Cosmo Communications (CSMO) 10-Q 2010 Q4 Quarterly report

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, 2010

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 11, 2011

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- 7
Item 2.	Management’s Discussion & Analysis of Financial Condition and Results of Operations	8 - 15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	16
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 AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,			March 31,
	2010			2010
	(Unaudited)			(Audited)
ASSETS
Current Assets:
Cash	$	916,122		$	635,516
Accounts receivable (net of allowance of $199,234 and $187,321, respectively)		2,279,824			2,259,969
Inventories (net of allowance of $601,271 and $1,103,360, respectively)		4,808,563			6,682,679
Prepaid expenses and deposits		17,250			11,259
Total Current Assets		8,021,759			9,589,423
Equipment and Other Assets:
Equipment, net of depreciation		4,211			15,367
Deferred taxes		8,317			8,317
Taxes recoverable		25,210			-
Total Equipment and Other Assets		37,738			23,684
Total Assets	$	8,059,497		$	9,613,107
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable	$	159,081		$	113,829
Accrued liabilities		364,729			483,728
Accounts payable to parent company		8,160,175			9,132,241
Interest payable to parent company		604,627			604,627
Taxes payable		-			82,905
Total Current Liabilities		9,288,612			10,417,330
Stockholders’ Deficit:
Preferred stock, $0.01 par value, cumulative and convertible, 30,000 shares authorized		-			-
Preferred stock, $0.01 par value, 9,970,000 shares authorized		-			-
Authorized, 40,467,636 shares issued and outstanding		2,023,382			2,023,382
Additional paid-in capital		27,704,592			27,704,592
Accumulated other comprehensive income		319,075			306,205
Accumulated deficit		(31,276,164	)		(30,838,402	)
Total Stockholders' Deficit		(1,229,115	)		(804,223	)
Total Liabilities and Stockholders' Deficit	$	8,059,497		$	9,613,107

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

1

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31

(Unaudited)

	2010			2009
Sales	$	6,877,240		$	5,754,648
Cost of products sold		5,539,942			5,149,490
Gross profit		1,337,298			605,158
Commission income		3,095			31,382
		1,340,393			636,540
Expenses:
Selling and delivery		689,808			475,865
Salaries and wages		354,090			318,589
General and administrative		189,808			188,481
Gain on foreign exchange		(105,325	)		(65,999	)
Financial		2,856			2,043
Depreciation		3,719			3,719
		1,134,956			922,698
Net income (loss) before income taxes		205,437			(286,158	)
Current income taxes		-			(844	)
Net income (loss)	$	205,437		$	(287,002	)
Foreign currency translation adjustment		67,005			(190,156	)
Comprehensive income (loss)		272,442			(477,158	)
Net income (loss)  per common share:
Basic and diluted	$	0.01		$	(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 AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 31

(Unaudited)

	2010			2009
Sales	$	14,109,037		$	13,470,758
Cost of products sold		11,913,301			11,913,124
Gross profit		2,195,736			1,557,634
Commission income		29,785			75,406
		2,225,521			1,633,040
Expenses:
Selling and delivery		1,243,933			1,153,296
Salaries and wages		865,464			822,813
General and administrative		532,372			515,590
Loss on foreign exchange		(824	)		(271,991	)
Financial		10,370			9,718
Depreciation		11,156			11,156
		2,662,471			2,240,582
Net loss before income taxes		(436,950	)		(607,542	)
Income taxes (recovery)		812			(9,047	)
Net loss	$	(437,762	)	$	(598,495	)
Foreign currency translation adjustment		12,870			(598,586	)
Comprehensive loss		(424,892	)		(12,909	)
Net loss per weighted number of shares outstanding:
Basic and diluted	$	(0.01	)	$	(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.

3

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31

 (Unaudited)

	2010			2009
Cash Flows from Operating Activities:
Net loss	$	(437,762	)	$	(598,495	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation		11,156			11,156
		(426,606	)		(587,339	)
Changes in operating assets and liabilities:
Accounts receivable		(19,855	)		(859,801	)
Inventories		1,874,116			1,668,600
Prepaid expenses and deposits		(5,991	)		(2,421	)
Accounts payable and accrued liabilities		(73,747	)		28,824
Taxes payable		(108,115	)		31,245
Accounts payable to parent company		(972,066	)		(649,690	)
Net cash provided by (used in) operating activities		267,736			(370,582	)
Effect of foreign currency translation		12,870			585,586
Net decrease in cash		280,606			215,004
Cash - beginning of period		635,516			444,410
Cash - end of period	$	916,122		$	659,414

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

4

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, the 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 month and nine months periods ended December 31, 2010 are not necessarily indicative of the results that may be expected for the year ending March 31, 2011. 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, 2010.

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.

Concentration of Credit Risk

The Company has cash in bank accounts that, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts.

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, 2010, the Company provided reserves for doubtful accounts receivable in the amount of $199,234 (March 31, 2010 - $187,321); provided inventory reserves for estimated obsolescence for $601,271 (March 31, 2010 - $1,103,360); and provided reserves for defective inventory returns of $210,101 (March 31, 2010 - $257,569).

5

Fair Value of Financial Instruments

The Company's financial instruments include cash, accounts receivable, accounts payable, 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, 2010 and March 31, 2010, the carrying amounts of cash, accounts receivable, accounts payable, and advances from the parent company 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 three months ended December 31, 2010 and 2009.

EQUIPMENT

The components of equipment are as follows:

	Cost		Accumulated Depreciation			Net Dec 31, 2010		Net March 31, 2010
Furniture and fixtures	$	42,462	$	(42,367	)	$	95	$	927
Equipment		31,858		(31,700	)		158		891
Computer		53,295		(51,249	)		2,046		5,643
Warehouse equipment		68,575		(66,663	)		1,912		7,906
	$	196,190	$	(188,261	)	$	4,211	$	15,367

AMOUNTS PAYABLE TO PARENT COMPANY

As of December 31, 2010, the Company owed $8,764,802 (March 31, 2010 - $9,736,868) to The Starlight Group of Companies, the principal corporate shareholder of the Company ("Starlight").  Of this amount $8,160,175 (March 31, 2010- $9,132,241) was owed in the form of trade payable and the remainder was interest on prior advances.  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, 2010 was $604,627 (March 31, 2010 - $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, 2010 were:

2011 (Three months)		86,399
2012		345,596
2013		348,368
2014		175,570
	$	955,933

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, 2010, the Company purchased $11,659.587 (nine months ended December 31, 2009 - $10,472,667) of goods from Starlight.  The Company also purchased a net value of $1,890,127 of goods from Singing Machine Company, a subsidiary company of our Parent Company for the three months ended December 31, 2010.

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 23% of sales for the nine months ended December 31, 2010 and 54% for the nine months ended December 31, 2010.  The Company has gradually reduced its economic dependence on this customer to avoid significant adverse results to the financial position of the Company on the loss of this account.

As of December 31, 2010, the accounts receivable from this customer amounted to approximately $617,899 (March 31, 2010 - $853,080) and claims payable for inventory returns amounted to approximately $20,426 (March 31, 2010 - $12,076).

7

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, 2010
Assets		7,165,931			44,475			849,091			8,059,497
Nine Months Ended December 31, 2010
Sales, net		12,365,582			954,726			788,730			14,109,037
Gross margin		2,046,491			98,417			50,828			2,195,736
Net loss		315,980			57,304			64,478			437,762
March 31, 2010
Assets		7,036,473			606,215			1,970,419			9,613,107
Nine Months Ended December 31, 2009
Sales, net		11,287,004			747,364			1,436,390			13,470,758
Gross margin		1,422,840			65,620			69,174			1,557,634
Net loss		(249,603	)		(49,867	)		(299,025	)		(598,495	)

SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended December 31, 2010 the Company paid interest of $10,370 (nine months ended December 31, 2009 - $9,718) and paid $125,729 in income taxes (nine months ended December 31, 2009 –$9,718.

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, 2010.

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, 2010 (“2010”) and For the Quarter Ended December 31, 2009 (“2009”)

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, 2010 and 2009.

	Three months ended			Three months ended			Nine months ended			Nine months ended			Three months ended			Three months ended
	December 31, 2010			December 31, 2009			December 31, 2010			December 31, 2009			June 30, 2010			June 30, 2009
Sales		100	%		100	%		100	%		100	%		100	%		100	%
Cost of products sold		80.6	%		89.5	%		84.5	%		88.5	%		89.5	%		88.6	%
Gross profit		19.4	%		10.5	%		15.5	%		11.5	%		10.5	%		11.4	%
Commission income		-			0.6	%		0.2	%		0.6	%		0.7	%		0.7	%
Expenses:
Salaries and wages		5.1	%		5.5	%		6.1	%		6.1	%		7.6	%		7.6	%
General and administrative		2.7	%		3.3	%		3.7	%		3.8	%		5.3	%		5	%
Selling and delivery		10	%		8.3	%		8.8	%		8.6	%		7.5	%		12	%
Financial		-			0.1	%		-			0.1	%		0.1	%		0.1	%
(Gain) loss on foreign exchange		(1.5	)%		(1.2	)%		-			(2.0	)%		3.4	%		(3.9	)%
Depreciation		0.1	%		0.1	%		0.1	%		0.1	%		0.1	%		0.1	%
Net loss before income tax		2.9	%		(5.0	)%		(3.0	)%		(4.5	)%		(12.9	)%		(8.8	)%
Income tax (recovery) expense		-			-			-			-			-			(0.3	)%
Net loss		2.9	%		(5.0	)%		(3.0	)%		(4.5	)%		(12.9	)%		(8.5	)%

10

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

Three months ended December 31, 2010 compared with three months ended December 31, 2009.

Net Sales:

Sales for the three months ended December 31, 2010 increased by approximately $1.1 million or 19.5% compared to the corresponding period in 2009.  The increase was a timing difference carried from the September quarter of 2010.  Due to severe labor shortages in Southern China, goods that would normally be shipped in September were delayed until October in the current quarter.   After the timing difference was removed, we recorded a moderate increase of $235,336 or 3.4%.  The net increase came from introducing a new line of karaoke products in the holiday season.

Cost of Sales and Gross Margin:

Gross margin was 19.4% for the three months ended December 31, 2010 as compared to 10.5% for the same period in 2009.   Average gross profit margin improved because we began selling a new line of karaoke products to replace the loss of DVD players in 2009.   We achieved a higher profit margin in new products whilst the DVD players have a very low profit margin.

Commission Income:

Commission income decreased by $28,287 for the three months ended December 31, 2010 compared to the corresponding period in 2009.  We are handling less defective returns from TV manufacturers on a commission basis.  Rather, we have negotiated to buy the defective returns from the manufacturers, refurbish the goods in house and sell the refurbished goods to our customers.  The revenue from the sale of refurbished goods for the current three months was $406,064 and is included with sales in the current quarter.

Selling, General and Administrative Expenses:

Selling expenses increased by $213,943 mainly because of advertising allowances provided to a new customer. The allowance provided ranged from 2% - 7% on sales.  Our salaries, general and administrative expenses increased by $36,828 for the three months ended December 31, 2010 compared with the same period in 2009.

11

Financial:

There was no major change in our financial costs in the two periods in comparison.

Net Earnings:

Net income for the three months ended December 31, 2010 was $205,437 compared with a net loss of $287,002 in the corresponding period in 2009.  The improvement was due to an increase in sales and a higher gross profit margin on the turnover.

Foreign exchange:

For the three months ended December 31, 2010, we made a gain of $105,325 in foreign exchange as compared with a gain of $65,999 in 2009.  Our Canadian subsidiary has liabilities due to our parent company which are dominated in US dollars.  With the decrease in the value of the US dollar as compared to the Canadian dollar, we realized a foreign exchange gain of $105,325 in the current quarter.

Nine months ended December 31, 2010 compared with nine months ended December 31, 2009.

Net Sales:

Sales for the nine months ended December 31, 2010 increased by $638,279 compared with the same period in 2009.   The increase was caused by a timing effect due to labor shortages in Southern China. Goods that would have normally been shipped in September were delayed until October in the current year.

Cost of Sales and Gross Margin:

Gross margin was 15.5% for the nine months ended December 31, 2010 compared with 11.5% in 2009.  The sales mix in the current quarter changed from a concentration in DVD players to audio karaoke products.  The change in sales mix accounted for the improvement in gross profit margin during the two periods in comparison.

Commission Income:

Commission income decreased by $45,621 for the current nine months compared with 2009.  The decrease was from reverse logistic income related to the handling of defective returns for third party manufacturers. We negotiated to buy the defective returns from the third party manufacturers, refurbished the goods in house and sold the refurbished goods to the second tier outlets.  Revenue from the sales was $936,538 and is included with sales .

Selling, General and Administrative Expenses:

Selling and delivery expenses increased by $90,637 for the nine months ended December 31, 2010.  The increase was due to an increase in advertising allowances provided to new customers in this period compared with 2009.

Salaries, general and administrative expenses increased by $59,383 during this period.  The increase was mainly due to an increase in warranty repairs.

Financial:

There was no major change in our financial costs in the two periods in comparison.

 

12

Net Earnings:

Net loss for the nine months ended December 31, 2010 was $437,762 compared with a net loss of $598,495 in 2009.  The improvement in net loss was due mainly to an increase in sales and a higher average gross profit margin of the sales mix.

Foreign exchange:

We recorded an exchange gain of $824 compared with a gain of $271,991 in 2009.  The exchange rates of the Canadian dollar against the US dollar have been volatile in the two periods in comparison.

Liquidity and Capital Resources

During the nine months ended December 31, 2010, net cash provided by operating activities was $267,736.  The main source of our working capital during this period came from reducing our inventory.   The ratio of current assets to current liabilities was 0.86 to 1, as compared to 0.92 to 1 on March 31, 2010.

There have been no cash flows from investing and financing activities for the nine months ended December 31, 2010 and we have no planned investing or financing activities.

We expect our factories will continue to provide credits to us and that Starlight will not demand immediate repayment of current liabilities and will provide financing to us if we require additional short term working capital.

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:

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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 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 Accounting Standards Codification “ASC” 830 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 ASC 830, 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 ASC 740, 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 first fiscal quarter ended September 30, 2010.  For additional information, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

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 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 11, 2011
By:	/s/ Carol Atkinson
	Name: Carol Atkinson Title: Chief Financial Officer
Date: February 11, 2011

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