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REPORT FOR THE QUARTER ENDED September 30, 2011 


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 September 30, 2011
 
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 Filer o
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:
 
November 14, 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- 8  
           
Item 2.
Management’s Discussion & Analysis of Financial Condition and Results of Operations
    9 - 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
 
   
As Of
September 30,
   
As Of
March 31,
 
   
2011
   
2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current Assets:
           
Cash
  $ 348,672     $ 375,365  
Accounts receivable (net of allowance of $175,206 and $175,206 respectively)
    3,378,129       1,971,806  
Inventories (net of allowance of $631,342 and $752,822 respectively)
    8,790,292       4,712,192  
Prepaid expenses and deposits
    21,983       9,702  
Total Current Assets
    12,539,076       7,069,065  
                 
Other Assets:
               
Deferred taxes
    8,317       8,317  
Total Equipment and Other Assets
    8,317       8,317  
                 
Total Assets
  $ 12,547,393     $ 7,077,382  
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current Liabilities:
               
Accounts payable
  $ 555,766     $ 496,179  
Accrued liabilities
    248,464       391,463  
Accounts payable to parent company
    14,384,727       7,809,241  
Interest payable to parent company
    604,627       604,627  
Taxes payable
    18,208       -  
Total Current Liabilities
    15,811,792       9,301,510  
                 
Stockholders’ Deficit:
               
Preferred stock, $0.01 par value, cumulative and convertible, 30,000 shares authorized, none issued and outstanding
    -       -  
Preferred stock, $0.01 par value, 9,970,000 shares authorized, none issued and outstanding
    -       -  
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
    321,969       355,598  
Accumulated deficit
    (33,314,342 )     (32,307,700 )
                 
Total Stockholders' Deficit
    (3,264,399 )     (2,224,128 )
                 
Total Liabilities and Stockholders' Deficit
  $ 12,547,393     $ 7,077,382  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
1

 

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(Unaudited)

   
2011
   
2010
 
             
Sales
  $ 4,473,229     $ 3,738,822  
Cost of products sold
    3,624,726       3,247,342  
                 
Gross profit
    848,503       491,480  
                 
Commission income
    2,605       2,165  
      851,108       493,645  
Expenses:
               
Selling and delivery
    511,100       291,650  
Salaries and wages
    223,176       244,321  
General and administrative
    187,851       155,956  
Loss (gain) on foreign exchange
    518,180       (13,542 )
Financial
    2,150       2,355  
Depreciation
    -       3,718  
      1,442,457       684,458  
                 
Net loss before income taxes
    (591,349 )     (190,813 )
                 
Current income taxes
    5       812  
                 
                 
Net loss
  $ (591,354 )   $ (191,625 )
                 
Foreign currency translation adjustment
    (26,459 )     11,066  
                 
Comprehensive loss
    (617,813 )     (180,559 )
Net loss  per common share:
               
Basic and diluted
  $ (0.01 )   $ (0.00 )
Weighted average shares outstanding:
               
Basic and diluted
    40,467,636       40,467,636  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
2

 

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30
(Unaudited)

   
2011
   
2010
 
             
Sales
  $ 6,176,305     $ 7,231,797  
Cost of products sold
    5,175,025       6,373,359  
                 
Gross profit
    1,001,280       858,438  
                 
Commission income
    8,587       26,690  
      1,009,867       885,128  
Expenses:
               
Selling and delivery
    648,560       554,125  
Salaries and wages
    470,862       511,374  
General and administrative
    364,138       342,562  
Loss on foreign exchange
    525,895       104,501  
Financial
    6,249       7,514  
Depreciation
    -       7,437  
      2,015,704       1,527,513  
                 
Net loss before income taxes
    (1,005,837 )     (642,385 )
                 
Income taxes
    805       812  
                 
Net loss
  $ (1,006,642 )   $ (643,197 )
                 
Foreign currency translation adjustment
    (33,629 )     (54,135 )
                 
Comprehensive loss
    (1,040,271 )     (697,332 )
                 
Net loss per weighted number of shares outstanding:
               
Basic and diluted
  $ (0.02 )   $ (0.02 )
Weighted average shares outstanding:
               
Basic and diluted
    40,467,636       40,467,636  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30
 (Unaudited)

   
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net loss
  $ (1,006,642 )   $ (643,197 )
Adjustments to reconcile net loss to net cash provided by operating activities
               
Depreciation
    -       7,437  
      (1,006,642 )     (635,760 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,406,323 )     (575,343 )
Inventories
    (4,078,100 )     (1,027,520 )
Prepaid expenses and deposits
    (12,281 )     (13,113 )
Accounts payable and accrued liabilities
    (83,412 )     313,489  
Taxes payable
    18,208       (69,240 )
Accounts payable to parent company
    6,575,486       1,761,638  
Net cash provided by (used in) operating activities
    6,936       (245,849 )
                 
                 
Effect of exchange rate changes on cash
    (33,629 )     (54,135 )
                 
Net decrease in cash
    (26,693 )     (299,984 )
                 
Cash - beginning of period
    375,365       635,516  
                 
Cash - end of period
  $ 348,672     $ 335,532  

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

 
4

 

COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NATURE OF OPERATIONS

Cosmo Communications Corporation and subsidiaries (the "Company" or "Cosmo") market and distribute consumer electronic products. The Company has operations in Hong Kong, 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 months and six months periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending March 31, 2012. 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, 2011.

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 September 30, 2011, the Company provided reserves for doubtful accounts receivable in the amount of $175,206 (March 31, 2011 - $175,206); provided inventory reserves for estimated obsolescence for $631,342 (March 31, 2011 - $752,822); and provided reserves for defective inventory returns of $116,836 (March 31, 2011 - $252,977).
 
 
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 September 30, 2011 and March 31, 2011, 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 September 30, 2011 and 2010.
 
AMOUNTS PAYABLE TO PARENT COMPANY
 
As of September 30, 2011, the Company owed $14,989,354 (March 31, 2011 - $8,413,869) to The Starlight Group of Companies, the principal corporate shareholder of the Company ("Starlight").  Of this amount $14,384,727 (March 31, 2011- $7,809,242) 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 September 30, 2011 was $604,627 (March 31, 2011 - $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 September 30, 2011 were:
 
2012 (Six months)
    167,344  
2013
    337,373  
2014
    170,029  
    $ 674,746  
 
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 six months ended September 30, 2011, the Company purchased $6,055,300 (six months ended September 30, 2010 - $6,321,495) of goods from Starlight.  The Company also purchased a net value of $904,307 of goods from Singing Machine Company, a subsidiary company of our Parent Company (six months ended September 30, 2010 - $940,773).
 
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 is the Company's largest customer, which accounted for approximately 29% of sales for the six months ended September 30, 2011 and 29% for the three months ended September 30, 2011.  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 September 30, 2011, the accounts receivable from this customer amounted to approximately $1,211,577, (March 31, 2011 – claims payable for inventory returns amounted to approximately $350,861).
 
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
 
September 30, 2011
                       
Assets
    11,169,445       275,276       1,102,672       12,547,393  
                                 
Six Months Ended September 30, 2011
                               
Sales, net
    5,126,280       761,874       288,151       6,176,305  
Gross margin
    983,448       106,035       (88,203 )     1,001,280  
Net loss
    (928,015 )     38,138       (116,765 )     (1,006,640 )
                                 
March 31, 2011
                               
Assets
    6,044,244       136,493       896,645       7,077,382  
                                 
Six Months Ended September 30, 2010
                               
Sales, net
    6,097,925       677,090       456,781       7,231,796  
Gross margin
    761,535       63,048       33,854       858,437  
Net loss
    (550,686 )     (50,789 )     (41,722 )     (643,197 )
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
During the six months ended September 30, 2011 the Company paid interest of $6,249 (six months ended September 30, 2010 - $7,514) and paid $805 in income tax (six months ended September 30, 2010 – $812).
 
 
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, 2011.

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 September 30, 2011 (“2011”) and For the Quarter Ended September 30, 2010 (“2010”)

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 September 30, 2011 and 2010.

   
Three months
ended
   
Three months
ended
   
Six months
ended
   
Six months
ended
   
Three months
ended
   
Three months
ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
   
June 30,
2010
   
June 30,
2009
 
Sales
    100 %     100 %     100 %     100 %     100 %     100 %
Cost of products sold
    81 %     86.9 %     83.8 %     88.1 %     89.5 %     88.6 %
                                                 
Gross profit
    19 %     13.1 %     16.2 %     11.9 %     10.5 %     11.4 %
                                                 
Commission income
    0.1 %     0.1 %     0.1 %     0.4 %     0.7 %     0.7 %
                                                 
Expenses:
                                               
Salaries and wages
    5 %     6.5 %     7.6 %     7.1 %     7.6 %     7.6 %
General and administrative
    4.2 %     4.2 %     5.9 %     4.7 %     5.3 %     5 %
Selling and delivery
    11.4 %     7.8 %     10.5 %     7.7 %     7.5 %     12 %
Financial
    0.1 %     0.1 %     0.1 %     0.1 %     0.1 %     0.1 %
(Gain) loss on foreign exchange
    11.6 %     (0.5 )%     8.5 %     1.5 %     3.4 %     (3.9 )%
Depreciation
    -       0.1 %     -       0.1 %     0.1 %     0.1 %
Net loss before income tax
    (13.2 %)     (5.0 %)     (16.3 %)     (8.9 %)     (12.9 %)     (8.8 %)
Income tax (recovery) expense
    -       -       -       -       -       (0.3 )%
Net loss
    (13.2 %)     (5.0 %)     (16.3 %)     (8.9 %)     (12.9 %)     (8.5 %)

The following is a discussion and analysis of our results of operations for the above periods:
 
 
10

 

Three months ended September 30, 2011 and three months ended September 30, 2010.
 
Net Sales:

Sales for the three months ended September 30, 2011 increased by approximately $734,407 or 20% compared to the corresponding period in 2010.  The increase reflected the normal sales level in this quarter.  In 2010, there was a severe labor shortages in Southern China, goods that would normally be shipped in September were delayed until October in that year.   We did not experience major labor shortages in the current year.

Cost of Sales and Gross Margin:

Gross margin was 19% for the three months ended September 30, 2011 as compared to 13% for the same period in 2010.   The Canadian dollar appreciated by about 3% this period compared with the 2010 period.  Cost of sales which was paid in US dollars became relatively cheaper with majority of our sales revenue in Canadian dollars.   A higher profit margin in refurbished products also helped to improve the overall gross profit margin.

Commission Income:

Commission income was similar in the two periods in comparison.

Selling, General and Administrative Expenses:

Our salaries expenses decreased by $21,145 for the three months ended September 30, 2011 compared with the same period in 2010.  General and administrative expense increased by $31,895, mainly in rent increment.  Our selling expenses increased by $219,450 due to the accrual of minimum royalties and increase in providing advertising and promotional allowances to our customers.  Through our parent company, we received the license to distribute Polaroid brand products.  Our share of the minimum royalty is $115,000 per quarter.
 
 
11

 
 
Financial:

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

Net Earnings:

The net loss for the three months ended September 30, 2011 was $591,354 compared with a net loss of $190,625 in the corresponding period in 2010.  The increase in net loss was due to loss in foreign exchange of $518,180 compared with an exchange gain of $13,542 in 2010.

Foreign exchange:
 
For the three months ended September 30, 2011, we recorded a loss of $518,180 in foreign exchange as compared with a gain of $13,542 in 2010.  The exchange rates of the Canadian dollar against the US dollar have been volatile in the two periods in comparison.
 
Six months ended September 30, 2011 compared with six months ended September 30, 2010.

Net Sales:

Sales for the six months ended September 30, 2011 decreased by $1,055,492 compared with the same period in 2010.   Our audio products experienced a decrease of $1.3M offset by an increase in new camera products under the Polaroid brand name of $141,000.

Cost of Sales and Gross Margin:

Gross margin was 16.2% for the six months ended September 30, 2011 compared with 11.9% in 2010.  The Canadian dollar appreciated by about 6% this period compared with the 2010 period.  Cost of sales which was paid in US dollars became relatively cheaper with majority of our sales in Canadian dollars.   A better profit margin in refurbished products also helped to improve the overall gross profit margin.
 
Commission Income:

Commission income decreased by $18,103 for the current six months compared with 2010.  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 $574,769, and has been booked as sales income in the current six months.

Selling, General and Administrative Expenses:

Selling and delivery expenses increased by $94,435 for the six months ended September 30, 2011.  The increase was due to the need to accrue minimum royalty expenses.
Salaries, general and administrative expenses decreased by $18,936 during this period.  The decrease was due to reduction in payroll of admin and warehouse staff offset by increase in rent increments.

Financial:
 
There was no major change in our financial costs in the two periods in comparison.
 
 
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Net Earnings:

Net loss for the six months ended September 30, 2011 was $1,006,642 compared with a net loss of $643,197 in 2010.  The increase in net loss was due mainly to the impact of foreign exchange.  Foreign exchange loss was $525,895 in this current period compared with $104,501 in 2010.

Foreign exchange:
 
We incurred an exchange loss of $525,895 compared with a loss of $104,501 in 2010  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 six months ended September 30, 2011, net cash provided by operating activities was $6,936.  The main source of our working capital during this period came from increasing our trade payable from our parent company.   The ratio of current assets to current liabilities was 0.76 to 1, as compared to 0.76 to 1 on March 31, 2011.

Seasonal and Quarterly Results
 
Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for electronic audio and video equipment during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year.   The current trend is we will receive less direct import orders and more domestic sales orders from our customers.  In effect, the timing of placing orders will be delayed.  Our results of operations often fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis.

Inflation
 
Inflation has not had a significant impact on the Company's operations.  The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts.

Critical Accounting Policies and Estimates

The methods, estimates and judgments Cosmo uses in applying its accounting policies have a significant impact on the results reported in its consolidated financial statements. Cosmo evaluates its estimates and judgments on an on-going basis.  Cosmo bases its estimates on historical experience and assumptions that Cosmo believes to be reasonable under the circumstances. Cosmo’s experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may vary from what Cosmo anticipates and different assumptions or estimates about the future could change its reported results.

Cosmo believes the following accounting policies are the most critical to Cosmo, in that they are important to the portrayal of Cosmo’s consolidated financial statements and they require Cosmo’s most difficult, subjective or complex judgments in the preparation of its consolidated financial statements:      

 
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Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
 
Revenue Recognition
 
Sales, net of estimated sales returns, are recognized upon passage of title to the customer.  This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer.  Revenue is recognized if persuasive evidence of an agreement exists, the sales price is fixed or determinable, and collectability is reasonably assured.

Commission income is derived from reverse logistic services that consist of handling other distributor companies returned goods.  In providing these services, the Company acts as an agent or broker without assuming the risks and rewards of ownership of the goods and therefore reports the commissions on a net basis.  Revenue is recognized based on the completion of the contracted services.

Inventories
 
Inventories are valued at the lower of cost or net realizable value.  Cost is determined on average cost.  Inventory is comprised of finished products that the Company intends to sell to its customers.  The Company periodically makes judgments and estimates regarding the future utility and carrying value of its inventory.  The carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from the inventory is less than its carrying value.  The Company has inventory reserves for estimated obsolescence or unmarketable inventory which is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Foreign Translation Adjustment
 
The accounts of the foreign subsidiaries were translated into U.S. dollars in accordance with the provisions of Accounting Standards Codification “ASC” 830 Foreign Currency Translation.  Management has determined that the Hong Kong dollar is the functional currency of the Hong Kong subsidiaries and the Canadian dollar is the functional currency of the Canadian subsidiary.  Certain current assets and liabilities of these foreign entities are denominated in U.S. dollars.  In accordance with the provisions of ASC 830, transaction gains and losses on these assets and liabilities are included in the determination of income for the relevant periods.  Adjustments resulting from the translation of the financial statements from their functional currencies to United States dollars are accumulated as a separate component of accumulated other comprehensive income and have not been included in the determination of income for the relevant periods.

Income Taxes
 
The Company accounts for income taxes pursuant to ASC 740, Accounting for Income Taxes.  Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.

 
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Fair Value of Financial Instruments
 
The Company's financial instruments include cash and cash equivalents, receivables, payables, and advances from the parent company.

The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies.  Considerable judgment is required in estimating fair value.  Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material changes in the Company’s market risk during the first fiscal quarter ended September 30, 2011.  For additional information, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal controls over financial reporting identified in connection with the requisite evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II - OTHER INFORMATION

ITEM 1. - LEGAL PROCEEDINGS

We are from time to time involved in routine litigation incidental to our business, most of which is adequately covered by insurance and none of which is expected to have a material adverse affect on our business, financial condition or results of operation.

ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.
 
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES

Not applicable.
 
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.
 
ITEM 5. - OTHER INFORMATION

Not applicable.
 
 
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ITEM 6. - EXHIBITS

The following exhibits are being filed as part of this quarterly report:

Exhibit No.
 
Description
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
     
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
     
32.1
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
COSMO COMMUNICATIONS CORPORATION
       
 
By: 
/s/ Peter Horak
 
   
Name: Peter Horak
 
   
Title: Chief Executive Officer
 
       
  Date: November 14, 2011  

 
By: 
/s/ Carol Atkinson
 
   
Name: Carol Atkinson
 
   
Title: Chief Financial Officer
 
       
 
Date: November 14, 2011
 
 
 
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