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EX-32.2 - COSMO COMMUNICATIONS CORPv189456_ex32-2.htm
EX-31.1 - COSMO COMMUNICATIONS CORPv189456_ex31-1.htm
EX-32.1 - COSMO COMMUNICATIONS CORPv189456_ex32-1.htm
EX-31.2 - COSMO COMMUNICATIONS CORPv189456_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
(905209-0488
(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

   
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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 Registrants 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