Attached files
file | filename |
---|---|
EX-32.2 - COSMO COMMUNICATIONS CORP | v189456_ex32-2.htm |
EX-31.1 - COSMO COMMUNICATIONS CORP | v189456_ex31-1.htm |
EX-32.1 - COSMO COMMUNICATIONS CORP | v189456_ex32-1.htm |
EX-31.2 - COSMO COMMUNICATIONS CORP | v189456_ex31-2.htm |
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED MARCH 31, 2010
Commission
File Number 119698
COSMO
COMMUNICATIONS
CORPORATON
(Exact name of Registrant as
Specified in Its Charter)
FLORIDA
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
59-2268025
(IRS
Employer
Identification
No.)
|
Unit
2 – 55 Travail Road
Markham,
Ontario, Canada
(905) 209-0488
(Address and Telephone Number of
Principal Executive Offices)
Securities Registered Pursuant to
Section 12(b) of the Act:
Common
Stock, $.05 Par Value Per Share
Securities Registered Pursuant to
Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant of
Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark if the disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company,” in Rule 12b-2 of the Exchange Act):
Large
accelerated filler ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company þ
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule 12b-2) Yes ¨ No þ
The
aggregate market value of the Registrant's voting stock held by non-affiliates
was undetermined as there have been no quotes on the bid and ask price of the
registrant’s common stock. There were 40,467,636 shares of Common Stock
issued and outstanding as of June 29, 2010.
COSMO
COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED MARCH 31, 2010
Forward-Looking
Statements and Risk Factors
We make forward-looking statements
in this report including, without limitation, statements concerning the future
of our industry, product development, business strategy, continued acceptance and growth of our
products, dependence on significant customers and suppliers, and the adequacy of
our available cash resources. Statements may contain projections of results of
operations or of financial condition. These statements may be identified by the use of
forward-looking terminology such as “may,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue” or other similar
words.
Forward-looking statements are
subject to many risks and uncertainties. We caution you not to place
undue reliance on these
forward-looking statements, which speak only as at the date on which they are
made. Actual results may differ materially from those described in these
forward-looking statements. We disclaim any obligation or undertaking to update
these forward-looking statements to
reflect changes in our expectations or changes in events, conditions, or
circumstances on which our expectations are based.
When considering
our forward-looking statements, you should keep in mind the risk factors and
other cautionary
statements identified in this report. The risk factors noted throughout this
Annual
Report,
particularly in the discussion in Item 1A, and other risk factors that
Cosmo has not
anticipated or discussed, could cause our actual results to differ significantly
from those anticipated in our forward-looking statements.
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. We contract for the manufacture of all electronic equipment
products with factories located in China. We market certain lines of
our products under labels that we have distribution agreements
with. We also sell products under private labels for our major
customer.
During
our early years of operations, the products we sold were principally that of
quartz and digital clocks, and radio cassette players. In the 90’s,
we began marketing Compact Disc (“CD”) equipment, cordless telephones and small
screen televisions.
In April
2000, we entered into a Stock Purchase Agreement pursuant to which we offered
shares of common stock representing 84.89% of the outstanding common stock to
Master Light Enterprise Limited. (“Master Light”), a subsidiary of Starlight
International Limited (“Starlight”), a publicly held company traded on the Hong
Kong Stock Exchange, for $1 million. Pursuant to an amendment to the
Stock Purchase Agreement, in January 2001, the transactions contemplated by the
Stock Purchase Agreement, as amended, were consummated and, after rescinding the
purchase of 1,347,420 shares, Master Light acquired 26,585,008 of our common
stock shares, representing 93.8% of our currently issued and outstanding common
stock. In September, 2001, additional financing from Starlight
allowed us to discharge all our obligations to our financial institution
lenders. Starlight owns and operates a number of subsidiaries
globally. Its principal activity is in the manufacture, sale and
distribution of consumer electronic products.
Our
principal executive office is located in Ontario, Canada with warehouse
facilities located in Ontario, Canada and California, USA.
Since
2001, our common stock shares have not traded on the OTC Bulletin
Board. As used herein, the “Company”, "Cosmo," "we," us" and similar
terms include Cosmo Communications Corporation, and its subsidiaries, Cosmo
Communications Corporation Canada Inc., Cosmo Communications Corporation (HK)
Limited and Cosmo Communication USA Corp. unless the context indicates
otherwise.
Product
Lines
We market
and distribute an assortment of video products including DVD/TV combination
units in both CRT’s and LCD’s with retails ranging from $99 – $299. In addition
to the TV line up we also market a variety of DVD players both portable with TFT
screens and stand alone players, retail pricing ranging from
$25-$99.
We market
and distribute a variety of MP3 and MP4 players with a memory size of 1GB – 4GB
capacity. Retail prices have ranged from $30 - $89.
Cosmo’s
Brands
Cosmo
marketing and product development efforts are designed to enhance its brand
images and generate increased loyalty among its consumers in each market segment
and among the retailers who sell Cosmo products. Cosmo markets its products
under the following primary brands:
·
|
Cosmo. Initially, we
established Cosmo brand name for clocks and digital alarm
clocks. We will keep this brand name for this product category
to capitalize on brand recognition. This category represents 7% of our
total sales.
|
·
|
Audiologic. The
Audiologic brand offers a range of radios, CD players, telephones, clock
radios, portable boom boxes and multiple CD music systems. These items
represent 6% of total sales.
|
·
|
Digital Lab: Digital
Lab is an upgraded line up from the audio category including clock
radio’s, MP3 players and audio products with Ipod connectivity. Digital
Lab accounted for 8% of total
sales.
|
·
|
Diamond Brand. Cosmo
introduced Diamond Vision and Diamond Sound as a new brand at the end of
the 2005 fiscal year for DVD players. We have since added to this line
Televisions, portable DVD players and MP3 Players. These items represent
5% of the total sales of the
group.
|
·
|
Disney. This is a licensed brand name of
Disney Enterprises, Inc. The licensed electronics products
include television, DVD players, CD players, and radio alarm
clocks. These items represent 10% of the total sales of the
group.
|
·
|
Digitec. We offered Digitec brand for our
LCD TV and DVD players. This brand represents 11% of the group
sales.
|
·
|
Llyods. We offered Llyods brand for our
LCD TV and DVD players, portable DVD players and some audio clock radio
products. This brand represents 10% of the group
sales.
|
We also
build products under the private label of our customers. The category
represents 26% of the Company’s sales.
Strategy for Cosmo’s
Brands
Cosmo’s
goal is to develop, distribute, market and sell consumer electronic audio and
video equipment, accessories and clocks of well recognized and respected brands
to customers around the world. Cosmo’s strategy is intended to
enhance and reinforce Cosmo’s global brand images among consumers and retailers.
Key elements of Cosmo’s strategy are to:
|
•
|
Continue
to introduce new and technologically innovative products that embody
distinctive Cosmo qualities; style and new
features;
|
|
•
|
Expand
the current product lines by adding new features LCD and Plasma TV’s, MP4
player and IPOD docking unit;
|
|
•
|
Expand
Cosmo’s distribution with new and existing
customers;
|
|
•
|
Continue
the penetration into the US market and expand focus in the brand name
products
|
Cosmo Products
Percent
of Sales by Product Class
Cosmo
sales since 2006 were divided among Cosmo’s principal product classes as shown
in the following table:
Year Ended March 31,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Product
Class:
|
%
|
%
|
%
|
%
|
%
|
|||||||||||||||
MP3
Players
|
- | 5 | 7 | 12 | 7 | |||||||||||||||
Other
Audio (1)
|
30 | 28 | 36 | 27 | 29 | |||||||||||||||
Video
(2)
|
61 | 59 | 48 | 58 | 62 | |||||||||||||||
Clocks
|
8 | 7 | 8 | 2 | 2 | |||||||||||||||
Tools
|
1 | 1 | 1 | 1 | - | |||||||||||||||
Total
|
100.0 | % | 100.0 | % | 100 | % | 100 | % | 100 | % |
(1)
Includes boom boxes, CD players, IPOD docking system
(2)
Includes digital photo frames, DVD players, LCD TV, portable DVD and TV/DVD
combo
Financial
information about geographic segments may be found in Note 12 of the Notes
to Consolidated Financial Statements of this
Form 10-K.
New
Products
Cosmo
introduces new products and enhances its existing products on a regular
basis. During fiscal 2010 we have not brought in new products
but will introduce large size LCD TV’s during fiscal 2011.
Sales,
Marketing and Distribution
Cosmo
endeavors to have its brands project images that appeal to consumers who
appreciate quality and value. Cosmo products are promoted with advertisements in
the various flyers of the companies that sell its products including Wal-Mart,
Home Hardware, Best Buy, Loblaws, Hart Department Stores, Bargain Shop,
etc.
We also
market our products at various trade shows each year. We regularly
attend the following trade shows and conventions: the Consumer Electronics Show
each January in Las Vegas; the Hardware Shop in Los Angeles and the Hong Kong
Electronics Show each October in Hong Kong.
Our
products are sold in United States, Canada and to selective customers in other
parts of the world, primarily through mass merchandisers, department stores,
electronic stores, chains, and specialty stores. Our products are currently sold
in such stores as Wal-Mart (Canada), Super-Stores, Home Hardware, Bargain Shop
and Toys “R” Us (Canada). In fiscal 2010, approximately 90% of
our sales were to the customers within Canada and 10% of sales were to the
customers in USA. Sales are handled by our in-house sales team and
our independent sales representatives. Our independent sales representatives are
paid a commission based upon sales in their respective
territories. The sales representative agreements are generally one
year agreements, which automatically renew on an annual basis, unless terminated
by either party on 30 days' notice. During the fiscal year March 31,
2010, we worked with two independent sales representatives in
Canada.
Sales
As a
percentage of total revenues, our net sales in the aggregate to our five largest
customers during the fiscal years ended March 31, 2010, and 2009 were
approximately 87% and 91%, respectively.
Although
we have long-established relationships with all of our customers, we do not have
contractual arrangements with any of them. A decrease in business from any of
our major customers could have a material adverse effect on our results of
operations and financial condition.
Geographic
Distribution of Sales
Cosmo’s
sales to external customers by geographic region were as
follows:
Years Ended March 31,
|
||||||||||||||||||||||||
Region
|
2006
|
2007
|
2008
|
2009
|
2010
|
2010
|
||||||||||||||||||
%
|
||||||||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
USA
|
- | 13,350 | 16,568 | 13,721 | 1,580 | 9.7 | % | |||||||||||||||||
Canada
|
$ | 49,743 | 42,384 | 17,891 | 14,293 | 14,785 | 90.3 | % | ||||||||||||||||
Europe
|
920 | 113 | - | - | - | - | ||||||||||||||||||
Others
|
348
|
440
|
362 | 1,449 | - | - | ||||||||||||||||||
Total
sales
|
$ | 51,011 | $ | 56,287 | 34,821 | 29,463 | 16,365 | 100 | % |
Returns
Returns
of electronic products by our customers are generally not permitted except in
approved situations involving quality defects, damaged goods, or goods shipped
in error. Our policy is to give credit to our customers for their
returns, in these approved situations only. Our total returns
represented 9% and 3% of our net sales in fiscal 2010 and 2009,
respectively.
We have
an ongoing arrangement with Starlight, the Company’s parent, to refurbish our
defective products, which are manufactured by Starlight’s factory. We
do not have return privileges with the other five factories we work
with. Starlight does not charge us refurbishment
cost. Outside factories will generally charge 25% to 30% of the
original cost to refurbish our products. We assessed each return
product manufactured by the outside factories before we made decisions to repair
or to sell as is. Our policy is to mark down the book value of
defective returns produced by the outside factories as they are received back in
our warehouse. Management periodically reviews the value of returned
and refurbished goods on hand and adjusts the cost of such inventory after
analyzing factors such as economic circumstances, product technology
obsolescence and declines in retail sales prices. Provisions are
recognized against returned and refurbished goods to reflect these adjusted
values.
Distribution
We
distribute our products to retailers and wholesale distributors through two
methods: shipment of products from inventory held at our warehouse facility in
Canada and USA (domestic sales), and shipments directly through our Hong Kong
subsidiary (direct sales). Domestic sales are made to customers
located throughout USA and Canada from inventories maintained at our warehouse
facilities. In the fiscal year ended March 31, 2010, approximately
92% of our sales were sales from our domestic warehouses ("Domestic Sales") and
8% were sales shipped directly from China ("Direct Sales").
Domestic Sales. Our strategy
of selling products from a domestic warehouse enables us to provide timely
delivery and serve as a domestic supplier of imported goods. We
purchase products overseas from certain factories in China for our own account,
and warehouse the products in leased facilities in USA and in
Canada. We are responsible for the costs of shipping, insurance,
customs clearance, duties, storage and distribution related to such products
and, therefore, domestic sales command higher sales prices than direct
sales. We generally sell from our own inventory in less than
container-sized lots.
Direct Sales. We ship some of
our products directly to customers from China through our subsidiary in Hong
Kong. Sales made through our subsidiary are completed by either
delivering products to the customers' common carriers at the shipping point or
by shipping the products to the customers' distribution centers, warehouses, or
stores. Direct sales are made in larger quantities (generally
container sized lots), who pay our subsidiary pursuant to irrevocable,
transferable letters of credit or on open account.
Manufacturing
and Production
Our
products are manufactured and assembled by third parties pursuant to design
specifications provided by us. Currently, substantially all of our
video and CD products are manufactured by Starlight’s factory located in
Guangdong Province in the People’s Republic of China (PRC). We also
have ongoing relationships with five factories, located in the southern
provinces of the PRC. For fiscal 2011, we anticipate that majority of
our products will be produced by Starlight’s factory. We believe that the
manufacturing capacity of our factories is adequate to meet the demands for our
products in fiscal year 2011. However, if Starlight’s primary factory in China
was prevented from manufacturing and delivering our products, our operation
would be severely disrupted (see Item 1A – Risk Factors). Our
products are manufactured using molds and certain other tooling owned by
Starlight and our other factories. Our products contain electronic
components manufactured by other companies such as Sanyo, Toshiba, Hitachi and
National Semiconductor. Our manufacturers purchase and install these
electronic components in our products under our specifications.
While our
equipment manufacturers purchase our supplies from a small number of large
suppliers, all of the electronic components and raw materials used by us are
available from several sources of supply, and we do not anticipate that the loss
of any single supplier would have a material long-term adverse effect on our
business, operations, or financial condition. To ensure that high
standards of product quality and on-time shipping schedules, we utilize
independent contractors as our representatives. These contractors
include product inspectors who are knowledgeable about product specifications
and work closely with the factories to verify that such specifications are
met. Additionally, our key personnel frequently visit our factories
for quality assurance and to maintain good working relationships.
All of
the electronic equipment sold by us is warranted to the end user against
manufacturing defects for a period of ninety (90) days for labor and
parts. During the fiscal years ended March 31, 2010 and 2009,
warranty claims have not been material to our results of
operations.
Cosmo
believes that its sources and supplies of finished goods, components and other
materials are adequate for its needs. Cosmo has not experienced a
significant inability to obtain necessary finished goods, components or other
materials.
Reverse
Logistic Operations
We have
an arrangement with certain manufacturers that distribute television sets and
DVD players in Canada to handle customer returns for them. Our
warehouse facility in Canada has the capacity to handle a high volume of
defective products. We charge the manufacturers a fee on a per piece
basis or a percentage based on the retail sales value of the merchandise and
reported this as commission and other income. Our agreement with
these manufacturers to handle their returns is on an on-going and mutually
agreed basis with no expiration date.
Commission
Revenues
received from the reverse logistic operations are treated as commission income.
Besides handling the defective returns, we also sell the returns on behalf of
our logistic customers.
License
Agreements
The
license agreement with Disney Enterprises, Inc. is between Starlight
International and Disney. We are not obligated to pay license fees to
Disney.
Competition
Our
business is highly competitive since we compete mainly in the basic entry level
category of our audio and video products. We believe that competition
for our products is based primarily on price, product features, reputation,
delivery times, and customer support. We believe that our brand names are
recognized in the industry and help us to compete in these
categories. Our financial position depends, among other things, on
our ability to keep pace with changes and developments in the household
entertainment industry and to respond to the requirements of our
customers. Many of our competitors have significantly greater
financial, marketing, and operating resources and broader product lines than we
do.
Intellectual
Property
We have
registered “Audiologic” as our trademark in the United States and Canada and
“Diamond Vision” and “Diamond Sound” as our trade marks in Canada.
We
believe our intellectual property is adequately protected, but there are no
assurances that these rights can be successfully asserted in the future or will
not be invalidated or challenged.
Government
Regulation
Our
products must meet the safety standards imposed in various national, state,
local and provincial jurisdictions. Our products sold in Canada are designed,
manufactured and tested to meet the safety standards of Underwriters
Laboratories, Inc. ("ULE") or Electronic Testing Laboratories
("ETL"). In Europe and other foreign countries, our products are
manufactured to meet the CE marking requirements. CE marking is a mandatory
European product marking and certification system for certain designated
products. When affixed to a product and product packaging, CE marking
indicates that a particular product complies with all applicable European
product safety, health and environmental requirements within the CE marking
system. Products complying with CE marking are now accepted to be
safe in 28 European countries.
The
manufacturing operations of our foreign suppliers in China are subject to
foreign regulation. China has permanent "normal trade relations"
("NTR") status under Canadian tariff laws, which provides a favorable category
of Canadian import duties. China's NTR status became permanent on
January 1, 2002. This substantially reduces the possibility of China losing its
NTR status, which would result in increasing costs for us.
Seasonality
and Seasonal Financing
Our
business is highly seasonal, with consumers making a large percentage of
purchases of our products around the traditional holiday season in our second
and third quarter. These seasonal purchasing patterns and requisite
production lead times cause risk to our business associated with the
underproduction or overproduction of products that do not match consumer
demand. Retailers also attempt to manage their inventories more
tightly, requiring that we ship products closer to the time that retailers
expect to sell the products to consumers. These factors increase the
risk that we may not be able to meet demand for certain products at peak demand
times, or that our own inventory levels may be adversely impacted by the need to
pre-build products before orders are placed. As of March 31, 2010, we
had inventory of $6.7 million (net of reserves totaling $1,103,360) compared to
inventory of $10 million as of March 31, 2009 (net of reserves totaling
$560,846).
Our
financing of seasonal working capital during fiscal 2010 was from selling of the
inventory carried over from the prior year. We rely on credit terms
from our manufacturers to finance the purchase of new inventory. We
also have an understanding from Starlight to provide short term working funds to
purchase inventory should we require them.
For
fiscal 2011, we plan on minimum financing our inventory purchases by liquidating
our inventory and if necessary with short term working funds provided by
Starlight.
Information
Systems
Cosmo’s
information systems are designed to respond quickly to inquiries from managers,
employees, suppliers and customers. Cosmo has implemented
internet-based systems to provide accurate and timely information and allow
Cosmo’s representatives, dealers and distributors to check the status of their
orders at a secure Internet site. Cosmo has also implemented internet
systems to provide accurate and timely information to its suppliers in support
of just-in-time delivery of components to Cosmo’s manufacturing
facilities. These systems help Cosmo reduce costs by reducing
inventory requirements and for a more timely and accurate exchange of
information with our suppliers.
Backlog
We ship
our products in accordance with delivery schedules specified by our customers,
which usually request delivery within three months of the date of the
order. In the consumer electronics industry, orders are subject to
cancellation or change at any time prior to shipment. In recent
years, a trend toward just-in-time inventory practices in the consumer
electronics industry has resulted in fewer advance orders and therefore less
backlog of orders for us. We believe that backlog orders at any given
time may not accurately indicate future sales. As of March 31, 2010
we had no backlog of orders and none in the same period in fiscal
2009. Backlog orders do not take into account of any sales ordered by
customers directly from our domestic inventory with order turnaround time of one
to two weeks. We normally have to keep the minimum inventory in our
domestic warehouses for these type of sales.
Employees
As of
March 31, 2010, we employed 19 people, 18 of whom are full-time employees,
including two executive officers. Two of our employees are located at
our subsidiary in Hong Kong and 17 in Canada. Of the employees,
eight are engaged in warehousing and technical support, and nine in accounting,
marketing, sales and administrative functions. We have never had a
work stoppage and none of our employees are unionized. We believe we have good
employee relations.
RISK FACTORS THAT MAY AFFECT COSMO’S
OPERATING RESULTS, BUSINESS PROSPECTS AND STOCK PRICE
Before you buy or sell Cosmo stock,
you should be aware that there are risks, including those described below and
others Cosmo has not anticipated or discussed. You should consider
carefully these and other risk factors, together with all of the other
information included in Cosmo’s periodic filings and current reports filed with
the SEC, before you decide to buy or sell shares of Cosmo’s common
stock.
As you consider these risk factors,
Cosmo also calls your attention to Cosmo’s statements about Forward Looking
Statements and Risk Factors in Part I of this Annual
Report.
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
March 31, 2010, our cash on hand is limited. We will finance our
working capital needs from the collection of accounts receivable, and sales of
existing inventory. See "Liquidity and Capital Resources" beginning on page 22.
As of March 31, 2010, our inventory was valued at approximately $6.7 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.
As a
percentage of total revenues, our net sales to our five largest customers during
the fiscal period ended March 31, 2010 and 2009 were approximately 87% and 91%
respectively. We do not have long-term contractual arrangements with
any of our customers and they can cancel their orders at any time prior to
delivery. A substantial reduction in or termination of orders from our largest
customers would decrease our revenues and cash flow significantly.
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 operation
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 gave
advertising allowances in the amount of $452,000 during fiscal 2010 and $501,000
during fiscal 2009. 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.
Our
gross profit margins have not improved over the past years and we expect a
continued competitive market in the future.
Over the
past years our gross profit margins have not improved to our expectation due to
price competition. For fiscal 2010, we achieved an improvement in
profit margin due to the strong gain in the Canadian currency against the US
dollar. We expect that our gross profit margin might decrease under
downward pressure in fiscal 2011 due to the rise in material and labor costs in
China. Based on past experience, we expect that we can pass on some
of the price pressure to our manufacturers.
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, accounted for approximately 62% and 77% of
total sales in fiscal 2010 and 2009 respectively.
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 facilities in Los Angeles, USA and in Toronto,
Canada. 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 Los Angeles, Toronto 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 five 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 2011. 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 portable DVD 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.
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 its largest customer or significant reductions in the purchases of
Cosmo’s products would reduce sales.
Cosmo’s
largest customer accounts for 54%, 70% and 76% of Cosmo’s sales in 2010, 2009
and 2008 respectively. Cosmo anticipates that this customer will continue to
account for a significant portion of its sales for the foreseeable future but is
not obligated to any long-term purchases. It has 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. As such Cosmo is exposed to gains and
losses on foreign currency, in particular the Canadian dollar. 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.
Unresolved Staff
Comments
|
None.
Our
corporate headquarters are located in Markham, Ontario, Canada in a 35,000 sq.
ft. office and warehouse facility.
Our
subsidiary in Hong Kong shares office space with Starlight in Hong Kong from
which we oversee China based manufacturing operations. There is no
lease agreement with Starlight and we do not pay rent to Starlight for the
facility.
We
believe that our facility is well maintained, in substantial compliance with
environmental laws and regulations, and adequately covered by
insurance. We also believe that our leased facility is not unique and
could be replaced, if necessary, at the end of the term of the existing
lease.
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.
No
matters were submitted to a vote of security holders during the fourth quarter
of our 2010 fiscal year.
Market for
Registrant’s Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
Since
2001, our common stock shares have not been traded on the OTC Bulletin
Board. There were no quotes of high and low during fiscal
2010. We have 396 recorded holders of our common stock on June 29,
2010.
Dividends
Our
policy is to retain earnings and we have not declared any dividends in the
past. Any payment of cash dividends in the future will be dependent
upon the financial condition, capital requirements, earnings, contractual
restrictions and other factors considered relevant by our Board of
Directors.
Equity
Compensation Plan Information
The
Company does not have any stock option plan or 401K plan as long-term
compensation.
Recent
Sales of Unregistered Securities
None.
Selected Financial
Data
|
The
following selected consolidated financial data should be read in conjunction
with Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Continuing Operations” and Item 8, “Financial Statements and
Supplementary Data” Included elsewhere in this Annual Report. The statements of
operations data for the years ended March 31, 2010, 2009 and 2008 and the
balance sheet data at March 31, 2010, 2009 and 2008 are derived from our audited
financial statements which are included elsewhere in this Annual
Report. The statement of operations data for the year ended March 31,
2007 and 2006 and the balance sheet data at March 31, 2007 and 2006 are derived
from our audited financial statements which are not included in this Form
10-K. The historical results are not necessarily indicative of
results to be expected for future periods.
Years Ended March 31,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||||||
Consolidated
Statements of Operations:
|
||||||||||||||||||||
Net
sales
|
$ | 16,365 | $ | 29,463 | $ | 34,821 | $ | 56,287 | $ | 51,011 | ||||||||||
Cost
of products sold
|
14,806 | 27,458 | 32,915 | 53,034 | 48,157 | |||||||||||||||
Gross
profit
|
1,559 | 2,005 | 1,906 | 3,253 | 2,854 | |||||||||||||||
Other
income
|
96 | 431 | 852 | 1,566 | 1,509 | |||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
Selling
and delivery
|
1,468 | 2,012 | 1,089 | 1,677 | 1,033 | |||||||||||||||
General
and administrative
|
1,795 | 2,375 | 3,040 | 2,901 | 2,684 | |||||||||||||||
Depreciation
and amortization
|
15 | 15 | 14 | 19 | 23 | |||||||||||||||
Total
operating expenses
|
3,278 | 4,402 | 4,143 | 4,597 | 3,740 | |||||||||||||||
Operating
income (loss)
|
(1,623 | ) | (1,966 | ) | (1,385 | ) | 223 | 623 | ||||||||||||
Interest
and other expense
|
(343 | ) | 930 | 126 | 238 | 304 | ||||||||||||||
Taxes
– current and deferred
|
(9 | ) | ( 183 | ) | 329 | (164 | ) | 172 | ||||||||||||
Net
income (loss)
|
$ | (1,271 | ) | $ | (2,714 | ) | (1,840 | ) | $ | 148 | $ | 147 | ||||||||
Income
(loss) per share:
|
||||||||||||||||||||
Basic
and diluted
|
$ | (0.03 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | 0.01 | $ | 0.01 | |||||||
Weighted
average shares:
|
||||||||||||||||||||
Basic
and diluted
|
40,467 | 40,467 | 40,467 | 29,104 | 29,104 |
As
of March 31
(in
thousands)
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Cash
|
636 | $ | 444 | $ | 512 | $ | 1,112 | $ | 549 | |||||||||||
Total
assets
|
9,613 | 13,237 | 15,486 | 20,133 | 8,249 | |||||||||||||||
Total
current liabilities
|
10,417 | 13,448 | 12,287 | 15,826 | 5,989 | |||||||||||||||
Total
long-term liabilities
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Stockholders’
equity (deficit)
|
-804 | -211 | 3,199 | 4,307 | 2,260 |
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with the Financial Statements
and Notes filed herewith. Our fiscal year ends March 31. This document contains
certain forward-looking statements including, among others, regarding
anticipated trends in our financial condition and results of operations and our
business strategy. (See Part I, Item 1A, "Risk Factors"). These forward-looking
statements are based largely on our current expectations and are subject to a
number of risks and uncertainties. Actual results could differ materially from
these forward-looking statements. Important factors to consider in evaluating
such forward-looking statements include (i) changes in external factors or in
our internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully in
the marketplace.
Results of
Operations
Overview
Our
operations were adversely affected by the uncertainty in the global economy
during fiscal 2010. Many retailers curtailed their buying programs
due to the excess inventory carried from the previous year. Our sales
dropped by 45%, mainly in the Disney and youth lines. Gross profit
margin increased from 6.8% in fiscal 2009 to 9.5% in the current fiscal
year.
We have
taken steps to control our operating costs while sales were decreasing in the
fiscal year. The net decrease in operating expenses was approximately
$1.12M. Selling expenses decreased by approximately
$544,000. Salaries and wages decreased by $250,000 and $330,000
decrease in general and administration.
We
reported a currency gain of $354,000 due to the strong Canadian dollar against
the US dollar.
Fiscal
Year Ended March 31, 2010 Compared with Fiscal Year Ended March 31,
2009
Sales
Net sales
decreased by $13 million or 45% compared to prior year. The large
decrease was due to the loss of a major account in our US
subsidiary. We were successful selling to this account with our
Disney and youth products in prior years. The decrease in Disney
product demands coincided with a sharp decline in the overall toys segment in
the US, resulting in this major account withdrawing our products in fiscal
2010. Although we have tried to renew their interest recently, it is
unlikely this will happen in fiscal 2011.
We
experienced decreases in sales of MP3 players and clocks but increase in sales
of LCD TV’s and DVD players. The clocks segment was affected by a
sharp increase in the costs of the products. The retail price of
clocks increased and the cost was passed on to our customers. The
decrease in clock sales was a reflection of the resistance by consumers to pay
the higher prices. We are expecting an increase in sales of LCD
TV’s in fiscal 2011. We launched our 22” LCD TV in April 2010 and
will continue to launch larger size TV’s up to 32”.
The mix
between direct import sales and domestic warehouse sales in fiscal 2010 was 8%
to 92% compared with 16% to 84% in fiscal 2009. During weak economic
times, our retail customers were cautious not to purchase container loads of
goods with a long lead time. Despite the fact we have to sell
more goods out of our domestic warehouse, we managed to reduce our inventory
levels on hand due to careful planning and monitoring of inventory.
Gross
Profit
Gross
profit for fiscal 2010 was $1.6 million or 9.5% of revenues compared with 6.8%
in fiscal 2009. The increase in gross profit margin was mainly
attributable to a strong Canadian dollar against the US dollar throughout the
fiscal year. For sales in Canada, we purchased our products from our
suppliers in US dollars but booked the sales revenue in Canadian
dollars. When the Canadian dollar appreciated against the US dollar,
our purchase cost decreased relatively resulting in a higher profit
margin.
Commission
Income
Our
commission and other income consist of commissions earned on brokering sales and
handling return products for Starlight and another manufacturer. Commission
income decreased from approximately $431,000 in fiscal 2009 to $96,000 in this
fiscal year. The weak economy caused a general reduction in demands for goods
and services, and thus we handled less returns for our customers in our reverse
logistics operations.
Operating
Expenses
Operating
expenses for the current fiscal year decreased from approximately $4.4 million
in fiscal 2009 to $3.3 million in this fiscal year. Selling and warehousing
contributed the largest decrease of approximately $544,000. Our warehousing
expense in US was significantly decreased due to the decrease of sales and
activities in this region. Similarly, in administrative expenses we reduced
travel, phone allowances, and office rent and office expenses in our US
subsidiary which accounted for the majority of the $330,000 decreases. Salaries
and wages decreased by approximately $250,000 and the majority of this decrease
came from payroll cuts in the Canadian operation.
Financial
expenses and exchange gain
The
Canadian dollar appreciated steadily from 0.8 to one US dollar at the beginning
of this fiscal year to 0.98 at the end of the fiscal year resulting in a gain of
$354,000 for the fiscal year. In fiscal 2009, we incurred exchange loss of
$739,000. We did not purchase any forward currency contracts to hedge against
the volatility of the Canadian dollar. However, our parent company Starlight, as
our major supplier of goods, purchased forward contracts on our behalf to allow
us to repay Starlight in Canadian dollars.
Interest
expense decreased by approximately $180,000 compared with the prior fiscal year.
The decrease was due to a one time interest charge levied by the Canadian tax
authority in fiscal 2009 and a reduction in direct import sales activities
compared with the prior fiscal year.
Income
Tax Expenses
Significant
management judgment is required in developing our provisions for income taxes,
including the determination of foreign tax liabilities, deferred tax assets and
liabilities and any valuation allowances that might be required against deferred
tax assets. Management evaluates its ability to realize its deferred tax assets
on a quarterly basis and adjusts its valuation allowance when it believes that
it is not likely to be realized.
For the
fiscal year ended March 31, 2010, we recovered income tax expense in the amount
of $9,047. In the prior years a tax audit on the Canadian subsidiary was
conducted on years 2004 and 2005 and additional taxes were reassessed. Taxes
related to these audits amounted to $714,638 in fiscal 2008. The current year
tax recovery was a result of carryback of losses in the current year to prior
years. The Company does not anticipate future changes in rates and as such does
not anticipate such variances in its current or deferred taxes in subsequent
years.
We
operate within multiple taxing jurisdictions and we are subject to audit in each
jurisdiction. Because of the complex issues involved, any claims can require an
extended period of time to resolve. In management's opinion, adequate provisions
for income taxes have been made.
Fiscal
Year Ended March 31, 2009 Compared with Fiscal Year Ended March 31,
2008
Sales
Sales
Net sales
decreased by $5.4 million compared to prior year. The biggest
decrease was in the Disney line which decreased by $4.3M compared with the prior
fiscal year. The decrease in Disney demands coincided with a sharp
decline in the overall toys segment in North America during the Christmas
holiday season. The remaining decrease in sales was in the MP3
players and clocks category. The clocks segment was affected by a
sharp increase in the costs of the products. The retail price of
clocks increased and the cost was passed on to our customers. The
decrease in clock sales was a reflection of the initial resistance by consumers
to pay the higher prices. Decrease in the clocks category was $1.1M
in fiscal 2009 compared to fiscal 2008.
The mix
between direct import sales and domestic warehouse sales in fiscal 2009 was 16%
to 84% compared with 24% to 76% in fiscal 2008. During weak economic
times, our retail customers were cautious not to purchase container loads of
goods with a long lead time. As a result of this, it increased our
need to hold inventory on hand at our warehouses in order to create
sales. This however also created a longer cycle of collecting cash
from our sales.
Gross
Profit
Gross
profit for fiscal 2009 was $2 million or 6.8% of revenues compared with 5.5% in
fiscal 2008. The increase in gross profit margin was mainly
attributable to the introduction of the new youth line and an increase in the
domestic warehouse sales mix where selling prices are higher than our direct
import sales. In domestic warehouse sales we have to factor in the
carrying costs of housing and handling to inventory as well as the freight
component of delivering the goods.
Commission
Income
Our
commission and other income consist of commissions earned on brokering sales and
handling return products for Starlight and another
manufacturer. Commission income decreased from approximately
$852,000 in fiscal 2008 to $431,000 in this fiscal year. The weak economy caused
a general reduction in demands for goods and services, and thus we handled less
returns for our customers in our reverse logistics operations.
Operating
Expenses
Operating
expenses for the March 31, 2009 year increased from approximately $4.1 million
to $4.4 million in fiscal 2009. Selling and warehousing contributed
the largest increase of approximately $923,000. In the current fiscal
year, we switched the status of two sales executive from salaried staff to
commission based staff. We also incurred higher warehousing expenses
this fiscal year as Starlight, our parent company, bore the Disney products
storage and handling in fiscal 2008 and no longer picked up these expenses in
this fiscal year as the subsidy was for the first year only. We also
provided higher advertising allowances to our customers during the weak holiday
season to induce sales. In administrative expense, we made cuts in
all discretionary expenses such as travel which resulted in 12% of savings,
partially offset by an increase of approximately $175,000 in bad debts
expenses. Salaries and wages decreased by approximately $500,000 as
offset to the increase in commission expense.
Financial
expenses and exchange loss
We
incurred a large exchange loss in the third quarter of the March 31, 2009 fiscal
year. A sharp decline in exchange rates between the Canadian
and US dollars from 0.96 of one US dollar to 0.82 during the third quarter
attributed to an annual exchange loss of approximately
$739,000. While we did not purchase currency forward contracts to
hedge against the volatility of the Canadian dollar, our parent company,
Starlight purchased forward contracts to allow us to convert from Canadian
dollars to US dollar at the rates locked in the forward contracts to mitigate
the exchange loss.
Interest
expense increased by approximately $87,000 due to a re-assessment of income tax
liabilities in our Canadian subsidiary.
Income
Tax Expenses
Significant
management judgment is required in developing our provisions for income taxes,
including the determination of foreign tax liabilities, deferred tax assets and
liabilities and any valuation allowances that might be required against deferred
tax assets. Management evaluates its ability to realize its deferred
tax assets on a quarterly basis and adjusts its valuation allowance when it
believes that it is not likely to be realized.
For the
fiscal year ended March 31, 2009, we recovered income tax expense in the amount
of $183,067. A tax audit on the Canadian subsidiary was conducted on
years 2004 and 2005 and additional taxes were reassessed. Taxes
related to these audits amounted to $714,638 in fiscal 2008. The
March 31, 2009 fiscal year tax recovery was a result of carryback of losses to
prior years. The Company does not anticipate future changes in rates
and as such does not anticipate such variances in its current or deferred taxes
in subsequent years.
We
operate within multiple taxing jurisdictions and we are subject to audit in each
jurisdiction. Because of the complex issues involved, any claims can
require an extended period of time to resolve. In management's opinion, adequate
provisions for income taxes have been made.
Liquidity and Capital
Resources
On March
31, 2010, we had cash on hand of $635,516 compared to cash on hand of $444,410
on March 31, 2009. The increase of cash on hand was primarily due to
the effect of foreign currency translation. The strong Canadian
dollar during the current fiscal improved our cash flow in purchases of goods
for resale.
Cash
flows used in operating activities were $486,881 for the year ended March 31,
2010. We have reduced our receivables and inventories at year end and
we reduced our debts to our parent company.
There
have been no cash flows from investing and financing activities for the fiscal
year ended March 31, 2010.
As of
March 31, 2010 our working capital was in deficit by approximately $223,000. Our
current liabilities of $10.4 million include:
|
·
|
amount
due to Starlight resulting from normal course of the business for $9
million;
|
|
·
|
current
liabilities resulting from normal course of the business with other
factories and suppliers for $0.6
million;
|
|
·
|
advance
from Starlight for $0.6 million
|
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.
Off Balance Sheet
Arrangements
Cosmo
does not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities referred to
as structured finance or variable interest entities (VIE’s), which would be
established for the purpose of facilitating off-balance sheet arrangements. As
of March 31, 2010, Cosmo did not have any unconsolidated
VIE’s.
Contractual
Obligations as of March 31, 2010
Cosmo had
contractual obligations at March 31, 2010 as follows:
Payments
Due by Period
|
||||||||||||||||||||
Less
Than
|
More
Than
|
|||||||||||||||||||
Contractual
Obligations
|
Total
|
1 Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
|||||||||||||||
Interest
payable to related party
|
$
|
604,627
|
$
|
604,627
|
$
|
—
|
—
|
—
|
||||||||||||
Operating
leases
|
$
|
1,198,103
|
$
|
339,206
|
$
|
858,897
|
—
|
—
|
Working
Capital Requirements for the Short and Long Term
During
the next twelve month period, we plan on financing our working capital needs
from:
|
·
|
The
collection of accounts receivable;
|
|
·
|
Sales
of existing inventory; and
|
|
·
|
The
continued support of factories in China that finance our purchases of
goods for fiscal 2011.
|
Our
sources of cash for working capital in the long term are the same as our sources
for the short term. If we need additional financing for the long term
use, one of the options that we may explore in the near future is by private
offerings. However, we cannot guarantee that our financing plan will
succeed. If we need to obtain additional financing and fail to do so,
it may have a material adverse effect on our ability to meet our financial
obligations and continue our operations.
During
fiscal 2011, we will continue to control our operating costs. We
expect domestic sales will continue to expand which will improve our working
capital to finance inventory and accounts receivable.
Except
for the foregoing, we do not have any present commitment that is likely to cause
our liquidity to increase or decrease in any material way. In
addition, except for the Company's need for additional capital to finance
inventory purchases, the Company is not aware of any trend, additional demand,
event or uncertainty that will result in, or that is reasonably likely to result
in, the Company's liquidity increasing or decreasing in any material
way.
Exchange
Rates
For
direct sales, we sell our products in U.S. dollars and pay for all of our
manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of
the Hong Kong office are paid in Hong Kong dollars. The exchange rate
of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong
government since 1983 at approximately HK $7.80 to U.S. $1.00 and, accordingly,
has not represented a currency exchange risk to the U.S.
dollar. Operating expenses of our Canada office is paid in Canadian
dollars, and domestic sales are received in Canadian dollars. The
exchange rate between the Canadian dollar and US dollar can represent an
exchange risk to us. Therefore any adverse fluctuation in this
exchange rate may have a material effect on our business, financial condition or
results of operation. The overall percentage of domestic sales in
Canadian dollars is at approximately 80% of total sales. Due to the increase in
domestic sales in Canada in the current fiscal year, our parent company entered
into 28 forward exchange contracts with a total amount of $6.75 million Canadian
dollars during the fiscal year. These forward contracts enable us to pay our
trade debts to our parent company in Canadian dollars and converted these to US
dollars at the rates locked in the forward contracts.
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. Sales in our fiscal second and
third quarter, combined, accounted for approximately 62% and 77% of net sales in
fiscal 2010, and 2009, respectively.
Our
results of operations may also 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 on any price increases to 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. For fiscal 2010, the Company had significant estimates
for allowances for doubtful accounts in the amount of $187,314, allowance for
obsolete inventory reserve of $1,103,360 and sales return and allowance reserve
of $257,569.
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.
Foreign
Translation Adjustment
The
accounts of the foreign subsidiaries were translated into U.S. dollars in
accordance with the Accounting Standards Codification (“ASC”) 830, subtopic 30
- 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 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.
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.
Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in financial and commodity
market prices and interest rates. We are exposed to market risk in
the areas of changes in Canada and International borrowing rates and changes in
foreign currency exchange rates. In addition, we are exposed to
market risk in certain geographic areas that have experienced or remain
vulnerable to an economic downturn, such as China. We purchase
substantially all our inventory from companies in China and, therefore, we are
subject to the risk that such manufacturers will be unable to provide inventory
at competitive prices.
While we
believe that if such an event were to occur we would be able to find alternative
sources of inventory at competitive prices, we cannot assure you that we would
be able to do so. These exposures are directly related to our normal
operating and funding activities. Historically and as of March 31,
2010, we have not used derivative instruments or engaged in hedging activities
to minimize market risk.
Interest
Rate Risk
As of
March 31, 2010, we have borrowed from Starlight and discounted our trade bills
to obtain cash advance on our direct sales. An increase in prime rate
will increase our costs of borrowing accordingly.
Foreign
Currency Risk
We have a
wholly-owned subsidiary in USA, a wholly-owned subsidiary in Canada and a
wholly-owned subsidiary in Hong Kong. Sales by the Canadian
operations made in Canada are denominated in Canadian dollar; purchases of
inventory are denominated in US or Hong Kong dollar, and operating expenses in
Canadian dollar. The Hong Kong operating expenses are denominated in
Hong Kong dollar, sales are denominated in U.S. dollar, and purchases of
inventory are denominated in U.S. or Hong Kong dollar. These
transactions create exposures to changes in exchange rates. Changes
in the Hong Kong dollar exchange rate and Canadian dollar exchange rate with the
U.S. dollar may positively or negatively affect our gross margins, operating
income and retained earnings. We do not believe that near-term changes in the
exchange rates, if any, will result in a material effect on our future earnings,
fair values or cash flows, and therefore, we have chosen not to enter into
foreign currency hedging transactions. We cannot assure you that this approach
will be successful, especially in the event of a significant and sudden change
in the value of the Canadian and Hong Kong dollar. To mitigate the
foreign currency risk, our parent company purchased Canadian dollar forward
contracts on our behalf. In fiscal 2010, our parent company purchased
28 Canadian dollar contracts at a total amount of $6.75M.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
#
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
31
|
Consolidated
Balance Sheets as at March 31, 2010 and 2009
|
32
|
Consolidated
Statements of Loss and Comprehensive Loss for the years ended
March 31, 2010, 2009, and 2008
|
33
|
Consolidated
Statements of Stockholders’ Deficit for the years ended March 31,
2010 and 2009
|
34
|
Consolidated
Statements of Cash Flows for the years ended March 31, 2010, 2009,
and 2008
|
35
|
Notes
to the Consolidated Financial Statements
|
36
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Cosmo
Communications Corporation and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Cosmo Communications Corporation and
Subsidiaries as of 31 March 2010 and 2009 and the related consolidated
statements of loss and comprehensive loss, stockholders' deficit and cash flows
for the years ended 31 March 2010, 2009 and 2008. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance whether the
consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits includes consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our
opinion, based on our audits, such consolidated financial statements present
fairly, in all material respects, the financial position of Cosmo Communications
Corporation and Subsidiaries as of 31 March 2010 and 2009 and the results of its
operations and cash flows for the years ended 31 March 2010, 2009 and 2008, in
conformity with accounting principles generally accepted in the United States of
America.
/s/
DNTW Chartered Accountants, LLP
Licensed
Public Accountants
Markham,
Ontario, Canada
29 June
2010
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
AT 31 MARCH
(Expressed
in United States Dollars)
Note
|
2010
|
2009
|
||||||||||
ASSETS
|
||||||||||||
Current
Assets
|
||||||||||||
Cash
|
$ | 635,516 | $ | 444,410 | ||||||||
Accounts
receivable, less allowance of $187,321 and $196,426 at 31 March 2010 and
2009, respectively
|
3 | 2,259,969 | 2,551,434 | |||||||||
Inventories
|
6,682,679 | 10,187,934 | ||||||||||
Prepaid
expenses and other
|
11,259 | 15,145 | ||||||||||
Total
Current Assets
|
9,589,423 | 13,198,923 | ||||||||||
Equipment
and Other Assets
|
||||||||||||
Equipment,
net
|
4 | 15,367 | 30,241 | |||||||||
Deferred
taxes
|
5 | 8,317 | 8,317 | |||||||||
Total
Equipment and Other Assets
|
23,684 | 38,558 | ||||||||||
Total
Assets
|
$ | 9,613,107 | $ | 13,237,481 | ||||||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||||||
Current
Liabilities
|
||||||||||||
Accounts
payable and accrued liabilities
|
7 | 597,557 | 693,583 | |||||||||
Accounts
payable to parent company
|
6 | 9,132,241 | 12,098,477 | |||||||||
Taxes
payable
|
5 | 82,905 | 51,660 | |||||||||
Interest
payable to parent company
|
6 | 604,627 | 604,627 | |||||||||
Total
Liabilities
|
10,417,330 | 12,286,850 | ||||||||||
Commitments
|
8 | |||||||||||
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
|
- | - | ||||||||||
Capital
stock, $0.05 par value, 50,000,000 shares 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 (loss)
|
306,205 | (371,782 | ) | |||||||||
Accumulated
deficit
|
(30,838,402 | ) | (29,567,058 | ) | ||||||||
Total
Stockholders' Deficit
|
(804,223 | ) | (210,866 | ) | ||||||||
Total
Liabilities and Stockholders' Deficit
|
$ | 9,613,107 | $ | 13,237,481 |
The
accompanying notes are an integral part of these consolidated financial
statements.
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR
THE YEARS ENDED 31 MARCH
(Expressed
in United States Dollars)
2010
|
2009
|
2008
|
||||||||||
SALES
|
$ | 16,364,733 | $ | 29,463,154 | $ | 34,820,750 | ||||||
COST
OF PRODUCTS SOLD
|
14,806,460 | 27,458,287 | 32,915,382 | |||||||||
GROSS
PROFIT
|
1,558,273 | 2,004,867 | 1,905,368 | |||||||||
COMMISSION
INCOME
|
96,497 | 430,982 | 852,238 | |||||||||
OPERATING
EXPENSES
|
||||||||||||
Salaries
and wages
|
1,060,735 | 1,310,628 | 1,822,066 | |||||||||
General
and administrative
|
734,398 | 1,064,791 | 1,217,493 | |||||||||
Selling
and delivery
|
1,467,694 | 2,012,088 | 1,088,947 | |||||||||
Depreciation
|
14,874 | 14,874 | 14,202 | |||||||||
TOTAL
OPERATING EXPENSES
|
3,277,701 | 4,402,381 | 4,142,708 | |||||||||
LOSS
FROM OPERATIONS
|
(1,622,931 | ) | (1,966,532 | ) | (1,385,102 | ) | ||||||
Financial
|
11,800 | 191,578 | 104,916 | |||||||||
(Gain)
loss on foreign exchange
|
(354,340 | ) | 739,437 | 21,413 | ||||||||
LOSS
BEFORE INCOME TAXES
|
(1,280,391 | ) | (2,897,547 | ) | (1,511,431 | ) | ||||||
INCOME
TAX RECOVERY
|
(9,047 | ) | (183,067 | ) | (254,247 | ) | ||||||
DEFERRED
INCOME TAXES
|
- | - | (131,906 | ) | ||||||||
REASSESSMENT
OF PRIOR YEARS INCOME TAXES
|
- | - | 714,638 | |||||||||
NET
LOSS
|
$ | (1,271,344 | ) | $ | (2,714,480 | ) | $ | (1,839,916 | ) | |||
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
677,987 | (695,458 | ) | 731,681 | ||||||||
COMPREHENSIVE
LOSS
|
$ | (593,357 | ) | $ | (3,409,938 | ) | $ | (1,108,235 | ) | |||
LOSS
PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND
DILUTED
|
$ | (0.03 | ) | $ | (0.07 | ) | $ | (0.05 | ) | |||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
|
40,467,636 | 40,467,636 | 40,467,636 |
The
accompanying notes are an integral part of these consolidated financial
statements.
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR
THE YEARS ENDED 31 MARCH 2010 AND 2009
(Expressed
in United States Dollars)
Shares
|
Capital Stock
|
Additional Paid-In
Capital
|
Accumulated Other
Comprehensive Income (Loss)
|
Accumulated
Deficit
|
Total
Stockholders'
Deficit
|
|||||||||||||||||||
Balance,
1 April 2008
|
40,467,636 | 2,023,382 | 27,704,592 | 323,676 | (26,852,578 | ) | 3,199,072 | |||||||||||||||||
Foreign
currency translation
|
- | - | - | (695,458 | ) | - | (695,458 | ) | ||||||||||||||||
Net
loss for the year
|
- | - | - | - | (2,714,480 | ) | (2,714,480 | ) | ||||||||||||||||
Balance,
31 March 2009
|
40,467,636 | 2,023,382 | 27,704,592 | (371,782 | ) | (29,567,058 | ) | (210,866 | ) | |||||||||||||||
Foreign
currency translation
|
- | - | - | 677,987 | - | 677,987 | ||||||||||||||||||
Net
loss for the year
|
- | - | - | - | (1,271,344 | ) | (1,271,344 | ) | ||||||||||||||||
Balance,
31 March 2010
|
40,467,636 | $ | 2,023,382 | $ | 27,704,592 | $ | 306,205 | $ | (30,838,402 | ) | $ | (804,223 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED 31 MARCH
(Expressed
in United States Dollars)
2010
|
2009
|
2008
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
loss
|
$ | (1,271,344 | ) | $ | (2,714,480 | ) | $ | (1,839,916 | ) | |||
Adjustment
to reconcile net earnings to net cash provided by (used in) operating
activities
|
||||||||||||
Depreciation
|
14,874 | 14,874 | 14,202 | |||||||||
Deferred
income taxes
|
- | - | (131,906 | ) | ||||||||
(1,256,470 | ) | (2,699,606 | ) | (1,957,620 | ) | |||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
291,465 | 1,290,932 | 5,075,471 | |||||||||
Inventories
|
3,505,255 | 842,062 | (1,514,507 | ) | ||||||||
Prepaid
expenses and other
|
3,886 | 33,082 | (31,731 | ) | ||||||||
Accounts
payable and accrued liabilities
|
(96,026 | ) | 63,017 | (1,094,672 | ) | |||||||
Taxes
payable
|
31,245 | (260,107 | ) | 826,095 | ||||||||
Accounts
payable to parent company
|
(2,966,236 | ) | 1,358,584 | (2,632,474 | ) | |||||||
CASH
FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(486,881 | ) | 627,964 | (1,329,438 | ) | |||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Acquisition
of equipment
|
- | (268 | ) | (2,299 | ) | |||||||
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
- | (268 | ) | (2,299 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Advances
to (from) related parties
|
- | - | - | |||||||||
CASH
FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
- | - | - | |||||||||
EFFECT
OF FOREIGN CURRENCY TRANSLATION
|
677,987 | (695,458 | ) | 731,681 | ||||||||
NET
INCREASE (DECREASE) IN CASH
|
191,106 | (67,762 | ) | (600,056 | ) | |||||||
CASH,
BEGINNING OF YEAR
|
444,410 | 512,172 | 1,112,228 | |||||||||
CASH,
END OF YEAR
|
$ | 635,516 | $ | 444,410 | $ | 512,172 |
The
accompanying notes are an integral part of these consolidated financial
statements.
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED 31 MARCH 2010 AND 2009
(Expressed
in United States Dollars)
1.
|
NATURE
OF OPERATIONS
|
Cosmo
Communications Corporation and Subsidiaries (the "Company" or "Cosmo") market
and distribute consumer electronic products. The Company has
operations in the United States, Hong Kong and Canada.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
accounting policies of the Company are in accordance with accounting principles
generally accepted in the United States of America. Presented below
are those policies considered particularly significant:
Principles
of Consolidation
The
Company includes, in consolidation, its wholly owned subsidiaries, Cosmo
Communications Canada Inc., Cosmo Communications (H.K.) Limited and Cosmo
Communication USA Corp. All significant intercompany transactions and
balances have been eliminated upon consolidation.
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. For fiscal 2010, the Company had
significant estimates for allowances for doubtful accounts in the amount of
$187,321, allowance for obsolete inventory reserve of $1,103,360 and sales
return and allowance reserve of $257,569.
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.
Cost
of Products Sold
Included
in cost of sales are cost of purchases (FOB cost) and cost associated with the
import of the products. Import cost components are customs entry fees
levied by the country of import and the freight and handling cost to unload
containers.
Advertising
Allowances
The
Company followed the guidance in Accounting Standards Codification (“ASC”)
605-50, Revenue Recognition-
Customer Payments and Incentives. In accoradance with ASC
605-50, the Company is required to classify certain payments to its customers as
a reduction of sales. The Company grants advertising allowances to
its major customers as contributions to promote the Company's
products. Management has determined that the Company meets the
requirements of ASC 605-50 in order to characterize these contributions as a
cost as opposed to a reduction in revenue and accordingly these costs are
included in selling and delivery expenses.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Consolidated
Statements of Income Classifications
The
Company calculates its gross profit as the difference between its revenue and
the associated cost of products sold. Cost of products sold includes
direct product costs, inbound freight, excise taxes, casualty insurance, import
duties and broker fees, vendor allowances, and increases or decreases to the
Company’s FIFO reserve. The Company’s gross profit may not be
comparable to other entities whose shipping and handling expenses are a
component of cost of sales. Instead the Company includes these costs
in selling and delivery expenses which amounted to $960,084 (2009 -
$1,120,935).
The
Company classifies the following expense categories separately on its statements
of operations: salaries and wages; selling and delivery; and general and
administrative. The Company’s labor costs of the warehouse and office
staff are included in the salaries and wages expense category. The
Company’s selling expenses primarily include shipping and handling costs, sales
commissions, travel, entertainment, and product promotional costs. General and
administrative expenses of the Company primarily include legal costs, insurance,
rent, repairs, and general office expenses.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of commercial accounts and interest-bearing bank
deposits and are carried at cost, which approximates current
value. Items are considered to be cash equivalents if the original
maturity is three months or less.
Inventories
Inventories
are valued at the lower of cost and 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. For the year ended 31 March 2010, the
Company’s inventory reserve was $1,103,360 ($560,846 in 2009).
Trade
receivables
The
Company's accounts receivable and related allowance for doubtful accounts are
analyzed in detail on a quarterly basis and all significant customers with
delinquent balances are reviewed to determine future collectability. Reserves
are established in the quarter in which the Company makes the determination that
the account is deemed uncollectible. The Company maintains additional reserves
based on its historical bad debt experience. The provision for accounts
receivables was assessed during the years ended 31 March 2010 and 2009 as
$187,321 and $196,426, respectively.
Equipment
Equipment
is stated at historical cost less accumulated
depreciation. Depreciation, based on the estimated useful lives of
the assets, is provided using the under noted annual rates and
methods:
Furniture
and fixtures
|
20%
declining balance
|
|
Equipment
|
20%
declining balance
|
|
Computer
|
25%
declining balance
|
|
Warehouse
equipment
|
20%
declining balance
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Foreign
Translation Adjustment
The
accounts of the foreign subsidiaries were translated into U.S. dollars in
accordance with the provisions of ASC 830, Foreign Currency
Matters. Management has determined that the Hong Kong dollar
is the functional currency of the Hong Kong subsidiary, the US dollar is the
functional currency of the US subsidiary 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 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, 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. At 31
March 2010 and 2009, 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.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Comprehensive
Income
The
Company adopted ASC 220, Comprehensive Income that
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive
income is presented in the statements of changes in stockholders' equity, and
consists of net income (loss) and unrealized gains (losses) on available for
sale marketable securities, foreign currency translation adjustments and changes
in market value of future contracts that qualify as a hedge. ASC 220
requires only additional disclosures in the financial statements and does not
affect the Company's financial position or results of operations.
Earnings
or Loss Per Share
The
Company accounts for earnings per share pursuant to ASC 260, Earnings per Share, which
requires disclosure on the financial statements of "basic" and "diluted"
earnings (loss) per share. Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding plus common stock equivalents (if dilutive) related to stock
options and warrants for each year.
There
were no dilutive financial instruments for the years ended 31 March 2010 and
2009.
Valuation
of Long-Lived Assets
In
accordance with ASC 360
Property, Plant and Equipment, long-lived assets to be held and used are
analyzed for impairment whenever events or changes in circumstances indicate
that the related carrying amounts may not be recoverable. The Company
evaluates at each balance sheet date whether events and circumstances have
occurred that indicate possible impairment. If there are indications
of impairment, the Company uses future undiscounted cash flows of the related
asset or asset grouping over the remaining life in measuring whether the assets
are recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value of the asset less cost to
sell.
Concentration
of Credit Risks
The
Company is exposed to credit risk on accounts receivable from its
customers. In order to reduce its credit risk, the
Company has adopted credit policies which include the analysis of the financial
position of its customers and the regular review of their credit terms. Our five
largest customers during fiscal year 2010 made up approximately 87% o f our
total revenues (2009 – 91%).
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within Canada, United States and Hong Kong. Certain financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains cash balances at financial institutions which,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for the banks located in the United States and Canada. Balances at
financial institutions or state-owned banks within Hong Kong are not covered by
insurance. Total cash in state-owned banks and cash on hand at March 31, 2010
and 2009, amounted to $105,340 and $85,365, respectively, of which no deposits
are covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.
The
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in China, and by
the general state of the Chinese economy. The Company’s operations in China are
subject to specific considerations and significant risks not typically
associated with companies in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company’s results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Foreign
Currency Risk
Foreign
currency risk arises from fluctuations in foreign exchange rates and the degree
of volatility of these rates relative to the Canadian dollar. Consequently, some
assets, liabilities, revenues and purchases are exposed to foreign exchange
fluctuations.
Management
has determined that the Hong Kong dollar is the functional currency of the Hong
Kong subsidiary, the US dollar is the functional currency of the US subsidiary
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. The Company is therefore
exposed to currency risks due to potential variation of the currencies in which
it operates. The Company does not use derivative instruments to hedge its
foreign exchange risk.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Recent
Accounting Pronouncements
On
September 30, 2009, the Company adopted the Financial Accounting Standards
Board (“FASB”) Statement No. 168, The FASB Accounting Standards
Codification and The Hierarchy of Generally Accepted Accounting
Principles. The Codification became the source of authoritative generally
accepted accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities
Exchange Committee (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification supersedes
all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
is nonauthoritative. GAAP is not intended to be changed as a result of this
statement, but will change the way the guidance is organized and presented.
The Company has implemented the Codification in the consolidated financial
statements by providing references to the Accounting Standards Codification
(“ASC”) topics.
In April
2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-13—Compensation—Stock Compensation
(Topic 718),which addresses the classification of an employee share-based
payment award with an exercise price denominated in the currency of a market in
which the underlying equity security trades. This Update provides
amendments to Topic 718 to clarify that an employee share-based payment award
with an exercise price denominated in the currency of a market in which a
substantial portion of the entity’s equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company expects that the adoption of the amendments
in this update will not have any significant impact on its financial position
and results of operations.
In April
2010, the FASB issued ASU No. 2010-17—Revenue Recognition—Milestone Method
(Topic 605), which provide guidance on the criteria that should be met
for determining whether the milestone method of revenue recognition is
appropriate. A vendor can recognize consideration that is contingent upon
achievement of a milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered
substantive. A milestone should be considered substantive in its entirety. An
individual milestone may not be bifurcated. The amendments in this Update are
effective on a prospective basis for milestones achieved in fiscal years, and
interim periods within those years, beginning on or after June 15, 2010. The
Company expects that the adoption of the amendments in this update will not have
any significant impact on its financial position and results of
operations.
In
January 2010, the FASB issued ASU No. 2010-06—Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. This Update amends Subtopic 820-10 that requires
new disclosures about transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. This Update also amends Subtopic 820-10 to
clarify certain existing disclosures. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements, which are effective for fiscal years beginning after
December 15, 2010.
January
2010, the FASB issued ASU 2010-02, Consolidation: Accounting and
Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification. ASU 2010-02 amends the Codification to clarify that the
scope of the decrease in ownership provisions of ASC 810-10 and related guidance
applies to: (i) a subsidiary or group of assets that is a business or nonprofit
activity; (ii) a subsidiary that is a business or nonprofit activity that is
transferred to an equity method or joint venture; (iii) an exchange of a group
of assets that constitutes a business or nonprofit activity for a
non-controlling interest in an entity (including an equity-method investee or
joint venture); and (iv) a decrease in ownership in a subsidiary that is not a
business or nonprofit activity when the substance of the transaction causing the
decrease in ownership is not addressed in other authoritative guidance. If no
other guidance exists, an entity should apply the guidance in ASC 810-10. The
amendments in the update also clarify that the decrease in ownership guidance in
ASC 810-10 does not apply to sales of in-substance real estate or conveyances of
oil and gas mineral rights, even if these transfers involve businesses. We
adopted ASU 2010-02 effective 31 December 2009 and it did not have a material
effect on our current financial statements.
In
January 2010, the FASB issued ASU 2010-01, Equity: Accounting for Distributions
to Shareholders with Components of Stock and Cash. ASU 2010-01 amends the
Codification to clarify that the stock portion of a distribution to shareholders
that allows them to elect to receive cash or stock with a potential limitation
on the total amount of cash that all shareholders can elect to receive in the
aggregate is considered a share issuance that is reflected in earnings per share
prospectively and is not a stock dividend. ASU 2010-01 codifies the consensus
reached by the Emerging Issues Task Force in Issue No. 09-E, Accounting for Stock Dividends,
including Distributions to Shareholders with Components of Stock and
Cash. We adopted ASU 2010-01 effective 31 December 2009 and it did not
have a material effect on our current financial statements, however, it may have
an effect on future financial statements depending on our future
activities.
In
October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. This update addressed the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than a combined unit
and will be separated in more circumstances that under existing US GAAP. This
amendment has eliminated that residual method of allocation. Effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after 15 June 2010. Early adoption is permitted.
The Company does not expect the provisions of ASU 2009-13 to have a material
effect on the financial position, results of operations or cash flows of the
Company.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), (codified by ASU No. 2009-17 issued in December 2009).
The standard amends FIN No. 46(R) to require a company to analyze whether
its interest in a variable interest entity (“VIE”) gives it a controlling
financial interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This Statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009. Earlier application is
prohibited. Comparative disclosures will be required for periods after the
effective date. It is expected the adoption of this Statement will have no
material effect on the Company’s Consolidated
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140, (codified
by ASU No. 2009-16 issued in December 2009). SFAS No. 166 limits the
circumstances in which a financial asset should be derecognized when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” along with the exception from applying FIN
46(R), Consolidation of
Variable Interest Entities. The standard is effective for the first
annual reporting period that begins after November 15, 2009. Earlier
application is prohibited. It is expected the adoption of this Statement will
have no material effect on the Company’s Consolidated Financial
Statements.
3.
|
VALUATION
AND QUALIFYING ACCOUNTS AND
RESERVES
|
The
carrying amounts of trade accounts receivable are reduced by an allowance that
reflects management’s best estimate of the amounts that will not be
collected. Management individually reviews all accounts receivable
balances and creates an allowance for doubtful accounts based on the credit
worthiness of specific accounts and an estimate of other uncollectible accounts
based on historical performance and current economic conditions.
Allowances
for estimated returns are recorded at the estimated gross profit based upon our
historical return patterns. Sales return allowances are recorded in
accounts payable and accrued liabilities in the consolidated balance
sheets.
The
following is the activity within the Company’s consolidated valuation and
qualifying accounts and reserves for fiscal 2010 and 2009:
Balance at
Beginning of
Year
|
Additions
(Reductions)
Charged to
Costs and
Expenses
|
Deductions
|
Balance at End
of Year
|
|||||||||||||
Year ended 31
March 2010
|
||||||||||||||||
Deducted
from asset account:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 196,426 | $ | 34,973 | $ | (44,078 | ) | $ | 187,321 | |||||||
Sales
return and allowance reserve
|
104,641 | 1,653,881 | (1,500,953 | ) | 257,569 | |||||||||||
Total
|
$ | 301,067 | $ | 1,688,854 | $ | (1,545,031 | ) | $ | 444,890 | |||||||
Year ended 31
March 2009
|
||||||||||||||||
Deducted
from asset account:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 25,927 | $ | 175,206 | $ | (4,707 | ) | $ | 196,426 | |||||||
Sales
return and allowance reserve
|
138,438 | 2,837,532 | (2,871,329 | ) | 104,641 | |||||||||||
Total
|
$ | 164,365 | $ | 3,012,738 | $ | (2,876,036 | ) | $ | 301,067 |
4.
|
EQUIPMENT
|
|
The
components of equipment are as
follows:
|
Cost
|
Accumulated
Depreciation
|
Net
2010
|
Net
2009
|
|||||||||||||
Furniture
and fixtures
|
$ | 42,462 | $ | (41,535 | ) | $ | 927 | $ | 2,037 | |||||||
Equipment
|
31,858 | (30,967 | ) | 891 | 1,867 | |||||||||||
Computer
|
53,295 | (47,652 | ) | 5,643 | 10,438 | |||||||||||
Warehouse
equipment
|
68,575 | (60,669 | ) | 7,906 | 15,899 | |||||||||||
$ | 196,190 | $ | (180,823 | ) | 15,367 | $ | 30,241 |
5.
|
INCOME
TAXES
|
The
provision for income taxes reconciles to the amount obtained by applying the
statutory income tax rates of 33% (2009 - 33%) in Canada, 16.5% (2009 - 16.5%)
in Hong Kong and 15% (2009 – 15%) in US to income before provision for taxes as
follows:
2010
|
2009
|
|||||||
Computed
expected tax
|
$ | (168,545 | ) | $ | (731,668 | ) | ||
Expenses
not deductible for tax purposes
|
7,287 | 55,434 | ||||||
Equipment
|
2,976 | (160 | ) | |||||
Tax
losses available for carryforward
|
267,837 | 860,843 | ||||||
Utilization
of prior year tax losses
|
(109,555 | ) | ||||||
Other
|
(9,047 | ) | (367,517 | ) | ||||
Provision
for income taxes
|
$ | (9,047 | ) | $ | (183,068 | ) |
The
Company has $4,568,542 of tax losses available to offset future taxable
income. $1,915,048 of these losses are held in our Canadian
subsidiary; $1,263,583 expire in 2019 and $651,465 in
2020. $1,784,304 of these losses are held in our Hong Kong subsidiary
and can be carried forward indefinitely. The remaining $869,190 tax
losses are held in our US subsidiary; $489,043 expire in 2029 and
$380,147 in 2030.
The
components of deferred income taxes have been determined at the combined
statutory rates as follows:
2010
|
2009
|
|||||||
Deferred
income tax assets (liabilities):
|
||||||||
Book
over tax depreciation
|
$ | 8,317 | $ | 8,317 | ||||
Tax
losses available for carryforward
|
1,056,754 | 860,843 | ||||||
Valuation
allowance
|
(1,054,754 | ) | (860,843 | ) | ||||
Deferred
income taxes
|
$ | 8,317 | $ | 8,317 |
6.
|
AMOUNTS
PAYABLE TO PARENT COMPANY
|
As of 31
March 2010, the Company owed $9,736,868 (2009 - $12,703,104) to The Starlight
Group of Companies, the principal corporate shareholder of the Company
("Starlight"). Of this amount $9,132,241 (2009 - $12,098,477)
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 31 March 2007,
leaving only the accrued interest as payable. These amounts are
payable on demand and Starlight has agreed not to charge further interest on the
accrued interest payable. Interest accrued as of 31 March 2010 was
$604,627 (2009 - $604,627).
7.
|
ACCOUNTS
PAYABLE AND ACCRUED LIBILITIES
|
|
The
balance is comprised of:
|
2010
|
2009
|
|||||||
Trade
payables
|
113,829 | 207,533 | ||||||
Accrued
liabilities
|
226,159 | 152,211 | ||||||
Claims
payable
|
- | 229,198 | ||||||
Sales
return and allowance reserve
|
257,569 | 104,641 | ||||||
$ | 597,557 | $ | 693,583 |
8.
|
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. Minimum lease
commitments under the leases at 31 March 2010 were:
2011
|
$ | 339,206 | ||
2012
|
341,926 | |||
2013
|
344,647 | |||
2014
|
172,324 | |||
$ | 1,198,103 |
9.
|
RELATED
PARTY TRANSACTIONS
|
Apart
from those as disclosed in note 6, 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 year ended 31 March 2010, the Company purchased $10,800,354 (2009 -
$25,191,456) of goods from Starlight and received no commissions from Starlight
in 2010 and 2009.
10.
|
ECONOMIC
DEPENDENCE
|
The
Company is economically dependent on its parent company for the supply of
inventory products to its customers. For fiscal 2010, the Company
purchased 80% of its inventory needs from Starlight (2009 -92%).
A
mass-market merchandiser and chain store located in Canada and US is the
Company's largest customer, which accounted for approximately 54% of sales in
2010 and 70% in 2009. 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 31
March 2010, the accounts receivable from this customer amounted to approximately
$853,080 (2009 - $1,842,933) and claims payable for inventory returns amounted
to approximately $12,076 (2009 - $12,964).
11.
|
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.
Canada
|
Hong Kong
|
United States
|
Total
|
|||||||||||||
2010
|
||||||||||||||||
Assets
|
7,036,473 | 606,215 | 1,970,419 | 9,613,107 | ||||||||||||
Sales,
net
|
13,471,277 | 1,313,933 | 1,579,523 | 16,364,733 | ||||||||||||
Gross
margin
|
1,398,821 | 115,537 | 43,915 | 1,558,273 | ||||||||||||
Net
loss
|
(829,432 | ) | (61,767 | ) | (380,145 | ) | (1,271,344 | ) | ||||||||
2009
|
||||||||||||||||
Assets
|
5,503,949 | 377,210 | 7,356,322 | 13,237,481 | ||||||||||||
Sales,
net
|
10,778,530 | 4,963,244 | 13,721,380 | 29,463,154 | ||||||||||||
Gross
margin
|
709,142 | 280,280 | 1,015,445 | 2,004,867 | ||||||||||||
Net
loss
|
(1,182,248 | ) | (1,034,185 | ) | (498,048 | ) | (2,714,481 | ) |
12.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
During
the year ended 31 March 2010 the Company paid interest of $11,800 (2009 -
$55,547) and paid income taxes of $33,000 (2009 -
$312,428).
None.
Evaluation
of Disclosure Controls and Procedures
(a) Evaluation of Disclosure
Controls. Our Chief Executive Officer and our Chief Financial Officer
evaluated the effectiveness of our disclosure controls and procedures as of the
end of our 2010 fiscal year. Disclosure controls and procedures are controls and
other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, as appropriate to allow
timely decisions regarding required disclosure. Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures were effective as of March 31,
2010.
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
Management’s
Report on Internal Control over Financial Reporting.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) and has assessed its effectiveness using the
components established in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Our internal control over financial reporting has been
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America.
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures are being
made only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements. Management concluded that we
maintained effective internal control over financial reporting as of March 31,
2010.
(b) Changes
in internal control over financial reporting. There have been no
changes in our internal control financial reporting that occurred during the
year ended March 31, 2010 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting. Our management team will continue to evaluate our internal
control over financial reporting in 2010.
This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this Annual Report.
None.
The
following table sets forth information concerning the directors, executive
officers and significant employees of Cosmo as of June 29, 2010:
Name
|
|
Age
|
|
Position
|
Philip
Lau
|
62
|
Chairman
of the Board of Directors and President
|
||
Peter
Horak
|
|
68
|
|
Chief
Executive Officer and Director
|
Carol
Atkinson
|
|
61
|
|
Chief
Financial Officer
|
Yu
Wing King
|
58
|
Vice
President, Hong Kong operation
|
||
Jacky
Lau
|
51
|
Director
|
||
Jeff
Horak
|
|
52
|
|
Vice
President –Sales and Marketing - Canada
Operations
|
Philip Lau - Chairman and
President
Mr.
Philip Lau, Chairman of the Board of Directors, was appointed in January 2001
after Starlight International Limited acquired 49% of the voting shares of the
Company. Since 1987, Mr. Lau has been the Chairman of Starlight
International, an electronics company the shares of which are listed on the Hong
Kong Stock Exchange, and has extensive experience in the consumer electronics
business.
Peter Horak – Chief Executive Officer,
Canada
Mr. Peter
Horak, President of Cosmo Canada, was appointed as the Chief Executive Officer
in January 2001. Mr. Horak was the co-founder of Cosmo's Canadian
subsidiary and has been its chief executive officer since 1988. Mr.
Horak is the Company's chief sales, marketing, and sourcing
executive.
Carol
Atkinson – Chief Finance
Officer
Ms.
Atkinson has served as Chief Finance Officer of the Company since January 2001
after Starlight International Limited acquired its shares. Ms
Atkinson is a licensed public accountant.
Yu Wing Kin – Vice President, Administration, Hong
Kong
Mr. Yu
has served as Vice President of Administration of Cosmo Hong Kong since joining
the Company in August 1978.
Jacky Lau – Director
Mr. Jacky
Lau has served as a director of the Company since January 2001 after Starlight
International Limited acquired its shares. He joined Starlight
International in 1987 as the Director of Material Sourcing.
Anthony Lau –
Director
Mr.
Anthony Lau was appointed in September 2006 and has been a director of Starlight
International since 1987.
Directors
are elected annually by the shareholders and hold office until the next annual
meeting and until their respective successors are elected and qualified. There
are no other family relationships among any of the Company's directors and
executive officers.
Family
Relationships
Mr.
Philip Lau, Mr. Jacky Lau, Mr. Anthony Lau and Ms Carol Atkinson are
siblings. Peter Horak is the brother of Jeff Horak.
Code
of Ethics
Our Board
of Directors has not yet adopted a formal Code of Ethics and Business Conduct
that applies to our Chief Executive Officer and Chief Financial Officer, as well
as to our directors, officers and employees. Once adopted, a copy of our Code of
Ethics will be filed as an exhibit to an amendment to this registration
statement or filed as part our future filings with the SEC.
Compliance
with Section 16(A) of the Exchange Act.
To our
knowledge, based solely on a review of the copies of such reports furnished to
the Company and written representations that no other reports were required, the
Company believes that during the year ended March 31, 2010, its officers,
directors and 10% shareholders complied with all Section 16(a) filing
requirements.
Executive
Compensation
|
Compensation
of Directors
The
following table sets forth with respect to the named directors, compensation
information inclusive of equity awards and payments made in the fiscal year
ended March 31, 2010.
Director
Compensation (1)
Name
(a)
|
Fees Earned
or Paid in
Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(d)(1)
|
Non-Equity Incentive
Plan Compensation
($)
(e)
|
Change in Pension Value and
Nonqualified Deferred
Compensation Earnings
(f)
|
All Other
Compensation
($)
(g)
|
Total
($)
(h)
|
|||||||||||||||||||||
(1) As
permitted under the rules promulgated by the Securities and Exchange Commission,
this table omits columns that are not applicable.
Board
Directors generally receive meeting attendance fees of $300. However,
each such director waived his/her rights to receive such fees during fiscal
2010. Annual retainers are not currently provided to directors;
however, such retainers may be re-instituted in the future.
Executive
Compensation
The
following table sets forth certain compensation information for the fiscal years
ended March 31, 2010, 2009 and 2008 with regard to (i) Peter Horak, our Chief
Executive Officer, and to each of the four most highly compensated executive
officers of Cosmo for fiscal 2010, 2009 and 2008:
Summary
Compensation Table
Name & Principal
Position
|
Year
|
Salary ($)
|
Bonus ($)
(5)
|
Stock
Awards($)
(5)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan
Compensation ($)
|
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($) (1)
|
Total ($)
|
||||||||||||||||||||||||||
Peter
Horak
CEO
and Director
|
2010
2009
2008
|
91,866
89,693
99,324
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
8,820
8,610
11,370
|
100,686
98,303
110,694
|
||||||||||||||||||||||||||
Jeff
Horak
Vice
President - Canada
|
2010
2009
2008
|
104,727
94,178
131,063
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
9,924
9,687
12,671
|
114,651
103,865
143,734
|
||||||||||||||||||||||||||
Yu
Wing King
Vice
President – Hong Kong
|
2010
2009
2008
|
40,131
45,978
43,524
|
1,538
1,267
-
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
-
2,418
|
41,669
47,245
45,952
|
||||||||||||||||||||||||||
E.
J. Colin
National
Sales Manager - Canada
|
2010
2008
2008
|
96,459
94,178
67,959
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
—
—
—
|
5,508
5,920
7,511
|
101,967
100,098
75,470
|
(1)
|
Includes
automobile expense allowances and other employee
benefits
|
Employment
Agreements
The
Company signed no new employment agreements during fiscal 2010 and
2009.
OPTION
GRANTS IN FISCAL 2010 (1)
The
following table set forth information concerning each grant of an award made to
a named executive officer in the last completed fiscal year under any plan,
including awards that subsequently have been transferred.
GRANTS OF PLAN-BASED AWARDS
|
||||||||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts Under Non-
Equity Incentive Plan Awards
|
Estimated Future Payouts Under
Equity Incentive Plan Awards
|
All Other Stock
Awards: Number of
Shares of Stocks or
|
All Other Option
Awards: Number of
Securities Underlying
|
Exercise or
Base Price of
|
Grant Date Fair
Value of Stock
|
|||||||||||||||||||||||||||||||||||||||
Name
(a)
|
Grant
Date
(b)
|
Threshold
($)
(c)
|
Target
($)
(d)
|
Maximum
($)
(e)
|
Threshold
($)
(f)
|
Target
($)
(g)
|
Maximum
($)
(h)
|
Units
(#)
(i)
|
Options
(#)
(j)
|
Option Awards
($/Sh)
k
|
and Option
Awards
l
|
|||||||||||||||||||||||||||||||||
|
(1) As
permitted under the rules promulgated by the Securities and Exchange Commission,
this table omits columns that are not applicable.
Outstanding
Equity Awards At Fiscal Year-End (1)
The
following table sets forth information for the named executive officers
regarding the number of shares subject to both exercisable and unexercisable
stock options, as well as the exercise prices and expiration dates thereof, as
of March 31, 2010.
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity Incentive
Plan Awards:
Market or Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
|
|||||||||||||||||||||||||||
|
(1) As
permitted under the rules promulgated by the Securities and Exchange Commission,
this table omits columns that are not applicable.
Long-term
Compensation – Stock Option Grants and 401K Plan
The
Company does not have any stock option plan or 401K plan as long-term
compensation.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
The
following table sets forth the name, address, number of shares beneficially
owned, and the percentage of the Registrant’s total outstanding common stock
shares owned by: (i) each of the Registrant’s Officers and Directors; (ii) the
Registrant’s Officers and Directors as a group; and (iii) other shareholders of
5% or more of the Registrant’s total outstanding common stock shares. The
percentages have been calculated by taking into account all Shares owned on the
record date as well as all such Shares with respect to which such person has the
right to acquire beneficial ownership at such date or within 60 days thereafter.
Unless otherwise indicated, all persons listed below have sole voting and sole
investment power over the Shares owned. Unless otherwise provided, each person's
address is c/o Cosmo Communications Corporation, Unit 2 – 55 Travail Road,
Markham, Ontario, Canada.
Title of Class
|
Name and Address of
Beneficial Owner
|
Amount and
Nature of
Beneficial
Ownership
|
Percent
of Class
|
||||||||
Common
Stock
|
Philip
Lau
Chairman
and President
|
— | — | ||||||||
Common
Stock
|
Peter
Horak
Chief
Executive Officer and Director
|
257,500 | * | ||||||||
Common
Stock
|
Carol
Atkinson
Chief
Financial Officer
|
— | — | ||||||||
Common
Stock
|
Yu
Wing King
Vice
President, Hong Kong operation
|
— | — | ||||||||
Common
Stock
|
Jacky
Lau
Director
|
— | — | ||||||||
Common
Stock
|
Jeff
Horak
Vice
President –Sales and Marketing - Canada Operations
|
— | — | ||||||||
Common
Stock
|
Starlight
International,
5/F,
232 Aberdeen Road
Hong
Kong
|
37,948,644 | 93.8 | % | |||||||
Common
Stock
|
All
Officers and Directors,
as
a Group
|
257,500 | * |
* Less
then one percent.
Equity
Compensation Plan Information
The
Company does not have any stock option plan or 401K plan as long-term
compensation.
During
the year ended March 31, 2010, we purchased $10,800,354 (2008 - $25,191,456) of
goods from our parent company, Starlight and received no commissions (2009
- nil).
The
following is a summary of the fees billed to the Company by DNTW Chartered
Accountants, LLP, Jeremy Karkheck CA Professional Corporation, and Chan &
Watt Company for professional services rendered to our company for the fiscal
years ended March 31, 2010 and 2009:
2010
|
2009
|
|||||||
Audit
Fees (a)
|
$ | 45,815 | $ | 48,215 | ||||
Tax
Fees (b)
|
10,903 | 26,629 | ||||||
Total
Fees
|
56,718 | 74,844 |
(a)
|
Consists
of fees billed for professional services rendered for the audit of the
Company's consolidated financial statements and review of the interim
consolidated financial statements included in quarterly
reports.
|
(b)
|
Consists
primarily of fees paid for tax compliance services. This category includes
services regarding tax return assistance, assistance with tax return
filings in certain foreign jurisdictions, assistance with tax audits and
appeals, and general U.S. and foreign tax
advice.
|
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Public Accounting Firm
The
Company currently does not have a designated Audit Committee, and accordingly,
the Company's Board of Directors' policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Company's Board of
Directors regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis.
Consolidated Financial
Statements
See Index
to Consolidated Financial Statements on page 28 of this
report.
Financial Statement
Schedule
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COSMO
COMMUNICATIONS CORPORATION
Description
|
Balance at
Beginning
of Year
|
Additions
(Reductions)
Charged to
Costs and
Expenses
|
Deductions
|
Balance at
End of Period
|
||||||||||||
Year
ended March 31, 2010
|
||||||||||||||||
Deducted
from asset account:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 196,426 | $ | 34,973 | $ | (44,078 | ) | $ | 187,321 | |||||||
Sales
return and allowance reserve
|
104,641 | 1,653,881 | (1,500,953 | ) | 257,569 | |||||||||||
Total
|
$ | 301,067 | $ | 1,688,854 | $ | (1,545,031 | ) | $ | 444,890 | |||||||
Year
ended March 31, 2009
|
||||||||||||||||
Deducted
from asset account:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 25,927 | $ | 175,206 | $ | (4,707 | ) | $ | 196,426 | |||||||
Sales
return and allowance reserve
|
138,438 | 2,837,532 | (2,871,329 | ) | 104,641 | |||||||||||
Total
|
$ | 164,365 | $ | 3,012,738 | $ | (2,876,036 | ) | $ | 301,067 | |||||||
Year
ended March 31, 2008
|
||||||||||||||||
Deducted
from asset account:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 6,520 | $ | 30,323 | $ | (10,916 | ) | $ | 25,927 | |||||||
Sales
return and allowance reserve
|
381,270 | 1,359,375 | (1,602,207 | ) | 138,438 | |||||||||||
Total
|
$ | 387,790 | $ | 1,389,698 | $ | (1,613,123 | ) | $ | 164,365 |
Other
financial statement schedules have not been presented, as they are not
applicable.
Exhibits
Exhibit
|
|||
Number
|
Description of Document
|
||
3.1
|
Articles
of Incorporation as amended
+
|
||
|
|||
3.2
|
Registrant's
Bylaws ++
|
||
|
|||
21.1
|
List
of Subsidiaries of Cosmo Communications Corporation
++++
|
||
|
|||
31.1
|
Certification
pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Peter
Horak *
|
||
|
|||
31.2
|
Certification
pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carol
Atkinson *
|
||
|
|||
32.1
|
Certification
by the 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
by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*
|
+
|
Incorporated
by reference to our Annual Report on Form 10-K for the year ended
March 31, 1992, as amended.
|
++
|
Incorporated
by reference to our Registration Statement (File No.
2-83088).
|
++++
|
Incorporated
by reference to our Annual Report on Form 10-K for the year ended
March 31, 2006 filed with the SEC on August 8,
2006.
|
*
|
Filed
herewith.
|
Pursuant
to the requirements of the Section 13 or 15(d), as amended, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Markham, Ontario, Canada on June 29,
2010.
COSMO
COMMUNICATIONS CORPORATION
|
||
By:
|
/s/ Peter
Horak
|
|
Peter
Horak
|
||
Chief
Executive Officer (Principal Executive Officer)
|
||
By:
|
/s/ Carol
Atkinson
|
|
Carol
Atkinson
|
||
Chief
Executive Officer (Principal Financial Officer and
Principal
Accounting Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
Name
|
Title
|
Date
|
||
/s/ PETER
HORAK
|
Chief
Executive Officer and
|
June
29, 2010
|
||
Peter
Horak
|
Director
(Principal Executive
Officer)
|
|||
/s/ CAROL
ATKINSON
|
Chief
Financial Officer and
|
June
29, 2010
|
||
Carol
Atkinson
|
Principal
Financial Officer and
Principal
Accounting Officer
|
|||
/s/ JACKY LAU
|
Director
|
June
29, 2010
|
||
Jacky
Lau
|
57