SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-KT





 ̈ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





x TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the transition period from July 1, 2010 to December 31, 2010





Commission File No. 000-51599





Infusion Brands International, Inc.


(Exact name of registrant as specified in its charter)





Nevada

54-2153837(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)14375 Myerlake Circle

Clearwater, Florida

33760(Address of principal executive offices)

(Zip Code)





(813) 885-5998


(Registrant’s telephone number, including area code)





Securities registered under Section 12(b) of the Exchange Act:





Title of each class registered:

Name of each exchange on which registered:None.

None.





Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.00001 par value per share.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ̈     No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ̈      No x





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 x  No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.   Yes x    No  ̈





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 filer
 ̈
Accelerated filer
 ̈Non-accelerated filer

(Do not check if a smaller reporting company)
 ̈
Smaller reporting company
x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   ̈   No  x





Revenues for the transition period from July 1, 2010 to December 31, 2010: $4,073,520





The aggregate market value of the registrant’s voting common stock held by non-affiliates as of December 31, 2010 based upon the closing price reported for such date on the OTC Bulletin Board was US $1,957,088.





As of March 31, 2011 the registrant had 178,951,422 shares of its common stock issued and outstanding.





Documents Incorporated by Reference: None.











Explanatory Notes





On December 16, 2010, we changed the name of our company from OmniReliant Holdings, Inc. to Infusion Brands International, Inc. (“Infusion Brands” or the “Company”).





On December 17, 2010, we changed our fiscal year end from June 30 to December 31. Our transition financial statements for the period from July 1, 2010 to December 31, 2010 are included elsewhere herein.





During our six month transition period ended December 31, 2010 we discontinued and disposed of all holdings in our former eCommerce and Fashion Goods business segments in order to concentrate on our consumer products development and branding business. As a result of these disposals, we are now a global consumer products company, specializing in developing innovative solutions and marketing profitable brands through our international direct-to-consumer channels of distribution. Our financial statements for all periods presented elsewhere herein, give effect to the treatment of our disposals of the discontinued segments as discontinued operations. That means that the historical operations of the discontinued segments have been reclassified into the single caption described in our consolidated statements of operations as loss from operations of discontinued operating segments and the assets and liabilities of the discontinued segments have been reclassified into two captions in our consolidated balance sheets described as assets of discontinued operating segments and liabilities of discontinued segments. We have no continuing involvement with the discontinued operations that were disposed of.





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Infusion Brands International, Inc.





FORM 10-KT





For the Transition Period July 1 2010 to December 31, 2010





TABLE OF CONTENTS





PAGEPART IITEM 1.
Business
5ITEM 1A.
Risk Factors
7ITEM 2.
Properties
13ITEM 3.
Legal Proceedings
13ITEM 4.
Removed and Reserved
15PART IIITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
16ITEM 6.
Selected Financial Data
18ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
18ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
36ITEM 8.
Consolidated Financial Statements
36ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
108ITEM 9A(T).
Controls and Procedures
108ITEM 9B.
Other Information
110PART IIIITEM 10.
Directors, Executive Officers and Corporate Governance
111ITEM 11.
Executive Compensation
116ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
118ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
119ITEM 14.
Principal Accounting Fees and Services
121PART IVITEM 15.
Exhibits, Financial Statement Schedules
122SIGNATURES
126




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PART I





FORWARD-LOOKING STATEMENTS:





This Transition Report on Form 10-KT (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Transition Report on Form 10-KT. Additionally, statements concerning future matters are forward-looking statements.





Although forward-looking statements in this Transition Report on Form 10-KT reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Related to Our Business" below, as well as those discussed elsewhere in this Transition Report on Form 10-KT. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Transition Report on Form 10-KT. We file reports with the Securities and Exchange Commission ("SEC"). You can obtain any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.





We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Transition Report on Form 10-KT. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Transition Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.





4





ITEM 1 – BUSINESS





Description of Business





General Development of Business:





Infusion Brands International, Inc. (the “Company”, “Infusion Brands”, “we”, or “our”) is a Nevada Corporation. Prior to the fourth quarter of our year ended June 30, 2010, we engaged in the acquisition, creation, design, distribution, and sale of various product lines, both proprietary and licensed.  The Company and predecessor management planned to create synergies and increase shareholder value through the acquisition of these assets. In connection with that business model the Company had acquired a portfolio of interests in various companies, patents and products to bring to the market, seeking to leverage our various assets to work together to ensure success of each entity and the holding company.





During the third quarter of our year ended June 30, 2010, the Company’s Board of Directors appointed a new management team which changed the direction of our business to that of a consumer products company with a sole focus on solving consumer problems by creating and sourcing branded innovative solutions worldwide. We are driven by powerful brands in five attractive consumer categories; Hardware/Tools, House wares/Cleaning, Beauty/Skincare, Fashion/Accessories and Fitness. By leveraging our expertise with international direct-to-consumer channels of distribution, we make our branded products available direct to consumers throughout the world. Our global marketing channels include, but not limited to, live television shopping, direct response programming, eCommerce via Cloud Computing and traditional “brick-and-mortar” retail channels of distribution. By leveraging our access to capital, human resource expertise, proprietary intellectual property and global corporate infrastructure, the Company will strive to:





-
Profitably build and market branded innovative consumer products to drive consistent revenue and earnings growth,


-
Innovate new products to grow sales


-
Position our branded products to outperform the competition by:


o
Constantly focusing on driving value innovation to our branded products rather than just simple incremental improvement


o
Expanding consumer relationships by developing effective direct response marketing campaigns to increase brand awareness and drive sales.


o
Cross marketing and extending our brands across our entire customer base


-
Leverage cloud computing to expand consumer awareness and create lean and flexible supply chains, business processes and scalable best practices





-
Leverage our financial resources in a conservatively strategic approach to be opportunistic


-
Focus on the pursuit of opportunities with the highest return on investment for the long term, while also driving short-term corporate initiatives.





Our plan of operation going forward consists of maintaining a strong commitment to research and development, and increasing the pace of our new product development and speed to market.  Our approach includes extensive research on both emerging technology trends, key global market trends and customer challenges that enable us to prioritize our efforts and capture market share.





5





While our initial and immediate objectives are focused on organic growth, we also strive to create additional shareholder value through strategic acquisitions which may increase our sales through opening access to new global markets, decrease costs by creating stronger purchasing power and-or add accretive revenue and earnings to our existing operations.





Coupled with an intensified focus on the reorganization of the Company as a consumer products company, our new management team has also been engaged in strategic initiatives focused on alleviating our operating and cash flow losses. As a result of these efforts, management, with the support of our Board of Directors, has concluded that the continuing losses from our holdings in the Fashion Goods and eCommerce Segments (the “Discontinued Segments”) and the associated drain on our capital resources warranted discontinuance of the businesses and disposal of the assets comprising the Discontinued Segments.





Fashion Goods Segment: The Fashion Goods Segment was engaged in the designer goods business as a product liquidator to both business-to-business and business-to-consumer channels of distribution through our former Designer Liquidator, Inc. (“Designer”) and RPS Trading LLC (“RPS”) subsidiaries. Operations in these businesses had been substantially curtained since June 2010 and were completely shut down during the months of November and December 2010. All assets have been disposed of or abandoned. We have no ongoing obligations or involvement in these companies of any nature.





eCommerce Segment: The eCommerce Segment was engaged in retail and wholesale distribution of specific products through our former wholly-owned subsidiary, OmniReliant Acquisition Sub, Inc. (“Abazias”) and companies that we held influential investments which were part of the eCommerce Segment and accounted for using the equity method. On December 16, 2010, we exchanged our interest is Abazias with its former owners for cancellation of their employment contracts. During December 2010, we also disposed of our equity investments for no consideration. We have no ongoing obligations or involvement in these companies of any nature.





We have reported our disposals of the Discontinued Segments throughout this Transition Report as discontinued operations pursuant to ASC 205-20 Presentation of Financial Statements. Under ASC 205–20, a component of an entity that can be clearly distinguished operationally and for financial reporting purposes from the rest of the entity is reported in discontinued operations if both (a) the operations and cash flows have been or will be eliminated from the ongoing operations and (b) the continuing entity will have no significant ongoing involvement or obligations associated with the components disposed. The Discontinued Segments meet these criteria for purposes of presentation of discontinued operations.





Business and Material Asset Acquisitions





On July 31, 2009, we acquired the assets and assumed certain liabilities of Designer in exchange for 100,000 shares of common stock and cash of $150,000. Designer was engaged in the manufacture and wholesale distribution of brand-name apparel and the retail sale of other accessories. We originally acquired Designer to expand our retail sales and enter manufacturing and wholesale distribution. On August 27, 2009, we completed our acquisition of the outstanding common stock of Abazias through the merger of Abazias with and into our newly-created, wholly-owned subsidiary, OmniReliant Acquisition Sub, Inc., in exchange for 13,000,000 shares of our designated Series E Convertible Preferred Stock. Abazias was an online retailer of high quality loose diamonds and fine jewelry settings for diamonds. We originally acquired Abazias for the purpose of building brand recognition and increasing retail market penetration. As discussed in the previous section, these two businesses were part of the Discontinued Segments and were disposed of.





6




Principal Products
 
 Prior to the change in direction discussed above, we have been engaged in identifying affordable and demonstrable products to market principally to domestic customers through direct-to-consumer channels such as television infomercials, live shopping networks, and ecommerce channels. Our products are also sold through web sites operated by the live shopping networks that agree to carry our products. Our principal product has been the Dual-Saw TM with its counter rotating dual blade technology. The Dual-Saw TM sales comprised 61% and 28% of our product sales during the six months ended December 31, 2010 and 2009, respectively, and 74% and 34% of our product sales during the years ended June 30, 2010 and 2009, respectively.


Government Regulation





Various aspects of our business are subject to regulation and ongoing review by a variety of federal, state, and local agencies, including the Federal Trade Commission, the United States Post Office, the Consumer Product Safety Commission, the Federal Communications Commission, Food and Drug Administration, various States' Attorneys General and other state and local consumer protection and health agencies. The statutes, rules and regulations applicable to the Company's operations, and to various products marketed by it, are numerous, complex and subject to change.





We will collect and remit sales tax in the states in which it has a physical presence. We are prepared to collect sales taxes for other states, if laws are passed requiring such collection. We do not believe that a change in the tax laws requiring the collecting of sales tax will have a material adverse effect on our financial condition or results of operations.





Employees





As of March 31, 2011 we have 31 employees, who work full-time. We consider our relations with our employees to be very good.





Competition





Competition in the consumer products industry is intense and may be expected to intensify. There are other, larger and well-established consumer products companies with whom we must compete. We compete directly with several companies which generate sales from direct to consumer marketing methods. We also compete with a large number of consumer product companies and retailers which have substantially greater financial, marketing and other resources than Infusion Brands, some of which have recently commenced, or indicated their intent to conduct, direct response marketing. We also compete with companies that make imitations of Infusion Brands’ products at substantially lower prices. Products similar to our products may be sold in department stores, pharmacies, general merchandise stores and through magazines, newspapers, direct mail advertising and catalogs. It is management's opinion that many of its major competitors are better and longer established, better financed and with enhanced borrowing credit based on historical operations, and enjoy substantially higher revenues than Infusion Brands does currently. As a new entrant into this marketing industry, we rely on the skill, experience and discernment of our new management. Our major competitors include consumer products companies such as Emerson, Bosch, Church & Dwight Co., Estee Lauder, Alberto Culver, Reckitt Benckiser, Thane International, and Guthy Renker.




ITEM 1A – RISK FACTORS





This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.





7





RISKS RELATED TO OUR BUSINESS:





TO DATE WE HAVE HAD SIGNIFICANT OPERATING LOSSES, AND AN ACCUMULATED DEFICIT AND HAVE HAD LIMITED REVENUES AND DO NOT EXPECT TO BE PROFITABLE FOR AT LEAST THE FORESEEABLE FUTURE, AND CANNOT PREDICT WHEN WE MIGHT BECOME PROFITABLE, IF EVER.





We have been operating at a loss since our inception, and we expect to continue to incur substantial losses for the foreseeable future. Net loss for the transition period from July 1, 2010 to December 31, 2010 was $(6,004,827) and year ended June 30, 2010 was $(30,811,723) resulting in an accumulated deficit of $(58,712,607). Further, we may not be able to generate significant revenues in the future. In addition, we expect to incur substantial operating expenses in order to fund the expansion of our business. As a result, we expect to continue to experience substantial negative cash flow for at least the foreseeable future and cannot predict when, or even if, we might become profitable.





IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE TRADING PRICE OF OUR COMMON STOCK.




Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if failures of internal controls exist, and may in the future discover areas of our internal control that need improvement




OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.





In their report dated March 31, 2011, Meeks International LLC stated that our financial statements for the fiscal year ended June 30, 2010 and six month transition period ended December 31, 2010, were prepared assuming that we would continue as a going concern, the factors that follow raise substantial doubt about the Company's ability to continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of our recurring losses from operations and our net capital deficiency. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and raise capital to finance our operation.





ADDITIONAL FINANCING IS NECESSARY FOR THE IMPLEMENTATION OF OUR GROWTH STRATEGY.





We may require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and existing losses, there can be no assurance that we will be successful in obtaining additional financing. Lack of additional funding could force us to curtail substantially our growth plans or cease our operations. Furthermore, the issuance by us of any additional securities pursuant to any future fundraising activities undertaken by us would dilute the ownership of existing shareholders and may reduce the price of our common stock.





Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations.





8





WE MAY BE UNABLE TO MANAGE OUR GROWTH OR IMPLEMENT OUR EXPANSION STRATEGY.





We may not be able to expand our product and service offerings, our client base and markets, or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will place a significant strain on our administrative, operational and financial resources. If we are unable to successfully manage our future growth, establish and continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, our financial condition and results of operations could be materially and adversely affected.





FLUCTUATIONS IN OUR OPERATING RESULTS AND ANNOUNCEMENTS AND DEVELOPMENTS CONCERNING OUR BUSINESS AFFECT OUR STOCK PRICE.





Our operating results, the number of stockholders desiring to sell their shares, changes in general economic conditions and the financial markets, the execution of new contracts and the completion of existing agreements and other developments affecting us, could cause the market price of our common stock to fluctuate substantially.





OUR BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL.





Our ability to increase sales and to profitably distribute and sell our products and services is subject to a number of risks, including changes in our business relationships with our principal distributors, competitive risks such as the entrance of additional competitors into our markets, pricing and technological competition, risks associated with the development and marketing of new products and services in order to remain competitive and risks associated with changing economic conditions and government regulation.  Our inability to overcome these risks could materially and adversely affect our operations.





OUR SUCCESS DEPENDS, IN PART, ON THE QUALITY AND SAFETY OF OUR PRODUCTS.





Our success depends, in part, on the quality and safety of our products. If our products are found to be defective or unsafe, or if they otherwise fail to meet our customers’ standards, our relationship with our customers could suffer, our brand appeal could be diminished, and we could lose market share and/or become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations and financial condition.





OUR BUSINESS IS CONDUCTED WORLDWIDE PRIMARILY IN THE SINGULAR CHANNEL OF DIRECT SELLING.





We plan to market our products primarily through direct to consumer marketplaces. If consumers change their purchasing habits, such as by reducing purchase behaviors, this could reduce our sales and have a material adverse effect on our business, financial condition and results of operations.





9





RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:





THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE PREFERRED STOCK, WARRANTS AND STOCK OPTIONS THAT MAY AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.





We have 178,951,422 common shares outstanding as of March 31, 2011. Also as of March 31, 2011 we have 247,014,196 common shares linked to our Convertible Preferred Stock, Warrants and Stock Options, as follows. The conversion or exercise, as the case may be, of these securities, will result in the dilution of our current shareholders







Securities

Common Stock

EquivalentConvertible Preferred Stock:Series C Convertible Preferred Stock


10,242,100Series E Convertible Preferred Stock


5,053,551Series G Convertible Preferred Stock


60,000,000Total Convertible Preferred Stock


75,295,651Warrants:Class B-2


480,000Class C-1


1,365,614Class C-2


1,365,614Class G


60,000,000Vicis Warrant


70,000,000Warrants issued to Broker Dealers


5,546,980Total Warrants


138,758,208Stock Options


32,960,337Total Common Equivalent Shares


247,014,196





On February 8, 2011, we issued 20,162,448 shares of our common stock to a consultant. These shares are included in the number of common shares outstanding above. In connection with the underlying consultancy agreement, we agreed to issue additional common shares equal to 5.0% of our outstanding common stock on the date that we have fulfilled our dividend payments on our Series G Convertible Preferred Stock.





On March 15, 2011, we agreed to issue 1,000,000 shares of our Series G Convertible Preferred Stock, which is convertible into 10,000,000 shares of our common stock, and Series G Warrants to purchase 10,000,000 shares of our common stock to a certain accredited investor for gross proceeds of $1,000,000.





RISKS RELATING TO OUR COMMON STOCK:





OUR INABILITY TO USE SHARES OF OUR COMMON STOCK TO FINANCE FUTURE OPERATIONS COULD IMPAIR THE GROWTH AND EXPANSION OF OUR BUSINESS.





The extent to which we will be able or willing to use shares of our common stock to further our operations will depend on (i) the market value of our securities which will vary, (ii) liquidity, which is presently limited, and (iii) the willingness of potential sellers to accept shares of our common stock as full or partial payment for their business. Using shares of our common stock for this purpose may result in significant dilution to existing stockholders. To the extent that we are unable to use common stock to fund operations, our ability to grow may be limited by the extent to which we are able to raise capital through debt or equity financings. We may not be able to obtain the necessary capital to finance operations. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of expansion or redirect resources committed to internal purposes. Our failure to use shares of our common stock to fund future operations may hinder our ability to grow our business.





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OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND PRICE FLUCTUATIONS WHICH COULD ADVERSELY IMPACT THE VALUE OF OUR COMMON STOCK.





There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will either develop or be maintained. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.





OUR STOCK PRICE MAY BE VOLATILE.





The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:





•
changes in our industry;


•
competitive pricing pressures;


•
our ability to obtain working capital financing;


•
additions or departures of key personnel;


•
sales of our common stock;


•
our ability to execute our business plan;


•
operating results that fall below expectations;


•
loss of any strategic relationship;


•
regulatory developments; and


•
economic and other external factors.





In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.





IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDER TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.





Our common stock current trades on the Over-the-Counter Bulletin Board (“OTC:BB”) under the symbol “INBI.”  Companies trading on the OTC:BB must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.





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A SOLE SHAREHOLDER BENEFICIALLY OWNS APPROXIMATELY 89.0% OF OUR COMMON STOCK. THIS SOLE SHAREHOLDER’S INTERESTS COULD CONFLICT WITH YOURS AND SIGNIFICANT SALES OF STOCK HELD BY THEM COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE. ADDITIONALLY, BECAUSE THIS SHAREHOLDER HOLDS A MAJORITY OF THE VOTING POWER OF OUR CAPITAL STOCK, OTHER SHAREHODLERSS MAY BE UNABLE TO EXERCISE CONTROL.





As of March 31, 2011, Vicis Capital Master Fund beneficially owned approximately 89.0% of our common stock. As a result, Vicis Capital Master Fund will have significant influence to:





-
elect or defeat the election of our directors;





-
amend or prevent amendment of our articles of incorporation or bylaws;





­-
effect or prevent a merger, sale of assets or other corporate transaction; and





­-
control the outcome of any other matter submitted to the stockholders for vote.





As a result of their ownership and positions, Vicis Capital Master Fund is able to significantly influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by Vicis Capital Master Fund, or the prospect of these sales, could adversely affect the market price of our common stock.





BECAUSE WE MAY BE SUBJECT TO THE “PENNY STOCK” RULES, YOU MAY HAVE DIFFICULTY IN SELLING OUR COMMON STOCK.





If our stock price is less than $5.00 per share, our stock may be subject to the SEC’s penny stock rules, which impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. The application of these rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you may own.





-
According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:





­-
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;





­-
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;





­-
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;





­-
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and





The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.





12





As an issuer of “penny stock” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.





Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, if we are a penny stock we will not have the benefit of this safe harbor protection in the event of any claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.





ITEM 1B—UNRESOLVED STAFF COMMENTS





None





ITEM 2—PROPERTIES





We own our principal office building and land that are located at 14375 Myerlake Circle, Clearwater, Florida 33760. Our building has 34,000 square feet and it is situated on approximately 5 1⁄2 acres of land. This facility is used in the Consumer Products Segment of our business operations. Our building and land serve as collateral for a $1,928,199 mortgage note payable. See Note 12 to our Consolidated Financial Statements included elsewhere herein for information on our long-term debt.





ITEM 3—LEGAL PROCEEDINGS





Mediaxposure Limited (Cayman) v. Omnireliant Holdings, Inc., Kevin Harrington, Timothy Harrington, Chris Philips, Richard Diamond, Paul Morrison, Vicis Capital Master Fund and Vicis Capital LLC:





Supreme Court of the State of New York, County of New York, Index No. 09603325





On October 30, 2009, Mediaxposure (Cayman) Limited filed a complaint against the named defendants alleging certain causes of actions, including aiding and abetting a breach of fiduciary duty. In January 2010, all defendants moved to dismiss the complaint. The Company’s motion was fully briefed and argued.  The Company’s motion to dismiss was granted on October 25, 2010. On or about November 18, 2010, Mediaexposure moved to amend the complaint to add a claim against the Company.  Omni opposed the motion, which is now sub judice.





OmniReliant Holdings, Inc v. ResponzeTV, et al.:





Supreme Court of the State of New York, County of New York, Index No. 600646/2009





The Company commenced this action on March 2, 2009 in the Supreme Court of the State of New York, County of New York against ResponzeTV, PLC, and two of its directors, Grahame Farquhar and Steven Goodman to recover $2,000,000, due and owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in favor of the Company, and also asserts causes of action for fraud and unjust enrichment.





Defendants have moved to dismiss the Complaint, and the Company has opposed this motion. The court denied the motion as against Grahame Farquhar.





13





Based upon ResponzeTV’s dissolution, the Company stipulated to dismiss the action against it, without prejudice. The Company moved to amend the complaint in July, 2010 to add Mediaxposure (Cayman) as a defendant.  The motion to leave to amend the complaint to add Mediaxposure (Cayman) as a defendant was withdrawn.





Local Ad Link, Inc., et al. v. AdzZoo, LLC, et al. v. OmniReliant Holdings, Inc., et ano:





United States District Court, District of Nevada, Case No. 2:08-cv-00457-LRH-PAL





On or about February 19, 2010, AdzZoo, LLC (“AdzZoo”) and the other defendants in the above-referenced action commenced a third-party action against the Company and Zurtvita Holdings, Inc.  In the Third-Party Complaint, AdzZoo alleges a cause of action for fraud against the Company, in which it seeks unspecified monetary damages.  Defendants also allege a claim for a declaratory judgment in which they seek a judgment declaring the rights with respect to certain representative agreements entered into between certain individual Defendants and Plaintiff.





On April 13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted against it. By Order, dated September 9, 2010, the Court granted the Company’s motion and dismissed the Third-Party Complaint against the Company.





Davlyn Industries, Inc. v. ResponzeTV America, LLC f/k/a Reliant International Media, LLC and OmniReliant  Corporation:





Circuit Court, Pinellas County, Florida, Case No: 09-11763 CI





Davlyn Industries, Inc. filed this lawsuit asserting a claim for breach of contract in connection with the purchase of cosmetic skin care products. Davlyn Industries, Inc. demands judgment against Infusion Brands of $293,600 plus interest and court costs. This case was in the discovery stage. While management believes the lawsuit is without merit, the matter was settled with a payment in the amount of $62,500.





OmniResponse, Inc. v. Global TV Concepts, Ltd., Laurie Braden and Lee Smith, case number 0-10:61029 in the Southern District Court of Florida (SDFL).





United States District Court, Southern District of Florida, Case No. 10-CV-61029





On June 17, 2010, OmniResponse, Inc. filed a complaint against Global Concepts Limited, Inc., d/b/a Global TV Concepts, LTD, Laurie Braden and Lee Smith alleging trademark infringement, unfair competition, violations of Florida’s Deceptive and Unfair Trade Practices Act and breach of contract. OmniResponse, Inc. is seeking monetary damages and injunctive relief. Also on July 17, 2010, the United States District Court for the Southern District of Florida entered an order preliminarily enjoining Defendants from the use of infringing trademarks. The matter was scheduled for trial at the end of June, 2011. However, the Company has accepted a confidential settlement from the defendants.




14





Global TV Products, Ltd. v. Omni Reliant Holdings, Inc., Trademark Opposition No. 91195187 before the Trademark Trial and Appeal Board (TTAB).





Global TV Concepts, Ltd. objected to Infusion Brands’s DualSaw trademark application serial number 77721489. Infusion Brands filed a motion to stay this Trademark Office proceeding in favor of the federal litigation. There are no damages, fees or costs to be assessed. The only relevant issue is Infusion Brand’s entitlement to federally register its DualSaw trademark. As part of the settlement described in the above case, GlobalTV withdrew any and all opposition against the Company’s trademark applications.





OmniReliant Holdings, Inc. v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder Products and Professor Amos Wonder Products, Inc.) et al. Case No. 10-2556-TPA





On October 4, 2010, the Company, the exclusive licensee of the “Professor Amos” brand, commenced this action against Professor Amos Wonder Products, the licensor, and certain of its officers and employees arisingfrom certain wrongful and tortious conduct of the defendant.  Plaintiff alleges claims for breach of an amended license agreement, tortious interference with the contract, tortious interference with business relationships, trade libel, fraud and seeks permanent injunctive relief. No answer has been filed as of the date of this Report.  Defendant, Professor Amos Wonder Products and Network 1,000,000 Inc., filed for bankruptcy and defendants removed the action to the bankruptcy court for the Western District of Pennsylvania.





On February 28, 2011, Defendants answered the Complaint and asserted counterclaims against the Company for breach of the amended license agreement. The Company denies the material allegations of the counterclaims.  Te Company intends vigorously prosecute its claims and defend the counterclaims.





Omnicomm Studios, LLC v. Vince Vellardita, D/B/A Valcom Studios, Inc., Valcom Studios, Inc., and Valcom, Inc. (collectively, the "Defendants"), in Circuit Court, Pinellas County, Florida (Case No: 10 7111 CI 15).





Infusion Brands Studios, Inc. (f/k/a Omnicomm Studios, LLC) filed this lawsuit asserting a claim for breach of a real estate lease agreement by the Defendants. Infusion Brands Studios, Inc., demanded judgment against the Defendants for payment of past due rent in excess of $85,000, plus subsequent accruing rent, reasonable attorney’s fees and costs. In November 2010, we settled this matter with the defendant for approximately $23,000.





Revenue Frontier, LLC v. OmniReliant Holdings, Inc., in the Superior Court of California for Los Angeles County, Western District (Case No. SC106265).





Revenue Frontier, LLC filed this claim asserting a breach of contract related to delivery of media services. Infusion Brands denied Revenue Frontier’s assertions.  In order to avoid the cost and risk of litigation, the parties entered into a Settlement Agreement dated January 19, 2010, pursuant to which we paid $16,785.00 to Revenue Frontier, LLC, and Revenue Frontier; LLC provided a full release.





General





As of December 31, 2010, the end of the annual period covered by this report, the Company was subject to the various legal proceedings and claims discussed above, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, the Company does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially adversely affect its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in these legal matters, the operating results of a particular reporting period could be materially adversely affected.





ITEM 4 — REMOVED AND RESERVED




15




PART II





ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Shares of the Company’s common stock are quoted on the Over the Counter Bulletin Board ("OTCBB") under the symbol INBI. Our shares were listed for trading in July of 2006. The following table sets forth, since July, 2008, the range of high and low intraday closing bid information per share of our common stock as quoted on the Over the Counter Bulletin Board.





Quarter Ended

High ($)


Low ($)December 31, 2010


0.10



0.04September 30, 2010


0.16



0.04June 30, 2010


0.11



0.06March 31, 2010


0.40



0.11December 31, 2009


0.99



0.35September 30, 2009


1.01



0.40June 30, 2009


1.01



1.01March 31, 2009


1.01



0.35December 31, 2008


1.18



0.60September 30,2008


1.60



1.01June 30, 2008


3.05



1.50





Holders:





As of March 31, 2011, we had 63 record holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Registrar and Transfer Company.





Dividend Policy





The Company has not paid or declared any dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future.





Equity Compensation Plan Information





The following table summarizes the equity compensation plans under which our securities may be issued as of December 31, 2010.





Plan Category

Number of securities

to be issued upon

exercise of

outstanding options

and warrants


Weighted-average

exercise price of

outstanding

options and

warrants


Number of securities

remaining available

for future issuance

under equity

compensation plansEquity compensation plans approved by security holders


—


$
0.00



—Equity compensation plan not approved by security holders


32,960,337


$
0.05



—


16




RECENT SALES OF UNREGISTERED SECURITIES





On June 30, 2010, we issued and sold 5,000,000 shares of our Series G Convertible Preferred Stock and Series G Warrants to purchase an aggregate of 50,000,000 shares of our common stock at a per share exercise price of $0.10 for an aggregate purchase price value of $5,000,000 consisting of (1) $3,500,000 in cash and (2) the return and cancellation of the note in the principal amount of $1,500,000 issued to Vicis Capital Master Fund pursuant to a Note Purchase Agreement dated June 4, 2010 between Vicis and the Company. Vicis is a beneficial owner of 89.0% of our outstanding capital stock.





On June 4, 2010, we entered into a Note Purchase Agreement with Vicis Capital Master Fund pursuant to which we sold an 8% convertible promissory note in the principal amount of $1,500,000 for an aggregate purchase price of $1,500,000 (the “Note”). The Note is due on demand in the holder’s discretion.  The Note is convertible into securities offered by the Company in a future financing pursuant to the terms of the Note Purchase Agreement. Vicis is a beneficial owner of 89.0% of our outstanding capital stock.





On July 20, 2009, the Company entered into a securities purchase agreement with Vicis Capital Master Fund whereby Vicis purchased from the Company a warrant to purchase 97,606,276 shares of the Company’s common stock for a purchase price of five million dollars ($5,000,000). The warrant has an exercise price of $0.25 per share and is exercisable for ten years from the date of issuance.  The warrant is exercisable on a cashless basis at any time after six months from the date of issuance if there is no effective registration statement registering the resale of the shares underlying the warrant. As further consideration for the sale of the warrant, Vicis surrendered for cancellation all existing warrants that it currently holds. Vicis is a beneficial owner of 89.0% of our outstanding capital stock.





On July 20, 2009 Vicis exercised in part, the warrant it holds, into 27,606,276shares of the Company’s common stock at an adjusted aggregate exercise price of $5,600,000.





On July 31, 2009, Vicis converted 9,285,354 shares of Series C Preferred Stock, 7,000,000 shares of Series D Preferred Stock and 10,000,000 shares of Series F Preferred Stock into 105,141,416 shares of the Company’s common stock.





On February 8, 2011, we issued 20,162,448 shares of common stock to a consulting organization as partial consideration in connection with a consulting agreement. We are obligated to issue such number of additional common shares that represent 5.0% of our post-issuance outstanding shares after fulfillment of our redemption obligations under the Series G Preferred Stock.





On March 15, 2011, we agreed to issue 1,000,000 shares of our Series G Convertible Preferred Stock, which is convertible into 10,000,000 shares of our common stock, and Series G Warrants to purchase 10,000,000 shares of our common stock to a certain accredited investor for gross proceeds of $1,000,000.





We believe that the offer and sale of the securities referenced in this section were exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and/or Regulation D promulgated there under as transactions not involving any public offering. All of the purchasers of unregistered securities for which we relied on Section 4(2) and/or Regulation D represented that they were accredited investors as defined under the Securities Act, except for up to 35 non-accredited investors. The purchasers in each case represented that they intended to acquire the securities for investment only and not with a view to the distribution thereof and that they either received adequate information about the registrant or had access, through employment or other relationships, to such information; appropriate legends were affixed to the stock certificates issued in such transactions; and offers and sales of these securities were made without general solicitation or advertising.





17





ITEM 6 - SELECTED FINANCIAL DATA





As a smaller reporting company we are not required to provide the information required by this Item.





ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion and analysis is intended to help the reader understand the results of operations, financial condition, and cash flows of Infusion Brands International, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements included elsewhere herein.





On December 16, 2010, we changed the name of our company from OmniReliant Holdings, Inc. to Infusion Brands International, Inc. (“Infusion Brands”).





On December 17, 2010, we changed our fiscal year end from June 30 to December 31.





During our six month transition period ended December 31, 2010 we discontinued and disposed of all holdings in our former eCommerce and Fashion Goods business segments in order to concentrate on our consumer product development and branding business. As a result of these disposals, we are now a global consumer products company, with a sole focus on solving consumer problems by creating and sourcing branded innovative solutions worldwide. We are driven by powerful brands in five attractive consumer categories; Hardware/Tools, House wares/Cleaning, Beauty/Skincare, Fashion/Accessories and Fitness. By leveraging our expertise with international direct-to-consumer channels of distribution, we make our branded products available direct to consumers throughout the world. Our global marketing channels include, but not limited to, live television shopping, direct response programming, eCommerce via Cloud Computing and traditional “brick-and-mortar” retail channels of distribution. Our financial statements for all periods presented elsewhere herein, which serve as our basis of analysis in the Discussion and Analysis give effect to the treatment of our disposals of the discontinued segments as discontinued operations. That means that the historical operations of the discontinued segments have been reclassified into the single caption described in our consolidated statements of operations as loss from operations of discontinued operating segments and the assets and liabilities of the discontinued segments have been reclassified into two captions in our consolidated balance sheets described as assets of discontinued operating segments and liabilities of discontinued segments. We have no continuing involvement with the discontinued operations that were disposed of.





Six months ended December 31, 2010 compared to six months ended December 31, 2009:





Revenues and costs of revenues –We derive the majority of our revenues from the sale of corporate owned tangible consumer products through global direct to consumer channels of distribution. We also derive revenue through marketing and distribution agreements with brand and intellectual property owners by from providing consumer product related marketing and distribution services. Finally, we collect rents from leasing a portion of the real estate we own in Clearwater, Florida. Our comparison of material components of revenues are as follows:





18





Product sales: Our consolidated product sales decreased by $9,554,673 or 70.1% to $4,073,520 for the six months ended December 31, 2010 from $13,628,193 for the six months ended December 31, 2009. The decrease in consolidated product sales is attributable to the redirection, focus and application of company assets, wherein our management team has initiated the recruitment of leading product and brand development and experts with many years of experience in the direct to consumer marketing industry. The management team is executing on our vision of becoming a world class consumer products company which builds demonstrable brands globally through an ecosystem of direct to consumer marketing channels. This management team has also initiated a strategic redirection of the former Consumer Products Segment away from its roots of simply being a reseller of “products” to becoming more focused on growing long term predictable revenue and earnings through its efforts of creating and marketing branded innovative consumer products, combined with product line extension of its new and existing brands. Moreover, we are implementing international distribution strategies as well as extending our reach to standard brick and mortar retailers on a global basis leading to new and more profitable revenue channels.





Cost of product sales: Our cost of product sales decreased by $4,549,999 or 64.2% to $2,534,443 for the six months ended December 31, 2010 from $7,084,442 for the year six months ended December 31, 2009. The decrease was attributable to the significant decline in our consumer products sales for reasons discussed in the previous section. Our gross margin as a percent of product sales during the six months ended December 31, 2010 amounted to 37.8% compared to 48.0% during the six months ended December 31, 2009. Margins on retail products are dependent upon the types and demands for specific types of products. Accordingly, our ongoing margins will likely be volatile until we establish the types of products that will serve as our long-term base of offerings.





Other revenue: Services revenue of $107,666 for the six months ended December 31, 2010 was derived from one customer contract that was prepaid with common stock of the customer. We had no services revenue during the six months ended December 31, 2010. Because our concentration is and will be on our consumer products branding strategies, we do not anticipate further pursuing these types of revenue lines in future periods. Rental income of commercial real estate amounted to $38,403 for the six months ended December 31, 2010, a decrease of $48,576 or 55.8% when compared to $86,979 of rental income that we reported for the six months ended December 31, 2009. The decrease is attributable to our corporate offices displacing tenants and assuming a higher level of occupancy in our building.





Other operating expenses – Other operating expenses consist of advertising expense, accounting and professional expenses, employment costs, depreciation and amortization and administrative expenses. Our analysis of the material components of changes in other operating expenses are as follows:





Advertising and promotion: Advertising and promotion expense decreased by $1,493,747 or 28.2% for the six months ended December 31, 2010 to $3,795,506 from $5,289,253 for the six months ended December 31, 2009. Because we offer product for sale in direct to consumer marketing method, there is a direct correlation between our product sales revenue and our advertising expense. As such, as noted above, we had a decrease in revenue from prior comparable periods; therefore we would expect a similar decrease in advertising expense. Lower advertising and promotion during the six months ended December 31, 2010 was the intentional result of focusing and redirecting the business in preparation for our new business model. Management purposefully slowed the rate of advertising expenditures in order to make the necessary operational changes to our business and growth plans for the future under our new business plan. Advertising and promotion will increase as we begin to enter our new distribution channels and proactively promote our brands.





Accounting and professional expense: Accounting and consulting professional expenses increased by $760,588 or 86.7% to $1,637,703for the six months ended December 31, 2010 from $877,115 for the six months ended December 31, 2009. These costs include fees relating to other professional consulting and audit related expenses. Our fees have increased due to our increased consulting fees for outsourced accountants and financial services, audit fees and operating activities. We anticipate a reduction of these fees because we have completed the majority of our company reorganization and because we anticipate bringing our accounting and legal services in-house as soon as practicable.





19





Other general and administrative: These costs and expenses include royalties, bad debts, occupancy costs and general office expenses. Our general and administrative costs decreased by $277,030 or 19.2% to $1,079,626 for the six months ended December 31, 2010 from $1,442,748 for the six months ended December 31, 2009. The overall decrease reflects lower bad debts expense, which amounted to $675,000 in 2009 and $9,726 in 2010, which amounts were offset by increases in commissions by $106,227 and travel expenses associated with the development of our new business model by substantially the remainder of the net decrease. Our other general and administrative expenses will increase proportionately as our business grows.





Employment Costs: Employment related costs consist of salaries and payroll, employee insurance, and share-based payment. These costs increased by $710,764 or 192.7% to $1,079,626 for the six months ended December 31, 2010 from $368,862 for the six months ended December 31, 2010. Our employment costs in the current transition period include non-cash share-based payment expense of $271,906 and there was no comparable cost in the same period in the prior fiscal year. Unamortized share-based payment expense amounts to $2,199,223 as of December 31, 2010. This amount will be amortized into expense as the stock options vest, generally over the next two to five years. The balance of the increase is associated with higher levels of head count.





Depreciation and amortization: Our amortization of intangible assets and depreciation of property and equipment decreased $301,260, or 75.2%, to $99,237 for the six months ended December 31, 2010 compared to $400,497 during the six months ended December 31, 2009. The decline is due to our conclusion during the fourth quarter of our prior fiscal year ended June 30, 2010 that the carrying values of our intangible assets were not recoverable through future cash flows or by other means. Accordingly, the intangible assets were written off at that time. We are currently reviewing accounting guidance as it relates to Direct Response advertising and the applicability of capturing intangible brand intellectual property allowing us to amortize a portion of our advertising expense to allocate expense with revenue according to generally accepted accounting principles.





Other income (expense)– Other income and expense include fair value adjustments related to our derivative financial instruments, interest expense and income, extinguishments and impairments. Our analysis of the material components of changes in the other income (expense) section of the statement of operations are as follows:





Derivative income (expense): Derivative income (expense) represents the changes in the fair values of our derivative financial instruments, consisting of derivative warrants and compound embedded derivatives that have been bifurcated from preferred stock. Fair value decreases during the six months ended December 31, 2010 resulted in income of $601,775. During the same period of the prior fiscal year, fair value decreases resulted in income of $9,272,414. The changes in the fair value of these derivatives were significantly influenced by changes in our trading stock price and changes in interest rates in the public markets. Further, certain elements of the fair value techniques require us to make estimates about the outcome of certain events, such as defaults. On December 17, 2011, we entered into agreements with the holders of the warrants and preferred stock to modify the financial instruments to exclude provisions, such as down-round anti-dilution protection, that cause these derivative financial instruments to be classified in liabilities and carried at fair value. On the modification date, we adjusted all derivative financial instruments to fair values, with charges or credits to income, and reclassified the remaining balances to paid-in capital. Accordingly, in the absence of future modification to these agreements or the issuance of additional financial instruments that give rise to derivative classification and measurement, we do not anticipate further derivative income (expense).





20





Interest and other income: Income generated from depository accounts decreased by $136,817 or 46.1% to $160,226 during the six months ended December 31, 2010 from $297,043 for the six months ended December 31, 2009. The decrease is attributable to average deposits during the periods.





Interest expense: Interest expense includes amortization of deferred finance costs and interest on our mortgage loan and other notes payable. Interest expense decreased by $62,211 or 43.3% to $81,569 during the six months ended December 31, 2010 compared to $143,780 for the six months ended December 31, 2009. Our interest expense declined in the transition period after we wrote off certain deferred finance costs that were subject to amortization in connection with the extinguishment transaction referred to below. Accordingly, our ongoing interest expense is that attributable to our real estate mortgage loan. Interest expense on this basis will remain stable into the foreseeable future.





Litigation settlement: We settled certain litigation for $62,500. Although we believed this matter was without any legal merits, settlement eliminates the potential of higher costs to defend the case.





Extinguishment expense: On July 20, 2009, we entered into a securities purchase agreement with Vicis whereby Vicis purchased from the Company a warrant to purchase 97,606,276 shares of the Company’s Common Stock for a purchase price of five million dollars ($5,000,000). The warrant has an exercise price of $0.25 per share and is exercisable for ten years from the date of issuance. The warrant is exercisable on a cashless basis at any time after nine months from the date of issuance if there is no effective registration statement registering the resale of the shares underlying the warrant.





As further consideration for the sale of the warrant, Vicis surrendered for cancellation all existing warrants that it currently holds that are indexed to 97,606,276 shares of common stock. These transactions are collectively referred to as the Exchange Transaction. The Exchange Transaction triggered certain down-round anti-dilution protection in an aggregate of 102,732,942 of our outstanding warrants, resulting in revisions of the exercise prices from a range of $0.50 – $2.00 to $0.25.





Prior to the Exchange Transaction, we carried the surrendered warrants as derivative liabilities and at fair value. The new warrant did not achieve equity classification because it did not meet the definition of “indexed to a company’s own stock.” Accordingly, we accounted for the exchange analogously to an exchange of debt instruments; that is as an extinguishment. The following table summarizes the components of the extinguishment calculation:





Fair value of New Warrant

$
37,090,385Fair value of surrendered warrants


(9,761,869
)Consideration


(5,000,000
)Extinguishment loss

$
22,328,516





Inducement expense: On July 31, 2010, pursuant to an inducement offer wherein we reduced the strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants, Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise price of $5,600,000. We accounted for the warrant exercise analogously to an inducement offer to convert debt instruments; that is the inducement value is recorded as a charge to income. The following table summarizes the components of the inducement calculation:





Fair value of warrants following inducement

$
26,851,487Fair value of warrants preceding inducement


25,377,632Inducement expense

$
1,473,855





21




Non-controlling interests – A non-controlling interest, formerly called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests arise from the consolidation of subsidiaries as a result of voting control or based upon benefits of an entity’s variable interests. We consolidate six entities that have non-controlling interests. Our subsidiary, Infusion Studios, Inc. (f/k/a OmniComm Studios LLC) (“Infusion Stuidos”) is consolidated in our continuing operations during the six months ended December 31, 2010 and 2009 because we own the majority of the voting control. Our subsidiary, RPS is consolidated in discontinued operations in the six months ended December 31, 2010 because we owned a 50% voting interest, it met the definition of a variable interest entity, and we are the primary beneficiary. Our subsidiary Wineharvest was consolidated in discontinued operations during the six months ended December 31, 2010 because we owned 40% voting interest, it meets the definition of a variable interest entity and we are the primary beneficiary, principally due to our guarantee of their lease. We no longer own the discontinued businesses. Non-controlling interests in the (income) loss of consolidated entities in continuing operations amounted to $68,935 and $41,455 during the six months ended December 31, 2010 and 2009, respectively. As of December 31, 2010, we are limited to $6,775 of future non-controlling interest credits.





Net loss from continuing operations – We have reported net loss of $5,372,190 during the six months ended December 31, 2010 compared to a net loss of $16,047,529 during the six months ended 30, 2009. The decrease in our loss from continuing operations is a result of the items discussed in the preceding discussion.





Loss from operations of discontinued segments – Our management has been engaged in strategic initiatives focused on alleviating our ongoing operating and cash flow losses, coupled with an intensified focus on the reorganization of the Company as a consumer products company that builds and markets brands internationally through direct-to-consumer channels of distribution. As a result of these efforts, management, with the support of our Board of Directors, concluded that the continuing losses from our holdings in the Fashion Goods and eCommerce Segments and the associated drain on our limited capital resources warranted discontinuance of the businesses and disposal of the assets comprising the discontinued segments. Operating activities of the discontinued segments are presented as one-line captions in our consolidated statements of operations. The composition of the operations of the discontinued segments and loss from their disposal is as follows:





Six Months Ended

December 31,


Year Ended

June 30,2010


2009


2010


2009(Unaudited)Revenues of discontinued segments

$
2,554,284


$
3,793,338


$
8,098,656


$
—Cost of revenues


2,766,388



4,029,355



9,502,978



—(212,101
)


(236,017
)


(1,404,322
)


—Costs and operating expenses:General and administrative


721,690



1,432,487



2,316,397



—Impairments (Note 9)


—



—



19,091,392



—Total costs and expenses


721,690



1,432,487



21,407,789



—Loss from operations


(933,794
)


(1,668,504
)


(22,812,111
)


—Other expenses:Impairment of investments (Note 7)


(406,848
)


(1,591,704
)


(3,590,196
)


(450,000
)Equity in losses of investees (Note 7)


881,682



(1,634,242
)


(1,975,846
)


(92,741
)Interest expense


(4,206
)


(9,524
)


(15,400
)


—Net loss


(463,166
)


(4,903,974
)


(28,393,553
)


(542,741
)Non-controlling interests


40,664



163,450



215,853



—Net loss applicable to Infusion Brands


(422,502
)


(4,740,524
)


(28,177,700
)


(542,741
)Loss on disposals


(279,070
)


—



—



—Loss from discontinued operations

$
(701,572
)

$
(4,740,524
)

$
(28,177,700
)

$
(542,741
)





22




We have no ongoing involvement with these discontinued company’s or assets.





Net loss – We have reported net loss of $6,004,827 during the six months ended December 31, 2010 compared to a net loss of $20,746,592 during the six months ended 30, 2009. The decrease is a result of the items discussed in the preceding discussion.





Loss applicable to common stockholders– Loss applicable to common stockholders represents our net loss or income as adjusted for deemed and accrued dividends and accretions on our preferred stock. For reporting purposes, loss applicable to common stockholders is allocated between amounts associated with continuing operations and amounts associated with continuing operations. Loss from continuing operations applicable to common shareholders for the six months ended December 31, 2010 gives effect to accretion of the discount on our Series G Preferred Stock in the amount of $1,680,534 and cumulative dividends of $203,774. Dividends accrue because they are contractually payable whether or not declared by our Board of Directors. During the six months ended December 31, 2009 our loss applicable to common stockholders reflected a $66,948,653 deemed dividend on our preferred stock arising from the exchange transaction referred to above. That was because the exchange transaction triggered anti-dilution protection adjustments to the conversion price of the preferred stock. The amount recorded as the deemed dividend during the six months ended December 31, 2009 is the incremental value associated with the post-exchange transaction preferred balances. The following table reflects the composition of our losses applicable to the common shareholders and the losses per common share:





Six Months Ended December 31,2010


2009(Unaudited)Reconciliation of loss from continuing operations attributable to Infusion Brands to loss attributable to Infusion Brand common shareholders:Loss from continuing operations attributable to Infusion Brands

$
(5,372,190
)

$
(16,047,529
)Loss attributable to non-controlling interests


68,935



41,455Preferred dividends and accretion


(1,884,308
)


(66,948,653
)Loss from continuing operations

$
(7,187,563
)

$
(82,954,727
)Loss from discontinued operations attributable to Infusion Brands

$
(742,236
)

$
(4,903,968
)Loss attributable to non-controlling interests


40,664



163,450Loss from discontinued operations

$
(701,572
)

$
(4,740,524
)Loss per common share:Basic:Continuing operations

$
(0.05
)

$
(0.71
)Discontinued operations

$
(0.00
)

$
(0.04
)DilutedContinuing operations

$
(0.05
)

$
(0.71
)Discontinued operations

$
(0.00
)

$
(0.04
)





23




Year ended June 30, 2010 compared to year ended June 30, 2009:





Revenues and costs of revenues –We derive the majority of our revenues from the sale of corporate owned tangible consumer products through global direct to consumer channels of distribution. We also derive revenue through marketing and distribution agreements with brand and intellectual property owners by providing consumer product related marketing and distribution services. Finally, we collect rents from leasing a portion of the real estate we own in Clearwater, Florida. Our comparison of material components of revenues are as follows:





Product sales: Our consolidated product sales increased by $7,176,869 or 75.1% to $16,729,761 for the year ended June 30, 2010 from $9,552,892 for the year ended June 30, 2009. The increase in consolidated product sales was attributable to the addition of two significant new products that were introduced to our portfolio of products and generated substantial sales revenues. Subsequent to these periods, demand has decreased and we no longer are experiencing sales at levels during the year ended June 30, 2010.





Cost of product sales: Our cost of product sales increased by $3,968,453 or 77.1% to $9,118,137 for the year ended June 30, 2010 from $5,149,684 for the year ended June 30, 2009. The increase was attributable to the significant increase in our consumer products sales for reasons discussed in the previous section. Our gross margin as a percent of product sales during the year ended June 30, 2010 amounted to 45.5% compared to 46.1% during the year ended June 30, 2009. Margins on retail products are dependent upon the types and demands for specific types of products. Accordingly, our ongoing margins will likely be volatile until we establish the types of products that will serve as our long-term base of offerings.





Other revenue: Services revenue of $742,167 for the year ended June 30, 2010 was derived from one customer contract that were prepaid with common stock of the customer. We had no services revenue during the year ended June 30, 2010. Because our concentration is and will be on our consumer products branding strategies, we do not anticipate further pursuing these types of revenue lines in future periods. Rental income of commercial real estate amounted to $332,462 for the year ended June 30, 2010, an increase of $96,441 or 40.9% when compared to $236,021 of rental income that we reported for the year ended June 30, 2009. The increase was attributable to increased occupancy.





Other operating expenses – Other operating expenses consist of advertising expense, accounting and professional expenses, employment costs, depreciation and amortization and administrative expenses. Our analysis of the material components of changes in other operating expenses are as follows:





Advertising and promotion: Advertising and promotion expense increased by $789,651 or 15.6% for the year ended June 30, 2010 to $5,840,209 from $5,050,558 for the year ended June 30, 2009. Because we offer product for sale in direct to consumer marketing method, there is a direct correlation between our product sales revenue and our advertising expense. As such, as noted above, we had a increase in revenue from prior comparable periods; therefore we would expect a similar increase in advertising expense.  Advertising and promotion was subsequently curtailed substantially. However, as a consumer products company, advertising and promotion expenses will continue to be a material operating expense once our new business model is fully in place and operating.





Impairments: Impairments of long lived assets consisting of intangible software costs and patents were impaired in the amounts of $3,881,462 and $198,456 during the years ended June 30, 2010 and 2009. As it relates to the software technologies impair in 2010, an abandonment decision was made by management when it was determined that insufficient funds would be available to develop the technology to a marketable state. During the year ended June 30, 2009, the impairment was associated with certain patents and proprietary rights that management had concluded were related to the prior business model and no longer going to generate cash flow to support their carrying value.





24





Accounting and professional expense: Accounting and consulting professional expenses increased by $607,385 or 38.7% to $2,178,288 for the year ended June 30, 2010 from $1,570,903 for the year ended June 30, 2009. These costs include fees relating to other professional consulting and audit related expenses. Our fees have increased due to our increased consulting fees for outsourced accountants and financial services, audit fees and operating activities. We anticipate a reduction of these fees because we have completed the majority of our company reorganization and because we anticipate bringing our accounting and legal services in-house as soon as practicable





Other general and administrative: These costs and expenses include royalties, bad debts, occupancy costs and general office expenses. Our general and administrative costs increased by $2,090,364 or 364.4% to $2,664,037 for the year ended June 30, 2010 from $573,673 for the year ended June 30, 2009. The increase was led by bad debts expense, which was $933,328 higher during the year ended June 30, 2010 than the year ended June 30, 2009. The second largest increase related to royalty costs of $829,322 related to certain product licensing. The balance of the increase was attributable to increased administrative expense resulting from ramped up sales operations during the period.





Employment Costs: Employment related costs consist of salaries and payroll, employee insurance, and share-based payment. These costs increased by $577,276 or 155.9% to $1,603,959 for the year ended June 30, 2010 from $626,683 for the year ended June 30, 2009. Our employment costs in 2010 included non-cash share-based payment expense of $581,386 and there was no comparable cost in the same period in the prior fiscal year.





Depreciation and amortization: Our amortization of intangible assets and depreciation of property and equipment increased $538,911, or 83.1%, to $1,187,547 for the year ended June 30, 2010 compared to $648,636 during the year ended June 30, 2009. The increase was the result of intangible assets acquired during the period that were impaired and included in impairment expense discussed above. We are currently reviewing accounting guidance as it relates to Direct Response advertising and the applicability of capturing intangible brand intellectual property allowing us to amortize a portion of our advertising expense to allocate expense with revenue according to generally accepted accounting principles.





Other income (expense)– Other income and expense include fair value adjustments related to our derivative financial instruments, interest expense and income, extinguishments and impairments. Our analysis of the material components of changes in the other income (expense) section of the statement of operations are as follows:





Derivative income (expense): Derivative income (expense) represents the changes in the fair values of our derivative financial instruments, consisting of derivative warrants and compound embedded derivatives that have been bifurcated from preferred stock. Fair value decreases during the year ended June 30, 2010 resulted in income of $29,606,972. During the same period of the prior fiscal year, fair value decreases resulted in income of $1,974,605. The changes in the fair value of these derivatives were significantly influenced by changes in our trading stock price and changes in interest rates in the public markets. Further, certain elements of the fair value techniques require us to make estimates about the outcome of certain events, such as defaults. On December 17, 2011, we entered into agreements with the holders of the warrants and preferred stock to modify the financial instruments to exclude provisions, such as down-round anti-dilution protection, that cause these derivative financial instruments to be classified in liabilities and carried at fair value. On the modification date, we adjusted all derivative financial instruments to fair values, with charges or credits to income, and reclassified the remaining balances to paid-in capital. Accordingly, in the absence of future modification to these agreements or the issuance of additional financial instruments that give rise to derivative classification and measurement, we do not anticipate further derivative income (expense).





25





Interest and other income: Income generated from depository accounts increased by $118,362 or 59.3% to $317,819 during the year ended June 30, 2010 from $199,457for the year ended June 30, 2009. The increase is attributable to average deposits during the periods.





Interest expense: Interest expense includes amortization of deferred finance costs and interest on our mortgage loan and other notes payable. Interest expense decreased by $141,894 or 40.5% to $208,597 during the year ended June 30, 2010 compared to $350,491 for the year ended June 30, 2009. Our interest expense declined after we wrote off certain deferred finance costs that were subject to amortization in connection with the extinguishment transaction referred to below. Accordingly, our ongoing interest expense is that attributable to our real estate mortgage loan. Interest expense on this basis will remain stable into the foreseeable future.





Extinguishment expense: On July 20, 2009, we entered into a securities purchase agreement with Vicis whereby Vicis purchased from the Company a warrant to purchase 97,606,276 shares of the Company’s Common Stock for a purchase price of five million dollars ($5,000,000). The warrant has an exercise price of $0.25 per share and is exercisable for ten years from the date of issuance. The warrant is exercisable on a cashless basis at any time after nine months from the date of issuance if there is no effective registration statement registering the resale of the shares underlying the warrant.





As further consideration for the sale of the warrant, Vicis surrendered for cancellation all existing warrants that it currently holds that are indexed to 97,606,276 shares of common stock. These transactions are collectively referred to as the Exchange Transaction. The Exchange Transaction triggered certain down-round anti-dilution protection in an aggregate of 102,732,942 of our outstanding warrants, resulting in revisions of the exercise prices from a range of $0.50 – $2.00 to $0.25.





Prior to the Exchange Transaction, we carried the surrendered warrants as derivative liabilities and at fair value. The new warrant did not achieve equity classification because it did not meet the definition of “indexed to a company’s own stock.” Accordingly, we accounted for the exchange analogously to an exchange of debt instruments; that is as an extinguishment. The following table summarizes the components of the extinguishment calculation:





Fair value of New Warrant

$
37,090,385Fair value of surrendered warrants


(9,761,869
)Consideration


(5,000,000
)Extinguishment loss

$
22,328,516





Inducement expense: On July 31, 2010, pursuant to an inducement offer wherein we reduced the strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants, Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise price of $5,600,000. We accounted for the warrant exercise analogously to an inducement offer to convert debt instruments; that is the inducement value is recorded as a charge to income. The following table summarizes the components of the inducement calculation:





Fair value of warrants following inducement

$
26,851,487Fair value of warrants preceding inducement


25,377,632Inducement expense

$
1,473,855





26




Non-controlling interests – A non-controlling interest, formerly called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests arise from the consolidation of subsidiaries as a result of voting control or based upon benefits of an entity’s variable interests. We consolidate six entities that have non-controlling interests. Our subsidiary, Infusion Studios is consolidated in our continuing operations during the year ended June 30, 2010 and 2009 because we own the majority of the voting control. Our subsidiary, RPS is consolidated in discontinued operations in the year ended June 30, 2010 because we owned a 50% voting interest, it met the definition of a variable interest entity, and we are the primary beneficiary. Our subsidiary Wineharvest was consolidated in discontinued operations during the year ended June 30, 2010 because we owned 40% voting interest, it meets the definition of a variable interest entity and we are the primary beneficiary, principally due to our guarantee of their lease. We no longer own the discontinued businesses. Non-controlling interests in the (income) loss of consolidated entities in continuing operations amounted to $121,403 and $122,886 during the years ended June 30, 2010 and 2009, respectively.





Net loss from continuing operations – We have reported net loss of $2,634,023 during the year ended June 30, 2010 compared to a net loss of $2,083,223 during the year ended 30, 2009. The decrease in our loss from continuing operations is a result of the items discussed in the preceding discussion.





Loss from operations of discontinued segments – Our management has been engaged in strategic initiatives focused on alleviating our ongoing operating and cash flow losses, coupled with an intensified focus on the reorganization of the Company as a consumer products company that builds and markets brands internationally through direct-to-consumer channels of distribution. As a result of these efforts, management, with the support of our Board of Directors, concluded that the continuing losses from our holdings in the Fashion Goods and eCommerce Segments and the associated drain on our limited capital resources warranted discontinuance of the businesses and disposal of the assets comprising the discontinued segments. Operating activities of the discontinued segments are presented as one-line captions in our consolidated statements of operations. The composition of the operations of the discontinued segments and loss from their disposal is as follows:





Six Months Ended

December 31,


Year Ended

June 30,2010


2009


2010


2009Revenues of discontinued segments

$
2,554,284


$
3,793,338


$
8,098,656


$
—Cost of revenues


2,766,388



4,029,355



9,502,978



—(212,101
)


(236,017
)


(1,404,322
)


—Costs and operating expenses:General and administrative


721,690



1,432,487



2,316,397



—Impairments


—



—



19,091,392



—Total costs and expenses


721,690



1,432,487



21,407,789



—Loss from operations


(933,794
)


(1,668,504
)


(22,812,111
)


—Other expenses:Impairment of investments


(406,848
)


(1,591,704
)


(3,590,196
)


(450,000
)Equity in losses of investees


881,682



(1,634,242
)


(1,975,846
)


(92,741
)Interest expense


(4,206
)


(9,524
)


(15,400
)


—Net loss


(463,166
)


(4,903,974
)


(28,393,553
)


(542,741
)Non-controlling interests


40,664



163,450



215,853



—Net loss applicable to Infusion Brands


(422,502
)


(4,740,524
)


(28,177,700
)


(542,741
)Loss on disposals


(279,070
)


—



—



—Loss from discontinued operations

$
(701,572
)

$
(4,740,524
)

$
(28,177,700
)

$
(542,741
)




We have no ongoing involvement with these discontinued company’s or assets.





Net loss – We have reported net loss of $30,811,723 during the year ended June 30, 2010 compared to a net loss of $2,625,964 during the year ended 30, 2009. The decrease is a result of the items discussed in the preceding discussion.




27




Loss applicable to common stockholders– Loss applicable to common stockholders represents our net loss or income as adjusted for deemed and accrued dividends and accretions on our preferred stock. For reporting purposes, loss applicable to common stockholders is allocated between amounts associated with continuing operations and amounts associated with continuing operations. Our increase in loss applicable to common shareholders is attributable to the $66,948,653 increase in deemed dividends on our preferred stock arising from the exchange transaction. That is, the exchange transaction triggered anti-dilution protection adjustments to the conversion price of the preferred stock. The amount recorded as the deemed dividend is the fair value of the incremental value associated with the post-exchange transaction preferred balances. The following table reflects the composition of our losses applicable to the common shareholders and the losses per common share:





Year Ended June 30,2010


2009Reconciliation of loss from continuing operations attributable to Infusion Brands to loss applicable to Infusion Brand common shareholders:Loss from continuing operations attributable to Infusion Brands

$
(2,755,426
)

$
(2,206,109
)Loss attributable to non-controlling interests


121,403



122,886Preferred dividends and accretion


(66,948,653
)


(2,958,350
)Loss from continuing operations

$
(69,582,676
)

$
(5,041,573
)Loss from discontinued operations attributable to Infusion Brands

$
(28,393,552
)

$
(542,741
)Loss attributable to non-controlling interests


215,852



—Loss from discontinued operations

$
(28,177,700
)

$
(542,741
)Loss per common share:Basic:Continuing operations

$
(0.50
)

$
(0.35
)Discontinued operations

$
(0.20
)

$
(0.04
)Diluted:Continuing operations

$
(0.50
)

$
(0.35
)Discontinued operations

$
(0.20
)

$
(0.04
)





Liquidity and Capital Resources





The preparation of financial statements in accordance with generally accepted accounting principles contemplates that operations will be sustained for a reasonable period. However, we have incurred operating losses of $5,990,122 and $1,670,835 during the six months ended December 31, 2010 and 2009, respectively, and $8,669,249 and $4,029,680 during our fiscal years ended June 30, 2010 and 2009, respectively. In addition, during these periods, we used cash of $3,556,230 and $2,905,070 during the six months ended December 31, 2010 and 2009, respectively, and $5,963,466 and $5,859,217 during the fiscal years ended June 30, 2010 and 2009, respectively, in support of our operating activities. As of December 31, 2010, we have cash on hand of $1,746,510 and total working capital of $2,088,260. Since our inception, we have been substantially dependent upon funds raised through the sale of preferred and common stock and warrants to sustain our operating and investing activities. These are conditions that raise substantial doubt about our ability to continue as a going concern for a reasonable period.




28




Our management began implementing strategic plans designed and developed during the fourth quarter of the prior fiscal year with the intention of alleviating ongoing operating losses. The principal focus of these plans is an intensified emphasis on the redesign of the consumer products business, shifting its focus from the highly expensive product based distribution model to a global brand development and brand ownership model. Management believes that the planned model, which is currently under development, will provide more predictable revenue streams as well as current and long-term profitability by curtailing the cost structure, allowing for longer product life, and providing for next-version, next-generation and follow-on opportunities to those branded products. However, substantial investment is required to support this change and, as a result, the Company had previously determined during the fourth quarter of its prior fiscal year that it would be unable to continue to provide significant operating capital to the operating entities within eCommerce Segment and with regard to the Fashion Goods Segment, such a decision was made early in the fourth quarter of the current calendar year. Subsequent to those curtailment decisions, management concluded that the two segments would continue to drain the Company of both capital and human resources and, accordingly, disposed of all businesses and assets within those operating segments during the fourth quarter of the current calendar year. Accordingly, in light of the fact that the Company has no ongoing involvement in those businesses, the future drain has been eliminated. Notwithstanding, there can be no assurances that either the aforementioned branded products model can be accomplished nor, if accomplished, can there be any assurances of its operational success.





The Company received no capital funding during the six months ended December 31, 2010 and $15,600,000 in funding from the sale of preferred stock and warrants and similar transactions during the year ended June 30, 2010. On March 15, 2011, we received $1,000,000 from the impending issuance of our Series G Preferred Stock and warrants.  Notwithstanding this recent funding, our ability to continue as a going concern for a reasonable period is dependent upon achieving our management’s plans for the Company’s reorganization and, ultimately, generating profitable operations from those restructured operations. We cannot give any assurances regarding the success of management’s plans. Our consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.





Cash and cash equivalents amounted to $1,746,510 as of December 31, 2010 compared to $5,393,142 at June 30, 2010. We have working capital of $2,088,260 as of December 31, 2010 and we had working capital of $3,070,296 at June 30, 2010. Our working capital improved as a result of a reclassification of derivative liabilities amounting to $3,584,182 to paid-in capital upon amendment to the underlying contracts to afford equity classification and reclassification of assets and liabilities of the discontinued segments to non-current assets and liabilities. However, such improvement was offset by our ongoing use of cash, which decreased $3,646,632 during the six month period from June 30, 2010 to December 31, 2010.





Cash Flow from Operating Activities– We used cash of $3,556,230 and $2,905,070 in our operating activities during the six months ended December 31, 2010 and 2009, respectively, and $5,963,466 and $5,859,217 during the years ended June 30, 2010.





We recorded net losses attributable to Infusion Brands of $6,114,426 and $20,951,497 during the six months ended December 31, 2010 and 2009, respectively, and $31,148,979 and $2,748,850 during the years ended June 30, 2010 and 2009, respectively. Our net losses are partially offset by net non-cash charges (credits) of $(422,659) and $18,796,908 during the six months ended December 31, 2010 and 2009, respectively, $25,701,657 and $142,678 during the years ended June 30, 2010 and 2009, respectively. Our analysis of the material components of changes in non-cash charges are as follows:




29




·
Derivative fair value changes: Non-cash charges and (credits) include changes in the fair value of derivative financial instruments and other activity associated with our financial instruments, amounting to credits of $601,775 and $9,272,414 during the six months ended December 31, 2010 and 2009, respectively, and credits of $29,606,972 and $1,974,605 during the years ended June 30, 2010 and 2009, respectively. We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes Merton (“BSM”) option valuation technique, adjusted for the effect of down-round anti-dilution protections, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, potential changes in conversion prices due to dilution triggering events and risk free rates) necessary to fair value these instruments. For compound derivative instruments, comprising certain redemption and put features embodied in our convertible preferred stock, we use discounted cash flow models involving multiple, probability-weighted outcomes and risk-adjusted rates. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as BSM) are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. On December 17, 2011, we entered into agreements with the holders of the warrants and preferred stock to modify the financial instruments to exclude provisions, such as down-round anti-dilution protection, that cause these derivative financial instruments to be classified in liabilities and carried at fair value. On the modification date, we adjusted all derivative financial instruments to fair values, with charges or credits to income, and reclassified the remaining balances to paid-in capital. Accordingly, in the absence of future modification to these agreements or the issuance of additional financial instruments that give rise to derivative classification and measurement, we do not anticipate further derivative income (expense).





·
Extinguishment: Non-cash charges included an extinguishment of $22,328,516 triggered by a July 20, 2009 exchange transaction, whereby Vicis purchased from the Company a warrant to purchase 97,606,276 shares of the Company’s Common Stock for a purchase price of five million dollars ($5,000,000).





·
Inducement expense: Non-cash charges also included an extinguishment loss of $1,473,855, pursuant to an inducement offer wherein we reduced the strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants and Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise price of $5,600,000. We accounted for the warrant exercise analogously to an inducement offer to convert debt instruments; that is the inducement value is recorded as a charge to income.





Our cash from operating activities also includes sources and (uses) of cash flow from changes in our operating assets and liabilities of $2,121,565 and $(750,480) for the six months ended December 31, 2010 2009, respectively, and $(516,144) and $(3,253,045) for the years ended June 30, 2010 and 2009, respectively.





·
Accounts receivable: Accounts receivable represents normal trade obligations from customers that are subject to normal trade collection terms, without discounts or rebates. Notwithstanding these collections, we periodically evaluate the collectability of our accounts receivable and consider the need to establish an allowance for doubtful accounts based upon our historical collection experience and specifically identifiable information about our customers. We experienced a decrease of $1,046,390 in our accounts receivable (a source of cash) for the six months ended December 31, 2010 as compared to an increase of $(1,641,881) in our accounts receivable (a use of cash) for the six months ended December 31, 2009. We experienced an increase of $(460,918) in our accounts receivable for the year ended June 30, 2010 as compared to an increase of $(1,955,082) in our accounts receivable for the year ended December 31, 2009.





30




·
Inventories: Inventories consist of retail merchandise that is in its finished form and ready for sale to end-user customers. Inventories are recorded at the lower of average cost or market. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred and included in cost of goods sold. Our inventories are acquired and carried for retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand. We use our best estimates of all available information to establish reasonable inventory quantities. However, these conditions may cause our inventories to become obsolete and/or excessive. We review our inventories periodically for indications that reserves are necessary to reduce the carrying values to the lower of cost or market values. Inventories decreased by $976,888 (a source of cash) during the six months ended December 31, 2010 as compared to an increase (a use of cash) of $(365,995) during the six months ended December 31, 2009. Inventories increased by $(565,284) during the year ended June 30, 2010 as compared to an increase of $(1,181,329) during the year ended June 30, 2009.





·
Accounts payable and accrued expenses: Our accounts payable and accrued liabilities increased (a source of cash) an aggregate of $911,097 and $728,072 during the six months ended December 31, 2010 and 2009, respectively. Our accounts payable and accrued liabilities decreased an aggregate of $(73,937) and increased $446,366 during the years ended June 30, 2010 and 2009, respectively.





Cash Flow from Investing Activities– We used cash of $36,321 and $5,692,452 in our investing activities during the six months ended December 31, 2010 and 2009, respectively, and $(5,818,622) and $(7,625,802) during the years ended June 30, 2010 and 2009, respectively. During the six months ended December 31, 2010, these activities consisted of normal purchases of assets and website development costs. During the six months ended December 31, 2009 and as to the annual amounts, we made substantial investments in investee companies. The increase in investments in the prior periods was as a result of our prior business plan to further invest in meaningful ventures in support of our overall business. However, many of the investments purchased by prior management proved to be either non-performing or required ongoing funding that our Company could not commit to. All investments included in the cash paid amounts were written off prior to the completion of our most recent fiscal year ended June 30, 2010.





We were also a party to two acquisitions during the six months ended December 31, 2009. On July 31, 2009 we acquired Designer Liquidator in which we received cash proceeds of $612,702 (net of $150,000 in cash payments). On August 27, 2009 we completed our acquisition of the outstanding common stock of Abazias in which we received cash proceeds of $127,530. We acquired Abazias for the purpose of building brand recognition and increasing retail market penetration. These businesses were included in former operating segments that we discontinued and, accordingly, these businesses were disposed of without compensation to the Company.




We have no commitments for the purchase of property and equipment or other long lived assets.





Cash Flow from Financing Activities– We used $54,081 cash in our financing activities during the six months ended December 31, 2010 and generated $10,583,657 during the same period of the prior year. We generated cash principally from preferred stock and warrant and debt financings of $15,467,808 and $11,054,906 during the years ended June 30, 2010 and 2009, respectively. Uses of cash from financing activities relate to the principal payments we made on our mortgage loan. We generated no cash from our financing activities during the six months ended December 31, 2010. However, on March 15, 2011, we received $1,000,000 from the impending issuance of our Series G Preferred Stock and warrants. During the six months ended December 31, 2009, we received $10,600,000 from the sale of preferred stock and warrants. We have been substantially dependent on these types of financings during our history. Additional funding sources may become available based upon interest in our reorganized business model. However, there can be no assurances that funding sources will become available or at terms that are suitable to our new management.




31





Series G Convertible Preferred Stock Redemption Requirements — On June 30, 2010, we sold 5,000,000 shares of Series G Convertible Preferred Stock. The Series G Preferred requires the payment of cash dividends quarterly at a rate of 8.0% of the stated value, regardless of declaration, and is mandatorily redeemable for cash of up to $50,600,000, which is mandatorily payable $5,000,000 on June 30, 2011 and $45,600,000 on June 30, 2013 as follows:





·
The stated value of $5,000,000 is payable on June 30, 2013.


·
An additional dividend equal to $1.00 per share of Series G Preferred is payable on June 30, 2011 if the special preferred distribution discussed in the next bullet point has not been paid before that date (aggregate redemption value $5,000,000).


·
A special preferred distribution equal to $8.12 per share of Series G Preferred is payable on June 30, 2013 or earlier at our option (aggregate redemption value of $40,600,000). This special preferred distribution is reduced by the amount of the additional dividend discussed in the preceding bullet point if it the additional dividend is paid on the June 30, 2011.





In summary, if the additional dividend described in the second bullet point above is paid on or before June 30, 2011, the mandatory redemption amount is $45,600,000. If the additional dividend is not paid on or before June 30, 2011, the mandatory redemption amount is $50,600,000. Quarterly and annual regular dividend requirements are $100,000 and $400,000, respectively, in cash only while the Series G Preferred Stock is outstanding.





Critical Accounting Policies





Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to reserves, deferred tax assets and valuation allowance, impairment of long-lived assets, fair value of our financial instruments and equity instruments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.





While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Management believes the policies that fall within this category are the policies on revenue recognition and accounts receivable and other intangible assets, investments, financial and derivative instruments.




32





Revenue recognition – Revenue is recognized when evidence of the arrangement exists, the product is shipped to a customer, or in the limited circumstances, at destination, when terms provide that title passes at destination, the fee for the service is fix or determinable and when we have concluded that amounts are collectible from the customers. Estimated amounts for sales returns and allowances are recorded at the time of sale. Shipping costs billed to customers are included as a component of product sales. The associated cost of shipping is included as a component of cost of product sales.





Accounts receivable –Accounts receivable represents normal trade obligations from customers that are subject to normal trade collection terms, without discounts or rebates. Notwithstanding these collections, we periodically evaluate the collectability of our accounts receivable and consider the need to establish an allowance for doubtful accounts based upon our historical collection experience and specifically identifiable information about our customers.





Inventories –Inventories consist of retail merchandise that is in its finished form and ready for sale to end-user customers. Inventories are recorded at the lower of average cost or market. Normal in-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred and included in cost of goods sold. Our inventories are acquired and carried for retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand. In addition, the prices of commodity products, such as diamonds, colored gemstones, platinum, gold and silver, carried by our Abazias subsidiary, are subject to fluctuations arising from changes in supply and demand, competition and market speculation. Rapid and significant changes in commodity prices, particularly diamonds, may materially and adversely affect our sales and profit margins by increasing the prices for our products. We use our best estimates of all available information to establish reasonable inventory quantities. However, these conditions may cause our inventories to become obsolete and/or excessive. We review our inventories periodically for indications that reserves are necessary to reduce the carrying values to the lower of cost or market values.





Impairments – Our management evaluates its tangible and definite-lived intangible assets for impairment under ASC 350 Intangible Assets and ASC 360 Impairments and Disposals.





·
Our evaluation related to goodwill provides for a two step process. The first step is to compare the carrying value of the company to the enterprise value, generally determined using the market in which our common stock trades. If the carrying value, including goodwill, exceeds the enterprise value, the implied goodwill is determined by reevaluating the carrying values of all assets. The excess of the carrying value of goodwill over its implied value requires recognition as an operating expense.


·
Our evaluation related to tangible and intangible long-lived assets provides a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment. For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates, for intangible assets.





Investments – Our investments consist of available for sale securities, non-marketable securities and other equity investments.





Available-for-Sale Investments: Investments that we designate as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). We base the cost of the investment sold on the specific identification method using market rates for similar financial instruments.





33





Non-Marketable and Other Equity Investments: We account for non-marketable and other equity investments under either the cost or equity method and include them in other long-term assets. Our non-marketable and other equity investments include:





Equity method investments when we have the ability to exercise significant influence, but not control, over the investee. We record equity method adjustments in gains (losses) on equity investments, net. Equity method adjustments include: our proportionate share of investee income or loss, gains or losses resulting from investee capital transactions, amortization of certain differences between our carrying value and our equity in the net assets of the investee at the date of investment, and other adjustments required by the equity method.


Non-marketable cost method investments when we do not have the ability to exercise significant influence over the investee.





Other-Than-Temporary Impairment: All of our non-marketable and other investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The indicators that we use to identify those events and circumstances include:





the investee's revenue and earnings trends relative to predefined milestones and overall business prospects;


the technological feasibility of the investee's products and technologies;


the general market conditions in the investee's industry or geographic area, including regulatory or economic changes;


factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and the rate at which the investee is using its cash; and


the investee's receipt of additional funding at a lower valuation. If an investee obtains additional funding at a valuation lower than our carrying amount or a new round of equity funding is required for the investee to remain in business, and the new round of equity does not appear imminent, it is presumed that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise.





Investments that we identify as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write down the investment to its estimated fair value. For non-marketable equity investments that we do not consider viable from a financial or technological point of view, we write the entire investment down, since we consider the estimated fair value to be nominal.





Financial instruments –Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments, long-term debt, and redeemable preferred stock.





We carry cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term debt at historical costs; their respective estimated fair values approximate carrying values. We carry derivative financial instruments at fair value in accordance with Financial ASC 815 Accounting for Derivative Financial Instruments and Hedging Activities (“ASC 815”). We carry redeemable preferred stock at either its basis derived from the cash received or fair value depending upon the classification afforded the preferred stock, or embedded components thereof, in accordance with ASC 815 and ASC 480 Financial Instruments with Characteristics of both Equity and Liabilities (“ASC 480”).





34





Derivative financial instruments – Derivative financial instruments, as defined in ASC 815 consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.





We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as redeemable preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by Statement 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.





On December 17, 2011, we entered into agreements with the holders of the warrants and preferred stock to modify the financial instruments to exclude provisions, such as down-round anti-dilution protection, that cause these derivative financial instruments to be classified in liabilities and carried at fair value. On the modification date, we adjusted all derivative financial instruments to fair values, with charges or credits to income, and reclassified the remaining balances to paid-in capital. Accordingly, in the absence of future modification to these agreements or the issuance of additional financial instruments that give rise to derivative classification and measurement, we do not anticipate further derivative income (expense).





Legal and Other Contingencies





As discussed in Part I, Item 3 of this Form 10-KT under the heading "Legal Proceedings" and in Note 12 "Commitments and Contingencies" in Notes to Consolidated Financial Statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In accordance with GAAP, the Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In management's opinion, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate materially adversely affect its financial condition or operating results. However, the outcomes of legal proceedings and claims brought against the Company are subject to significant uncertainty. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.





Changes in accounting:





We adopted two accounting standards at the beginning of the first quarter of our year ended June 30, 2010 that had a material effect on our financial statements and presentation. The standards adopted and the associated effects were as follows:





35





Effective on July 1, 2009, we adopted the requirements of Accounting Standards Codification (“ASC”) 810 Consolidations that required (i) presentation of non-controlling interests (formerly referred to as minority interests) as a component of equity and (ii) presentation of income (loss) associated with Infusion Brands International, Inc. separately from income (loss) associated with non-controlling interests. This accounting standard required retrospective adoption and, accordingly, the comparable amounts in prior periods have been reclassified to conform to this new standard. The effect of this change in accounting was to increase beginning stockholders’ equity that was previously reported in the amount of $40,109,747 as of June 30, 2010 by the amount of non-controlling interests in the amount of $197,114 as of June 30, 2010. See Note 14 for information on Non-Controlling Interests.





Effective on July 1, 2009, we also adopted the requirements of ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of derivative contracts linked to our equity instruments. Derivative contracts may be classified in equity only when they both are indexed to a company’s own stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) would be considered indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed monetary amount. We were unable to continue to carry 30,904,171 warrants in equity because they embodied anti-dilution protections that did not achieve the fixed-for-fixed definition. The reclassification of the fair value of the warrants, amounting to $4,045,146, to liabilities was recorded on July 1, 2009 as a cumulative effect in accounting principle wherein the original amounts recorded were removed from paid-in capital $28,719,115 and the difference $24,673,969, representing the fair value changes, was recorded as an adjustment to beginning accumulated deficit.





ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As a smaller reporting company we are not required to provide the information required by this Item.





ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





36





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and Stockholders of


Infusion Brands International, Inc. and Subsidiaries





We have audited the accompanying consolidated balance sheets of Infusion Brands International, Inc and subsidiaries at December 31, 2010 and June 30, 2010 and 2009 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the six months ended December 31, 2010 and years ended June 30, 2010 and 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits 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 about whether the 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 included 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Infusion Brands, Inc. and subsidiaries at December 31, 2010 and June 30, 2010 and 2009, and the consolidated results of their operations, changes in their stockholders’ deficit and their cash flows for the six months ended December 31, 2010 and years ended June 30, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 of the accompanying consolidated financial statements, the Company has incurred significant recurring losses from operations and is dependent on outside sources of financing for continuation of its operations and management is restructuring and redirecting its operating initiatives that require the use its available capital resource. These factors raise substantial doubt about the Company's ability to continue as a going concern.





/s/Meeks International LLC


Tampa, Florida


March 31, 2011





37





Infusion Brands International, Inc. and Subsidiaries


Consolidated Balance Sheets





December 31


June 302010


2010


2009AssetsCurrent assets:Cash and cash equivalents

$
1,746,510


$
5,393,142


$
2,005,702Accounts receivable, net of allowances for returns and bad debts of $216,413, $168,355 and $187,763


393,851



922,015



1,864,465Inventories, net


2,067,226



1,481,985



1,294,250Prepaid expenses and other current assets


22,796



134,854



632,200Total current assets


4,230,383



7,931,996



5,796,617Property and equipment, net


2,418,357



2,458,669



2,579,548Other assets


125,516



21,302



909,714Intangible assets, net


—



—



1,123,335Assets of discontinued operating segments


—



4,288,548



4,676,984Total assets

$
6,774,256


$
14,700,515


$
15,086,198Liabilities, Redeemable Preferred Stock and DeficitCurrent liabilities:Accounts payable and accrued expenses

$
1,855,861


$
586,531


$
556,747Notes payable and maturities of long-term debt


286,262



35,380



33,230Deferred revenue


—



53,833



—Derivative liabilities


—



4,185,956



6,481,839Total current liabilities


2,142,123



4,861,700



7,071,816Long-term debt


1,891,542



1,911,700



1,945,647Security deposits on leases


9,193



9,193



11,734Deferred revenue


—



2,000,000



—Liabilities of discontinued operating segments


—



694,412



—Total liabilities


4,042,858



9,477,005



9,029,197Commitments and contingencies (Note 16)


—



—



—Redeemable preferred stock


9,497,444



7,816,910



45,969,634Deficit:Infusion Brands shareholders’ deficit:Series E Preferred Stock, $0.00001 par, 13,000,000 shares authorized and issued, 2,856,282 and 2,555,095 outstanding


2,344,776



2,937,004



—Common Stock, $0.00001 par, 400,000,000 shares authorized; 158,795,060, 158,073,323 and 14,509,225 shares outstanding


1,589



1,581



145Paid-in capital


49,593,421



47,029,421



6,532,238Accumulated deficit


(58,712,607
)


(52,707,780
)


(46,570,028
)Other comprehensive items


—



30,000



(72,102
)Total Infusion Brands shareholders’ deficit


(6,772,821
)


(2,709,774
)


(40,109,747
)Non-controlling interests


6,775



116,374



197,114Total deficit


(6,766,046
)


(2,593,400
)


(39,912,633
)Total liabilities, redeemable preferred stock and deficit

$
6,774,256


$
14,700,515


$
15,086,198





See accompanying notes.





38


Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Operations





Six Months Ended December 31,2010


2009(Unaudited)Revenues:Product sales

$
4,073,520


$
13,628,193Cost of product sales (including depreciation expense of $8,409 and $6,997)


2,534,443



7,084,442Gross profit


1,539,077



6,543,751Other revenues:Rental income


140,925



163,889Services and other revenues


107,666



—Total other revenues


248,591



163,889Other costs and operating expenses:Advertising and promotional


3,795,506



5,289,253Accounting and professional


1,637,703



1,442,748Other general and administrative


1,165,719



877,115Employment costs


1,079,626



368,862Depreciation, excluding depreciation classified in cost of product sales


99,237



400,4977,777,791



8,378,475Loss from operations


(5,990,122
)


(1,670,835
)Other income (expense):Derivative income


601,775



9,272,414Interest and other income


160,226



297,043Interest expense


(81,569
)


(143,780
)Litigation settlement


(62,500
)


—Extinguishment expense


—



(22,328,516
)Inducement expense


—



(1,473,855
)Total other income (expense)


617,932



(14,376,694
)Loss from continuing operations


(5,372,190
)


(16,047,529
)Discontinued operations:Loss from operations of discontinued operating segments


(463,166
)


(4,903,968
)Loss on disposal of operating segments


(279,070
)


—Loss from discontinued operations


(742,236
)


(4,903,968
)Net loss attributable to Infusion Brands International


(6,114,426
)


(20,951,497
)Net loss attributable to non-controlling interests


109,598



204,905Net loss

$
(6,004,827
)

$
(20,746,592
)





Continued on next page.





See accompanying notes.





39





Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Operations





Six Months Ended December 31,2010


2009(Unaudited)Reconciliation of loss from continuing operations attributable to Infusion Brands to loss attributable to Infusion Brand common shareholders:Loss from continuing operations attributable to Infusion Brands

$
(5,372,190
)

$
(16,047,529
)Loss attributable to non-controlling interests


68,935



41,455Preferred dividends and accretion


(1,884,308
)


(66,948,653
)Loss from continuing operations

$
(7,187,563
)

$
(82,954,727
)Loss from discontinued operations attributable to Infusion Brands

$
(742,236
)

$
(4,903,968
)Loss attributable to non-controlling interests


40,664



163,450Loss from discontinued operations

$
(701,572
)

$
(4,740,524
)Loss per common share:Basic:Continuing operations

$
(0.05
)

$
(0.71
)Discontinued operations

$
(0.00
)

$
(0.04
)DilutedContinuing operations

$
(0.05
)

$
(0.71
)Discontinued operations

$
(0.00
)

$
(0.04
)Weighted average common shares—basic


158,751,348



116,970,641Weighted average common shares—diluted


158,751,348



116,970,641





See accompanying notes.




40




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Operations





Years Ended June 30,2010


2009Revenues:Product sales

$
16,729,761


$
9,552,892Cost of product sales (including depreciation expense of $14,608 and $7,474)


9,118,137



5,149,684Gross profit


7,611,624



4,403,208Other revenues:Services and other revenues


742,167



—Rental income


332,462



236,021Total other revenues


1,074,629



236,021Other costs and operating expenses:Advertising and promotional


5,840,209



5,050,558Impairment of long-lived assets


3,881,462



198,456Other general and administrative


2,664,037



573,673Accounting and professional


2,178,288



1,570,903Employment costs


1,603,959



626,683Depreciation, excluding depreciation classified in cost of product sales


1,187,547



648,63617,355,502



8,668,909Loss from operations


(8,669,249
)


(4,029,680
)Other income (expense):Derivative income


29,606,972



1,974,605Extinguishment expense


(22,328,516
)


—Inducement expense


(1,473,855
)


—Interest and other income


317,819



199,457Interest expense


(208,597
)


(350,491
)Total other income (expense)


5,913,823



1,823,571Loss from continuing operations


(2,755,426
)


(2,206,109
)Discontinued operations:Loss from operations of discontinued operating segments


(28,393,552
)


(542,741
)Loss on disposal of operating segments


—



—Loss from discontinued operations


(28,393,552
)


(542,741
)Net loss attributable to Infusion Brands International


(31,148,978
)


(2,748,850
)Net loss attributable to non-controlling interests


337,255



122,886Net loss

$
(30,811,723
)

$
(2,625,964
)





Continued on next page.




See accompanying notes.




41




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Operations





Year Ended June 30,2010


2009Reconciliation of loss from continuing operations attributable to Infusion Brands to loss applicable to Infusion Brand common shareholders:Loss from continuing operations attributable to Infusion Brands

$
(2,755,426
)

$
(2,206,109
)Loss attributable to non-controlling interests


121,403



122,886Preferred dividends and accretion


(66,948,653
)


(2,958,350
)Loss from continuing operations

$
(69,582,676
)

$
(5,041,573
)Loss from discontinued operations attributable to Infusion Brands

$
(28,393,552
)

$
(542,741
)Loss attributable to non-controlling interests


215,852



—Loss from discontinued operations

$
(28,177,700
)

$
(542,741
)Loss per common share:Basic:Continuing operations

$
(0.50
)

$
(0.35
)Discontinued operations

$
(0.20
)

$
(0.04
)Diluted:Continuing operations

$
(0.50
)

$
(0.35
)Discontinued operations

$
(0.20
)

$
(0.04
)Weighted average common shares—basic


137,891,440



14,503,289Weighted average common shares—diluted


137,891,440



14,503,289





See accompanying notes.




42




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Cash Flows





Six Months Ended December 31,2010


2009(Unaudited)Cash flows from operating activities:Net loss

$
(6,114,426
)

$
(20,951,497
)Adjustments to reconcile net loss to net cash from operating activities:Equity in losses of investees


(881,682
)


1,634,242Derivative income


(601,775
)


(9,272,414
)Impairment of investments


406,848



1,591,704Loss on disposal of discontinued segments


279,070



—Share-based payment


271,906



—Amortization of deferred revenue


(107,666
)


(392,970
)Depreciation expense


102,656



58,695Bad debts expense and returns and allowances


71,838



675,000Loss on disposal of property and equipment


36,146



—Extinguishment


—



22,328,516Inducement expense


—



1,473,855Amortization of intangible assets


—



685,113Amortization of deferred finance costs


—



15,167Changes in operating assets and liabilities:Accounts receivable


1,046,390



(1,641,881
)Inventories


976,888



(365,995
)Prepaid expenses and other assets


46,480



529,323Accounts payable and accrued expenses


911,097



728,072Net cash used in operating activities


(3,556,230
)


(2,905,070
)Cash flows from investing activities:Purchases of property and equipment


(30,571
)


(20,975
)Purchases of investments


(5,750
)


(6,411,709
)Acquisition of Designer Liquidators


—



612,702Acquisition of Abazias


—



127,530Net cash flow from investing activities


(36,321
)


(5,692,452
)Cash flows from financing activities:Principal payments on long-term debt


(54,081
)


(16,343
)Proceeds from sale of preferred stock and warrants


—



10,600,000Net cash flow from financing activities


(54,081
)


10,583,657Net change in cash and cash equivalents


(3,646,632
)


1,986,135Cash and cash equivalents at beginning of period


5,393,142



2,005,702Cash and cash equivalents at end of period

$
1,746,510


$
3,991,837





See accompanying notes.




43




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Cash Flows





Supplemental Cash Flow Information





Six Months Ended December 31,2010


2009(Unaudited)Cash paid for interest

$
63,644


$
70,567Cash paid for income taxes

$
—


$
—Disposals of discontinued segments:Assets of discontinued segments, including cash of $166,899

$
561,904Liabilities of discontinued segments


(282,834
)Net assets of discontinued segments


279,070Proceeds


—Loss on disposals

$
279,070Non-cash investing and financing activities:Issuance of 100,000 shares of common stock for partial consideration transferred in acquiring Designer Liquidators


—


$
101,000Issuance of 13,000,000 shares of Series E Preferred Stock for consideration transferred in acquiring Abazias:Classified as preferred stock


—


$
13,236,165Classified in paid-in capital, representing beneficial conversion feature






2,605,159Total fair value of Series E Preferred Stock


—


$
15,841,323Exchange of available for sale investments for intangible asset


—


$
3,782,717Consideration for marketing agreements in the form of common stock and notes receivable, carried as investments:Zurvita, 15,200,000 common shares (fair value of $646,000), plus face value $2,000,000, 6% per annum note receivable due October 2012, at fair value


—


$
2,646,000Net Talk.com, 1,000,000 common shares at fair value


—



150,000—


$
2,796,000





See accompanying notes.




44




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Cash Flows





Years ended June 30,2010


2009Cash flows from operating activities:Net loss

$
(31,148,979
)

$
(2,748,850
)Adjustments to reconcile net loss to net cash from operating activities:Derivative income


(29,606,972
)


(1,974,605
)Impairment of long-lived assets


22,972,854



198,456Extinguishment


22,328,516



—Impairment of investments


3,590,196



450,000Equity in losses of investees


1,975,846



92,741Amortization of intangible assets


1,836,071



376,226Inducement expense


1,473,855



—Bad debts expense and returns and allowances


1,072,176



138,848Amortization of deferred revenue


(742,167
)


—Share-based payment


518,886



387,672Depreciation expense


170,169



232,353Non-cash severance costs


76,077



—Amortization of deferred finance costs


36,150



240,987Changes in operating assets and liabilities:Accounts receivable


(460,918
)


(1,955,082
)Inventories


(565,284
)


(1,181,329
)Prepaid expenses and other assets


583,995



(563,000
)Accounts payable and accrued expenses


(73,937
)


446,366Net cash used in operating activities


(5,963,466
)


(5,859,217
)Cash flows from investing activities:Purchases of investments


(6,495,500
)


(4,758,050
)Acquisition of Designer Liquidators


612,702



—Cash of discontinued segments disposed


(298,280
)


—Acquisition of Abazias


127,530



—Purchases of property and equipment


(68,615
)


(2,811,901
)Consolidation of Wineharvest


5,261



—Investment by non-controlling interest holders


—



320,000Payments for licenses and patents


—



(300,000
)Security deposits


—



(75,850
)Net cash flow from investing activities


(6,116,902
)


(7,625,801
)Cash flows from financing activities:Proceeds from sale of preferred stock and warrants


15,600,000



9,136,994Redemption of common stock


(100,000
)


—Principal payments on long-term debt


(32,192
)


(21,124
)Proceeds from long-term debt, net of $60,964 in loan costs


—



1,939,036Net cash flow from financing activities


15,467,808



11,054,906Net change in cash and cash equivalents


3,387,440



(2,430,112
)Cash and cash equivalents at beginning of period


2,005,702



4,435,814Cash and cash equivalents at end of period

$
5,393,142


$
2,005,702





Continued on the next page.





See accompanying notes.




45




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Cash Flows





Supplemental Cash Flow Information





Years ended June 30,2010


2009Cash paid for interest

$
128,860


$
86,937Cash paid for income taxes

$
—


$
—Non-cash investing and financing activities:Issuance of 100,000 shares of common stock for partial consideration transferred in acquiring Designer Liquidators

$
101,000


$
—Issuance of 13,000,000 shares of Series E Preferred Stock for consideration transferred in acquiring Abazias:Classified as preferred stock

$
13,236,165


$
—Classified in paid-in capital, representing beneficial conversion


2,605,159



—Total fair value of Series E Preferred Stock

$
15,841,323


$
—Exchange of available for sale investments for intangible asset

$
3,782,717


$
—Consideration for marketing agreements in the form of common stock and notes receivable, carried as investments:Zurvita, 15,200,000 common shares (fair value of $646,000), plus face value $2,000,000, 6% per annum note receivable due October 2012, at fair value

$
2,646,000


$
—Net Talk.com, 1,000,000 common shares at fair value


150,000



—$
2,796,000


$
—Common stock issued for loan

$
—


$
43,333





See accompanying notes.




46




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Stockholders’ Equity (Deficit)





For the year ended June 30, 2010 and the six months ended December 31, 2010





Series E


Common Stock


Paid-in


Comprehensive


Accumulated


Infusion Brands


Non-Controlling


TotalPreferred Stock


Shares


Amount


Capital


Income Items


Deficit


Equity (deficit)


Interests


Equity (deficit)Balances, July 1, 2009

$
—



14,509,225


$
145


$
6,532,238


$
(72,102
)

$
(46,570,028
)

$
(40,109,747
)

$
197,114


$
(39,912,633
)Change in accounting for derivatives


—



—



—



(28,719,115
)


—



24,673,969



(4,045,146
)


—



(4,045,146
)Balances, adjusted for change In accounting for derivatives






14,509,225



145



(22,186,877
)


(72,102
)


(21,896,059
)


(44,154,893
)


197,114



(43,957,779
)Warrant exchange


—



—



—



(66,948,653
)


—



—



(66,948,653
)


—



(66,948,653
)Conversions of preferred stock


—



105,141,416



1,051



107,587,408



—



—



107,588,459



—



107,588,459Acquisition – Designer LiquidatorIssuance of common stock


—



100,000



1



100,999



—



—



101,000



163,450



264,450Income taxes


—



—



—



60,967



—



—



60,967



—



60,697Acquisition – Abazias:Issuance of Series E Preferred


15,841,323



—



—



—



—



—



15,841,323



—



15,841,323Beneficial conversion feature


(2,605,158
)


—



—



2,605,158



—



—



—



—



—Income taxes


—



—



—



2,281,030



—



—



2,281,030



—



2,281,030Warrant exercises


—



27,606,276



276



12,811,450



—



—



12,811,726



—



12,811,726Cashless option exercises


—



4,167



—



—



—



—



—



—



—Conversions of Series E


(10,299,161
)


12,012,239



121



10,299,040



—



—



—



—



—Redemption






(1,300,000
)


(13
)


(99,987
)


—



—



(100,000
)


—



(100,000
)Share-based payment


—



—



—



518,886



—



—



518,886



—



518,886Unrealized gains (losses)


—



—



—



—



102,102



—



102,102



—



102,102Loss from continuing operations


—



—



—



—



—



(2,634,023
)


(2,634,023
)


(121,403
)


(2,755,426
)Loss from discontinued operations


—



—



—



—



—



(28,177,700
)


(28,177,700
)


(215,852
)


(28,393,552
)Balances, June 30, 2010


2,937,004



158,073,323



1,581



47,029,421



30,000



(52,708,780
)


(2,709,774
)


116,374



(2,593,400
)Conversion of preferred


(592,228
)


721,737



8



592,220



—



—



—



—



—Share-based payment


—



—



—



271,906



—



—



271,906



—



271,906Derivative reclassification


—



—



—



3,584,182



—



—



3,584,182



—



3,584,182Accretion of Series G Preferred


—



—



—



(1,680,534
)


—



—



(1,680,534
)


—



(1,680,534
)Dividends on Series G Preferred


—



—



—



(203,774
)


—



—



(203,774
)


—



(203,774
)Unrealized gains and losses


—



—



—



—



(30,000
)


—



(30,000
)


—



(30,000
)Loss from continuing operations


—



—



—



—



—



(5,303,255
)


(5,303,255
)


(68,935
)


(5,372,190
)Loss from discontinued operations


—



—



—



—



—



(701,572
)


(701,572
)


(40,664
)


(742,236
)Balances, December 31, 2010

$
2,344,776



158,795,060


$
1,589


$
49,593,421


$
—


$
(58,712,607
)

$
(6,772,821
)

$
6,775


$
(6,766,046





See accompanying notes.




47




Infusion Brands International, Inc. and Subsidiaries


Consolidated Statements of Stockholders’ Equity (Deficit)





For the year ended June 30, 2009 and the six months ended December 30, 2009





Series E


Common Stock


Paid-in


Comprehensive


Accumulated


Infusion Brands


Non-Controlling


TotalPreferred Stock


Shares


Amount


Capital


Income Items


Deficit


Equity (deficit)


Interests


Equity (deficit)Balances, July 1, 2008

$
—



14,475,892


$
145


$
9,102,916


$
(31,135
)

$
(43,944,064
)

$
(34,872,138
)

$
—


$
(34,872,138
)Fair value adjustments on available for sale securities


—



—



—



—



(40,967
)


—



(40,967
)


—



(40,967
)Non-controlling interests in consolidated subsidiaries


—



—



—



—



—



—



—



320,000



320,000Non-controlling interests in net loss


—



—



—



—



—



—



—



—



—Share-based payments (employees)


—



33,333



—



327,016



—



—



327,016



—



327,016Share-based payments (others)


—



—



—



60,656



—



—



60,656



—



60,656Accretion of Series F Preferred Stock


—



—



—



(2,958,350
)


—



—



(2,958,350
)


—



(2,958,350
)Loss from continuing operations


—



—



—



—



—



(2,083,223
)


(2,083,223
)


(122,886
)


(2,206,109
)Loss from discontinued operations


—



—



—



—



—



(542,741
)


(542,741
)


—



(542,741
)Balances, June 30, 2009


—



14,509,225



145



6,532,238



(72,102
)


(46,570,028
)


(40,109,747
)


197,114



(39,912,633
)Change in accounting for derivatives


—



—



—



(28,719,115
)


—



24,673,969



(4,045,146
)


—



(4,045,146
)Warrant exchange


—



—



—



(66,948,653
)


—



—



(66,948,653
)


—



(66,948,653
)Conversions of preferred


—



105,141,416



1,051



107,587,408



—



—



107,588,459



—



107,588,459Acquisition: Designer Liquidator


—



100,000



1



161,966



—



—



161,967



163,450



325,417Acquisition: Abazias


13,236,165



—



—



4,886,188



—



—



18,122,353



—



18,122,353Warrant exercises


—



27,606,276



276



12,811,450



—



—



12,811,726



—



12,811,726Cashless option exercises


—



4,167



—



—



—



—



—



—



—Conversions of Series E


(10,058,848
)


11,761,159



118



10,058,730



—



—



—



—



—Unrealized gains (losses)


—



—



—



—



497,102



—



497,102



—



497,102Loss from continuing operations


—



—



—



—



—



(16,025,122
)


(16,025,122
)


(41,455
)


(16,066,577
)Loss from discontinued operations


—



—



—



—



—



(4,721,476
)


(4,721,476
)


(163,450
)


(4,884,926
)Balances, December 31, 2009

$
3,177,317



159,122,243


$
1,591


$
46,370,212


$
425,000


$
(42,642,651
)

$
7,331,469


$
155,659


$
7,487,128





See accompanying notes.




48




Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 1 – Organization and nature of business operations:





Infusion Brands International, Inc. is a Nevada Corporation. We are a global consumer products company, specializing in developing innovative solutions and marketing profitable brands through our international direct-to-consumer channels of distribution.





On December 16, 2010, we changed the name of our company from OmniReliant Holdings, Inc. to Infusion Brands International, Inc. (“Infusion Brands”).





On December 17, 2010, we changed our fiscal year end from June 30 to December 31. The accompanying consolidated financial statements as of and for the six month transition period ended December 31, 2010 (the “Transition Period”) and the unaudited consolidated financial statements for the six months ended December 31, 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-KT.





Note 2 – Going concern and management’s plans:





The preparation of financial statements in accordance with generally accepted accounting principles contemplates that operations will be sustained for a reasonable period. However, we have incurred operating losses of $5,990,122 and $1,670,835 during the six months ended December 31, 2010 and 2009, respectively, and $8,669,249 and $4,029,680 during our fiscal years ended June 30, 2010 and 2009, respectively. In addition, during these periods, we used cash of $3,556,230 and $2,905,070 during the six months ended December 31, 2010 and 2009, respectively, and $5,963,466 and $5,859,217 during the fiscal years ended June 30, 2010 and 2009, respectively, in support of our operating activities. As of December 31, 2010, we have cash on hand of $1,746,510 and total working capital of $2,088,260. Since our inception, we have been substantially dependent upon funds raised through the sale of preferred and common stock and warrants to sustain our operating and investing activities. These are conditions that raise substantial doubt about our ability to continue as a going concern for a reasonable period.





49





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 2 – Going concern and management’s plans (continued):





Our management began implementing strategic plans designed and developed during the fourth quarter of the prior fiscal year with the intention of alleviating ongoing operating losses. The principal focus of these plans is an intensified emphasis on the redesign of the consumer products business, shifting its focus from the highly expensive product based distribution model to a global brand development and brand ownership model. Management believes that the planned model, which is currently under development, will provide more predictable revenue streams as well as current and long-term profitability by curtailing the cost structure, allowing for longer product life, and providing for next-version, next-generation and follow-on opportunities to those branded products. However, substantial investment is required to support this change and, as a result, the Company had previously determined during the fourth quarter of its prior fiscal year that it would be unable to continue to provide significant operating capital to the operating entities within eCommerce Segment and with regard to the Fashion Goods Segment, such a decision was made early in the fourth quarter of the current calendar year. Subsequent to those curtailment decisions, management concluded that the two segments would continue to drain the Company of both capital and human resources and, accordingly, disposed of all businesses and assets within those operating segments during the fourth quarter of the current calendar year. Accordingly, in light of the fact that the Company has no ongoing involvement in those businesses, the future drain has been eliminated. Notwithstanding, there can be no assurances that either the aforementioned branded products model can be accomplished nor, if accomplished, can there be any assurances of its operational success.





The Company received no capital funding during the six months ended December 31, 2010 and $15,600,000 in funding from the sale of preferred stock and warrants and similar transactions during the year ended June 30, 2010. On March 15, 2011, we received $1,000,000 from the impending issuance of Series G Preferred Stock and warrants. Notwithstanding this additional funding, our ability to continue as a going concern for a reasonable period is dependent upon achieving our management’s plans for the Company’s reorganization and, ultimately, generating profitable operations from those restructured operations. We cannot give any assurances regarding the success of management’s plans. Our consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.





50





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies:





Restatement and reclassifications – As more fully discussed in Note 4, during our quarterly period ended December 31, 2010 we discontinued and disposed of all holdings in our former eCommerce and Fashion Goods business segments in order to concentrate on our consumer products development and branding business. Our consolidated financial statements for all prior periods presented herein and where applicable, associated footnote disclosures, have been restated to give effect to the treatment of the discontinued segments as discontinued operations.





We have also reclassified amounts and eliminated certain captions in our consolidated financial statements in response to recent comments on our consolidated financial statements by the Securities and Exchange Commission. We previously reported gross profit from our product sales, excluding depreciation, in our statements of operations. We have reclassified depreciation directly attributable to our product sales to cost of product sales in the accompanying consolidated financial statements. This reclassification did not affect the amounts of operating loss or net loss that we previously reported but decreased our gross profit and increased operating expenses from amounts previously reported by $14,608 and $7,474 for the years ended June 30, 2010 and 2009, and $6,997 for the six months ended December 31, 2009. In addition, we previously reconciled our net loss attributable to Infusion Brands to cash flows from operating activities in our consolidated statements of cash flows. We have revised our previously reported statements of cash flows to reconcile our net loss to cash flows from operating activities. This reclassification did not affect the total cash flows from operating activities.





Use of estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements. Significant estimates embodied in the Company’s consolidated financial statements include (i) developing fair value measurements to record financial instruments, including derivatives and investments, (ii) estimating the collectability of accounts receivable and the recoverability of inventories and (iii) developing cash flow projections for purposes of evaluating the recoverability of long-lived assets. All estimates are developed by or under the direction of our Chief Executive Officer using the best available information at the time of the estimate. However, actual results could differ from those estimates.





Accounting changes – We adopted two accounting standards during our year ended June 30, 2010 that had a material effect on our consolidated financial statements and presentation therein. The standards adopted were as follows:





51





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Effective on July 1, 2009, we adopted the requirements of Accounting Standards Codification (“ASC”) 810 Consolidations that required (i) presentation of non-controlling interests (formerly referred to as minority interests) as a component of equity and (ii) presentation of income (loss) associated with Infusion Brands separately from income (loss) associated with non-controlling interests. This accounting standard required retrospective adoption and, accordingly, the comparable amounts in prior periods have been reclassified to conform to this new standard. The effect of this change in accounting was to increase beginning stockholders’ equity that was previously reported in the amount of $(40,109,747) as of June 30, 2010 by the amount of non-controlling interests in the amount of $197,114 as of June 30, 2010. See Note 14 for information on Non-Controlling Interests.





Effective on July 1, 2009, we also adopted the requirements of ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of derivative contracts linked to our equity instruments. Derivative contracts may be classified in equity only when they both are indexed to a company’s own stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) would be considered indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed monetary amount. We were unable to continue to carry 30,904,171 warrants in equity because they embodied certain anti-dilution protections that did not achieve the fixed-for-fixed definition. The reclassification of the fair value of the warrants, amounting to $4,045,146, to liabilities was recorded on July 1, 2009 as a cumulative effect of a change in accounting principle wherein the original amounts recorded were removed from paid-in capital ($28,719,115) and the difference ($24,673,969), representing the fair value changes, was recorded as an adjustment to beginning accumulated deficit.





Principles of consolidation and equity method investees– Our consolidated financial statements include the accounts of Infusion Brands, its wholly and majority owned subsidiaries, and Variable Interest Entities (“VIE”) where we are the primary beneficiary. See Note 15 for additional information about VIEs that we consolidate. We account for investments that we do not control, but exert significant influence using the equity method of accounting. For purposes of determining control, we consider all facts and circumstances surrounding our investment in addition to common equity ownership. However, in the absence of evidence to the contrary, we consider investments between 20% and 50% of common equity to be subject to significant influence. See Note 6 for additional information about investees that we account for using the equity method of accounting. Operations of the following companies are consolidated or accounted for under the equity method for the periods presented:





Companies Consolidated:


·
OmniResponse, Inc. (100%)


·
OmniReliant Acquisition Sub, Inc. (100%)


·
Designer Liquidator, Inc. (100%)


·
Infusion Brands Studios, Inc. (f/k/a OmniComm Studios LLC) (60%)


·
RPS Trading LLC (50%; a VIE)





52





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





·
Wineharvest, Inc. (40%; a VIE)





53





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Companies under Equity Method:


·
Zurvita Holdings, Inc. (23%)


·
Webcarnation LLC (40%)


·
Cellular Blowout, Inc. (45%)


·
A Perfect Pear, Inc. (49.5%)


·
For Your Imagination, Inc. (20%)





As more fully discussed in Note 4, we have disposed of businesses and assets in our eCommerce and Fashion Goods Segment. At December 31, 2010, our consolidated companies consisted of Infusion Brands and Infusion Brands Studios, LLC due to the disposal of our other consolidated entities during the Transition Period, and we had no investments that rose to equity method accounting treatment. All other entities previously consolidated continued to be consolidated through the dates of their disposal. All significant intercompany accounts, profits and transactions have been eliminated in consolidation.


Business segments — We apply the management approach to the identification of our reportable business segments, which requires us to report our segment information based on how our Chief Executive Officer internally evaluates our operating activities and performance. Prior to the Transition Period during which we disposed of certain entities (See Note 4) , our business segments consisted of (i) Consumer Products, (ii) eCommerce, and (iii) Fashion Goods. Upon disposal of the businesses and assets in the eCommerce and Fashion Goods Segments, discussed in Note 4, we now operate in a single dominant segment that we refer to as Consumer Products.





Discontinued operations – We apply the component approach to the application of discontinued operations when we dispose of significant assets and businesses. A component is an entity that comprises cash flows and operations that are clearly discernable from our other operations and cash flows. A component may consist of an identifiable segment, a subsidiary, a reporting unit or an asset group that meets this criteria. The result of operations of a component that has been discontinued or disposed are reported as discontinued operations when both (i) the operations and cash flows of the component have or will be eliminated from the ongoing, or continuing, operations of the Company and (ii) the Company has no significant continuing involvement with the component following the disposal transaction. Disposals by sale or abandonment are reported as discontinued operations in the period that sale or abandonment occurs.





Revenue recognition – We derive revenue from (i) product sales, (ii) marketing services and license revenue and (iii) commercial rents. All revenues are recognized when evidence of the arrangement exists, in the case of products, when the product is shipped to a customer, or in the case of certain marketing agreements that span periods, pro-rata over the contractual term, when the fee is fixed or determinable and finally when we have concluded that amounts are collectible from the customers. Estimated amounts for product sales returns and allowances are recorded at the time of sale. Shipping costs billed to customers are included as a component of product sales. The associated cost of shipping is included as a component of cost of product sales.





54





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





During 2009, we entered into two services and one license agreements for aggregate consideration of $2,796,000 that we received in the form of common stock of the customers with a fair values aggregating $796,000, based upon quoted market prices and a $2,000,000 convertible debenture, due October 9, 2012. We deferred the revenue for which we received the common stock and are amortizing the revenue into our sales as the services are provided or on a straight line basis over the license term. We also deferred the revenue for which we received the convertible debenture. However, current accounting standards provide that any extended payment terms in revenue arrangements, and in particular terms that extend beyond twelve months, indicate that the compensation is not fixed and determinable, a requisite criteria for revenue recognition as noted above. Accordingly, this revenue will not be recognized until all requisite criteria for revenue recognition are met. Rental revenues are recognized on a straight-line basis over the term of the tenants’ lease agreements.





Due to the nature of retail business sector, our revenues may be concentrated from time-to-time in the sale of certain specific products or a single product. These concentrations generally arise from the timing and intensity of our marketing and infomercial campaigns related to those specific products. During the six months ended December 31, 2010 and 2009, two products comprised 61% and 12% and 28% and 14%, respectively, of our consolidated product sales. During the year ended June 30, 2010, two products comprised 74% and 24% of our consolidated Product Sales. During the year ended June 30, 2009, two products comprised 34% and 29%, respectively, of our consolidated Product Sales.





Accounts receivable –Accounts receivable represents normal trade obligations from customers that are subject to normal trade collection terms, without discounts or rebates. We may require deposits or retainers when we consider a customer’s credit risk to warrant the collection of such. Notwithstanding these collections, we periodically evaluate the collectability of our accounts receivable and consider the need to establish an allowance for doubtful accounts based upon our historical collection experience and specifically identifiable information about our customers.





Inventories –Inventories include retail merchandise that is in its finished form and ready for sale to end-user customers. At June 30, 2010, inventories of $1,844,161 are included in the caption, assets of discontinued segments of which $958,161 relates to manufacturing inventories. Inventories are recorded at the lower of average cost or market. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred and included in cost of goods sold. Our inventories are acquired and carried for retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand. We use our best estimates of all available information to establish reasonable inventory quantities. However, these conditions may cause our inventories to become obsolete and/or excessive. We review our inventories periodically for indications that reserves are necessary to reduce the carrying values to the lower of cost or market values. See Note 6 for additional information on our inventories.





55





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Property and equipment –Property and equipmentare recorded at our cost. We depreciate property and equipment, other than land, using the straight-line method over lives that we believe the assets will have utility. Buildings and building improvements are depreciated over 30 years. Furnishings and office equipment are depreciated over 5 years. We allocate depreciation expense related to assets directly associated with our product sales to cost of product sales. Depreciation for our real estate assets and general office assets is included in operating expenses. Our expenditures for additions, improvements and renewals are capitalized, while normal expenditures for maintenance and repairs are charged to expense.





Intangible assets and impairment – Our intangible assets consisted of identifiable intangible assets and goodwill that we acquired in connection with our purchases of Abazias, Inc., Designer Liquidator and Wineharvest. See Note 5 for additional information on our purchase business combinations and Note 9 for additional information on the components of intangible assets. We have also purchased individual intangible assets, such as patents. Intangible assets are recorded at cost and are amortized using straight line methods over estimated lives. Our evaluation of impairments is generally as follows:





Identifiable Intangible Assets: We evaluate the carrying value of identifiable intangible assets for impairment annually or at more frequent intervals should circumstances indicate impairment may be present. Our evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if the fair value is lower, we record an impairment adjustment. For purposes of fair value, we generally use a discounted cash flow approach, using risk-adjusted discount rates.





Goodwill: We evaluate the carrying value of goodwill for impairment annually. Generally, goodwill impairment testing is a two step process wherein initially the net carrying values of assets, including goodwill, are compared to the fair value. For purposes of this initial step, we are required to identify the reporting units within our organization and both allocate assets, including goodwill, and develop fair value estimates for the reporting unit. In performing our analysis for the year ended June 30, 2010, we concluded that the reporting units consisted of the individual companies in our consolidated reporting structure; that is, one step below the segment reporting previously outlined. Since, in no instance did the fair value exceed the carrying value of the reporting unit, we were required to perform the second step, which consists of a hypothetical purchase allocation based upon fair values of assets and liabilities of each reporting unit in order to arrive at the implied value of goodwill.





56





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Our impairment analyses at June 30, 2010 for both identifiable intangibles and goodwill indicated that full impairment was required. Our impairment testing of both goodwill and identifiable intangible assets at that time was significantly influenced by the operating plans of our new management that were made during the fourth quarter of our year ended June 30, 2010, and in summary, these plans (i) no longer contemplate the integration of operations of the Consumer Products and eCommerce or Fashion Goods Segments and (ii) no longer contemplate operational funding of eCommerce Segment companies and curtailed funding of Fashion Goods. As a result of these plans, goodwill was allocated solely to the defined reporting units for purposes of analysis (that is, no synergies are contemplated to support allocation to other operating units) and the fair values of the reporting units and assets, which were based upon discounted cash flow models, was substantially lower than was anticipated when the initial investments were made in these assets. In addition, as it relates to certain software technologies owned by Infusion Brands, an abandonment decision was made by new management when it was determined that insufficient funds would be available to develop the technology to a marketable state. Accordingly, these circumstances resulted in a direct write off of the carrying value of the software technologies. The following table summarizes the impairment charges by continuing operations and discontinued operations during the year ended June 30, 2010:





Continuing

Operations


Discontinued

OperationsFormer Segment

Identifiable

Intangibles


Identifiable

Intangibles


Goodwill


Total

Discontinued


TotalConsumer Products:Infusion Brands

$
3,881,462



—



—



—


$
3,881,462eCommerce:Abazias


—


$
5,903,975


$
12,419,756


$
18,323,731



18,323,731Wineharvest


—



—



172,250



172,250



172,250Fashion Goods:RPS Trading


—



335,355



—



336,355



336,355Designer Liquidator


—



—



259,056



259,056



259,056$
3,881,462


$
6,239,330


$
12,851,062


$
19,091,392


$
22,972,854





During our year ended June 30, 2009, we recorded impairment charges of $198,456 that related to certain technologies held in our Consumer Products Segment that management concluded to not further pursue. These charges were reflected in the operating expenses.





Investments – Our investments consisted of available for sale securities, non-marketable securities and other equity investments.





Available-for-Sale Investments: Investments that we designate as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). We base the cost of the investment sold on the specific identification method using market rates for similar financial instruments.





57





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Non-Marketable and Other Equity Investments: We account for non-marketable and other equity investments under either the cost or equity method and include them in other long-term assets.





·
Equity method investments when we have the ability to exercise significant influence, but not control, over the investee. We record equity method adjustments in gains (losses) on equity investments, net. Equity method adjustments include: our proportionate share of investee income or loss, gains or losses resulting from investee capital transactions, amortization of certain differences between our carrying value and our equity in the net assets of the investee at the date of investment, and other adjustments required by the equity method. In certain instances, due to the time that it takes our equity investees to close their accounting records, we record our equity interest in income or loss in arrears up to but not exceeding three-months.


·
Non-marketable cost method investments when we do not have the ability to exercise significant influence over the investee.





Other-Than-Temporary Impairment: All of our non-marketable and other investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The indicators that we use to identify those events and circumstances include:





·
the investee's revenue and earnings trends relative to predefined milestones and overall business prospects;


·
the technological feasibility of the investee's products and technologies;


·
the general market conditions in the investee's industry or geographic area, including regulatory or economic changes;


·
factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and the rate at which the investee is using its cash; and


·
the investee's receipt of additional funding at a lower valuation. If an investee obtains additional funding at a valuation lower than our carrying amount or a new round of equity funding is required for the investee to remain in business, and the new round of equity does not appear imminent, it is presumed that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise.





Investments that we identify as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write down the investment to its estimated fair value. For non-marketable equity investments that we do not consider viable from a financial or technological point of view, we write the entire investment down, since we consider the estimated fair value to be nominal.





During the years ended June 30, 2010 and 2009, we recorded investment impairments of $3,590,196 and $450,000, respectively. See Note 7 for additional information about our investments and the impairments. We record impairment charges associated with our investments as a component of other expense.





58





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Deferred finance costs– Direct, incremental finance costs related to debt instruments and other financial instruments that are recorded in liabilities are included in other assets and amortized over the term of the respective instrument through charges to interest expense using the effective method or the straight-line method, when the difference would not be material. Total deferred financing cost included in other assets amount to $-0- and $898,214, as of June 30, 2010 and June 30, 2009, respectively. These amounts are net of accumulated amortization of $36,150 and $283,097 as of June 30, 2010 and June 30, 2009, respectively.





Share-based payment – We apply the grant-date fair value method to our share-based payment arrangements with employees. Under this method, share-based compensation cost to employees is measured at the grant date fair value based on the value of the award and is recognized over the service period, which is usually the vesting period for employees. Share-based payments to non-employees are recorded at fair value on the measurement date and reflected in expense over the service period.





We apply the Binomial Lattice option valuation model to determine the grant-date fair value of stock options and employee stock purchase plan shares. The determination of the fair value of share-based payment awards on the date of grant using an option-valuation model is affected by the Company’s stock price as well as assumptions regarding a number of complex variables. These variables include the Company’s expected stock price volatility over the term of the awards, projected employee stock option exercise behavior, expected risk-free interest rate and expected dividends. The Company estimates the expected term and volatility of options granted based on values derived from its industry peer group. However, we continue to weight our own trading activity into this calculation as our trading history grows. We base the risk-free interest rate for option valuation on Constant Maturity Rates provided by the U.S. Treasury with remaining terms similar to the expected term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. In addition, current accounting standards require forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company uses the straight-line attribution as its expensing method of the value of share-based compensation for options and awards.





Advertising – We generally expense advertising costs when it is incurred. Commencing in the prior fiscal year we began engaging for the production of infomercials related to consumer products. Our accounting policy for infomercial production costs provides that the costs are deferred in prepaid assets until the first airing, at which time the cost is expensed in its entirety.





59





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Financial instruments –Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments, long-term debt, and redeemable preferred stock. We carry cash and cash equivalents, accounts payable and accrued liabilities and long-term debt at historical costs; their respective estimated fair values approximate carrying values due to the limited terms. We carry derivative financial instruments at fair value as is required under current accounting standards. We carry redeemable preferred stock at historical cost and accrete carrying values to estimated redemption values over the term of the financial instrument.





Derivative financial instruments – Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. See Note 11 for additional information.





We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as redeemable preferred stock arrangements with embedded features and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.





Redeemable preferred stock – Redeemable preferred stock (and, if ever, any other redeemable financial instrument we may enter into) is initially evaluated for possible classification as liabilities in instances where redemption is certain to occur. Redeemable preferred stock classified as liabilities is recorded and carried at fair value. Redeemable preferred stock that does not, in its entirety, require liability classification is evaluated for embedded features that may require bifurcation and separate classification as derivative liabilities. In all instances, the classification of the redeemable preferred stock host contract that does not require liability classification is evaluated for equity or mezzanine classification based upon the nature of the redemption features. Generally, any feature that could require cash redemption for matters not within our control, irrespective of probability of the event occurring, requires classification outside of stockholders’ equity. Redeemable preferred stock that is recorded in the mezzanine section is accreted to its redemption value through charges to stockholders’ equity when redemption is probable using the effective interest method. See Note 13 for further disclosures about our redeemable preferred stock.





60





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Income taxes –Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
 When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of operations. Three years of our consolidated income tax returns are subject to examination by the Internal Revenue Service. However, the Service has not indicated to us its intention to perform an audit of any prior filing.





Comprehensive income –Comprehensive income is defined as all changes in stockholders’ equity from transactions and other events and circumstances. Therefore, comprehensive income includes our net income (loss) and all charges and credits made directly to stockholders’ equity other than stockholder contributions and distributions, such as the changes in fair value of our available for sale investments. The following table reconciles our net loss to comprehensive loss for the periods presented herein:





Six Months ended December 312010


2009Net loss

$
(6,004,827
)

$
(20,746,598
)Unrealized gains (losses) on available for sale investments


30,000



(497,102
)Comprehensive loss

$
(6,034,827
)

$
(21,243,700
)





Years ended June 302010


2009Net loss

$
(30,811,723
)

$
(2,625,964
)Unrealized gains (losses) on available for sale investments


(102,102
)


40,967Comprehensive loss

$
(30,913,825
)

$
(2,584,997
)





61





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 3 – Summary of significant accounting policies (continued):





Loss per common share – Basic loss per common share represents our loss applicable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per common share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising from warrants and options using the treasury stock method or, in the case of liability classified warrants, the reverse treasury stock method. We compute the effects on diluted loss per common share arising from convertible securities using the if-converted method. The effects, if anti-dilutive are excluded. Loss per common share is allocated between our loss associated with continuing operations and discontinued operations. All adjustments to reconcile our net loss to loss applicable to common stockholders are reflected as an adjustment to loss from continuing operations.





Note 4 – Dispositions and discontinued operations:





Our management has been engaged in strategic initiatives focused on alleviating our ongoing operating and cash flow losses, coupled with an intensified focus on the reorganization of the Company as a consumer products company that builds and markets brands internationally through direct-to-consumer channels of distribution. As a result of these efforts, management, with the support of our Board of Directors, has concluded that the continuing losses from our holdings in the Fashion Goods and eCommerce Segments (the “Discontinued Segments”) and the associated drain on our limited capital resources warranted discontinuance of the businesses and disposal of the assets comprising the Discontinued Segments.





Fashion Goods Segment: The Fashion Goods Segment was engaged in the designer goods business as a product liquidator to both business-to-business and business-to-consumer channels of distribution through our former Designer Liquidator, Inc. and RPS Trading LLC subsidiaries. Operations in these businesses had been substantially curtained since June 2010 and were completely shut down during the months of November and December 2010. All assets have been disposed of or abandoned. We have no ongoing obligations or involvement in these companies of any nature.





eCommerce Segment: The eCommerce Segment was engaged in retail and wholesale distribution of specific products through our OmniReliant Acquisition Sub, Inc. (“Abazias”) and companies that we held influential investments which were part of the eCommerce Segment and accounted for using the equity method. On December 16, 2010, we exchanged our interest is Abazias with its former owners for cancellation of their employment contracts. During December 2010, we also disposed of our equity investments for no consideration. We have no ongoing obligations or involvement in these companies of any nature.





We have accounted for and reported our disposals of the Discontinued Segments as discontinued operations pursuant to ASC 205-20 Presentation of Financial Statements. Under ASC 205–20, a component of an entity that can be clearly distinguished operationally and for financial reporting purposes from the rest of the entity is reported in discontinued operations if both (a) the operations and cash flows have been or will be eliminated from the ongoing operations and (b) the continuing entity will have no significant ongoing involvement or obligations associated with the components disposed. The Discontinued Segments meet these criteria for purposes of presentation of discontinued operations.





62





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 4 – Dispositions and discontinued operations:





Assets and liabilities of the Discontinued Segments are presented as one-line captions in our consolidated balance sheets. The composition of assets and liabilities of Discontinued Segments are as follows:





December 31,


June 30,2010


2010


2009Current assets:Cash

$
—


$
298,280


$
—Accounts receivable


—



542,239



—Inventories (Note 6)


—



1,844,361



—Investments and other assets


—



5,721



—Total current assets


—



2,690,601



—Investments (Note 7)


—



1,520,583



4,676,984Property and equipment (Note 8)


—



69,147



—Other assets


—



8,217



—Assets of discontinued segments

$
—


$
4,288,548


$
4,676,984Current liabilities:Accounts payable (Note 10)

$
—


$
409,607


$
—Notes payable


—



284,805



—Liabilities of discontinued segments

$
—


$
694,412


$
—





Operating activities of the Discontinued Segments are presented as one-line captions in our consolidated statements of operations. The composition of the operations of the Discontinued Segments is as follows:





Six Months Ended

December 31,


Year Ended

June 30,2010


2009


2010


2009(Unaudited)Revenues of discontinued segments

$
2,554,284


$
3,793,338


$
8,098,656


$
—Cost of revenues


2,766,388



4,029,355



9,502,978



—(212,101
)


(236,017
)


(1,404,322
)


—Costs and operating expenses:General and administrative


721,690



1,432,487



2,316,397



—Impairments (Note 9)


—



—



19,091,392



—Total costs and expenses


721,690



1,432,487



21,407,789



—Loss from operations


(933,794
)


(1,668,504
)


(22,812,111
)


—Other expenses:Impairment of investments (Note 7)


(406,848
)


(1,591,704
)


(3,590,196
)


(450,000
)Equity in losses of investees (Note 7)


881,682



(1,634,242
)


(1,975,846
)


(92,741
)Interest expense


(4,206
)


(9,524
)


(15,400
)


—Net loss


(463,166
)


(4,903,974
)


(28,393,553
)


(542,741
)Non-controlling interests


40,664



163,450



215,853



—Net loss applicable to Infusion Brands


(422,502
)


(4,740,524
)


(28,177,700
)


(542,741
)Loss on disposals


(279,070
)


—



—



—Loss from discontinued operations

$
(701,572
)

$
(4,740,524
)

$
(28,177,700
)

$
(542,741
)





63





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 4 – Dispositions and discontinued operations:





Reserves and write-off associated with inventory impairments are included in cost of revenues. Cost of revenues also includes depreciation and amortization of $9,109, $343,312 and $804,085 for the six months ended December 31, 2010 and 2009 and the year ended June 30, 2010, respectively.





Note 5 – Business acquisitions:





On July 31, 2009, we acquired the assets and assumed certain liabilities of Designer Liquidator, Inc. (“Designer”) in exchange for 100,000 shares of common stock and cash of $150,000. Designer was engaged in the manufacture and wholesale distribution of brand-name apparel and the retail sale of other accessories. We originally acquired Designer to expand our retail sales and enter manufacturing and wholesale distribution. On August 27, 2009, we completed our acquisition of the outstanding common stock of Abazias, Inc. (“Abazias”) in exchange for 13,000,000 shares of our newly designated Series E Convertible Preferred Stock. Abazias was an online retailer of high quality loose diamonds and fine jewelry settings for diamonds. We originally acquired Abazias for the purpose of building brand recognition and increasing retail market penetration. These companies were included in the Discontinued Segments more fully discussed in Note 4.





We accounted for our acquisitions applying the Acquisition Method. Accordingly, we recognized, separately from goodwill, the identifiable tangible and intangible assets acquired and liabilities assumed at their fair values on the acquisition dates. The excess of the fair value of the consideration transferred, plus the fair value of non-controlling interests in the acquired assets, over the fair values of assets acquired and liabilities assumed was recorded as goodwill.





64





Infusion Brands International, Inc. and Subsidiaries


Notes to Consolidated Financial Statements





Note 5 – Business acquisitions (continued):





The following table summarizes the results of the allocation:





Abazias


Designer


TotalCurrent assets, including cash of $127,530 and $612,702 from Abazias and Designer, respectively

$
523,307


$
1,964,119


$
2,487,425Property and equipment


2,027



—



2,027Intangible assets:Customer lists and customer related


2,545,930



484,353



3,030,283Dealer network intangibles


2,133,679



—



2,133,679Registered trademarks, trade names and dress


1,642,420



—



1,642,420Executive employment contracts


210,928



—



210,928Software and operational processes


35,000



—



35,000Trade liabilities assumed


(347,905
)


(124,728
)


(472,633
)Notes payable


—



(250,000
)


(250,000
)Deferred income taxes


(2,281,029
)


(60,967
)


(2,341,966
)4,464,357



2,012,777



6,477,133Consideration transferred (excluding direct expenses):Cash consideration


—



150,000



150,000Fair value of Infusion Brands Securities (See Note 13)


15,841,323



101,000



15,942,323Investments (see Note 7)


1,042,789



1,857,383



2,900,172Non-controlling interest in RPS Trading LLC


—



163,450



163,450Consideration transferred, plus non-controlling interests


16,884,112



2,271,833



19,155,945Goodwill arising from the acquisitions under ASC 805

$
12,419,756


$
259,056


$
12,678,812





The principal factor giving rise to the amount of goodwill at the time of our acquisitions was the expected synergies that would have resulted from the combined companies’ efforts to jointly promote existing and new retail product offerings. However, as more fully discussed in Notes 3, 4 and 9, our new management’s plans no longer contemplate integration of these companies with the Consumer Products Segment. As a result, substantially all identifiable intangible assets and goodwill were impaired during the fourth quarter of the year ended June 30, 2010.





The terms of the acquisition of Designer included the assumption of a $250,000 note payable with Heritage Bank which requires interest payments at the bank’s borrowing rate, plus 1.0%, and is due on demand.





Our acquisition of Designer included a 50% equity interest in RPS Trading LLC (“RPS”), which is engaged in the manufacture of apparel and the sale of accessories. RPS is a variable interest entity which is an entity that has (i) an insufficient amount of equity to absorb the entity’s expected losses, (2) equity owners as a group that are not able to make decisions about the entity’s activities, or (3) equity that does not absorb the entity’s losses or receive the entity’s residual returns. Prior to our acquisition of Designer, we invested $1,857,383 in RPS secured notes, which was the principal funding of RPS’s early operations. Our interests in these notes, and rights there under, coupled with our purchase of the 50% equity interest held by Designer place us as the primary beneficiary to RPS expected losses. As a result, the values of RPS assets are included in the assets acquired from RPS and the non-controlling interest is reflected as a component of the consideration transferred for purposes of computing goodwill. Also see Note 13.




65




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 5 – Business acquisitions (continued):





Abazias’ operations were originally consolidated with our operations commencing with the closest monthly closing date near the date of acquisition, or September 1, 2009. Designer operations were originally consolidated with our operations commencing August 1, 2009.





The allocation of the acquisition consideration issued or paid for our business acquisitions required us to estimate the fair values of assets acquired (both tangible and intangible) and liabilities assumed. Significant elements of our estimation processes are as follows:





Current assets and liabilities: Current assets of Abazias consisted of cash, accounts receivable and inventories of $127,530, $48,715, and $347,062, respectively. Current assets of Designer consisted of cash, accounts receivable and inventories of $612,702, $312,331 and $1,039,086, respectively. We concluded that the carrying values of the accounts receivable and inventories by these companies were a fair and appropriate estimation of their net realizable values. Current liabilities largely comprised trade accounts payable and demand notes. We concluded that the carrying values of liabilities werean appropriate estimation of their fair values.





Customer intangibles: Abazias and Designer each owned customer lists and data bases of customers that we believed had substantial value. We valued the customer intangibles using the income approach, wherein the projected future cash flows associated with these assets were discounted to net present value using risk-adjusted interest rates over the estimated useful lives of the assets of seven years for the Abazias asset and three years for the Designer asset. Discount rates that were built based upon both market data and company-specific data ranged from 27.18% to 31.87% for the Abazias asset and 29.9% for the Designer asset.





Dealer network intangible: Abazias operated in a highly-valued, strategic captive precious gems dealer network that we considered as having substantial value in our purchase consideration because the network afforded substantial and beneficial financing arrangements and associated terms. For purposes of valuation, we used the income approach giving effect to the overall savings that the network afforded Abazias at discount rates similar to those used in the customer intangible calculations.





Trademark: The Abazias name, which is a registered trademark, is a significant asset that brings brand recognition. We valued the trademark using the Relief from Royalties technique wherein future cash flows associated with the brand recognition are measured at a market royalty rate and then present valued using risk adjusted rates. We developed the royalty rate of 7.68% based upon a compilation of twelve actual negotiated royalty rates derived from actual market transactions that ranged from 4.5% to 15.0%. Discount rates used to present value cash flows were consistent with those used in the customer intangible valuation, above.





66


Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 6 – Inventories:





Our inventories consisted of the following as of December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009Continuing operations:Finished goods

$
2,335,800


$
1,481,985


$
1,510,194Reserves for obsolescence and excess quantities


(268,574
)


—



(215,944
)$
2,067,226


$
1,481,985


$
1,294,250





Discontinued operations (See Note 4):Finished goods

$
—


$
1,226,989


$
—Work-in-process


—



897,681



——



2,124,670



—Reserves for obsolescence and excess quantities


—



(280,309
)


—$
—


$
1,844,361


$
—





Note 7 – Investments:





Investments were made in certain Internet retail and other business ventures by our former eCommerce Segment, which has been discontinued (See Note 4). The following table summarizes balances included in assets of discontinued segments at each respective report date:





December 31


June 302010


2010


2009Classification based upon method of accounting:Available-for-sale investments

$
—


$
180,000


$
2,461,675Equity Method investments


—



1,340,583



1,965,309Cost method investments


—



—



250,000$
—


$
1,520,583


$
4,676,984




67


Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 7 – Investments (continued):





Available for sale and held-to-maturity investments consisted of the following on December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009Available-for-sale investments:NetTalk.com, Inc., 1,000,000 shares of common stock; cost basis $150,000


—


$
180,000



—Beyond Commerce, 10% notes receivable, due October 2010; face value $1,391,426 and $1,000,000 at 2010 and 2009


—



—


$
976,083Valcom, 10% face value $100,000 convertible note receivable, plus  accrued interest of $2,336, due January 6, 2010; cost basis $100,000 at June 30, 2009


—



—



103,365Abazias, Inc., face value $700,000, 10.0% convertible note receivable, originally due December 31, 2009






—



732,227Held-to-maturity investments:


—RPS Trading LLC, variable rate (currently 4.75%), face value $650,000 notes receivable, originally due in November and December 2009


—



—



650,000Total available for sale investments


—



180,000



2,461,675Current portion of investments






(180,000
)


(1,729,448
)Total non-current investments


—


$
—


$
732,227





Unrealized (gains) losses related to available for sale investments are recorded as a component of other comprehensive income in stockholders’ equity. The composition of other comprehensive income related to these investments is as follows as of December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009NetTalk.com Common Stock

$
—


$
30,000


$
—Beyond Commerce Notes Receivable


—



—



(23,917
)Valcom Notes Receivable


—



—



(1,430
)Abazias


—



—



(17,960
)Other investments


—



—



(28,795
)$
—


$
30,000


$
(72,102
)




68


Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 7 – Investments (continued):





Equity method investments and an investment accounted for at cost or method of accounting consisted of the following as of June 30, 2010 and 2009:





Voting

Ownership


Investment

Cost


Equity in

Earnings


Impaired


June 30,

2010


June 30,

2009Equity method investees:Zurvita Holdings


23.0
%

$
2,646,000


$
(1,600,214
)

$
—


$
1,045,786


$
—Webcarnation


40.0
%


415,000



(101,181
)


—



294,797



230,978Cellular Blowout


45.0
%


1,530,000



(87,269
)


(1,442,731
)


—



1,030,000A Perfect Pear


49.5
%


494,084



(84,405
)


(353,767
)


—



244,088Wineharvest


40.0
%


315,050



(61,803
)


(3,101
)


—



260,243For Your Imagination


20.0
%


300,000



(40,974
)


(259,026
)


—



200,0005,700,134



(1,975,846
)


(2,051,339
)


1,340,583



1,965,309Cost method investees:Nested Media


—



187,500



—



(187,500
)


—



250,000Total non-marketable and other equity investments





$
5,887,634


$
(1,975,846
)

$
(2,238,839
)

$
1,340,583


$
2,215,309





The following table summarizes activity through December 31, 2010 related to equity method investees which remained as of June 30, 2010:





Equity method investees:

Balances

June 30, 2010

(above)


Equity in losses

of Investee


Impairment

Charges


Balances

December 31,

2010Zurvita Holdings

$
1,045,786


$
(1,045,786
)

$
—


$
—Webcarnation


294,797



(18,699
)


(281,848
)


—$
1,340,583


$
(1,064,485
)

$
(281,848
)

$
—





Equity in earnings (losses) of investments carried under the equity method amounted to $(92,741) during the year ended June 30, 2009.





During the six months ended December 31, 2010, we made an additional, but final investment in Webcarnation in the amount of $5,750, an equity investee that was written off during the same period.





69




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 7 – Investments (continued):





During the years ended June 30, 2010 and 2009, we made cash investments in companies in the amounts of $6,495,500 and $4,758,050, respectively, and non-cash investments in the amounts of $2,796,000 and $-0-, respectively. The following table summarizes the investee company, the nature of the investment security and the cost basis of the investment, for cash and non-cash transactions, for each of the years ended June 30, 2010 and 2009:





Investee Company

Nature

2010


2009Available for sale investments (cash transactions):Beyond Commerce (1)

Debt

$
3,949,235


$
1,000,000RPS Trading LLC (2)

Debt


1,207,383



650,000Abazias, Inc. (2)

Debt


342,798



700,000Valcom (3)

Debt


—



100,000Total available for sale investments (cash transactions)




5,499,416



2,450,000Equity and cost investment s(cash transactions) (4)Cellular Blowout

Equity


500,000



1,030,000Perfect Pear

Equity


194,084



300,000Webcarnation

Equity


165,000



250,000For Your Imagination

Equity


100,000



200,000Wineharvest (5)

Equity


37,000



278,050Nested Media (cost-type investment) (6)

Equity


—



250,000Total equity and cost investments (cash transactions)




996,084



2,308,050Total cash investments



$
6,495,500


$
4,758,050Available for sale investments (non-cash transactions)Net Talk.com, Inc. (7)

Equity

$
150,000Equity investments (non-cash transactions) (4)Zurvita Holdings, Inc. (8)

Debt


2,000,000Zurvita Holdings, Inc. (8)

Equity


646,000Total non-cash investments



$
2,796,000





(1)
During the period from June 2009 to September 2009, we invested approximately $4,950,000 in Beyond Commerce 13.5% Notes Receivable, due at various dates through October 9, 2010. During the quarterly period ended December 31, 2009, our management evaluated the continuing carrying value of the Beyond Commerce investment. As a result of the review, and after extensive negotiations, we exchanged a portion of the notes receivable with a principal amount of $3,428,574 and accrued interest of $135,355, and a fair value of $3,782,717, for certain of Beyond Commerce’s software pursuant to an Asset Purchase Agreement dated October 9, 2009, and provided a full reserve on the balance. The remaining balance on the notes at face value amounts to $1,391,426, which with interest of $231,896, is due October 9, 2010. Although the balance was not paid on or before that date, we will continue to pursue collection of this amount from the debtor. There can be no assurances that we will be able to recover the balance due on the note receivable. As it relates to the software acquired, we recorded the software at the fair value of the available for sale securities exchanged, which amount was viewed as a reasonable estimate of the fair value of the software.





70




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 7 – Investments (continued):





(2)
During the year ended June 30, 2009 and the first fiscal quarter of the year ended June 30, 2010, we invested $1,857,383 in RPS Trading LLC and $1,042,798 in Abazias, each in the form of interest bearing notes receivable. As more fully discussed in Note 4 Business Acquisitions, we acquired Abazias on August 27, 2009 and Designer, parent company to RPS Trading LLC, on July 31, 2009. Upon acquisition of these companies our investment was adjusted to fair values because they were classified as available for sale and included in the acquisition cost of these companies that was subject to allocation to the assets acquired and liabilities assumed.


(3)
We invested an aggregate of $100,000 in interest bearing notes receivable from Valcom. During the quarterly period ended March 31, 2010, our management evaluated the continuing carrying value of Valcom and concluded that recoverability was improbable and wrote off the carrying value of $102,336.


(4)
Our equity method investments generally represent our ownership in voting common stock and the percentage represents our votes divided by the number of total votes of these companies. Current accounting standards provide that voting interests of 20% or greater afford the investor substantial influence. However, we consider all aspects of our relationships with the investee companies in determining whether our investment rises to the level of influential as is contemplated for equity accounting. Our equity method investments are evaluated periodically for impairment. See the table below for impairment charges that have resulted from our review of the carrying values of our equity investments.


(5)
During the years ended June 30, 2010 and 2009, we invested an aggregate of $315,050 in Wineharvest. As more fully disclosed in Note 18 and in the next item, we also acquired an additional 10% interest in Wineharvest in connection with the settlement of a former Officer. In addition to our purchases of Wineharvest equity and the exchange of securities with the former Officer, we also agreed to guarantee the lease of Wineharvest, which is material to these operations. As a result of these transactions, we concluded that Wineharvest met the definition of a variable interest entity and that our equity was the sole equity at risk. Accordingly, we are the primary beneficiary and consolidated Wineharvest under the rules for consolidation during the fourth fiscal quarter.


(6)
During our year ended June 30, 2009, we made a $250,000 cash investment for a minority, non-influential position in the common stock of Nested Media, Inc. (“Nested Media”) a private company. As more fully discussed in Note 18, our separation agreement with our former Officer included a portion of our equity holdings in Nested Media, which using an average cost basis, had a carrying value of $62,500, and we received the former Officer’s investment in Wineharvest, which increased our ownership percentage from 30% to 40%.


(7)
During our quarterly period ended December 31, 2009, we entered into a services agreement with Net Talk.com, Inc. and were compensated in the form of its common stock, which is publicly listed. The fair value of the common stock using the quoted price amounted to $150,000. We recorded the revenue associated with the services agreement as deferred revenue and are amortizing such amount into income as it is earned.


(8)
During our quarterly periods ended September 30, 2009 and December 31, 2009, we entered into a Marketing and Sales Agreement and a License and Marketing Agreement, respectively, with Zurvita Holdings, Inc. These agreements are more fully discussed in Note 17. We received 15,200,000 shares of Zurvita’s common stock, representing a 23% voting interest, for the Advertising and Marketing Agreement. The common stock was valued at $646,000 using the quoted market price of Zurvita’s common stock. We received a 9.0% face value $2,000,000 convertible debenture due October 9, 2012, which is convertible at our option at any time at a conversion rate of $0.25 per common share, for the License and Marketing Agreement.




71




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 7 – Investments (continued):





During the fourth quarter of the most recently completed fiscal year and the transition period ended December 31, 2010, our new management performed a review of all investments and determined that (i) certain non-performing investments should be impaired and (ii) curtailment of funding of certain other investments would be required to preserve operating capital, thus resulting in the impairment. Details of our impairment charges by investee name and type during the six months ended December 31, 2010 and the years ended June 30, 2010 and 2009, which are included in discontinued operations (Note 4), are as follows:





December 31


June 30Investee Company

2010


2010


2009Investments carried under the equity method:Webcarnation

$
281,848


$
—


$
—Cellular Blowout


—



1,442,731



—Perfect Pear


—



352,683



—For your imagination


—



255,925



—281,848



2,051,339



—Available for sale investments:NetTalk.com


125,000



—



—Beyond Commerce


—



1,249,021



—Valcom


—



102,336



—Carolyn and Company


—



—



450,000125,000



1,351,357



450,000Nested Media (Cost basis)


—



187,500



—$
406,868


$
3,590,196


$
450,000





Note 8 – Property and equipment:





Our property and equipment consisted of the following as of December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009Continuing operations:Land

$
500,000


$
500,000


$
500,000Building and improvements


1,554,333



1,529,755



1,529,755Office equipment


834,972



820,220



782,146Leasehold improvements


16,093



—



—2,905,398



2,849,975



2,811,901Accumulated depreciation


(487,041
)


(391,306
)


(232,353
)$
2,418,357


$
2,458,669


$
2,579,548





Our land, building and building improvements serve as security under our mortgage note payable disclosed in Note 12. Property and equipment included in assets of discontinued operations consisted of office equipment and furnishings and is omitted from the tabular presentation due to immaterial amounts. See Note 4.




72




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 8 – Property and equipment (continued):





During December 2010, we disposed of office equipment with a carrying cost of $36,145 for no consideration. The carrying amount was reflected in operations as a loss upon disposal upon disposal.





Note 9 – Intangible assets:





During the year ended June 30, 2010, we acquired intangible assets in connection with our acquisition accounting for Abazias and Designer. See Notes 4 and 5 for additional information. In addition to the business acquisitions, and as also discussed in Note 6 Investments, we exchanged notes receivable carried at a fair value of $3,782,717 related to our investment in Beyond Commerce for certain of Beyond Commerce’s software that we concluded had a value reasonably in line with our carrying value of the investment. The software was subject to further development and did not possess the attributes of a business and, accordingly, we accounted for our purchase of the software technologies as the purchase of an intangible asset. Finally, we consolidated Wineharvest, which we previously accounted for using the equity method, when Wineharvest met the definition of a VIE and we concluded that Infusion Brands was the primary beneficiary. See Note 15 for additional information. The consolidation of Wineharvest gave rise to goodwill. During the fourth quarter of our current fiscal year, our impairment analyses for both identifiable intangibles and goodwill indicated that full impairment was required.





The following table reflects the beginning balances in our intangible assets, originating acquisitions, amortization and impairments for the year ended June 30, 2010:




73




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 9 – Intangible assets (continued):





Intangible Acquisition

Year ended June 30, 2010June 30,

2009


(Note 5)

Abazias


(Note 5)

Designer


Infusion

Brands


Wine

Harvest


Sub-Total


Impaired


June 30,

2010Patent and related

$
1,248,814


$
—


$
—


$
—


$
—


$
1,248,814


$
(1,248,814
)

$
—Customer lists


—



2,545,930



484,353



—



—



3,030,283



(3,030,283
)


—Dealer network


—



2,133,679



—



—



—



2,133,679



(2,133,679
)


—Employment


—



210,928



—



—



—



210,928



(210,928
)


—Software


—



35,000



—



3,783,216



—



3,818,216



(3,818,216
)


—1,248,814



4,925,537



484,353



3,783,216



—



10,441,920



(10,441,920
)


—Amortization


(125,479
)


(663,983
)


(147,997
)


(1,024,091
)


—



(1,961,550
)


1,961,550



—Net carrying values


1,123,335



4,261,554



336,356



2,759,125



—



8,479,872



(8,479,872
)


—Trademarks


—



1,642,420



—



—



—



1,642,420



(1,642,420
)


—Goodwill


—



12,419,756



259,056



—



172,250



12,851,062



(12,851,062
)


—Other adjustments


—



—



—



—



—



—



998



—$
1,123,335


$
18,323,730


$
595,412


$
2,759,125


$
172,250


$
22,973,852


$
(22,972,854
)

$
—





Amortization of intangible assets was recorded through the end of the fourth fiscal quarter of June 30, 2010 and amounted to $1,836,071 and $376,226 during the year ended June 30, 2009.





Our impairment testing of both goodwill and identifiable intangible assets was significantly influenced by the operating plans of our new management that were made during the fourth quarter of our year ended June 30, 2010, and in summary, (i) no longer contemplate the integration of operations of the Response and eCommerce or Fashion Safari and (ii) no longer contemplate operational funding of eCommerce companies and curtailed funding of Fashion Goods Segment operations. As a result of these plans, goodwill was allocated solely to the defined reporting units for purposes of analysis (that is, no synergies are contemplated to support allocation to other operating units) and the fair values of the reporting units and assets, which were based upon discounted cash flow models, was substantially lower than was anticipated when the initial investments were made in these assets. In addition, as it relates to certain software technologies owned by Infusion Brands, including the software acquired in the Beyond Commerce exchange discussed above, an abandonment decision was made by new management when it was determined that insufficient funds would be available to develop the technology to a marketable state. Accordingly, these circumstances resulted in a direct write off of the carrying value of the software technologies.




74




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 9 – Intangible assets (continued):





The following table allocates the intangible asset and impairment activity between our continuing operations and discontinued operations.







Intangible Acquisition

Year ended June 30, 2010June 30,

2009


(Note 5)

Abazias


(Note 5)

Designer


Infusion

Brands


Wine

Harvest


Sub-Total


Impaired


June 30,

2010Continuing operations:Patent

$
1,192,838


$
—


$
—


$
—


$
—


$
1,192,838


$
(1,192,838
)

$
—Software


—



—



—



3,782,717



—



3,782,717



(3,782,717
)


—Other


55,976



—



—







—



55,976



(55,976
)


—Cost basis


1,248,814



—



—



3,782,717



—



5,031,051



(5,031,051
)


—Amortization


(125,977
)


—



—



(1,024,091
)


—



(1,150,068
)


1,150,068



—Carrying values


1,122,837



—



—



2,758,626



—



3,881,463



(3,881,463
)


—Discontinued operations:Goodwill


—



12,419,756



259,056



—



172,250



12,851,062



(12,851,062
)


—Customer related


—



2,545,930



484,353



—



—



3,030,283



(3,030,283
)


—Vendor related


—



2,133,679



—



—



—



2,133,679



(2,133,679
)


—Employment


—



210,928



—



—



—



210,928



(210,928
)


—Software


—



35,000



—



—



—



35,000



(35,000
)


—Trademarks


—



1,642,420



—



—



—



1,642,420



(1,642,420
)


—Cost basis


—



18,987,713



743,409



—



172,250



19,903,372



(19,903,372
)


—Amortization


—



(663,982
)


(147,997
)


—



—



(811,979
)


811,979



—Carrying values


—



18,323,731



595,412



—



172,250



19,091,393



(19,091,391
)


—$
1,122,837


$
18,323,731


$
595,412


$
2,758,626


$
172,250


$
22,972,856


$
(22,972,854
)

$
—




75




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 10 – Accounts payable and accrued expenses:





Our accounts payable and accrued expenses consisted of the following as of December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009Continuing operations:Accounts payable

$
1,060,914


$
384,042


$
485,791Accrued expenses:Dividends on Series G Preferred Stock (Note 13)


203,774



—



—Customer deposits


187,302



—



—Warranty


85,343



71,324



52,989Employment related


31,550



75,000



—Interest


2,521



2,521



2,521Real estate taxes


—



15,000



—Other accrued expenses


284,457



38,644



15,446Total accrued expenses


794,947



202,489



70,956Total accounts payable and accrued expenses

$
1,855,861


$
586,531


$
556,747


Discontinued operations (Note 4):Accounts payable

$
—


$
366,061


$
—Accrued expenses:Interest


—



41,736



—Other accrued expenses


—



1,810



—Total accrued expenses


—



43,546



—Total accounts payable and accrued expenses

$
—


$
409,607


$
—





Note 11 – Derivative financial instruments:





Our derivative financial instruments (liabilities) consisted warrants and compound embedded derivatives that originated in connection with our financing arrangements. On December 17, 2010, we modified the warrant agreements and the Series G Preferred Stock Certificate of Designation to eliminate the down-round anti-dilution protection features that prevented equity classification of the financial instruments. Modifications to the Series G Preferred Stock, which is an akin-to-liability type financial instrument, as more fully discussed in Note 13, did not rise to substantive for purposes of extinguishment accounting. Accordingly, on the modification date, we adjusted these financial instruments to fair value and reclassified the balance, amounting to $3,584,182, to paid-in capital. No change to the carrying value of the Series G Preferred Stock resulted from these modifications and this financial instrument will continue to be accreted to its future redemption value, also more fully discussed in Note 13.




76




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 11 – Derivative financial instruments (continued):





The following table summarizes the components of derivative liabilities as of December 17, 2010 (immediately before reclassification to paid-in capital) and June 30, 2010 and 2009 by financing transaction from which they originated and by category:





December 17


June 30Financing—Financial Instrument

2010


2010


2009Freestanding Warrants:Series A Preferred Financing—Investor warrants

$
—


$
—


$
716,700Series B Preferred Financing—Investor warrants


10,128



15,312



75,312Series C Preferred Financing—Investor warrants


65,140



78,250



—Series D Preferred Financing—Investor warrants


—



—



1,752,800Series D Preferred Financing—Placement agent warrants


—



—



166,950Series F Preferred Financing—Investor warrants


—



—



2,946,667Series F Preferred Financing—Placement agent warrants


94,167



104,166



370,000Series G Preferred Financing-Investor warrants


1,160,000



1,330,000



—Warrant financing Transaction—Investor warrants


1,673,000



1,806,000



—Warrant Financing Transaction—Placement agent warrants


31,747



35,750



—Total derivative warrants


3,034,182



3,369,478



6,028,429Embedded Derivatives:


—Series C Preferred Financing—Put derivative


—



16,478



199,993Series D Preferred Financing—Put derivative


—



—



253,417Series G Preferred Financing—Conversion option


550,000



800,000



—Total embedded derivatives


550,000



816,478



453,410Derivative liabilities

$
3,584,182


$
4,185,956


$
6,481,839





The following table summarizes the number of common shares indexed to derivative financial instruments as of June 30, 2010 and 2009:





Financing—Financial Instrument

2010


2009Freestanding Warrants:





—Series A Preferred Financing—Investor warrants


—



6,000,000Series B Preferred Financing—Investor warrants


480,000



960,000Series C Preferred Financing—Investor warrants


2,731,228



—Series D Preferred Financing—Investor warrants


—



28,000,000Series D Preferred Financing—Placement agent warrants


—



2,100,000Series F Preferred Financing—Investor warrants


—



33,333,333Series F Preferred Financing—Placement agent warrants


4,166,666



4,166,666Series G Preferred Financing—Investor warrants


50,000,000Warrant Financing Transaction—Investor warrants


70,000,000Warrant Financing Transaction—Placement agent warrants


1,380,314Total derivative warrants


128,758,208



74,559,999Embedded Derivative:Series G Preferred Financing—Conversion options


50,000,000



—178,758,208



74,559,999




77




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 11 – Derivative financial instruments (continued):





Effective July 1, 2009, we adopted the requirements of ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of derivative contracts in equity. Derivative contracts may be classified in equity only when they are both indexed to a company’s own stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) would be considered indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed monetary amount. We were unable to continue to carry 30,904,171 warrants in equity because they embodied anti-dilution protections that did not achieve the fixed-for-fixed definition. The reclassification of the fair value of the warrants, amounting to $4,045,146, to liabilities was recorded on July 1, 2009 as a cumulative effect of a change in accounting principle wherein the original amounts recorded were removed from paid-in capital ($28,719,115) and the difference ($24,673,969), representing the fair value changes, was recorded as an adjustment to beginning accumulated deficit.





Also, as discussed in Note 13, on September 30, 2009, pursuant to an inducement offer wherein we reduced the strike price on the certain investor warrants from $0.25 to $0.2029 on 97,606,276 warrants, the investor exercised 27,606,276 warrants for an adjusted aggregate exercise price of $5,600,000. We accounted for the warrant exercise analogously to an inducement offer to convert debt instruments; that is the inducement value is recorded as a charge to income for the inducement value, which was calculated as the increase in fair value resulting from the modified strike price in the amount of $1,473,855.





Changes in the fair value of derivative financial instruments are recorded in income. The following tables summarize the components of derivative income (expense) arising from fair value adjustments during the six months ended December 31, 2010 and 2009:





December 31, 2010:

Financing—Financial Instrument

Embedded

Derivatives


Warrant

Derivatives


TotalSeries A Preferred Financing

$
—


$
—


$
—Series B Preferred Financing


—



5,184



5,184Series C Preferred Financing


16,479



13,110



29,589Series D Preferred Financing


—



—



—Series F Preferred Financing


—



10,000



10,000Series G Preferred Financing (1)


250,000



170,000



420,000Warrant Financing (2)


—



137,002



137,002Derivative income (expense)

$
266,479


$
335,296


$
601,775




78




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 11 – Derivative financial instruments (continued):





December 31, 2009 (Unaudited):

Financing—Financial Instrument

Embedded

Derivatives


Warrant

Derivatives


TotalNew Vicis Warrant

$
—


$
(11,057,848
)

$
(11,057,848
)Series A Preferred Financing


—



833



833Series B Preferred Financing


—



783,160



783,160Series C Preferred Financing


5,565



25,674



31,239Series D Preferred Financing


11,032



56,666



67,698Series F Preferred Financing—Warrants


—



775,416



775,416Derivative income (expense)

$
16,597


$
(9,289,011
)

$
(9,272,414
)





The following tables summarize the components of derivative income (expense) arising from fair value adjustments during the years ended June 30, 2010 and 2009:





June 30, 2010:

Financing—Financial Instrument

Embedded

Derivatives


Warrant

Derivatives


TotalSeries A Preferred Financing

$
—


$
(1,020
)

$
(1,020
)Series B Preferred Financing


—



60,188



60,188Series C Preferred Financing


(6,739
)


256,263



249,524Series D Preferred Financing


(11,032
)


(410,620
)


(421,652
)Series F Preferred Financing


—



209,168



209,168Series G Preferred Financing (1)


—



—



—Warrant Financing (2)


—



29,510,764



29,510,764Derivative income (expense)

$
(17,771
)

$
29,624,743


$
29,606,972





(1)   The Series G Preferred Financing was completed on June 30, 2010. There was no change in fair value.


(2)   The significant level of income, or decrease in fair value, resulted when these warrants were re-priced earlier in our fiscal year resulting in charges to our income and recorded as extinguishment and inducement, and then declines in subsequent value of our trading market price, a significant influence on fair value, declined substantially, causing the fair value of the derivative to decline.




79




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 11 – Derivative financial instruments (continued):





June 30, 2009:

Financing—Financial Instrument

Embedded

Derivatives


Warrant

Derivatives


TotalSeries A Preferred Financing

$
—


$
376,800


$
376,800Series B Preferred Financing


—



(32,928
)


(32,928
)Series C Preferred Financing


533,151



—



533,151Series D Preferred Financing


760,946



1,557,959



2,318,905Series F Preferred Financing


—



(1,221,323
)


(1,221,323
)Derivative income (expense)

$
1,294,097


$
680,508


$
1,974,605





The following table represents a reconciliation of the changes in our derivatives and the related changes in fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended December 31, 2010 and 2009:





2010


2009(Unaudited)Balances at June 30

$
4,185,956


$
6,481,839Change in accounting, described above


—



4,045,146Balances at July 1


4,185,956



10,526,985Issuances (Notes 13 and 14):Exchange transaction


—



37,090,385Warrant financing transaction


—



382,761Total


—



37,473,146Reclassifications


(3,584,181
)


—Conversions and cancellations (Note 14):Exchange transaction


—



(9,761,869
)Conversion transaction


—



(454,702
)Exercises


—



(7,594,487
)Total


(3,584,181
)


(17,811,058
)Fair value adjustments:Anti-dilution re-pricing events (1)


—



1,436,735Inducement adjustment (Note 14)


—



1,473,855Other assumption changes (1)


(601,775
)


(10,709,149
)Total


(601,775
)


(7,798,559
)Balances at December 31

$
—


$
2,390,514





(1)
The aggregate amount of these two components equals our derivative (income) expense.




80




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 11 – Derivative financial instruments (continued):





The following table represents a reconciliation of the changes in our derivatives and the related changes in fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended June 30, 2010 and 2009:





2010


2009Balances at the beginning of the year

$
6,481,839


$
6,361,100Change in accounting, described above


4,045,146



—Balances at July 1


10,526,985



6,361,100Issuances (Note 13):Exchange transaction


37,090,385



—Warrant financing transaction


382,761



—Series G Preferred Financing Transaction:Compound embedded derivative


800,000



—Warrant derivatives


1,330,000



—Series F Preferred Financing Transaction


—



2,095,344Total


39,603,148



2,095,344Conversions and cancellations (Note 14):Exchange transaction


(9,761,869
)


—Conversion transaction


(454,702
)


—Exercises


(7,594,487
)


—Total


(17,811,058
)


—Fair value adjustments:Anti-dilution re-pricing events (1)


1,436,735



—Inducement adjustment (Note 14)


1,473,855



—Other assumption changes (1)


(31,043,707
)


(1,974,605
)Total


(28,133,117
)


(1,974,605
)Balances at the end of the year

$
4,185,956


$
6,481,839





(1)
The aggregate amount of these two components equals our derivative (income) expense for the period.





Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high estimated volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.




81




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 11 – Derivative financial instruments (continued):





The warrants were valued using Black-Scholes-Merton (“BSM”). Significant assumptions underlying the BSM calculations are as follows as of December 17, 2010 and December 31, 2009:





December 17, 2010:

Indexed

Shares


Exercise

Price


Remaining

Term


Expected

Volatility


Risk-Free

RateWarrant Financing:Investor Warrants


70,000,000


$
0.10



8.55



95.56
%


2.69
%Placement agent warrants


1,380,314


$
0.10



8.75



91.04
%


3.33
%Series B Preferred Financing:B-2 Investor Warrants


480,000


$
0.10



1.40



227.03
%


0.30
%Series C Preferred Financing:C-1 Investor Warrants


1,365,614


$
0.10



1.80



220.30
%


0.61
%C-2 Investor Warrants


1,365,614


$
0.10



6.80



105.77
%


2.69
%Series F Preferred Financing:BD-12 Placement agent warrants


833,333


$
0.10



8.12



94.55
%


2.69
%BD-13 Placement agent warrants


3,333,333


$
0.10



8.12



94.55
%


2.69
%Series G Investor Warrants


50,000,000


$
0.10



9.50



87.47
%


3.33
%





December 31, 2009 (Unaudited):

Indexed

Shares


Exercise

Price


Remaining

Term


Expected

Volatility


Risk-Free

RateNew Vicis Warrant


70,000,000


$
0.2029



9.55



82.86
%


3.85
%Series B Preferred Financing:B-1 Investor Warrants


480,000


$
0.25



0.40



272.84
%


0.20
%B-2 Investor Warrants


480,000


$
0.25



2.40



159.73
%


1.14
%Series C Preferred Financing:C-1 Investor Warrants


1,365,614


$
0.25



2.80



152.70
%


1.70
%C-2 Investor Warrants


1,365,614


$
0.25



7.80



89.12
%


3.39
%Series F Preferred Financing:BD-12 Placement agent warrants


833,333


$
0.25



9.12



84.41
%


3.85
%BD-13 Placement agent warrants


3,333,333


$
0.25



9.12



84.41
%


3.85
%Warrant Financing Transaction—Placement agent warrants


1,380,314


$
0.2029



9.75



82.38
%


3.85
%





Significant assumptions underlying the calculations are as follows as of June 30, 2010 and 2009:





June 30, 2010:

Indexed

Shares


Exercise

Price


Remaining

Term


Expected

Volatility


Risk-Free

RateWarrant Financing:Investor Warrants


70,000,000


$
0.10



9.05



70.88
%


2.97
%Placement agent warrants


1,380,314


$
0.10



9.26



70.00
%


2.97
%Series B Preferred Financing:B-1 Investor Warrants (expired)


—



—



—



—
%


—
%B-2 Investor Warrants


480,000


$
0.10



1.90



186.22
%


0.61
%Series C Preferred Financing:C-1 Investor Warrants


1,365,614


$
0.10



2.30



173.21
%


0.61
%C-2 Investor Warrants


1,365,614


$
0.10



7.31



77.86
%


2.42
%Series F Preferred Financing:BD-12 Placement agent warrants


833,333


$
0.10



8.63



71.47
%


2.97
%BD-13 Placement agent warrants


3,333,333


$
0.10



8.63



71.47
%


2.97
%Series G Investor Warrants


50,000,000


$
0.10



10.01



68.01
%


2.97
%




82




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 11 – Derivative financial instruments (continued):





June 30, 2009:

Indexed

Shares


Exercise

Price


Remaining

Term


Expected

Volatility


Risk-Free

RateSeries A Preferred Financing:A-1 Investor Warrants


3,000,000


$
0.50



2.39



120.04
%


1.11
%A-2 Investor Warrants


3,000,000


$
0.50



7.39



70.20
%


3.19
%Series B Preferred Financing:B-1 Investor Warrants


480,000


$
0.50



0.90



164.77
%


0.56
%B-2 Investor Warrants


480,000


$
0.50



2.90



108.45
%


1.64
%Series D Preferred Financing:D-1 Investor Warrants


28,000,000


$
0.75



5.83



71.99
%


3.19
%BD-10 Placement agent warrants


700,000


$
0.50



3.83



93.95
%


1.64
%BD-11 Placement agent warrants


1,400,000


$
0.75



3.83



93.95
%


1.64
%Series E Preferred Financing:E Investor Warrants


33,333,333


$
1.13



9.62



65.61
%


3.53
%BD-12 Placement agent warrants


833,333


$
1.11



9.62



65.61
%


3.53
%BD-13 Placement agent warrants


3,333,333


$
1.13



9.62



65.61
%


3.53
%





The remaining term of our warrants is used as our term input. Since our trading history does not cover a period sufficient for computing volatility in all instances, we use a weighted average of our historical volatility based upon days of trading history over the days of the remaining term, coupled with the trading history of a peer group. For purposes of the risk-free rate, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrant.





Our embedded conversion option derivative represents the conversion option, certain redemption and put features in our Series G Preferred Stock. See Note 13 for additional information about our Series G Preferred Stock. These embedded features (i) met the definition of derivatives individually and (ii) were not clearly and closely related to the host preferred stock based upon risks. This is because the Series G Preferred Stock, being both redeemable for cash on a specific future date, coupled with a periodic return (i.e. cumulative dividend) that was consistent with returns for debt, caused us to conclude that the Series G Preferred Stock bore risks more closely associated with debt-type financial instruments. Accordingly, when comparing the risks of the debt-type host contract with the risks of the equity-type embedded features, they were not clearly and closely related.





The features embedded in the Series G Preferred Stock were combined into one compound embedded derivative that we fair valued using the Monte Carlo valuation technique. Monte Carlo was believed by our management to be the best available technique for this compound derivative because, in addition to providing for inputs such as trading market values, volatilities and risk free rates, Monte Carlo also embodies assumptions that provide for credit risk, interest risk and redemption behaviors (i.e. assumptions market participants exchanging debt-type instruments would also consider). Monte Carlo simulates multiple outcomes over the period to maturity using multiple assumption inputs also over the period to maturity. The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of December 17, 2010 (Reclassification Date) and June 30, 2010, which was the date of the financing transaction:




83




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 11 – Derivative financial instruments (continued):





RangeDecember 17, 2010 Assumptions:

Low


High


EquivalentVolatility


67.28
%


105.19
%


87.76
%Market adjusted interest rates


4.66
%


8.00
%


6.02
%Credit risk adjusted rates


11.81
%


13.04
%


12.30
%Implied expected life (years)


—



—



2.53





RangeJune 30, 2010 Assumptions:

Low


High


EquivalentVolatility


65.99
%


92.51
%


82.57
%Market adjusted interest rates


4.28
%


8.00
%


5.70
%Credit risk adjusted rates


12.34
%


13.77
%


13.04
%Implied expected life (years)


—



—



2.38





Our embedded put derivatives represent features embedded in the Series C and Series D Preferred Stock that (i) met the definition of a derivative and (ii) were not clearly and closely related to the host preferred contract. Accordingly, we were required to bifurcate these derivatives from our Series C and Series D Preferred Stock, classify them in liabilities and carry them at fair value. The put derivative fair values are estimated based upon a multiple, probability-weighted outcomes, cash flow model that is present valued using risk-adjusted market interest rates. We use publicly available bond-rate curves for companies that we estimate have credit ratings similar to what ours may be based upon Standard & Poors and Moody’s rating scales. Those ratings generally fall in the highly speculative to in-poor-standing categories of these ratings, and ranged from 8.07% to 10.29% for periods from one to five years, respectively, as of June 30, 2010. The range at June 30, 2009 was 15.56% and 19.04%, respectively.




84




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 12 — Long-term debt:





Long-term debt consisted of the following at December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009Initial $2,000,000 six-year, variable rate mortgage note, with interest at the Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75% during the first three years and a floor of 6.75% and a cap of 8.75% during the second three years; principal and interest payments of $13,507 are payable over the six year term based upon a twenty-five year amortization schedule, with $1,775,557 payable at maturity; secured by real estate; guaranteed by related parties.

$
1,928,199


$
1,947,080


$
1,978,877Bank lending rate (3.5% and 3.8% at December 31, 2010 and June 30, 2010) demand bank note


249,605



249,605



—2,177,804



2,231,885



1,978,877Less current maturities


(286,262
)


(284,985
)


(33,230
)Long-term debt

$
1,891,542


$
1,946,900


$
1,945,647Maturities of long-term for each year ended December 31 are as follows:2011









$
286,1722012










39,0292013










41,6682014










1,810,935$
2,177,804





We have concluded that the interest rate collar on the variable rate mortgage note is clearly and closely related to the host debt instrument and, accordingly, it does not require bifurcation and recognition at fair value. The interest rate in effect during the current quarterly period was at the 6.5% floor.




85




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 13 – Redeemable preferred stock:





Redeemable preferred stock represents preferred stock that is either redeemable for cash on a specific date or contingently redeemable for cash for events that are not within the control of management. Preferred stock where redemption for cash is certain to occur is classified in liabilities. We currently have no preferred stock classified in liabilities. Redeemable preferred stock is required to be classified outside of stockholders’ equity (in the mezzanine section). Redeemable preferred stock consists of the following as of December 31, 2010 and June 30, 2010 and 2009:





December 31


June 302010


2010


2009Series C Convertible Preferred Stock, 1,024,210 and 10,620,000 shares issued and outstanding at June 30, 2010 (liquidation value $1,024,210) and June 30, 2009 (liquidation value $10,620,000), respectively.

$
4,946,910


$
4,946,910


$
28,969,634Series D Convertible Preferred Stock, -0- and 7,000,000 shares issued and outstanding at June 30, 2010 and June 30, 2009 (liquidation value $7,000,000), respectively.


—



—



7,000,000Series F Convertible Preferred Stock, -0- and 10,000,000 shares issued and outstanding at June 30, 2009 and June 30, 2009 (liquidation value $10,000,000), respectively.


—



—



10,000,000Series G Convertible Preferred Stock, 5,000,000 shares issued and outstanding at June 30, 2010; liquidation value $5,000,000; value $50,600,000.


4,550,534



2,870,000



—$
9,497,444


$
7,816,910


$
45,969,634





We are accreting the Series G Convertible Preferred Stock from its initial carrying amount of $2,870,000 to its redemption value using the effective interest method. Accretion recorded during the six months ended December 31, 2010 amounted to $1,680,534. Cumulative dividends on the Series G Preferred Stock are payable irrespective of declaration and, accordingly, are recognized when they are earned. During the six months ended June 30, 2010 we accrued dividends of $203,774, which are recorded in paid-in capital in the absence of accumulated earnings and accrued liabilities.





As more fully discussed in Note 14, on July 31, 2009, investors converted 9,285,354 shares of Series C Convertible Preferred Stock, 7,000,000 shares of Series D Convertible Preferred Stock, and 10,000,000 shares of Series F Convertible Preferred Stock into 105,141,416 shares of common stock, after the reset of the conversion prices from $0.50, $0.50 and $1.20 for the Series C, D and F Preferred, respectively, to $0.25. This transaction is referred to in Note 13 as the Conversion Transaction and is more fully disclosed therein to integrate the disclosure with the Exchange Transaction also disclosed therein.




86




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 13 – Redeemable preferred stock (continued):





Terms, Features and Conditions of our Redeemable Preferred Stock:





Series

Date of

Designation

Number of

Shares


Par

Value


Stated

Value


Liquidation

Value


Dividend

Rate


Initial

Conversion


Current

ConversionC

10/18/2007


10,620,000


$
0.00001


$
1.00


$
1.00



—


$
0.75


$
0.25D

4/30/2008


7,000,000


$
0.00001


$
1.00


$
1.00



—


$
0.50



—F

2/12/2009


10,000,000


$
0.00001


$
1.00


$
1.00



—


$
1.20



—G

6/30/2010


5,000,000


$
0.00001


$
1.00


$
1.00



8.0
%

$
0.10


$
0.10





The conversion prices of all classes of our designated convertible preferred stock are subject to adjustment for anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations (traditional restructuring events), and (ii) sales or issuances of common shares or contracts to which common shares are indexed at less than the stated conversion prices (down-round protections). As it relates to adjustments to conversion prices arising from down-round financing triggering events, we account for the incremental value to convertible preferred stock classified as liabilities by charging earnings. For convertible preferred stock classified in stockholders’ equity or redeemable preferred stock (mezzanine classification) we charge the incremental value to paid-in capital or accumulated deficit, if paid-in capital is exhausted, as a deemed dividend.





All outstanding series of our convertible preferred stock have voting rights equal to the if-converted number of common shares.





The Series C Preferred is redeemable for cash in an amount representing the stated value only in the event of a redemption triggering event as discussed below:





·
The Corporation shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder;


·
Unless specifically addressed elsewhere in the Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Corporation, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;


·
The Corporation shall be party to a Change of Control Transaction;


·
There shall have occurred a Bankruptcy Event or Material Monetary Judgment;





If the Company fails to pay the Series C Preferred Triggering Redemption amount on the date it is due, interest will accrue at a rate equal to the lesser of 18% per year, or the maximum rate permitted by applicable law, accruing daily from the date of the Triggering event until the amount is paid in full.




87




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 13 – Redeemable preferred stock (continued):





The Series G Preferred requires the payment of cash dividends quarterly at a rate of 8.0% of the stated value, regardless of declaration, and is mandatorily redeemable for cash of up to $50,600,000, which is mandatorily payable $5,000,000 on June 30, 2011 and $45,600,000 on June 30, 2013 as follows:





·
The stated value of $5,000,000 is payable on June 30, 2013.


·
An additional dividend equal to $1.00 per share of Series G Preferred is payable on June 30, 2011 if the special preferred distribution discussed in the next bullet point has not been paid before that date (aggregate redemption value $5,000,000).


·
A special preferred distribution equal to $8.12 per share of Series G Preferred is payable on June 30, 2013 or earlier at our option (aggregate redemption value of $40,600,000). This special preferred distribution is reduced by the amount of the additional dividend discussed in the preceding bullet point if the additional dividend is paid on the June 30, 2011.





In summary, if the additional dividend described in the second bullet point above is paid on or before June 30, 2011, the mandatory redemption amount is $45,600,000. If the additional dividend is not paid on or before June 30, 2011, the mandatory redemption amount is $50,600,000. Quarterly and annual regular dividend requirements are $100,000 and $400,000, respectively, while the Series G Preferred Stock is outstanding.





The mandatory redemption feature embodied in the Series G Preferred Stock is probable of payment. Accordingly, we are required to accrete the carrying value of the Series G Preferred Stock to its redemption value by charges to paid in capital using the effective interest method. The following summarizes the annual accretion for each fiscal year ending December 31:





AccretionCarrying value on December 31, 2010

$
4,550,534Accretion for year ending December 31:2011


6,889,3962012


17,319,7702013


16,840,300Redemption value

$
45,600,000





Fiscal 2010 Series G Preferred Stock and Warrant Financing Arrangement:





On June 30, 2010, we entered into a securities purchase agreement with Vicis pursuant to which Vicis purchased 5,000,000 shares of our newly designated Series G Convertible Preferred Stock and Series G Warrants to purchase 50,000,000 shares of our common stock for $0.10 per share for a period of ten years. Aggregate proceeds amounted to $5,000,000. The Series G Preferred is convertible into common shares at $0.10 (or 50,000,000 common shares) and is mandatorily redeemable as discussed in the preceding paragraphs. A placement agent was not engaged in this transaction.





We have evaluated the Series G Preferred and the Series G Warrants for purposes of classification.




88




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 13 – Redeemable preferred stock (continued):





The Series G Preferred embodies a conversion option which (i) met the definition of a derivative and (ii) was not considered clearly and closely related to the host preferred stock based upon economic risks. Establishing a clear and close relationship between the host preferred contract and the embedded feature is necessary to avoid bifurcation, liability classification and fair value measurement of the embedded feature. In order to establish a clear and close relationship, we were first required to establish the nature of the host preferred instrument as either an akin to equity or an akin to debt type instrument. Because the Series G Preferred Stock is both redeemable for cash on a specific future date and embodies a periodic return (i.e. cumulative dividend) that was consistent with returns for debt we concluded that the Series G Preferred Stock bore risks more closely associated with debt-type financial instruments. The risks of the equity linked conversion option not being clearly and closely related to the risks of the debt-type preferred host contract, required us to bifurcate the embedded conversion feature at its fair value and classify such amount in liabilities.





The Series G Warrants were evaluated for classification in either liabilities or equity. Generally, a freestanding warrant agreement must both (i) be indexed to the Company’s own stock and (ii) meet certain explicit criteria in order to be classified in stockholders’ equity. Because the Series G Warrants embodied anti-dilution features that would adjust the exercise price in the event of a sale of securities below the $0.10 exercise price, the Series G Warrants do not meet the indexed test; and, therefore, the explicit criteria does not require evaluation. As a result, the Series G Warrants require liability classification at their fair value both on the inception date of the financing arrangement and subsequently.





The following table summarizes the allocation of the proceeds from the Series G Preferred Stock and Warrant Financing Arrangement on June 30, 2010:





Financial Instrument:

AllocationSeries G Preferred

$
2,870,000Embedded Conversion Feature


800,000Series G Warrants


1,330,000$
5,000,000





Our allocation methodology provided that the proceeds were allocated first to the Series G Warrants at their fair value, second to the Embedded Conversion Feature at its fair value and, lastly, the residual to the Series G Preferred. Information about the valuation of these derivative financial instruments is provided in Note 10. We will accrete the Series G Preferred to its redemption value with charges to stockholders’ equity over the term to its mandatory redemption date using the effective interest method.





Fiscal 2009 Series F Preferred Stock and Warrant Financing Arrangement:





On February 12, 2009, we entered into a securities purchase agreement with Vicis pursuant to which Vicis purchased 10,000,000 shares of our newly designated Series F Convertible Preferred Stock (“Series F Preferred Stock”), par value $0.00001, stated value $1.00, respectively for an aggregate purchase price of $10,000,000 ($9,166,994 net of direct expenses). As discussed in Note 14, the Series F Preferred Stock was converted in connection with the Conversion Transaction on July 31, 2009.




89




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 13 – Redeemable preferred stock (continued):





The Series F Preferred stock did not provide for dividends but each holder of Series F Preferred Stock has the right to such number of votes equal to the number of shares of common stock that the Series F Preferred Stock shall be converted into, subject to the beneficial ownership limitation described below. Vicis also received a warrant to purchase 33,333,333 shares of our common stock in connection with this transaction. The warrant is exercisable for a period of ten years from the date of issuance at an initial exercise price of $1.50. The warrant is classified in liabilities, at fair value, because anti-dilution protection features cause it not to meet the test for indexed to the Company’s own stock.





Midtown Partners & Co., LLC, which served as our placement agent in connection with the Securities Purchase Agreement (“Midtown”), received aggregate placement agent fees of $700,000.00, as well as the following common stock purchase warrants: (a) a warrant entitling Midtown to purchase 833,333 shares of our common stock at an exercise price of $1.20 per share, and (b) a warrant entitling Midtown to purchase 3,333,333 shares of our common stock at an exercise price of $1.50 per share. The warrants have a term of five years from the date of issuance and embody the same fundamental transaction provision as the warrant issued to Vicis. Other direct, incremental finance costs amounted to $133,006.





We evaluated the Series F Convertible Preferred Stock, the investor warrants and the placement agent warrants for classification. The Series F Convertible Preferred Stock was conditionally redeemable under certain circumstances, including (i) a change in control, (ii) insufficient authorized shares to settle the conversion option, (iii) bankruptcy and (iv) significant monetary judgments against the Company. These terms and features do not rise to the level of “unconditionally” redeemable for purposes of liability classification. The investor and placement agent warrant embodied the same anti-dilution protections that caused the investor warrants to be classified in liabilities.





We then evaluated the conversion feature embedded in the Series F Convertible Preferred Stock, and certain other features (i.e. the contingent redemption elements) for classification and measurement. Generally, embedded terms and features that both (i) meet the definition of derivatives and (ii) are clearly and closely related to the host contract in terms of risks, do not require bifurcation and separate measurement. In order to develop these conclusions, we first evaluated the hybrid contract to determine if the hybrid contract, with all features included, was more akin to an equity instrument or a debt instrument. Significant indicators of equity were the non-existence of a fixed and determinable redemption provision, the non-existence of any dividend feature and the existence of voting rights based upon the if-converted number of common shares. Significant indicators of debt were the Company’s ability to redeem the preferred stock at a 10% premium and redemption features that require redemption of the preferred stock for events that embody credit risk (i.e. bankruptcy event and monetary judgments). The weight of these indicators led us to the conclusion that the hybrid contract was more akin to an equity instrument. Accordingly, the conversion option does not require bifurcation because its risks and the risks of the hybrid are clearly and closely related. The contingent redemption features, conversely, do require bifurcation because their risks and the risks of the host are not clearly and closely related.




90


Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 13 – Redeemable preferred stock (continued):





Further consideration of the classification of the Series F Convertible Preferred Stock as either equity or mezzanine was required. Generally, redeemable instruments, where redemption is either stated or outside the control of management, require classification outside of stockholders’ equity. Redemption in the event of a change in control required the Series F Convertible Preferred Stock to be classified outside of stockholders’ equity in the mezzanine.





For purposes of our accounting, we were required to develop estimates of fair value of each component of the transaction, including the Series F Convertible Preferred Stock, the investor warrants and the broker warrants. The fair values of the Series F Convertible Preferred Stock and investor warrants were necessary to develop the relative fair values for purposes of (i) identifying the presence of a beneficial conversion feature and (ii) make certain allocations, such as financing costs among the components. In addition, the warrants require fair value measurement on the inception date and thereafter.





The following table reflects the components of fair value and related allocations:





Fair Value


Allocated

Value


Allocation of

Cash Costs


Allocation of

Warrant CostsGross consideration




$
10,000,000Cash financing costs








$
(863,006
)Warrant financing costs (fair value)












$
(253,750
)Financial instruments sold:Series F Convertible Preferred

$
10,002,594


$
7,970,000


$
(717,410
)

$
(210,940
)Investor warrants


2,030,000



2,030,000



(145,596
)


(42,810
)$
12,032,594


$
10,000,000


$
(863,006
)

$
(253,750
)





The gross proceeds were allocated to the Series F Convertible Preferred and Investor Warrants, first to the fair value of the Investor warrants, because they required liability classification on the inception date, and the residual to the Series F Convertible Preferred. Cash and warrant financing costs were allocated to the Series F Convertible Preferred and the Investor Warrants based upon their relative fair values. We evaluate all terms and features in estimating the fair value of our hybrid contracts, such as the Series F Preferred Stock. The fair value of the Series F Preferred Stock is derived from a combination of the common stock equivalent value plus the value of the liquidation preference. On a combined basis, these features are enhanced by the incremental values associated the down-round, anti-dilution protection and the significant voting influence that the investor has in the Series F Preferred Stock and all other voting investments that the investor has in our company. The fair value of the investor and broker warrants was based upon the Black-Scholes-Merton option valuation technique.





91




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 13 – Redeemable preferred stock (continued):





Components of the fair value of the Series F Preferred Stock are as follows:





Series F Preferred Stock:

AmountCommon stock equivalent value (8,333,333 indexed shares at $0.60)

$
5,000,000Liquidation preference


3,003,174Voting features


1,528,802Down-round, anti-dilution protection


470,618$
10,002,594





Details of the fair value of the investor and broker warrants (inception) are as follows:





Warrants:

Investor


Broker


BrokerIndexed common shares


33,333,333



3,333,333



833,333Strike

$
1.50


$
1.50


$
1.20Term (contractual in years)


10



10



10Volatility


64.40
%


64.40
%


64.40
%Risk free rate


2.75
%


2.75
%


2.75
%Fair value

$
2,030,000


$
203,000


$
50,750





Accounting standards provide that the effective conversion price necessary to establish the presence of a beneficial conversion feature is the relative fair value of the convertible instrument ($8,312,916) divided by the number of common shares indexed to the convertible instrument (8,333,333). As a result, the initial conversion price is $1.20, but the effective conversion price is $1.00. In light of the fact that the trading market price of our common stock on the transaction date was $0.60, there was no beneficial conversion feature present.





The above allocation resulted in the Series F Convertible Preferred to be initially recognized at a discount to its redemption value of $10,000,000. As a result, we recognized a deemed dividend by charging paid-in capital for $2,958,350 for the discount since the security does not have a stated maturity or redemption date and it is convertible at any time after the issuance date. The following table shows the details of the allocation and the dividend:





AmountAllocation of gross proceeds

$
7,970,000Allocation of cash finance costs


(717,410
)Allocation of warrant finance costs


(210,940
)7,041,650Deemed dividend


2,958,350$
10,000,000




92




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 14 – Equity (deficit):





Changes in accounting:





Effective July 1, 2009, we adopted the requirements of ASC 810 Consolidations that required (i) presentation of non-controlling interests (formerly referred to as minority interests) as a component of equity and (ii) presentation of income (loss) associated with Infusion Brands separately from income (loss) associated with non-controlling interests. These standards required retrospective adoption and, accordingly, the comparable amounts in prior periods have been reclassified to conform to the new standard.





Effective July 1, 2009, we also adopted the requirements of ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of derivative contracts in equity. Derivative contracts may be classified in equity only when the both are indexed to a company’s own stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) would be considered indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed monetary amount. We were unable to continue to carry 30,904,171 warrants in equity because they embodied anti-dilution protections that did not achieve the fixed-for-fixed definition.





The reclassification of the fair value of the warrants, amounting to $4,045,146, to liabilities was recorded on July 1, 2009 as a cumulative effect of a change in accounting principle wherein the original amounts recorded were removed from paid-in capital $28,719,115 and the difference $24,673,969, representing the fair value changes, was recorded as an adjustment to beginning accumulated deficit.





Series E Convertible Preferred Stock:





On December 3, 2008, we designated 13,001,000 shares of our newly designated $0.00001 par value, $1.00 stated value, Series E Convertible Preferred Stock (the “Series E Preferred Stock”) of which 13,000,000 were issued on August 27, 2009 in connection with our acquisition of Abazias. See Note 4 for additional information about our purchase of Abazias. The Series E Preferred Stock votes with the common shareholders on an if-converted basis. The Series E Preferred Stock does not provide for either a liquidation preference or a dividend right. The Series E Preferred Stock was initially convertible into common stock on a one-for-one basis. However, this conversion rate was subject to a one-time adjustment, on the closing date of the Abazias purchase, where the conversion price was adjusted downward on a pro rata basis for common market values below $1.20, subject to a floor of $0.50. Since the market value on the closing date, August 27, 2009, was $1.01, the effective conversion price is $0.84; resulting in the 13,000,000 Series E Convertible Preferred Shares issued being indexed to 15,476,190 common shares. In addition to the aforementioned conversion adjustment, the Series E Preferred Stock provides for down-round price protection in the event that we sell shares or indexed securities below $1.20 during the two year period following issuance. In the event of a down-round financing, the conversion price is adjusted similarly to the one-time adjustment described above. That is, on a pro rata basis for down round financings at less than $1.20. This protection has a floor of $0.50. The current conversion price is $0.50. The Series E Preferred Stock conversion price is otherwise subject to adjustment for traditional reorganizations, such as stock splits, stock dividends and similar restructuring of equity. Finally, Infusion Brands is precluded from changing the designations of the Series E Preferred Stock without the approval of at least 80% of the holders.




93




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 14 – Equity (deficit) (continued):





The following table reflects the activity in our Series E Convertible Preferred Stock during the year ended June 30, 2010 and the six months ended December 31, 2010:





Shares


AmountShares issued to acquire Abazias, Inc. on August 27, 2009


13,000,000


$
15,841,323Beneficial conversion feature


—



(2,605,158
)Conversion into 12,012,239 shares of common stock


(10,115,399
)


(10,299,161
)Balances at June 30, 2010


2,884,601



2,937,004Conversion into 721,737 shares of common stock


(357,825
)


(592,228
)Balances at December 31, 2010


2,526,776


$
2,344,776





The Series E Preferred shares issued in connection with the acquisition of Abazias were recorded at their fair value. Fair value was established based upon the common stock equivalent value of the Series E Preferred, using our trading market price on the closing date of the transaction ($1.01 on August 27, 2009), plus the incremental value associated with the anti-dilution protections afforded the holders of the Series E Preferred.





The effective conversion price of the Series E Preferred on the closing date of the Abazias acquisition was $0.84, which gave rise to a beneficial conversion feature. The beneficial conversion feature, which is recorded as a component of paid-in capital, was calculated by multiplying the linked common shares (15,476,190 common shares) times the spread between the trading market price of $1.01 and the conversion price of $0.84, or $2,605,158.





As of December 31, 2010, the remaining shares of Series E Preferred are convertible into 5,053,551shares of common stock.





Exchange and conversion transactions:





On July 20, 2009, we entered into a securities purchase agreement (the “Purchase Agreement”) with Vicis, whereby Vicis purchased from the Company a warrant to purchase 97,606,276 shares of the Company’s Common Stock (the “New Warrant”) for a purchase price of five million dollars $5,000,000. The Warrant has an exercise price of $0.25 per share and is exercisable for ten years from the date of issuance. The Warrant is exercisable on a cashless basis at any time after six months from the date of issuance if there is no effective registration statement registering the resale of the shares underlying the Warrant.





As further consideration for the sale of the Warrant, Vicis surrendered for cancellation all existing warrants that it currently holds that are indexed to 97,606,276 shares of common stock. These transactions are collectively referred to as the Exchange Transaction. The Exchange Transaction triggered certain down-round anti-dilution protection in an aggregate of 105,464,170 of our outstanding warrants, resulting in revisions of the exercise prices from a range of $0.50 – $2.00 to $0.25.





94




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 14 – Equity (deficit) (continued):





Prior to the exchange transaction, we carried the surrendered warrants as derivative liabilities and at fair value. The new warrant did not achieve equity classification because it did not meet the definition of “indexed to a company’s own stock.” Accordingly, we accounted for the exchange analogously to an exchange of debt instruments; that is as an extinguishment. The following table summarizes the components of the extinguishment calculation:





Fair value of New Warrant

$
37,090,385Fair value of surrendered warrants


(9,761,869
)Consideration


(5,000,000
)Extinguishment loss

$
22,328,516





As previously mentioned the exchange transaction triggered certain anti-dilution protection provisions in other derivative warrants and preferred stock. Changes in the fair value of derivative warrants arising from reductions in strike prices are recorded in income. Changes in the fair value of preferred stock arising from reductions in conversion prices increase the number of equity linked shares and, accordingly, are recorded in equity, as a deemed dividend.





Changes in fair value are summarized as follows:





Incremental value of derivative warrants linked to 7,857,894 shares of common stock, recorded in derivative expense

$
1,436,735Incremental value of redeemable preferred stock linked to 42,952,461 shares of common stock before the anti-dilution trigger and 109,238,256 after, recorded in paid-in capital

$
66,948,653





On July 31, 2009, Vicis converted 9,285,354 shares of Series C Convertible Preferred Stock, 7,000,000 shares of Series D Convertible Preferred Stock, and 10,000,000 shares of Series F Convertible Preferred Stock into 105,141,416 shares of common stock, after the reset of the conversion prices from $0.50, $0.50 and $1.20 for the Series C, D and F Preferred, respectively, to $0.25. This transaction is referred to as the Conversion Transaction.




95




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 14 – Equity (deficit) (continued):





The following table summarizes the effects on our capital structure (reflected as common and equivalent common shares) of the Exchange and Conversion Transactions:





Pre-Exchange

and

Conversion


Exchange (1)


Conversion


Post-Exchange

and

ConversionCommon shares outstanding


14,509,225






105,141,416



119,650,641Preferred Stock:Series C Convertible Preferred


20,619,128



20,619,128



(37,141,416
)


4,096,840Series D Convertible Preferred


14,000,000



14,000,000



(28,000,000
)


—Series F Convertible Preferred


8,333,333



31,666,667



(40,000,000
)


—42,952,461



66,285,795



(105,141,416
)


4,096,840Warrants and Stock Options:Exchange Warrant


—



97,606,276







97,606,276Class A Warrants


6,900,000



(6,900,000
)






—Class B-1 and B-2


1,008,000



(48,000
)






960,000Class C-1 and C-2


29,956,171



(27,224,943
)






2,731,428Class D-1


30,100,000



(30,100,000
)






—Class F


37,499,999



(33,333,333
)






4,166,666Other Warrants


1,000,000



—







1,000,000Employee stock options


2,145,000



—







2,145,000108,609,170



—







108,609,170Common and common equivalent shares


166,070,856



66,285,795



—



232,356,561





(1)  The Exchange column in the above table gives effect to the triggering of anti-dilution protection wherein the exercise and conversion prices were adjusted to $0.25.





Warrant exercise:





On September 30, 2009, pursuant to an inducement offer wherein we reduced the strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants, Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise price of $5,600,000. We accounted for the warrant exercise analogously to an inducement offer to convert debt instruments; that is the inducement value is recorded as a charge to income. The following table summarizes the components of the inducement calculation:





Fair value of warrants following inducement

$
26,851,487Fair value of warrants preceding inducement


25,377,632Inducement expense

$
1,473,855




96




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 14 – Equity (deficit) (continued):





Stock Options and Warrants:





The following table summarizes the activity related to warrants and stock options for the years ended June 30, 2010 and 2009:





Linked Common

Shares


Exercise Prices

Per Share


Weighted Average

Exercise Prices Per ShareWarrants


Stock Options


Warrants


Stock Options


Warrants


Stock OptionsOutstanding at July 1, 2008


38,694,171



300,000


$
0.75-3.75


$
1.00


$
0.63


$
1.00Granted


37,499,999



1,845,000



0.50-1.50



0.50



1.34



0.50Exercised


—



—



—



—



—



—Cancelled or expired


—



—



—



—



—



—Outstanding at June 30, 2009


106,464,170



2,145,000



0.50-3.75



0.50-1.00



0.92



0.57Granted


148,986,590



37,448,671



0.10-0.25



0.01-0.35



0.20



0.06Exercised


(27,606,275
)


(8,334
)


0.20



0.50



0.25



0.50Exchanged


(97,606,276
)


(4,800,000
)


0.25



0.19-0.35



0.25



0.22Cancelled or expired


(1,480,000
)


(1,825,000
)


0.10-1.00



0.05-1.00



0.76



0.58Outstanding at June 30, 2010


128,758,209



32,960,337


$
0.10


$
0.01-0.50


$
0.10


$
0.05Exerciseable at June 30, 2010


126,758,209



311,666


$
0.10


$
0.50


$
0.10


$
0.50Exerciseable at June 30, 2009


106,464,170



2,145,000


$
0.20-1-00


$
0.50-1.00


$
0.20


$
0.57Compensation expense:Grant date fair values:Year ended June 30, 2010





$
2,942,415Year ended June 30, 2009





$
344,339Compensation expense recorded:Six months December 31, 2010





$
271,906Six months December 31, 2009





$
—Year ended June 30, 2010





$
518,886Year ended June 30, 2009





$
344,339Compensation subject to amortization in future periods as options vest at December 31, 2010





$
2,199,223





We have not granted stock options during the six months ended December 31, 2010 and no stock options were cancelled or expired.




97




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 14 – Equity (deficit) (continued):





Stock Options: Grant date fair values of stock options are calculated using the Binomial Lattice Valuation Technique. In previous years we used Black Scholes Merton; the effect of this change was immaterial and we believe that Binomial Lattice is a preferable technique. Significant assumptions for estimated grant date fair values issued are as follows:





Fiscal 2010 Awards: We awarded stock options during the year ended June 30, 2010, as follows:





·
On December 31, 2009, we awarded employees 2,400,000 stock options with exercise prices of $0.35, pro rata vesting of four years and terms of four years. The grant date fair value amounted to $689,450. Volatility assumptions ranged from 139.35% to 282.51%; Risk-free rate assumptions ranged from 0.06% to 1.70%.


·
On March 31, 2010, we awarded employees 4,825,000 stock options with exercise prices of $0.19, pro rata vesting of five years and terms of five years. The grant date fair value amounted to $435,025. Volatility assumptions ranged from 138.40% to 211.91%; Risk-free rate assumptions ranged from 0.16% to 1.60%.


·
On June 30, 2010, we awarded 30,243,671 stock options to employees and consultants (12,097,468 shares) (of which 4,800,000 replaced previously issued stock options) with exercise prices of $0.01, pro rata vesting of three years and terms of ten years. The grant date fair value amounted to $1,723,890. Volatility assumptions ranged from 156.05% to 217.79%; Risk-free rate assumptions ranged from 0.18% to 1.00%.





Fiscal 2010 Exchanges: On June 30, 2010, we granted 4,800,000 stock options to three officers in exchange for an equal number of previously issued stock options. The 4,800,000 stock options have an exercise price of $0.01. The 4,800,000 stock options exchanged had exercise prices ranging from $0.19 to $0.35. The difference in fair value between the newly issued stock options and those exchanged amounted to $47,600, which amount was charged to compensation expense.





Fiscal 2010 Cancellations: On January 21, 2010, 1,825,000 exercisable options were redeemed and cancelled in connection with the separation of an officer and an employee of the Company. None of our stock options are contractually redeemable for cash or other assets; rather, in the case of our former CEO, we agreed to redeem 1,800,000 stock options for a price of $50,000 pursuant to a separation agreement. The payment was charged to employment cost on the date of the officer’s separation. The remaining 25,000 stock options associated with the separation of another employee were cancelled.





Fiscal 2009 Awards: On January 15, 2009, we issued 1,845,000 stock options to employees and related parties 1,520,000 to employees and 325,000 to affiliates classified as non-employees. The options have strike prices of $0.50 and expire in five years; the grant date fair market value per common share was $1.00. The awards vest to the benefit of each recipient upon grant. Total grant date fair value of these options amounted to $344,339, using the Black-Scholes-Merton valuation technique, and was recorded as compensation in the period of grant. This amount is included in other operating expenses in the accompanying statements of operations. We used the remaining contractual term for the expected term, volatility ranging from 45.73% to 49.17% and risk-free rates ranging from 0.73% to 1.36%.




98




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 Note 15 – Income taxes:





We have changed our tax year to December 31 to correspond with our new fiscal year end. Income tax provisions and (benefits) are allocated between continuing operations and discontinued operations. The following table reflects the amounts of income tax provisions and (benefits) reflected in our operations:





Six months ended December 31


Years ended June 302010


2009


2010


2009Continuing operations

$
—


$
—


$
—


$
—Discontinued operations


—



—



—



—$
—


$
—


$
—


$
—





Income tax benefit resulting from applying statutory rates in jurisdictions in which we are taxed (Federal and State of Florida) differs from the income tax provision (benefit) in our consolidated financial statements. The following table reflects the reconciliation for the six months ended December 31, 2010 and the years ended June 30, 2010 and 2009:





Six Months

Ended


Years Ended

June 30December 31,

2010


2010


2009Benefit at federal statutory rate


(34.00
)%


(34.00
)%


(34.00
)%State, net of federal deduction


(3.30
)%


(3.30
)%


(3.30
)%Fair value adjustments to our derivatives


(3.74
)%


(35.84
)%


(28.05
)%Impairment of goodwill


—
%


15.56
%


—
%Extinguishment and inducement


—
%


28.81
%


—
%Other items


(31.14
)%


5.22
%


(1.75
)%Change in valuation allowance


72.17
%


23.55
%


67.09
%Effective tax rate


0.00
%


0.00
%


0.00
%





Deferred income taxes arise from temporary differences in the recognition of certain items for income tax and financial reporting purposes. The approximate tax effects of significant temporary differences which comprise the deferred tax assets and liabilities are as follows at December 31, 2010 and June 30, 2010 and 2009:





December 31,


June 30,2010


2010


2009Net operating losses

$
13,793,605


$
8,797,367


$
2,898,060Investment impairments


3,026,225



2,921,096



3,087,929Unconsolidated investee


116,833



732,836



34,592Impairment charges


1,447,971



1,447,971



74,024Bad debts and other reserves


80,722



433,711



51,790Share-based payment


328,286



226,865



1,490,114Inventory reserves


100,178



—



35,972Intangible assets


—



—



(368,286
)Net deferred tax assets, before allowances


18,893,821



14,559,845



7,304,195Less: Valuation allowances


(18,893,821
)


(14,559,845
)


(7,304,195
)$
—


$
—


$
—




99




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 15 – Income taxes (continued):





Changes in our valuation allowance arise from (i) originating and reversing temporary differences and (ii) reductions associated with deferred tax credits resulting from acquisition accounting. Reductions in valuation allowances arising from acquisition accounting are recorded as a component of paid-in capital.





December 31,


June 30,2010


2010


2009Originating and reversing temporary differences

$
(4,333,976
)

$
(9,766,464
)

$
(1,761,848
)Acquisition accounting:Acquisition: Abazias


—



2,449,848



—Acquisition: Designer


—



60,967



——



2,510,815



—Change in valuation allowance

$
(4,333,976
)

$
(7,255,649
)

$
(1,761,848
)





As of December 31, 2010, we have $36,980,000 in net operating loss carry forward and $5,777,000 in long term capital loss carry forward that, subject to limitation, may be available in future tax years to offset taxable income.





The amount of income taxes and related income tax positions taken are subject to audits by federal and state tax authorities. As of December 31, 2010, the Company’s most recently filed income tax return dates are as of June 30, 2010, and generally three years of income tax returns commencing with that date are subject to audit by these authorities. Our estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company’s policy is to record a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and tax position taken or expected to be taken on the tax return. Then, to the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense. During the periods reported, management of the Company has concluded that no significant tax position requires recognition under FIN 48.




100




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 16 – Commitments and contingencies:





Consulting Agreements:





On June 30, 2010, we entered into consulting agreements with two former members of our Board of Directors. One agreement provides for a one year term and the other a two year term. Each provides for annual compensation of $125,000 and a one-time stock option for 1.5% of our fully-diluted common ownership as calculated on the date of the agreement to each former member. The agreements provide for extension solely for cash compensation. The aggregate number of common shares linked to both stock options was 12,097,468 and the aggregate grant date fair value amounted to $689,556 using the Trinomial Lattice Technique. The stock options have a strike price of $0.01, vest over two years and expire in ten years. However, exercise of the stock options is restricted to periods following the payment of the special dividends on our Series G Preferred Stock (see Note 13). We will record the annual compensation as the services are earned, which is expected to be ratably over the term of the agreements. We will record the compensation expense associated with the stock options over the vesting period.





Litigation, claims and assessments:





We are involved in the following matters:





Mediaxposure Limited (Cayman) v. Omnireliant Holdings, Inc., Kevin Harrington, Timothy Harrington, Chris Philips, Richard Diamond, Paul Morrison, Vicis Capital Master Fund and Vicis Capital LLC:





Supreme Court of the State of New York, County of New York, Index No. 09603325





On October 30, 2009, Mediaxposure (Cayman) Limited filed a complaint against the named defendants alleging certain causes of actions, including aiding and abetting a breach of fiduciary duty. In January 2010, all defendants moved to dismiss the complaint. The Company’s motion was fully briefed and argued. The Company’s motion to dismiss was granted on October 25, 2010. On or about November 18, 2010, Mediaexposure moved to amend the complaint to add a claim against the Company. Omni opposed the motion, which is now sub judice.





OmniReliant Holdings, Inc v. ResponzeTV, et al.:





Supreme Court of the State of New York, County of New York, Index No. 600646/2009





The Company commenced this action on March 2, 2009 in the Supreme Court of the State of New York, County of New York against ResponzeTV, PLC, and two of its directors, Grahame Farquhar and Steven Goodman to recover $2,000,000, due and owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in favor of the Company, and also asserts causes of action for fraud and unjust enrichment.





Defendants have moved to dismiss the Complaint, and the Company has opposed this motion. The court denied the motion as against Grahame Farquhar.





Based upon ResponzeTV’s dissolution, the Company stipulated to dismiss the action against it, without prejudice. The Company moved to amend the complaint in July, 2010 to add Mediaxposure (Cayman) as a defendant. The motion to leave to amend the complaint to add Mediaxposure (Cayman) as a defendant was withdrawn.




101




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements





Note 16 – Commitments and contingencies (continued):





Local Ad Link, Inc., et al. v. AdzZoo, LLC, et al. v. OmniReliant Holdings, Inc., et ano:





United States District Court, District of Nevada, Case No. 2:08-cv-00457-LRH-PAL





On or about February 19, 2010, AdzZoo, LLC (“AdzZoo”) and the other defendants in the above-referenced action commenced a third-party action against the Company and Zurtvita Holdings, Inc.  In the Third-Party Complaint, AdzZoo alleges a cause of action for fraud against the Company, in which it seeks unspecified monetary damages.  Defendants also allege a claim for a declaratory judgment in which they seek a judgment declaring the rights with respect to certain representative agreements entered into between certain individual Defendants and Plaintiff.





On April 13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted against it. By Order, dated September 9, 2010, the Court granted the Company’s motion and dismissed the Third-Party Complaint against the Company.





Davlyn Industries, Inc. v. ResponzeTV America, LLC f/k/a Reliant International Media, LLC and OmniReliant Corporation





Circuit Court, Pinellas County, Florida, Case No: 09-11763 CI.





Davlyn Industries, Inc. filed this lawsuit asserting a claim for breach of contract in connection with the purchase of cosmetic skin care products. Davlyn Industries, Inc. demands judgment against Infusion Brands of $293,600 plus interest and court costs. While our management believes the lawsuit is without merit, it was settled for $62,500, which amount is included in expenses for the six months ended December 31, 2010.





OmniResponse, Inc. v. Global TV Concepts, Ltd., Laurie Braden and Lee Smith, case number 0-


10:61029 in the Southern District Court of Florida (SDFL).





United States District Court, Southern District of Florida, Case No. 10-CV-61029




102




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 16 – Commitments and contingencies (continued):





On June 17, 2010, OmniResponse, Inc. filed a complaint against Global Concepts Limited, Inc., d/b/a Global TV Concepts, LTD, Laurie Braden and Lee Smith alleging trademark infringement, unfair competition, violations of Florida’s Deceptive and Unfair Trade Practices Act and breach of contract. OmniResponse, Inc. is seeking monetary damages and injunctive relief. Also on July 17, 2010, the United States District Court for the Southern District of Florida entered an order preliminarily enjoining Defendants from the use of infringing trademarks. The matter was scheduled for trial at the end of June, 2011. However, the Company has accepted a confidential settlement from the defendants.





Global TV Products, Ltd. v. Omni Reliant Holdings, Inc., Trademark Opposition No. 91195187 before the Trademark Trial and Appeal Board (TTAB).





Global TV Concepts, Ltd. objected to Infusion Brand’s DualSaw trademark application serial number 77721489. Infusion Brands filed a motion to stay this Trademark Office proceeding in favor of the federal litigation. There are no damages, fees or costs to be assessed. The only relevant issue is Infusion Brands’s entitlement to federally register its DualSaw trademark. As part of the settlement described in the above case, GlobalTV withdrew any and all opposition against the Company’s trademark applications.





OmniReliant Holdings, Inc. v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder Products and Professor Amos Wonder Products, Inc.) et al. Case No. 10-2556-TPA





On October 4, 2010, the Company, the exclusive licensee of the “Professor Amos” brand, commenced this action against Professor Amos Wonder Products, the licensor, and certain of its officers and employees arisingfrom certain wrongful and tortious conduct of the defendant.  Plaintiff alleges claims for breach of an amended license agreement, tortious interference with the contract, tortious interference with business relationships, trade libel, fraud and seeks permanent injunctive relief. No answer has been filed as of the date of this Report. Defendant, Professor Amos Wonder Products and Network 1,000,000 Inc., filed for bankruptcy and defendants removed the action to the bankruptcy court for the Western District of Pennsylvania.





On February 28, 2011, Defendants answered the Complaint and asserted counterclaims against the Company for breach of the amended license agreement.  The Company denies the material allegations of the counterclaims.  Te Company intends vigorously prosecute its claims and defend the counterclaims.


Omnicomm Studios, LLC v. Vince Vellardita, D/B/A Valcom Studios, Inc., Valcom Studios, Inc., and Valcom, Inc. (collectively, the "Defendants"), in Circuit Court, Pinellas County, Florida (Case No: 10 7111 CI 15).





Infusion Brands Studios filed this lawsuit asserting a claim for breach of a real estate lease agreement by the Defendants.  Infusion Brands Studios demanded judgment against the Defendants for payment of past due rent in excess of $85,000, plus subsequent accruing rent, reasonable attorney’s fees and costs. In November 2010, we settled this matter with the defendant for approximately $23,000, which is included in other income.





103




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements




Note 16 – Commitments and contingencies (continued):





Revenue Frontier, LLC v. Infusion Brands International, Inc., in the Superior Court of California for Los Angeles County, Western District (Case No. SC106265).





Revenue Frontier, LLC filed this claim asserting a breach of contract related to delivery of media services. Infusion Brands denied Revenue Frontier’s assertions.  In order to avoid the cost and risk of litigation, the parties entered into a Settlement Agreement dated January 19, 2010, pursuant to which we paid $16,785 to Revenue Frontier, LLC, and Revenue Frontier; LLC provided a full release.





As of December 31, 2010, the end of the transition period covered by this report, the Company was subject to the various legal proceedings and claims discussed above, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, the Company does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially adversely affect its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in these legal matters, the operating results of a particular reporting period could be materially adversely affected.





License Agreement





On October 9, 2009, we entered into a License and Marketing Agreement (the “License Agreement”) with Zurvita Holdings, Inc. (“Zurvita”) whereby we granted a perpetual right and license, under all intellectual property rights applicable to the Software, to access, use, execute, display, market, and sell the Software to Zurvita in consideration for a royalty fee of $2.00 per user for a period of twenty four (24) months, commencing ninety (90) days from the date Zurvita runs its first advertisement. Compensation for the license represented a 6% promissory note in the principal amount of $2,000,000, payable three (3) years from the date of issuance and convertible at any time at our option at a conversion price of $0.25 per share.  We originally deferred the revenue for which we received the convertible debenture. However, current accounting standards provided that any extended payment terms in revenue arrangements, and in particular terms that extend beyond twelve months, indicate that the compensation is not fixed and determinable, a requisite criteria for revenue recognition as noted above.





Other contingencies:





In connection with our business, we enter into other arrangements from time to time that are routine and customary for the operation of our business that include commitments, typically of a short duration. These arrangements include, among other things, infomercial development and production arrangements and royalty or contingent consideration to product manufacturers or infomercial hosts. As of December 31, 2010, we do not believe that our routine and customary business arrangements are material for reporting purposes.




104




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 17 – Related party transactions:





Production Agreement: On May 31, 2009, we entered into a production agreement with the minority shareholder of Omnicom Studios. The agreement provides for the production of commercials. Compensation under the arrangement was $58,000, plus royalties ranging from 0.5% to 1.0% of gross sales receipts from the associated product sales, capped at $250,000. This agreement concluded on September 30, 2010.





Placement Agent and Related Services - Midtown Partner & Co. LLC and Apogee Financial Investments, serve as our placement agents and merchant banker, respectively, in connection with certain of our financing and other strategic transactions. These companies are owned by certain shareholders and former Board Members. We compensated these companies in warrants with fair values of $382,761 during the year ended June 30, 2010, related to financing arrangements. See Note 13 for information about the financing transactions and the broker-dealer warrants issued. Further, these companies are entitled to receive commissions from us upon the exercise by investors of warrants that were issued in connection with financings that they arranged for us. These companies also received a commission of $240,000 in cash related to our investment in Beyond Commerce, Inc. (see Note 6).





Financial Consulting Agreement – We previously engaged TotalCFO to provide financial services. TotalCFO is owned by certain shareholders and former Board members’ relatives. We recognized $470,600 and $345,000 of expense related to this arrangement for years ended June 30, 2010 and 2009. Charges by TotalCFO during the six months ended December 31, 2010 were approximately $143,000. We no longer utilize the services of Total CFO.





Investments– As more fully discussed in Note 5, we acquired Designer which had a 50% interest in RPS on July 31, 2009.  Designer was owned by a relative of a former member of our Board of Directors. Prior to our purchase of Designer, we invested approximately $1,857,000 in notes receivable. We invested cash and our common stock with an aggregate value of $251,000 to purchase this company. Our purchase of Designer included a provision that requires us to pay 10% of the net profits before income taxes derived from a specific customer of RPS for a period of two years following the purchase. No net profits were earned from this customer during the year ended June 30, 2010 and management does not currently project net profits during the remaining term of this provision. Also, as more fully discussed in Note 4, we acquired Abazias on August 27, 2009 and, as discussed in Note 6 made pre-acquisition investments in Abazias amounting to $1,042,789. At the time of the acquisition and investments, a former Board Member had a minor, non-controlling investment in the outstanding common stock of Abazias. We also made investments in Wineharvest in the aggregate amount of $315,050, which company was owned by the same relatives of the former Board Member and Apogee. We continue to fund Wineharvest operations and guarantee its lease, which has non-cancellable future payments due of approximately $228,000. As a result, we have consolidated Wineharvest because it meets the definition of a Variable Interest Entity and we are the primary beneficiary because our equity in Wineharvest is the only equity at risk.





Advertising and Marketing Agreement – On July 30, 2009, we entered into an Advertising and Marketing Agreement with Zurvita, more fully described in Note 17, above. Certain of our Former Board Members also serve as Directors of Zurvita. On January 21, 2010, we separated with our President and Chief Executive Officer. The separated officer also served as a Zurvita Director. Two of our current Board Members also serve on the Board of Directors of Zurvita.




105




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 17 – Related party transactions (continued):





Redemption of Shares – During the fourth quarter of our year ended June 30, 2010, we redeemed 1,000,000 shares of our common stock for $100,000 (an amount equal to the trading market of the shares) from a company that is owned by a family member of a former director.





Separation of Officer—On January 21, 2010, we entered into a Severance, Release and Confidentiality Agreement with our former President and Chief Executive Officer. The agreement provided for, among other things, severance as follows:





1.
Cash severance of $225,000, payable $75,000 within 10 days of the agreement and $12,500 monthly for a period of twelve months.


2.
Cash of $50,000 to redeem 1,500,000 stock options and 300,000 shares of the Company’s common stock. Our stock options do not provide for such redemption; rather, this provision was negotiated between the parties in the settlement. The payment was recorded in employment costs.


3.
Cash of $49,000 for the former officer’s expenses.


4.
A company-owned automobile with a carrying and estimated fair value of $13,509.


5.
An exchange of investments, wherein we will deliver 50 common shares in Strathmore Investments and 625,000 preferred shares in Nested Media (collectively, our Cellular Blowout investment) for 1,000,000 shares in Wineharvest owned by the separated officer. The aggregate carrying value and fair value of investments transferred to the former officer amounted to $62,500.





Termination benefits amounting to $400,009 were recorded as a component of employment costs in the current period on the basis that such benefits were formally established and communicated with the separated employee.





Significant Ownership – Vicis, which has provided significant funding, is the beneficial owner of 89.0% of our fully-diluted equity. Vicis also has financial interests in our investee companies Net Talk.com, Inc. and Zurvita.





Consulting Agreements— As more fully disclosed in Note 17, On June 30, 2010, we entered into consulting agreements with two former members of our Board of Directors.




106




Infusion Brands International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements


Note 18 – Subsequent events:





We have evaluated subsequent events arising following the balance sheet date of December 31, 2010 through the date of March 31, 2011. There have been no material subsequent events not provided elsewhere herein or in filings on Form 8-K.





Consulting Agreement:





On December 7, 2010, we agreed to the terms and conditions of a consumer products identification and development agreement that commenced January 1, 2011 with an organization that specializes in these services. The arrangement provides for share-based and cash consideration. On February 8, 2011, we issued 20,162,448 shares of common stock to the consulting organization. We are obligated to issue such number of additional common shares that represent 5.0% of our post-issuance outstanding shares after fulfillment of our redemption obligations under the Series G Preferred Stock (see Note 13). The arrangement provides for a monthly cash payment of $25,000 subject to adjustment after the first twelve months of the arrangement. The arrangement also provides for royalty payments to the consulting organization based upon a range of 2.0% to 4.0% of net sales that result from the arrangement. We are currently evaluating the accounting necessary for this arrangement.





On March 15, 2011, we agreed to issue 1,000,000 shares of Series G Convertible Preferred Stock, which are convertible into 10,000,000 shares of common stock, and Series G Warrants to purchase 10,000,000 shares of common stock to a certain accredited investor for gross proceeds of $1,000,000, which was received on March 15, 2011. Terms and conditions of the Series G Preferred Stock, as reflected in the Certificate of Designation, are disclosed in Note 13 Redeemable Preferred Stock. The Series G Warrants are exercisable for a period of ten years at an exercise price of $0.10. Our preliminary evaluation of the accounting treatment for this round of financing is consistent with the accounting disclosed in Note 13 for the previous Series G Convertible Preferred and Series G Warrant Financing Transaction. However, at the time of the issuance of this Transition Report, we have not completed the calculations of values and allocations that will be reflected in our quarterly report for the quarter ended March 31, 2011.




107




ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





NONE.





ITEM 9A – CONTROLS AND PROCEDURES COMPANY CONFIRM INEFFECTIVENESS OF PROCEDURES





(a) Disclosure Controls and Procedures




Our principal executive and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report. He has concluded that, based on such evaluation, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting as of December 31, 2010, as further described below.




(b) Management’s Annual Report on Internal Control over Financial Reporting




Overview




Internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control over financial reporting.




Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.




Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. As a result of the material weaknesses described below, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2010.




Management’s Assessment




Management had previously determined that there were material weaknesses in both the design and effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and had determined that there were four general categories of material weaknesses in internal control over financial reporting. As a result of the assessment that material weaknesses in our internal control over financial reporting existed, management had concluded that our internal control over financial reporting was not effective as of June 30, 2010. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2010, management has determined that remedial measures taken with regard to the prior material weaknesses have reduced the risk of misstatement in the Company’s financial reporting process to a reasonable level. Below is a summary of the prior material weaknesses and a brief description of the remedial measures that have been taken and completed as of December 31, 2010.




108




The material weaknesses we identified and remedied include:




Deficiencies pertaining to a lack of human resources within our finance and accounting functions. We currently have 31 employees, an increase from 19 at December 31, 2010. We previously reported that the lack of appropriately skilled personnel and less effective monitoring activities could result in material misstatements to financial statements not being detected in a timely manner. We have added additional human resources in our finance organization and have concluded that this deficiency has now been resolved to management’s satisfaction.




Deficiencies pertaining to the lack of controls or ineffectively designed controls. Our control design analysis and process walk-throughs disclosed a number of instances where review approvals were previously undocumented, procedures were not defined, and controls were not in place. Our finance organization has remediated the deficiencies in the high-risk processes and continues to develop additional controls over financial reporting processes. Further, we have segregated incompatible financial duties and responsibilities to management’s satisfaction.




Deficiencies related to information technology control design and operating effectiveness weaknesses. This former reported material weakness resulted from the absence of key formalized information technology policies and procedures and could result in (1) unauthorized system access, (2) application changes being implemented without adequate reliability testing, (3) inconsistent investigation of system errors and the absence of timely or properly considered remedial actions, and (4) over reliance on spreadsheet applications without quality control assurances. These deficiencies have been remediated to management’s satisfaction through the implementation of effective information technology platforms that afford automated control mechanisms, including access control.




Deficiencies related to failures in operating effectiveness of the internal control over financial reporting. We previously reported that our procedures relating to operating effectiveness, including monitoring activities, of financial reporting internal controls were ineffective.  This deficiency has been remediated to management’s satisfaction after the implementation of additional controls and the improvements achieved through the information technology platforms that were implemented.




This Transition Report does not require an attestation report from the Company’s registered accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission




We intend to adopt additional remediation measures related to ongoing identified control deficiencies as necessary as well as to continue to evaluate our internal controls on an ongoing basis in order to upgrade and enhance when appropriate. Our Board of Directors takes an active role in reviewing and discussing the internal control deficiencies with our auditors and financial management. Our management and the Board of Directors will actively monitor the implementation and effectiveness of the remediation efforts undertaken by our financial management.




109




(c) Changes in Internal Control over Financial Reporting




Except for the remedial improvements described in section (b), above, there have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during this transition period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





ITEM 9B - Other Information





None.


110




PART III





ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE





The following table sets forth certain information with respect to our directors and executive officers.





Below are the names and certain information regarding the Company's executive officers, directors and director nominees. Officers are elected annually by the Board of Directors.





Name

Age

PositionRobert DeCecco*

43

Chief Executive Officer, Chief Financial Officer, President, Secretary, Treasurer, and Chairman of the Board of DirectorsShadron Stastney**

41

DirectorKeith Hughes**

54

Director


*Appointed as Chief Executive Officer, President, Secretary on January 21, 2010


**Appointed on September 7, 2010





Background of Executive Officers and Directors





Robert DeCecco.





On September 21, 2009, the Board of Directors of the Company approved the appointment of Robert John DeCecco III as Chief Financial Officer and on January 21, 2010 approved his appointment as Chief Executive Officer, President, Secretary and Treasurer.  Prior to his current role as CFO of Infusion Brands, Mr. DeCecco has spent the past 3 years as President and CEO of a holding company which owned and operated companies with a specific focus on internet marketing, network marketing, affiliate marketing and social media marketing. Prior to that, Mr. DeCecco held the position of President and CEO of a Mortgage Bank, Aclarian Mortgage, which was eventually acquired by Opteum Inc. a publicly traded company on the NYSE; OPX (now BNMN). Prior to Aclarian, Mr. DeCecco was the CFO of two venture backed 'enterprise software' companies; Skyway Software, a rapid application development suite, and Q-Link Technologies, a business process management software company which was sold to Adobe Systems for more than $20 million, returning a profit to the company founders and investor group. In addition, he was the corporate controller and interim CFO for Peak Performance Coach and Speaker Anthony Robbins in La Jolla, Calif., heading a finance department of more than 35 finance professionals and managing nearly $100 million in revenue at Robbins Research International.  As a CPA, Mr. DeCecco worked for PricewaterhouseCoopers - Boston in the Assurance and Business Advisory services practice, assisting high-tech and financial services clients through the audit and due diligence process; participating in Initial Public Offerings, and Secondary Market Offerings. Mr. DeCecco is a Certified Public Accountant and holds a B.S. in Accounting from Franklin Pierce College in Rindge, N.H. He is also a founding member and past chairman of the Lakewood Ranch Business Alliance (www.lwrba.org) and served on the Mortgage Technology Advisory Board. Mr. DeCecco is also a director of OmniReliant Acquisition Sub, Inc, Designer Liquidator, Inc., OmniResponse, Inc., OminResponse Cleaning Solutions, Inc., Dual Saw, Inc., OminResponse Safety Solutions, Inc., and OmniReliant Corp.  Mr. DeCecco was chosen to be a director of the Company based on his general knowledge of the industry.




111




Shadron Stastney.





On September 7, 2010, the Company appointed Mr. Stastney as a member of its board of directors.  Mr. Stastney is a founding partner of Vicis Capital LL (”Vicis”).  He graduated from the University of North Dakota in 1990 with a B.A. in Political Theory and History, and from Yale Law School in 1994 with a J.D. focusing on corporate and tax law.  From 1994 to 1997, he worked as an associate at Cravath, Swaine and Moore in New York, where he worked in the tax group and in the corporate group, focusing on derivatives.  In 1997, he joined CSFB’s then-combined convertible/equity derivative origination desk.  From 1998 through 2001, he worked in CSFB’s corporate equity derivatives origination group, eventually becoming a Director and Head of the Hedging and Monetization Group, a joint venture between derivatives and equity capital markets.  In 2001, he jointly founded Victus Capital Management, LP, and in 2004, he jointly founded Vicis.  Mr. Stastney also jointly founded Vicis Capital Management LLC in 2001.  Mr. Stastney has been a director of Quality Health Plans since February 2010, China Hydro since January 2010, Master Silicone Carbide since September 2008, Amacore Holdings, Inc. since August 2008, Care Media since April 2007, China New Energy since August 2008, Zurvita Holdings, Inc. since March 2010, Age of Learning since March 2010 and OptimizeRX Corporation since July 2010.  Mr. Stastney was a director of Medical Solutions Management from October 2007 to January 2009 and MDWerks from May 2008 to August 2009. Mr. Stastney was chosen to be a director of the Company based on his general knowledge of the industry.





Keith Hughes.





On September 7, 2010, the Company appointed Mr. Stastney as a member of its board of directors.  Mr. Hughes has served as the Chief Financial Officer and Chief Compliance Officer of Vicis since 2006.  Mr. Hughes is a Certified Public Accountant and graduated from St. John’s University in 1978 with a B.A. in Accounting. He joined Vicis in January 2006 from International Fund Services, the fund’s administrator, where he was a Managing Director of Operations since 2001. From 1998 to 2001, he has held various financial roles with hedge funds including Treasurer, Controller and Chief Financial Officer. From 1986 to 1998 he worked at UBS where he was a Managing Director and the Equity Controller for North America. Previous to UBS he worked at Dean Witter, Merrill Lynch and McGladery & Pullen, C.P.A.s. Mr. Hughes has been a director of Quality Health Plans since February 2009, Amacore Holdings, Inc. since February 2010 and Zurvita Holdings, Inc. since March 2010. Mr. Hughes was chosen to be a director of the Company based on his general knowledge of the industry.





Family Relationships





None.





Conflicts of Interest





Certain potential conflicts of interest are inherent in the relationships between the Company’s officers and directors and the Company.





From time to time, one or more of the Company’s affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that the Company own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with the Company’s business with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which the Company’s affiliates are associated. The Company’s affiliates are in no way prohibited from undertaking such activities, and neither the Company nor the Company’s shareholders will have any right to require participation in such other activities.




112




Further, because The Company intend to transact business with some of the Company’s officers, directors and affiliates, as well as with firms in which some of the Company’s officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. The Company believes that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.





With respect to transactions involving real or apparent conflicts of interest, The Company have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of the Company’s disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by the Company’s directors.





The Company’s policies and procedures regarding transactions involving potential conflicts of interest are not in writing.  The Company understands that it will be difficult to enforce the Company’s policies and procedures and will rely and trust the Company’s officers and directors to follow the Company’s policies and procedures.  The Company will implement the Company’s policies and procedures by requiring the officer or director who is not in compliance with the Company’s policies and procedures to remove himself and the other officers and directors will decide how to implement the policies and procedures, accordingly.





Involvement in Certain Legal Proceedings





To the Company’s knowledge, during the past ten (10) years, none of the Company’s directors, executive officers, promoters, control persons, or nominees has been:





 ̈
the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; ̈
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);





 ̈
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or





 ̈
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law





Employment Agreements





On June 30, 2010, we entered into an employment agreement with Robert DeCecco, our Chief Executive Officer and Chief Financial Officer, pursuant to which Mr. DeCecco will serve as Chief Executive Officer, President and Chief Financial Officer for the Company for a period of three years, subject to renewal.  In consideration for his services, Mr. DeCecco will receive an annual base salary of $225,000 and options to purchase (i) that number of shares of common stock of the Company equal to 4.5% of the issued and outstanding common stock of the Company on a fully diluted basis; (ii) that number of shares of  Designer qual to 4.5% of the issued and outstanding shares of Designer Liquidator’s common stock on a fully diluted basis and (iii) that number of shares of OmniResponse, Inc. , the Company’s wholly owned subsidiary (“OmniResponse”) equal to 4.5% of the issued and outstanding shares of OmniResponse’s common stock on a fully diluted basis (collectively, the “Stock Options”).  The Stock Options of the Company are calculated and issued as of the date of the Employment Agreement.  The Stock Options of OmniResponse and Designer, will be calculated and issued upon the consummation of a Spin-Off Transaction whereby the Company will spin-out certain subsidiaries, assets, brands, and/or lines of business of the Company into a separate company.  Notwithstanding the foregoing, none of the Stock Options shall become exercisable, whether or not vested, until the Company has paid in full to holders of its Series G Convertible Preferred Stock the Special Preferred Distribution, as described in the Series G Preferred Stock Certificate of Designation.




113




Director Independence




Our board of directors has determined that currently none of it members  qualify as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SEC and in the listing standards of The Nasdaq Stock Market, Inc. - Marketplace Rule 4200.





Board Leadership Structure and Role in Risk Oversight





Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to partially combine these roles. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions partially combined.





The Company currently has three full directors, including Robert DeCecco, its Chairman, who also serves as the Company's Chief Executive Officer. The Chairman and the Board are actively involved in oversight of the Company's day to day activities.





Meetings and Committees of the Board of Directors





Our board of directors held no formal meetings during the most recently completed fiscal year. All proceedings of the board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the State of Nevada and our bylaws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.





Committees





Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees. We presently do not have any committees of our board of directors, however, our board of directors intends to establish various committees at some point in the near future.




114




Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year ended June 30, 2010 and the six months ended December 31, 2010, and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended June 30, 2010, we believe that during the year ended June 30, 2010 and the six months ended December 31, 2010, our executive officers, directors and all persons who own more than ten percent of a registered class of our equity securities have complied with all Section 16(a) filing requirements.





Code of Ethics





We have not yet adopted a code of business conduct and ethics that applied to all directors, officers and employers.


115




ITEM 11 – EXECUTIVE COMPENSATION





The following table sets forth information concerning the annual and long-term compensation earned by or paid to our Chief Executive Officer and to other persons who served as executive officers as at and/or during the fiscal year ended June 30, 2010 who earned compensation exceeding $100,000 during 2010 (the “named executive officers”), for services as executive officers for the last two fiscal years.





Summary Compensation Table





Name &

Principal

Position

Year

Salary ($)


Bonus

($)


Stock

Awards

($)


Option

Awards

($)


Non-Equity

Incentive Plan

Compensation

($)


Change in Pension Value and

Non-Qualified Deferred

Compensation Earnings

($)


All Other

Compensation

($)


Total

($)Robert DeCecco, CEO, CFO, Director

2010


225,000



—



—



1,034,334
(1)


—



—



—



1,259,3342009


—



—



—



—







—



—



—Paul Morrison, CEO, Director*

2010


120,000



—



—







—



—



—



120,0002009


120,000



—



—



283,683
(2)


—



—



—



403,683





*Resigned from all positions on January 21, 2010





(1) The Company awarded options to purchase 18,146,203 shares of common stock on June 30, 2010 with a strike price of $0.01 per share. Compensation was calculated as fair value using the Trinomial Lattice Technique. These stock options vest to the benefit of the officer through March 2012.


(2) The Company awarded options to purchase 1,500,000 shares of common stock with a strike price of $0.50 per share. Compensation was calculated as fair value using the Black-Scholes-Merton Technique.





116




Outstanding Equity Awards at Fiscal Year-End Table





Option Awards


Stock AwardsName

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable


Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable


Equity Incentive

Plan Awards:

Number of

Securities

Underlying

Unexercised

Unearned Options

(#)


Option

Exercise

Price

($)


Option

Expiration

Date


Number

of Shares

or Units

of Stock

That

Have Not

Vested

(#)


Market

Value of

Shares or

Units of

Stock That

Have Not

Vested

($)


Equity Incentive

Plan Awards:

Number Of

Unearned Shares,

Units or Other

Rights That Have

Not Vested

(#)


Equity Incentive

Plan Awards: Market

or Payout Value Of

Unearned Shares,

Units or Other Rights

That Have Not

Vested

($)Robert DeCecco, CEO, CFO, Director


—



—



18,146,203


$
0.01



6-30-2020



—



—



—



—




117




Directors’ Compensation





For the former fiscal year ended June 30, 2010, three directors were compensated an aggregate of $59,067 and none for the six months ended December 31, 2010.





Audit Committee





We do not have an audit committee at this time.





Certain Relationships and Related Transactions





The Company will present all possible transactions between us and the Company’s officers, directors or 5% shareholders, and the Company’s affiliates to the Board of Directors for their consideration and approval. Any such transaction will require approval by a majority of the disinterested directors and such transactions will be on terms no less favorable than those available to disinterested third parties





Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The following table sets forth certain information, as of March 31, 2010 with respect to the beneficial ownership of the Company’s outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the named executive officers, directors and director nominees; and (iii) our directors, director nominees and named executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.





Name of Beneficial Owner(1)

Common Stock

Beneficially

Owned


Percentage of Common

Stock

Beneficially Owned (2)Robert DeCecco


18,146,203
(3)


9.2
%Vicis Capital, LLC (5)


328,502,441
(6)


89.0
%Keith Hughes (4)


—



—Shadron Stastney (7)


—



—All officers and directors as a group (3 persons)


18,146,203



9.2
%





(1) Except as otherwise indicated, the address of each beneficial owner is c/o Infusion Brands International, Inc. 14375 Myerlake Circle, Clearwater, FL 33760.





(2) Applicable percentage ownership of common stock has been calculated by dividing the common stock beneficially owned as reflected in the table above, by the sum of the number of common shares outstanding at March 31, 2011, which amount to 178,951,422 and the common stock beneficially owned.





(3) Reflects 18,146,203 stock options granted on June 30, 2010 with an exercise price of $0.01, which vest to the officer’s benefit over two years and expire in ten years. The numerator of the percent is the 18,146,203 stock options and the denominator is the combination of (i) the common shares outstanding of 178,951,422 and (ii) the 18,146,203 stock options. The total denominator is 197,097,625.





(4) Mr. Hughes is a director of the Company.





118




(5) The address for Vicis Capital LLC is 445 Park Avenue, 16 th Floor, New York, NY 10022.





(6) Includes as the numerator (i) 138,502,441 shares of Infusion Brand’s common stock, plus (ii) warrants to purchases 130,000,000 shares of Infusion Brand’s common stock with an exercise price of $0.10 per share plus, (iii) 60,000,000 common shares that are linked to the Series G Preferred Stock Conversion Feature. The total numerator is 328,502,441. The denominator includes (i) 178,951,422 shares  of common stock outstanding, plus (ii) warrants to purchases 130,000,000 shares of Infusion Brand’s common stock with an exercise price of $0.10 per share plus, (iii) 60,000,000 common shares that are linked to the Series G Preferred Stock Conversion Feature. The denominator is 368,951,422.





(7) Mr. Statsney is a director of the Company.





ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Except as set forth below, there were no transactions during the last fiscal year and six months ended December 31, 2010, and there are no proposed transactions, to which the Company was or is to become a party in which any director, executive officer, director nominee, beneficial owner of more than five percent (5%) of any class of our stock, or members of their immediate families had, or is to have, a direct or indirect material interest:





On June 30, 2010, we issued and sold 5,000,000 shares of our Series G Convertible Preferred Stock and Series G Warrants to purchase an aggregate of 50,000,000 shares of our common stock at a per share exercise price of $0.10 for an aggregate purchase price value of $5,000,000 consisting of (1) $3,500,000 in cash and (2) the return and cancellation of the note in the principal amount of $1,500,000 issued to Vicis Capital Master Fund pursuant to a Note Purchase Agreement dated June 4, 2010 between Vicis and the Company.  Vicis is a beneficial owner of 89.0% of our outstanding capital stock.





On June 4, 2010, we entered into a Note Purchase Agreement with Vicis Capital Master Fund pursuant to which we sold an 8% convertible promissory note in the principal amount of $1,500,000 for an aggregate purchase price of $1,500,000 (the “Note”). The Note is due on demand in the holder’s discretion.  The Note is convertible into securities offered by the Company in a future financing pursuant to the terms of the Note Purchase Agreement.  Vicis is a beneficial owner of 89.0% of our outstanding capital stock.





On July 20, 2009, the Company entered into a securities purchase agreement with Vicis Capital Master Fund whereby Vicis purchased from the Company a warrant to purchase 97,606,276 shares of the Company’s common stock for a purchase price of five million dollars ($5,000,000). The warrant has an exercise price of $0.25 per share and is exercisable for ten years from the date of issuance.  The warrant is exercisable on a cashless basis at any time after six months from the date of issuance if there is no effective registration statement registering the resale of the shares underlying the warrant.  As further consideration for the sale of the warrant, Vicis surrendered for cancellation all existing warrants that it currently holds. Vicis is a beneficial owner of 89.0% of our outstanding capital stock.





Placement Agent and Related Services - Midtown Partner & Co. LLC and Apogee Financial Investments, serve as our placement agents and merchant banker, respectively, in connection with certain of our financing and other strategic transactions. These companies are owned by certain shareholders and former Board Members. We compensated these companies in warrants with fair values of $382,761 during the year ended June 30, 2010, related to financing arrangements, and none during the six month transition period ended December 31, 2010. Further, these companies are entitled to receive commissions from us upon the exercise by investors of warrants that were issued in connection with financings that they arranged for us. These companies also received a commission of $240,000 in cash related to our investment in Beyond Commerce, Inc.




119




Investments– We acquired Designer which had a 50% interest in RPS on July 31, 2009.  Designer was owned by a relative of a former member of our Board of Directors. Prior to our purchase of Designer, we invested approximately $1,857,000 in notes receivable. We invested cash and our common stock with an aggregate value of $251,000 to purchase this company. We also acquired Abazias on August 27, 2009 and, as discussed in Note 6 made pre-acquisition investments in Abazias amounting to $1,042,789. At the time of the acquisition and investments, a former Board Member had a minor, non-controlling investment in the outstanding common stock of Abazias.We also made investments in Wineharvest in the aggregate amount of $315,050, which company was owned by the same relatives of the former Board Member and Apogee. We continue to fund Wineharvest operations and guarantee its lease, which has non-cancellable future payments due of approximately $228,000. As a result, we have consolidated Wineharvest because it meets the definition of a Variable Interest Entity and we are the primary beneficiary because our equity in Wineharvest is the only equity at risk.





Advertising and Marketing Agreement – On July 30, 2009, we entered into an Advertising and Marketing Agreement with Zurvita Holdings, Inc. (“Zurvita”). Certain of our former Board Members also serve as Directors of Zurvita. On January 21, 2010, we separated with our then President and Chief Executive Officer. The separated officer also served as a Zurvita. Director. Two of our current Board Members, Mr. Stastey and Mr. Hughes, also serve on the board of Zurvita.





Redemption of Shares – During our year ended June 30, 2010, we redeemed 1,000,000 shares of our common stock for $100,000 (an amount equal to the trading market of the shares) from a company that is owned by a family member of a former director.





Separation of Officer—On January 21, 2010, we entered into a Severance, Release and Confidentiality Agreement with our former President and Chief Executive Officer. The agreement provided for, among other things, severance as follows:





6.
Cash severance of $225,000, payable $75,000 within 10 days of the agreement and $12,500 monthly for a period of twelve months.


7.
Cash of $50,000 to redeem 1,500,000 stock options and 300,000 shares of the Company’s common stock. Our stock options do not provide for such redemption; rather, this provision was negotiated between the parties in the settlement. The payment was recorded in employment costs.


8.
Cash of $49,000 for the former officer’s expenses.


9.
A company-owned automobile with a carrying and estimated fair value of $13,509.


10.
An exchange of investments, wherein we will deliver 50 common shares in Strathmore Investments and 625,000 preferred shares in Nested Media (collectively, our Cellular Blowout investment) for 1,000,000 shares in Wineharvest owned by the separated officer. The aggregate carrying value and fair value of investments transferred to the former officer amounted to $62,500.





Termination benefits amounting to $400,009 were recorded as a component of employment costs in the current period on the basis that such benefits were formally established and communicated with the separated employee.




120




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





The Company's board of directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. Meeks International was engaged as our auditor April 27, 2010 and KBL LLP was our auditor prior to April 27, 2010. In its review of non-audit service fees and its appointment of Meeks International LLP as the Company's independent accountants, the board of directors considered whether the provision of such services is compatible with maintaining independence. All of the services provided and fees charged by Meeks International LLC and KLB LLP were approved by the board of directors.





Fees are as follows:





Meeks International LLC Fees





The aggregate fees billed for professional services for the audit of the annual financial statements of the Company and the reviews of the financial statements included in the Company's quarterly reports on Form 10-Q for 2010 and 2009 were $50,000 and $0, respectively, net of expenses.





Other Securities Exchange Commission services for registration and related services were $7,400 in 2010 and $0 in 2009.





Tax Fees





Tax fees for tax filings were $2,000 in 2010 and $0 in 2009.





KBL LLP





The aggregate fees billed for professional services for the audit of the annual financial statements of the Company and the reviews of the financial statements included in the Company's quarterly reports on Form 10-Q for 2010 and 2009 were $195,000 and $163,000 respectively, net of expenses.





Other Securities Exchange Commission services for registration and related services $19.000 in 2010 and $45,000 in 2009.





Tax Fees





Tax fees for tax filings were $0 in 2010 and 2009.





Audit-Related Fees





There were no other fees billed by during the last two fiscal years for assurance and related services that were reasonably related to the performance of the audit or review of the Company's financial statements and not reported under "Audit Fees" above.





All Other Fees





There were no other fees billed during the last two fiscal years for products and services provided.





Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors





We do not currently have an Audit Committee.  The policy of our Board of Directors, which acts as our Audit Committee, is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.





121




ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a)(2) Financial Statement Schedules





We do not have any financial statement schedules required to be supplied under this Item.





(a)(3)   Exhibits




3.1
Certificate of Incorporation of Willowtree Advisors (Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and Exchange Commission on August 2, 2004 (File No. 333-117840)3.2
Bylaws of Willowtree Advisors(Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and Exchange Commission on August 2, 2004 (File No. 333-117840)4.1
Certificate of Designation Series F Convertible Preferred Stock (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2009)4.2
Form of Series E Common Stock Purchase Warrant (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2009)4.3
Form of Series BD Common Stock Purchase Warrant (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2009)4.4
Form of Senior Secured Working Capital (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2009)4.5
Form of Series E Preferred Stock Certificate of Designation (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 24, 2009)4.6
Form of Vicis Capital Master Fund Warrant (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on October 13, 2009)4.7
Form of Midtown Partners & Co, LLC Warrant (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on October 13, 2009)4.8
Amendment No.1 to Promissory Note (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on December 28, 2010)10.1
Form of Securities Purchase Agreement by and between OmniReliant Holdings, Inc., Abazias, Inc. and Abazias.com, Inc. dated December 3, 2008 (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2008).10.2
Form of Note issued by Abazias, Inc. to OmniReliant Holdings, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2008).10.3
Form of Employment Agreement between Abazias.com, Inc and Oscar Rodriguez attached as Exhibit D-1 to Exhibit Number 10.1 (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2008).10.4
Form of Employment Agreement between Abazias.com, Inc and Jesus Diaz   attached as Exhibit D-1 to Exhibit Number 10.1 (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2008).10.5
Form of Note Purchase Agreement dated January 6, 2009 by and between Valcom, Inc. and Omnireliant Holdings, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2009)




122




10.6
Form of 10% Secured Promissory Note dated January 6, 2009 by and between Valcom, Inc. and Omnireliant Holdings, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2009)10.7
Form of Warrant dated January 6, 2009 by and between Valcom, Inc. and Omnireliant Holdings, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2009)10.8
Form of Security Agreement dated January 6, 2009 by and between Valcom, Inc. and Omnireliant Holdings, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2009)10.9
Amended Stock Purchase Agreement (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2009)10.10
Form of Securities Purchase Agreement dated July 20, 2009 by and between Omnireliant Holdings, Inc. and Vicis Capital Master Fund (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2009).10.11
Form of Warrant dated July 20, 2009 (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2009).10.12
Form of Kathy Hilton License Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on August 13, 2009).10.13
Form of Merger Agreement (Incorporated by reference to the company’s Current Report on Form 8-K, filed with the SEC on September 24, 2009)10.14
Form of Employment Agreement between the Company and Paul Morrison (Incorporated by reference to the company’s Current Report on Form 8-K, filed with the SEC on September 24, 2009)10.15
Securities Purchase Agreement, dated February 12, 2009, by and between OmniReliant Holdings, Inc. and Vicis Capital Master Fund (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2009)10.16
First Amendment to the Registration Rights Agreement, dated February 12, 2009, between OmniReliant Holdings, Inc. and Midtown Partners & Co., LLC(Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2009)10.17
Second Amendment to the Amended and Restated Registration Rights Agreement, dated February 12, 2009, by and among OmniReliant Holdings, Inc., Vicis Capital Master Fund and Dynamic Decisions Strategic Opportunities(Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2009)10.18
Securities Purchase Agreement between Strathmore Investments, Inc. and OmniReliant Holdings, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2009)10.19
Security Agreement between OmniReliant Holdings, Inc. and Strathmore Investments, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2009)




123




10.20
Form of Kathy Hilton Agreement (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on August 13, 2009)10.21
Securities Purchase Agreement (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 11, 2009)10.22
Form of Debenture (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 11, 2009)10.23
Form of Warrant (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 11, 2009)10.24
Security Interest and Pledge Agreement (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 11, 2009)10.25
Form of Merger Agreement (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 24, 2009)10.26
Form of Employment Agreement (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 24, 2009)10.27
Asset Purchase Agreement, dated October 9, 2009 (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on October 16, 2009)10.28
License Agreement, dated October 9, 2009 (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on October 16, 2009)10.29
Promissory Note, dated October 9, 2009 (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on October 16, 2009)10.30
Note Purchase agreement dated June 4, 2010 (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 7, 2010)10.31
Securities Purchase Agreement dated June 30, 2010 (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.32
Series G Convertible Preferred Stock Certificate of Designations (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.33
Series G Warrant (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.34
Registration Rights Agreement (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.35
Security Agreement (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.36
Subsidiary Agreement (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.37
Guarantor Security Agreement (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2010)10.38
Employment Agreement with Robert DeCecco (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on June 6, 2010)10.39
Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 3, 2010)10.40
Security Agreement (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 3, 2010)10.41
Merger Agreement between the Company and Infusion Brands International, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 28, 2010)10.42
Articles of Merger filed on December 16, 2010 (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 28, 2010)




124




10.43
Amended and Restated Series G Convertible Preferred Stock (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 28, 2010)10.44
Stock Purchase Agreement between the Company and Jesus Diaz and Oscar Rodriguez (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 28, 2010)10.45
Stock Purchase Agreement between the Company and Webcarnation LLC (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on December 28, 2010)10.46
Agreement to Settle and Release all Actions and Extinguish all Debts (Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on March 4, 2011)


125




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.





INFUSION BRANDS INTERNATIONAL, INC.Date March 31, 2011
By:
/s/ Robert DeCecco IIIRobert DeCecco IIIChief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.





Name

Position

Date/s/ Robert DeCecco III

Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) and Chairman of the Board of Directors

March 31, 2011Robert DeCecco III/s/ Shadron Statsney

Director

March 31, 2011Shadron Statsney/s/ Keith Hughes

Director

March 31, 2011Keith Hughes





126