Attached files
file | filename |
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EX-32.1 - COSMO COMMUNICATIONS CORP | v210768_ex32-1.htm |
EX-31.2 - COSMO COMMUNICATIONS CORP | v210768_ex31-2.htm |
EX-31.1 - COSMO COMMUNICATIONS CORP | v210768_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarter ended December
31, 2010
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _______________________to
_______________________
Commission
File No. 0-11968
COSMO
COMMUNICATIONS
CORPORATION
(Name of
Small Business Issuer in its Charter)
FLORIDA
|
59-2268025
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No)
|
Unit 2 - 55 Travail Road,
Markham, Ontario, Canada
(Address
of Principal Executive Offices)
(905)
209-0488
(Issuer's
Telephone Number)
(Former
Name or Former Address, if changed since last Report)
Check
whether the Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange
Act
during the past 12 months (or for such shorter period that the Company was
required to file such
reports),
and (2) has been subject to such filing requirements for the past 90
days.
(1)
Yes x
No o
(2) Yes x
No o
(ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Not
applicable
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company filer.
See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer o Accelerated
Filer o Non-Accelerated
Filero Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes
o
No x
(APPLICABLE
ONLY TO CORPORATE ISSUERS)
State the
number of shares outstanding of each of the Issuer's classes of common equity,
as of the latest practicable date:
February
11, 2011
Common – 40,467,636
shares
DOCUMENTS
INCORPORATED BY REFERENCE
A
description of any "Documents Incorporated by Reference" is contained in Item 6
of this Report.
Transitional
Small Business Issuer Format
Yes o
No x
TABLE
OF CONTENTS
Page
|
||
PART
I - FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
|
§ Consolidated
Balance Sheets
|
1
|
|
§ Consolidated
Statements of Operations
|
2-3
|
|
§ Consolidated
Statements of Cash Flows
|
4
|
|
§ Notes to
Consolidated Financial Statements
|
5-
7
|
|
Item
2.
|
Management’s
Discussion & Analysis of Financial Condition and Results of
Operations
|
8 -
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
15
|
Item
4.
|
Controls
and Procedures
|
15
|
PART
II - OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
16
|
Item
2.
|
Unregistered
Sales of Equity securities and Use of Proceeds
|
16
|
Item
3.
|
Defaults
Upon Senior Securities
|
16
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
16
|
Item
5
|
Other
Information
|
16-
|
Item
6.
|
Exhibits
|
17
|
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31,
|
March 31,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 916,122 | $ | 635,516 | ||||
Accounts
receivable (net of allowance of $199,234 and $187,321,
respectively)
|
2,279,824 | 2,259,969 | ||||||
Inventories
(net of allowance of $601,271 and $1,103,360,
respectively)
|
4,808,563 | 6,682,679 | ||||||
Prepaid
expenses and deposits
|
17,250 | 11,259 | ||||||
Total
Current Assets
|
8,021,759 | 9,589,423 | ||||||
Equipment
and Other Assets:
|
||||||||
Equipment,
net of depreciation
|
4,211 | 15,367 | ||||||
Deferred
taxes
|
8,317 | 8,317 | ||||||
Taxes
recoverable
|
25,210 | - | ||||||
Total
Equipment and Other Assets
|
37,738 | 23,684 | ||||||
Total
Assets
|
$ | 8,059,497 | $ | 9,613,107 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 159,081 | $ | 113,829 | ||||
Accrued
liabilities
|
364,729 | 483,728 | ||||||
Accounts
payable to parent company
|
8,160,175 | 9,132,241 | ||||||
Interest
payable to parent company
|
604,627 | 604,627 | ||||||
Taxes
payable
|
- | 82,905 | ||||||
Total
Current Liabilities
|
9,288,612 | 10,417,330 | ||||||
Stockholders’
Deficit:
|
||||||||
Preferred
stock, $0.01 par value, cumulative and convertible, 30,000 shares
authorized
|
- | - | ||||||
Preferred
stock, $0.01 par value, 9,970,000 shares authorized
|
- | - | ||||||
Authorized,
40,467,636 shares issued and outstanding
|
2,023,382 | 2,023,382 | ||||||
Additional
paid-in capital
|
27,704,592 | 27,704,592 | ||||||
Accumulated
other comprehensive income
|
319,075 | 306,205 | ||||||
Accumulated
deficit
|
(31,276,164 | ) | (30,838,402 | ) | ||||
Total
Stockholders' Deficit
|
(1,229,115 | ) | (804,223 | ) | ||||
Total
Liabilities and Stockholders' Deficit
|
$ | 8,059,497 | $ | 9,613,107 |
The accompanying notes are an integral part of these financial statements.
1
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED DECEMBER 31
(Unaudited)
2010
|
2009
|
|||||||
Sales
|
$ | 6,877,240 | $ | 5,754,648 | ||||
Cost
of products sold
|
5,539,942 | 5,149,490 | ||||||
Gross
profit
|
1,337,298 | 605,158 | ||||||
Commission
income
|
3,095 | 31,382 | ||||||
1,340,393 | 636,540 | |||||||
Expenses:
|
||||||||
Selling
and delivery
|
689,808 | 475,865 | ||||||
Salaries
and wages
|
354,090 | 318,589 | ||||||
General
and administrative
|
189,808 | 188,481 | ||||||
Gain
on foreign exchange
|
(105,325 | ) | (65,999 | ) | ||||
Financial
|
2,856 | 2,043 | ||||||
Depreciation
|
3,719 | 3,719 | ||||||
1,134,956 | 922,698 | |||||||
Net
income (loss) before income taxes
|
205,437 | (286,158 | ) | |||||
Current
income taxes
|
- | (844 | ) | |||||
Net
income (loss)
|
$ | 205,437 | $ | (287,002 | ) | |||
Foreign
currency translation adjustment
|
67,005 | (190,156 | ) | |||||
Comprehensive
income (loss)
|
272,442 | (477,158 | ) | |||||
Net
income (loss) per common share:
|
||||||||
Basic
and diluted
|
$ | 0.01 | $ | (0.01 | ) | |||
Weighted
average shares outstanding:
|
||||||||
Basic
and diluted
|
40,467,636 | 40,467,636 |
The
accompanying notes are an integral part of these financial
statements.
2
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE NINE MONTHS ENDED DECEMBER 31
(Unaudited)
2010
|
2009
|
|||||||
Sales
|
$ | 14,109,037 | $ | 13,470,758 | ||||
Cost
of products sold
|
11,913,301 | 11,913,124 | ||||||
Gross
profit
|
2,195,736 | 1,557,634 | ||||||
Commission
income
|
29,785 | 75,406 | ||||||
2,225,521 | 1,633,040 | |||||||
Expenses:
|
||||||||
Selling
and delivery
|
1,243,933 | 1,153,296 | ||||||
Salaries
and wages
|
865,464 | 822,813 | ||||||
General
and administrative
|
532,372 | 515,590 | ||||||
Loss
on foreign exchange
|
(824 | ) | (271,991 | ) | ||||
Financial
|
10,370 | 9,718 | ||||||
Depreciation
|
11,156 | 11,156 | ||||||
2,662,471 | 2,240,582 | |||||||
Net
loss before income taxes
|
(436,950 | ) | (607,542 | ) | ||||
Income
taxes (recovery)
|
812 | (9,047 | ) | |||||
Net
loss
|
$ | (437,762 | ) | $ | (598,495 | ) | ||
Foreign
currency translation adjustment
|
12,870 | (598,586 | ) | |||||
Comprehensive
loss
|
(424,892 | ) | (12,909 | ) | ||||
Net
loss per weighted number of shares outstanding:
|
||||||||
Basic
and diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted
average shares outstanding:
|
||||||||
Basic
and diluted
|
40,467,636 | 40,467,636 |
The
accompanying notes are an integral part of these financial
statements.
3
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED DECEMBER 31
(Unaudited)
2010
|
2009
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (437,762 | ) | $ | (598,495 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
||||||||
Depreciation
|
11,156 | 11,156 | ||||||
(426,606 | ) | (587,339 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(19,855 | ) | (859,801 | ) | ||||
Inventories
|
1,874,116 | 1,668,600 | ||||||
Prepaid
expenses and deposits
|
(5,991 | ) | (2,421 | ) | ||||
Accounts
payable and accrued liabilities
|
(73,747 | ) | 28,824 | |||||
Taxes
payable
|
(108,115 | ) | 31,245 | |||||
Accounts
payable to parent company
|
(972,066 | ) | (649,690 | ) | ||||
Net
cash provided by (used in) operating activities
|
267,736 | (370,582 | ) | |||||
Effect
of foreign currency translation
|
12,870 | 585,586 | ||||||
Net
decrease in cash
|
280,606 | 215,004 | ||||||
Cash
- beginning of period
|
635,516 | 444,410 | ||||||
Cash
- end of period
|
$ | 916,122 | $ | 659,414 |
The
accompanying notes are an integral part of these financial
statements.
4
COSMO
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NATURE
OF OPERATIONS
Cosmo
Communications Corporation and subsidiaries (the "Company" or "Cosmo") market
and distribute consumer electronic products. The Company has operations in Hong
Kong, the United States of America and Canada.
BASIS
OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the Securities
Exchange Commission (“SEC”) instructions to Form
10-Q. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three
month and nine months periods ended December 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2011. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company’s annual report on Form 10-K for
the year ended March 31, 2010.
PRINCIPLES
OF CONSOLIDATION
The
Company includes, in consolidation, its wholly owned subsidiaries, Cosmo
Communications Canada Inc. (“Cosmo Canada”), Cosmo Communications (H.K.) Limited
(“Cosmo H.K.”) and Cosmo Communication USA Corporation (“Cosmo
USA”). All significant intercompany transactions and balances have
been eliminated upon consolidation.
Concentration
of Credit Risk
The
Company has cash in bank accounts that, at times, may exceed federally insured
limits. The Company has not experienced any losses in such
accounts.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. These estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings in the period in
which they become known. As of December 31, 2010, the Company
provided reserves for doubtful accounts receivable in the amount of $199,234
(March 31, 2010 - $187,321); provided inventory reserves for estimated
obsolescence for $601,271 (March 31, 2010 - $1,103,360); and provided reserves
for defective inventory returns of $210,101 (March 31, 2010 -
$257,569).
5
Fair
Value of Financial Instruments
The
Company's financial instruments include cash, accounts receivable, accounts
payable, and advances from the parent company.
The
estimated fair value of financial instruments has been determined by the Company
using available market information and valuation
methodologies. Considerable judgment is required in estimating fair
value. Accordingly, the estimates may not be indicative of the
amounts the Company could realize in a current market exchange. At
December 31, 2010 and March 31, 2010, the carrying amounts of cash, accounts
receivable, accounts payable, and advances from the parent company approximate
their fair values due to the short-term maturities of these
instruments.
Earnings
or Loss Per Share
There
were no anti-dilutive financial instruments for three months ended December 31,
2010 and 2009.
EQUIPMENT
The
components of equipment are as follows:
Cost
|
Accumulated
Depreciation
|
Net Dec 31,
2010
|
Net March 31,
2010
|
|||||||||||||
Furniture
and fixtures
|
$ | 42,462 | $ | (42,367 | ) | $ | 95 | $ | 927 | |||||||
Equipment
|
31,858 | (31,700 | ) | 158 | 891 | |||||||||||
Computer
|
53,295 | (51,249 | ) | 2,046 | 5,643 | |||||||||||
Warehouse equipment
|
68,575 | (66,663 | ) | 1,912 | 7,906 | |||||||||||
$ | 196,190 | $ | (188,261 | ) | $ | 4,211 | $ | 15,367 |
AMOUNTS
PAYABLE TO PARENT COMPANY
As of
December 31, 2010, the Company owed $8,764,802 (March 31, 2010 - $9,736,868) to
The Starlight Group of Companies, the principal corporate shareholder of the
Company ("Starlight"). Of this amount $8,160,175 (March 31,
2010- $9,132,241) was owed in the form of trade payable and the remainder was
interest on prior advances. These amounts are unsecured, payable on
demand and Starlight has agreed not to charge further interest on the accrued
interest payable. Interest accrued as of December 31, 2010 was
$604,627 (March 31, 2010 - $604,627).
6
COMMITMENTS
The
Company leases premises under an operating lease with a five year term in Canada
and shares the facilities for its Hong Kong operation. In September
2008 the Company extended the current operating lease in Canada for five years
commencing on October 1, 2008. Minimum lease commitments under the
leases at December 31, 2010 were:
2011
(Three months)
|
86,399 | |||
2012
|
345,596 | |||
2013
|
348,368 | |||
2014
|
175,570 | |||
$ | 955,933 |
RELATED
PARTY TRANSACTIONS
Apart
from those as disclosed in Amounts Payable to Parent Company, the Company's
transactions with related parties were, in the opinion of the directors, carried
out on normal commercial terms and in the ordinary course of the Company's
business.
During
the nine months ended December 31, 2010, the Company purchased $11,659.587 (nine
months ended December 31, 2009 - $10,472,667) of goods from
Starlight. The Company also purchased a net value of $1,890,127 of
goods from Singing Machine Company, a subsidiary company of our Parent Company
for the three months ended December 31, 2010.
ECONOMIC
DEPENDENCE
The
Company is economically dependent on its parent company for the supply of
inventory products to its customers. A mass-market merchandiser and
chain store located in Canada and US is the Company's largest customer, which
accounted for approximately 23% of sales for the nine months ended December 31,
2010 and 54% for the nine months ended December 31, 2010. The Company
has gradually reduced its economic dependence on this customer to avoid
significant adverse results to the financial position of the Company on the loss
of this account.
As of
December 31, 2010, the accounts receivable from this customer amounted to
approximately $617,899 (March 31, 2010 - $853,080) and claims payable for
inventory returns amounted to approximately $20,426 (March 31, 2010 -
$12,076).
7
OPERATING
SEGMENT INFORMATION
The
Company operated in one business segment and all of its sales are consumer
electronic products. The Company's customers are principally in
Canada and in the USA. Borrowings are principally in the United
States.
Canada
|
Hong Kong
|
United States
|
Total
|
|||||||||||||
December
31, 2010
|
||||||||||||||||
Assets
|
7,165,931 | 44,475 | 849,091 | 8,059,497 | ||||||||||||
Nine
Months Ended December
31, 2010
|
||||||||||||||||
Sales,
net
|
12,365,582 | 954,726 | 788,730 | 14,109,037 | ||||||||||||
Gross
margin
|
2,046,491 | 98,417 | 50,828 | 2,195,736 | ||||||||||||
Net
loss
|
315,980 | 57,304 | 64,478 | 437,762 | ||||||||||||
March
31, 2010
|
||||||||||||||||
Assets
|
7,036,473 | 606,215 | 1,970,419 | 9,613,107 | ||||||||||||
Nine
Months Ended December
31, 2009
|
||||||||||||||||
Sales,
net
|
11,287,004 | 747,364 | 1,436,390 | 13,470,758 | ||||||||||||
Gross
margin
|
1,422,840 | 65,620 | 69,174 | 1,557,634 | ||||||||||||
Net
loss
|
(249,603 | ) | (49,867 | ) | (299,025 | ) | (598,495 | ) |
SUPPLEMENTAL
CASH FLOW INFORMATION
During
the nine months ended December 31, 2010 the Company paid interest of $10,370
(nine months ended December 31, 2009 - $9,718) and paid $125,729 in income taxes
(nine months ended December 31, 2009 –$9,718.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the information
contained in our consolidated financial statements and the notes thereto
appearing elsewhere in this quarterly report, and in conjunction with the
Management's Discussion and Analysis set forth in (1) our annual report on Form
10-K for the year ended March 31, 2010.
As used
in this quarterly report, to term “we”, “us”, our”, “Cosmo”, the “Company” or
“our company refer to Cosmo Communications Corporation, a Florida
corporation.
Preliminary
Note Regarding Forward-Looking Statements
This
quarterly report and the documents incorporated herein by reference contain
forward-looking statements within the meaning of the federal securities laws,
which generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic
performance and our current beliefs regarding revenues we might earn if we are
successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors. You can identify
forward-looking statements generally by the use of forward-looking terminology
such as “believes,” “expects,” “may,” “will,” “intends,” “plans,” “should,”
“could,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other
variations of those terms, including their use in the negative, or by
discussions of strategies, opportunities, plans or intentions. You
may find these forward-looking statements in this Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations, as
well as throughout this quarterly report. A number of factors could
cause results to differ materially from those anticipated by forward-looking
statements.
These
forward-looking statements necessarily depend upon assumptions and estimates
that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause actual results to
differ in significant ways from any future results expressed or implied by the
forward-looking statements.
Any of
the factors described in this quarterly report, including in this Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, could cause our financial results, including our net income (loss)
or growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially. We base the forward-looking statements on information
currently available to us, and we assume no obligation to update
them.
In
addition, readers are also advised to refer to the information contained in our
filings with the Commission, especially on Forms 10-K, 10-Q and 8-K, in which we
discuss in more detail various important factors that could cause actual results
to differ from expected or historic results. It is not possible to foresee or
identify all such factors. As such, investors should not consider any
list of such factors to be an exhaustive statement of all risks and
uncertainties or potentially inaccurate assumptions.
9
Overview
Cosmo
Communications Corporation (the “Company”, “Cosmo”, “we”, “us” or “our”) was
incorporated in the state of Florida in 1983.
The
Company is engaged in the development, production, distribution, marketing and
sale of consumer electronic audio and video equipment, accessories and
clocks. Our products are sold primarily in Canada and to selective
customers in USA, United Kingdom, and South America through mass merchandisers,
department stores, electronic stores, chains, and specialty stores.
Our
products are currently sold in stores such as Wal-Mart, Super-Stores, Home
Hardware, Bargain Shop, and Best Buy/Future Shop.
Results
of Operations for the Quarter Ended December 31, 2010 (“2010”) and For the
Quarter Ended December 31, 2009 (“2009”)
The
following table sets forth, for the periods indicated, certain items related to
our consolidated statements of operations as a percentage of net revenues for
the three months ended December 31, 2010 and 2009.
Three months
ended
|
Three months
ended
|
Nine months
ended
|
Nine months
ended
|
Three months
ended
|
Three months
ended
|
|||||||||||||||||||
December 31,
2010
|
December 31,
2009
|
December 31,
2010
|
December 31,
2009
|
June 30,
2010
|
June 30,
2009
|
|||||||||||||||||||
Sales
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
Cost
of products sold
|
80.6 | % | 89.5 | % | 84.5 | % | 88.5 | % | 89.5 | % | 88.6 | % | ||||||||||||
Gross
profit
|
19.4 | % | 10.5 | % | 15.5 | % | 11.5 | % | 10.5 | % | 11.4 | % | ||||||||||||
Commission
income
|
- | 0.6 | % | 0.2 | % | 0.6 | % | 0.7 | % | 0.7 | % | |||||||||||||
Expenses:
|
||||||||||||||||||||||||
Salaries
and wages
|
5.1 | % | 5.5 | % | 6.1 | % | 6.1 | % | 7.6 | % | 7.6 | % | ||||||||||||
General
and administrative
|
2.7 | % | 3.3 | % | 3.7 | % | 3.8 | % | 5.3 | % | 5 | % | ||||||||||||
Selling
and delivery
|
10 | % | 8.3 | % | 8.8 | % | 8.6 | % | 7.5 | % | 12 | % | ||||||||||||
Financial
|
- | 0.1 | % | - | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||||||||
(Gain)
loss on foreign exchange
|
(1.5 | )% | (1.2 | )% | - | (2.0 | )% | 3.4 | % | (3.9 | )% | |||||||||||||
Depreciation
|
0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||||||
Net
loss before income tax
|
2.9 | % | (5.0 | )% | (3.0 | )% | (4.5 | )% | (12.9 | )% | (8.8 | )% | ||||||||||||
Income
tax (recovery) expense
|
- | - | - | - | - | (0.3 | )% | |||||||||||||||||
Net
loss
|
2.9 | % | (5.0 | )% | (3.0 | )% | (4.5 | )% | (12.9 | )% | (8.5 | )% |
10
The
following is a discussion and analysis of our results of operations for the
above periods:
Three
months ended December 31, 2010 compared with three months ended December 31,
2009.
Net
Sales:
Sales for
the three months ended December 31, 2010 increased by approximately $1.1 million
or 19.5% compared to the corresponding period in 2009. The increase
was a timing difference carried from the September quarter of
2010. Due to severe labor shortages in Southern China, goods that
would normally be shipped in September were delayed until October in the current
quarter. After the timing difference was removed, we recorded a
moderate increase of $235,336 or 3.4%. The net increase came from
introducing a new line of karaoke products in the holiday season.
Cost
of Sales and Gross Margin:
Gross
margin was 19.4% for the three months ended December 31, 2010 as compared to
10.5% for the same period in 2009. Average gross profit margin
improved because we began selling a new line of karaoke products to replace the
loss of DVD players in 2009. We achieved a higher profit margin
in new products whilst the DVD players have a very low profit
margin.
Commission
Income:
Commission
income decreased by $28,287 for the three months ended December 31, 2010
compared to the corresponding period in 2009. We are handling less
defective returns from TV manufacturers on a commission
basis. Rather, we have negotiated to buy the defective returns from
the manufacturers, refurbish the goods in house and sell the refurbished goods
to our customers. The revenue from the sale of refurbished goods for
the current three months was $406,064 and is included with sales in the current
quarter.
Selling,
General and Administrative Expenses:
Selling
expenses increased by $213,943 mainly because of advertising allowances provided
to a new customer. The allowance provided ranged from 2% - 7% on
sales. Our salaries, general and administrative expenses increased by
$36,828 for the three months ended December 31, 2010 compared with the same
period in 2009.
11
Financial:
There was
no major change in our financial costs in the two periods in
comparison.
Net
Earnings:
Net
income for the three months ended December 31, 2010 was $205,437 compared with a
net loss of $287,002 in the corresponding period in 2009. The
improvement was due to an increase in sales and a higher gross profit margin on
the turnover.
Foreign
exchange:
For the
three months ended December 31, 2010, we made a gain of $105,325 in foreign
exchange as compared with a gain of $65,999 in 2009. Our Canadian
subsidiary has liabilities due to our parent company which are dominated in US
dollars. With the decrease in the value of the US dollar as compared
to the Canadian dollar, we realized a foreign exchange gain of $105,325 in the
current quarter.
Nine
months ended December 31, 2010 compared with nine months ended December 31,
2009.
Net
Sales:
Sales for
the nine months ended December 31, 2010 increased by $638,279 compared with the
same period in 2009. The increase was caused by a timing effect
due to labor shortages in Southern China. Goods that would have normally been
shipped in September were delayed until October in the current
year.
Cost
of Sales and Gross Margin:
Gross
margin was 15.5% for the nine months ended December 31, 2010 compared with 11.5%
in 2009. The sales mix in the current quarter changed from a
concentration in DVD players to audio karaoke products. The change in
sales mix accounted for the improvement in gross profit margin during the two
periods in comparison.
Commission
Income:
Commission
income decreased by $45,621 for the current nine months compared with
2009. The decrease was from reverse logistic income related to the
handling of defective returns for third party manufacturers. We negotiated to
buy the defective returns from the third party manufacturers, refurbished the
goods in house and sold the refurbished goods to the second tier
outlets. Revenue from the sales was $936,538 and is included with
sales .
Selling,
General and Administrative Expenses:
Selling
and delivery expenses increased by $90,637 for the nine months ended December
31, 2010. The increase was due to an increase in advertising
allowances provided to new customers in this period compared with
2009.
Salaries,
general and administrative expenses increased by $59,383 during this
period. The increase was mainly due to an increase in warranty
repairs.
Financial:
There was
no major change in our financial costs in the two periods in
comparison.
12
Net
Earnings:
Net loss
for the nine months ended December 31, 2010 was $437,762 compared with a net
loss of $598,495 in 2009. The improvement in net loss was due mainly
to an increase in sales and a higher average gross profit margin of the sales
mix.
Foreign
exchange:
We
recorded an exchange gain of $824 compared with a gain of $271,991 in
2009. The exchange rates of the Canadian dollar against the US dollar
have been volatile in the two periods in comparison.
Liquidity
and Capital Resources
During
the nine months ended December 31, 2010, net cash provided by operating
activities was $267,736. The main source of our working capital
during this period came from reducing our inventory. The ratio
of current assets to current liabilities was 0.86 to 1, as compared to 0.92 to 1
on March 31, 2010.
There
have been no cash flows from investing and financing activities for the nine
months ended December 31, 2010 and we have no planned investing or financing
activities.
We expect
our factories will continue to provide credits to us and that Starlight will not
demand immediate repayment of current liabilities and will provide financing to
us if we require additional short term working capital.
Seasonal
and Quarterly Results
Historically,
our operations have been seasonal, with the highest net sales occurring in the
second and third quarters (reflecting increased orders for electronic audio and
video equipment during the Christmas selling months) and to a lesser extent the
first and fourth quarters of the fiscal year. The current trend
is we will receive less direct import orders and more domestic sales orders from
our customers. In effect, the timing of placing orders will be
delayed. Our results of operations often fluctuate from quarter to
quarter as a result of the amount and timing of orders placed and shipped to
customers, as well as other factors. The fulfillment of orders can therefore
significantly affect results of operations on a quarter-to-quarter
basis.
Inflation
Inflation
has not had a significant impact on the Company's operations. The
Company has historically passed any price increases on to its customers since
prices charged by the Company are generally not fixed by long-term
contracts.
Critical
Accounting Policies and Estimates
The
methods, estimates and judgments Cosmo uses in applying its accounting policies
have a significant impact on the results reported in its consolidated financial
statements. Cosmo evaluates its estimates and judgments on an on-going
basis. Cosmo bases its estimates on historical experience and
assumptions that Cosmo believes to be reasonable under the circumstances.
Cosmo’s experience and assumptions form the basis for its judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may vary from what Cosmo anticipates
and different assumptions or estimates about the future could change its
reported results.
Cosmo
believes the following accounting policies are the most critical to Cosmo, in
that they are important to the portrayal of Cosmo’s consolidated financial
statements and they require Cosmo’s most difficult, subjective or complex
judgments in the preparation of its consolidated financial
statements:
13
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. These estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings in the period in
which they become known.
Revenue
Recognition
Sales,
net of estimated sales returns, are recognized upon passage of title to the
customer. This occurs upon shipment or upon receipt by the customer
depending on the country of the sale and the agreement with the
customer. Revenue is recognized if persuasive evidence of an
agreement exists, the sales price is fixed or determinable, and collectability
is reasonably assured.
Commission
income is derived from reverse logistic services that consist of handling other
distributor companies returned goods. In providing these services,
the Company acts as an agent or broker without assuming the risks and rewards of
ownership of the goods and therefore reports the commissions on a net
basis. Revenue is recognized based on the completion of the
contracted services.
Inventories
Inventories
are valued at the lower of cost or net realizable value. Cost is
determined on average cost. Inventory is comprised of finished
products that the Company intends to sell to its customers. The
Company periodically makes judgments and estimates regarding the future utility
and carrying value of its inventory. The carrying value of inventory
is periodically reviewed and impairments, if any, are recognized when the
expected future benefit from the inventory is less than its carrying
value. The Company has inventory reserves for estimated obsolescence
or unmarketable inventory which is equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions.
Foreign
Translation Adjustment
The accounts of the foreign
subsidiaries were translated into U.S. dollars in accordance with the provisions
of Accounting Standards
Codification “ASC” 830 Foreign Currency
Translation. Management has determined that the Hong Kong dollar is the
functional currency of the Hong Kong subsidiaries and the Canadian dollar is the
functional currency of the Canadian subsidiary. Certain current
assets and liabilities of these foreign entities are denominated in U.S.
dollars. In accordance with
the provisions of ASC
830, transaction gains and
losses on these assets and liabilities are included in the determination of
income for the relevant periods. Adjustments resulting from the
translation of the financial statements from their functional currencies to
United States dollars are accumulated as a separate component of accumulated
other comprehensive income and have not been included in the determination of
income for the relevant periods.
Income
Taxes
The
Company accounts for income taxes pursuant to ASC 740, Accounting for Income
Taxes. Deferred tax assets and liabilities are recorded for
differences between the financial statement and tax basis of the assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is recorded for the amount of
income tax payable or refundable for the period increased or decreased by the
change in deferred tax assets and liabilities during the
period.
14
Fair
Value of Financial Instruments
The
Company's financial instruments include cash and cash equivalents, receivables,
payables, and advances from the parent company.
The
estimated fair value of financial instruments has been determined by the Company
using available market information and valuation
methodologies. Considerable judgment is required in estimating fair
value. Accordingly, the estimates may not be indicative of the
amounts the Company could realize in a current market exchange.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has
been no material changes in the Company’s market risk during the
first fiscal quarter ended September 30, 2010. For additional
information, refer to the Company’s Annual Report on Form 10-K for the
fiscal year ended March 31, 2010.
ITEM
4. CONTROLS AND PROCEDURES
In
designing and evaluating disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute assurance of achieving the
desired objectives. Also, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based, in part, upon certain assumptions
about the likelihood of future events and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of management, including our chief
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation,
management concluded that our disclosure controls and procedures are effective
to cause the information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods prescribed by SEC, and that such information is
accumulated and communicated to management, including our chief executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
There was
no change in our internal controls over financial reporting identified in
connection with the requisite evaluation that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
15
PART
II - OTHER INFORMATION
ITEM
1. - LEGAL PROCEEDINGS
We are
from time to time involved in routine litigation incidental to our business,
most of which is adequately covered by insurance and none of which is expected
to have a material adverse affect on our business, financial condition or
results of operation.
ITEM
2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not
applicable.
ITEM
3. - DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
ITEM
5. - OTHER INFORMATION
Not
applicable.
16
ITEM
6. - EXHIBITS
The
following exhibits are being filed as part of this quarterly
report:
Exhibit No.
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934.
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COSMO
COMMUNICATIONS CORPORATION
|
||
By:
|
/s/
Peter Horak
|
|
Name:
Peter Horak
Title:
Chief Executive Officer
|
||
Date:
February 11, 2011
|
||
By:
|
/s/
Carol Atkinson
|
|
Name:
Carol Atkinson
Title:
Chief Financial Officer
|
||
Date:
February 11, 2011
|
17