327,495 compared with a loss of $272,374 in the corresponding period in 2007.  The decline was attributable to a reduced gross profit margin and a significant foreign exchange loss.

Foreign exchange:

For the three months ended December 31, 2008, the value of the Canadian dollar decreased sharply compared to the US dollar.  As a result, the Company incurred a foreign exchange loss of $695,206 because our Canadian subsidiary holds liabilities repayable to Starlight, the parent company and other vendors, which are repayable in US dollars.  The total foreign exchange loss for the nine months ended December 31, 2008 was $816,135.

12

Liquidity and Capital Resources

During the nine months ended December 31, 2008, net cash provided in operating activities was $1,912,513.  The main source of our working capital during this quarter came from financing from our vendors, mostly our parent company for goods supplied on open credit.  Trade receivables and inventories during the current quarter increased mainly because of the increase of domestic sales in Canada and in US.  The ratio of current assets to current liabilities was 1.05 to 1, as compared to 1.25 to 1 on March 31, 2008.  Our ratio of current assets to current liabilities deteriorated because our customers were paying us slower due to the current tight credit condition and our suppliers demanded shorter terms of repayment.  We expect the current trend is temporary and we will monitor our liquidity closely in the next quarter.  We 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.  In effect, the 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.

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.

13

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 average cost.  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.

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.

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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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material changes in the Company’s market risk during the third fiscal quarter ended December 31, 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 February 14 2009, 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 December 31, 2008, our inventory was valued at $11 million. If these sources do not provide us with adequate financing, we will be seeking financing from our parent company suppliers.  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 CD players, DVD players and television sets 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 with 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 competitors 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 or incurring significant obsolescence costs .

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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.  We expect that our gross profit margin might decrease under downward pressure in fiscal 2009 but we are also putting pressure on our manufacturers to lower their production costs.  During the current quarter, we have had some success in our manufacturers lowering their costs.

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 portion of our sales occur during the second quarter ended September 30 and the third quarter ended December 31.  Combined sales in our second and third quarter of our 2009 fiscal year account for approximately 64% of total sales.

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.

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 in 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, LA 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.

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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 2009.  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 products.  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.

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

This significant customer accounts for approximately 75% of Cosmo’s sales in the current 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.

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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 and 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:	February 17, 2009
By:	/s/ Carol Atkinson
	Name: Carol Atkinson Title: Chief Financial Officer
Date:	February 17, 2009

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