UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended
March 31, 2012
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51599
Infusion Brands International, Inc.
(Exact name of small business issuer as
specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
|
|
54-2153837
(I.R.S. Employer
Identification No.)
|
14375 Myerlake Circle
Clearwater, Florida 33760
(Address of principal executive offices)
(727) 230-1031
(Issuer's telephone number)
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 and
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 the filing requirements for the past 90 days.
Yes
þ
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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
þ
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
¨
|
Smaller reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). Yes
¨
No
þ
The number of shares of the issuer’s common stock outstanding
as of May 17, 2012 is 181,459,602.
INFUSION BRANDS INTERNATIONAL, INC. AND
SUBSIDIARIES
QUARTERLY PERIOD ENDED
MARCH 31, 2012
Table of Contents
Part
|
|
Item and Description
|
|
Page
|
|
|
|
|
|
Part I
|
|
Financial Information
|
|
|
|
|
Forward-Looking Statements
|
|
2
|
|
|
Item 1. Financial Statements
|
|
3
|
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
21
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risks
|
|
31
|
|
|
Item 4. Controls and Procedures
|
|
31
|
|
|
|
|
|
Part II
|
|
Other Information
|
|
|
|
|
Item 1. Legal Proceedings
|
|
32
|
|
|
Item 1A. Risk Factors
|
|
32
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
|
32
|
|
|
Item 3. Defaults Upon Senior Securities
|
|
32
|
|
|
Item 4. Mine Safety Disclosures
|
|
32
|
|
|
Item 5. Other Information
|
|
32
|
|
|
Item 6. Exhibit Index
|
|
32
|
|
|
|
|
|
Signatures
|
|
|
|
33
|
PART I - FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains “forward-looking
statements” relating to Infusion Brands International, Inc. (referred to as the “Company” or “we”,
“us” or “our” in this Form 10-Q), which represent the Company’s current expectations or beliefs including,
but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this
purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements.
Without limiting the generality of the foregoing, words such as “may”, “anticipation”, “intend”,
“could”, “estimate”, or “continue” or the negative or other comparable terminology are intended
to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit
losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue
its growth strategy and competition, certain of which are beyond the Company’s control. Should one or more of these risks
or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially
from those indicated in the forward-looking statements.
Any forward-looking statement speaks only
as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statements.
Infusion Brands International, Inc. and
Subsidiaries
Consolidated Balance Sheets
Item1. Financial Statements.
|
|
March 31,
|
|
|
December 31,
|
|
Assets
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,113,842
|
|
|
$
|
1,890,806
|
|
Accounts receivable, net of allowances for returns and bad debts of $26,106 and $293,983
|
|
|
711,212
|
|
|
|
2,788,358
|
|
Inventories, net
|
|
|
1,987,092
|
|
|
|
2,375,509
|
|
Prepaid expenses and other current assets
|
|
|
296,539
|
|
|
|
553,428
|
|
Total current assets
|
|
|
4,108,685
|
|
|
|
7,608,101
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,697,816
|
|
|
|
2,751,362
|
|
Other assets
|
|
|
412,306
|
|
|
|
349,737
|
|
Intangible assets, net
|
|
|
38,885
|
|
|
|
38,832
|
|
Total assets
|
|
$
|
7,257,692
|
|
|
$
|
10,748,032
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Redeemable Preferred Stock and Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4,891,252
|
|
|
$
|
5,166,921
|
|
Accounts receivable financing arrangement
|
|
|
95,359
|
|
|
|
1,025,330
|
|
Deferred revenue
|
|
|
19,075
|
|
|
|
68,512
|
|
Notes payable and current maturities of long-term debt
|
|
|
105,763
|
|
|
|
115,651
|
|
Total current liabilities
|
|
|
5,111,449
|
|
|
|
6,376,414
|
|
Long-term debt
|
|
|
2,219,251
|
|
|
|
2,231,786
|
|
Security deposits on leases
|
|
|
—
|
|
|
|
17,578
|
|
Total liabilities
|
|
|
7,330,700
|
|
|
|
8,625,778
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
25,133,308
|
|
|
|
20,471,818
|
|
|
|
|
|
|
|
|
|
|
Deficit:
|
|
|
|
|
|
|
|
|
Infusion Brands shareholders’ deficit:
|
|
|
|
|
|
|
|
|
Series C Preferred Stock, $0.00001 par, 10,620,000 shares authorized, 1,024,210 shares outstanding
|
|
|
4,946,910
|
|
|
|
4,946,910
|
|
Series E Preferred Stock, $0.00001 par, 13,000,000 shares authorized, 2,856,282 outstanding
|
|
|
2,344,776
|
|
|
|
2,344,776
|
|
Common Stock, $0.00001 par, 800,000,000 shares authorized; 181,459,602 and 181,457,508 shares outstanding as of March 31, 2012 and December 31, 2011
|
|
|
1,816
|
|
|
|
1,816
|
|
Paid-in capital
|
|
|
34,524,501
|
|
|
|
39,592,589
|
|
Accumulated deficit
|
|
|
(67,380,165
|
)
|
|
|
(65,57,012
|
)
|
Cumulative translation adjustments
|
|
|
19,250
|
|
|
|
23,733
|
|
Total Infusion Brands shareholders’ deficit
|
|
|
(25,542,912
|
)
|
|
|
(18,747,188
|
)
|
Non-controlling interests
|
|
|
336,596
|
|
|
|
397,624
|
|
Total deficit
|
|
|
(25,206,316
|
)
|
|
|
(18,349,564
|
)
|
Total liabilities, redeemable preferred stock and deficit
|
|
$
|
7,257,692
|
|
|
$
|
10,748,032
|
|
See accompanying notes
Infusion Brands International, Inc. and
Subsidiaries
Consolidated Statements of Operations
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues and cost of product sales:
|
|
|
|
|
|
|
Product sales
|
|
$
|
2,177,548
|
|
|
$
|
4,156,716
|
|
Cost of product sales (including depreciation expense of $8,754 and $3,492)
|
|
|
1,692,395
|
|
|
|
1,960,423
|
|
Gross profit
|
|
|
485,153
|
|
|
|
2,196,293
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
59,399
|
|
|
|
63,227
|
|
|
|
|
|
|
|
|
|
|
Other costs and operating expenses:
|
|
|
|
|
|
|
|
|
Employment costs
|
|
|
913,562
|
|
|
|
679,456
|
|
Other general and administrative
|
|
|
528,911
|
|
|
|
410,812
|
|
Accounting and professional
|
|
|
381,668
|
|
|
|
374,592
|
|
Advertising and promotional
|
|
|
355,632
|
|
|
|
2,189,287
|
|
Depreciation, excluding depreciation classified in cost of product sales
|
|
|
67,299
|
|
|
|
53,328
|
|
|
|
|
2,247,072
|
|
|
|
3,707,475
|
|
Loss from operations
|
|
|
(1,702,520
|
)
|
|
|
(1,447,955
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(94,764
|
)
|
|
|
(35,356
|
)
|
Interest and other income
|
|
|
4,704
|
|
|
|
70,427
|
|
Gain on asset sales
|
|
|
—
|
|
|
|
86,756
|
|
Total other income (expense)
|
|
|
(90,060
|
)
|
|
|
121,827
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Infusion Brands
|
|
|
(1,792,580
|
)
|
|
|
(1,326,128
|
)
|
Net losses attributable to non-controlling interests
|
|
|
69,427
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,723,153
|
)
|
|
$
|
(1,319,352
|
)
|
Continued on next page.
See accompanying notes.
Infusion Brands International, Inc. and
Subsidiaries
Consolidated Statements of Operations
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Reconciliation of net loss to loss attributable to Infusion Brands common shareholders:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,723,153
|
)
|
|
$
|
(1,319,352
|
)
|
Preferred stock dividends and accretion
|
|
|
(5,121,490
|
)
|
|
|
(1,278,070
|
)
|
Loss attributable to Infusion Brands common shareholders
|
|
$
|
(6,844,643
|
)
|
|
$
|
(2,597,422
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares—basic
|
|
|
181,459,602
|
|
|
|
167,980,175
|
|
Weighted average common shares—diluted
|
|
|
181,459,602
|
|
|
|
167,980,175
|
|
See accompanying notes.
Infusion Brands International, Inc. and
Subsidiaries
Consolidated Statements of Cash Flows
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,792,580
|
)
|
|
$
|
(1,326,128
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
66,625
|
|
|
|
56,820
|
|
Share-based payment
|
|
|
53,402
|
|
|
|
210,234
|
|
Bad debts expense and returns and allowances
|
|
|
9,228
|
|
|
|
10,783
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,067,918
|
|
|
|
(289,450
|
)
|
Inventories
|
|
|
388,417
|
|
|
|
770,300
|
|
Prepaid expenses and other assets
|
|
|
194,267
|
|
|
|
(171,845
|
)
|
Accounts payable and accrued expenses
|
|
|
(753,247
|
)
|
|
|
(829,817
|
)
|
Deferred revenue
|
|
|
(49,437
|
)
|
|
|
—
|
|
Net cash provided by (used in) operating activities
|
|
|
184,593
|
|
|
|
(1,569,103
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(13,080
|
)
|
|
|
(16,219
|
)
|
Net cash flow (used in) investing activities
|
|
|
(13,080
|
)
|
|
|
(16,219
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net payments on accounts receivable factoring arrangement
|
|
|
(929,971
|
)
|
|
|
—
|
|
Principal payments on long-term debt
|
|
|
(22,423
|
)
|
|
|
(23,071
|
)
|
Cash contribution in subsidiary by non-controlling interest holder
|
|
|
8,400
|
|
|
|
—
|
|
Proceeds from advances
|
|
|
—
|
|
|
|
1,000,000
|
|
Net cash flow (used in) provided by financing activities
|
|
|
(943,994
|
)
|
|
|
976,929
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(772,481
|
)
|
|
|
(608,393
|
)
|
Foreign currency translation adjustments
|
|
|
(4,483
|
)
|
|
|
—
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,890,806
|
|
|
|
1,746,510
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,113,842
|
|
|
$
|
1,138,117
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
94,764
|
|
|
$
|
31,606
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes.
Infusion Brands International, Inc. and
Subsidiaries
Consolidated Statements of Stockholders’
Equity (Deficit)
For the three months ended March 31, 2012
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
other
Comprehensive
|
|
|
Accumulated
|
|
|
Infusion Brands
International,
Inc.
|
|
|
Non-Controlling
|
|
|
Total
Stockholders’
|
|
|
|
Preferred Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income Items
|
|
|
Deficit
|
|
|
Equity (deficit)
|
|
|
Interests
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2012
|
|
$
|
7,291,686
|
|
|
|
181,457,508
|
|
|
$
|
1,816
|
|
|
$
|
39,592,589
|
|
|
$
|
23,733
|
|
|
$
|
(65,657,012
|
)
|
|
$
|
(18,747,188
|
)
|
|
$
|
397,624
|
|
|
$
|
(18,349,564
|
)
|
Accretion of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,661,490
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,661,490
|
)
|
|
|
—
|
|
|
|
(4,661,490
|
)
|
Dividends on preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(460,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(460,000
|
)
|
|
|
—
|
|
|
|
(460,000
|
)
|
Share-based payment
|
|
|
—
|
|
|
|
2,094
|
|
|
|
—
|
|
|
|
53,402
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,402
|
|
|
|
—
|
|
|
|
53,402
|
|
Cash contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,400
|
|
|
|
8,400
|
|
Currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,483
|
)
|
|
|
—
|
|
|
|
(4,483
|
)
|
|
|
—
|
|
|
|
(4,483
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,723,153
|
)
|
|
|
(1,723,153
|
)
|
|
|
(69,427
|
)
|
|
|
(1,792,580
|
)
|
Balances, March 31, 2012
|
|
$
|
7,291,686
|
|
|
|
181,459,602
|
|
|
$
|
1,816
|
|
|
$
|
34,524,501
|
|
|
$
|
19,250
|
|
|
$
|
(67,380,165
|
)
|
|
$
|
(25,542,912
|
)
|
|
$
|
336,596
|
|
|
$
|
(25,206,316
|
)
|
For the three months ended March 31, 2011
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Total
|
|
|
Non-Controlling
|
|
|
Infusion Brands
|
|
|
|
Preferred Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity (deficit)
|
|
|
Interests
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2011
|
|
$
|
2,344,776
|
|
|
|
158,795,060
|
|
|
$
|
1,589
|
|
|
$
|
49,593,421
|
|
|
$
|
(58,712,607
|
)
|
|
$
|
(6,772,821
|
)
|
|
$
|
6,775
|
|
|
$
|
(6,766,046
|
)
|
Reclassification of Series C Preferred
|
|
|
4,946,910
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,946,910
|
|
|
|
—
|
|
|
|
4,946,910
|
|
Share-based payment—employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,712
|
|
|
|
—
|
|
|
|
80,712
|
|
|
|
—
|
|
|
|
80,712
|
|
Share-based payment—consultant
|
|
|
—
|
|
|
|
20,162,448
|
|
|
|
202
|
|
|
|
129,320
|
|
|
|
—
|
|
|
|
129,522
|
|
|
|
—
|
|
|
|
129,522
|
|
Accretion of Series G Preferred
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,179,440
|
)
|
|
|
—
|
|
|
|
(1,179,440
|
)
|
|
|
—
|
|
|
|
(1,179,440
|
)
|
Dividends on Series G Preferred
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(98,630
|
)
|
|
|
—
|
|
|
|
(98,630
|
)
|
|
|
—
|
|
|
|
(98,630
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,319,352
|
)
|
|
|
(1,319,352
|
)
|
|
|
(6,775
|
)
|
|
|
(1,326,127
|
)
|
Balances, March 31, 2011
|
|
$
|
7,291,686
|
|
|
|
178,957,508
|
|
|
$
|
1,791
|
|
|
$
|
48,525,383
|
|
|
$
|
(60,031,959
|
)
|
|
$
|
(4,213,099
|
)
|
|
$
|
—
|
|
|
$
|
(4,213,099
|
)
|
See accompanying notes.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note
1 – Basis of presentation:
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.
The accompanying unaudited condensed consolidated
financial statements as of and for the three months ended March 31, 2012 and 2011 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-Q. Accordingly, they do not include all the information and footnotes required
for complete financial statements. However, the unaudited condensed consolidated financial information includes all adjustments
which are, in the opinion of management, necessary to fairly present the consolidated financial position and the consolidated results
of operations for the interim periods presented. The operations for the three months ended March 31, 2012 are not necessarily indicative
of the results for the year ending December 31, 2012. The unaudited condensed consolidated financial statements included in this
report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.
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 net losses of $1,723,153 and $1,319,352 during the three months ended March 31, 2012 and 2011, respectively.
As more fully discussed in Note 6, we have material redemption requirements associated with our Series G Preferred Stock during
the year ending December 31, 2013. 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.
Our management began implementing strategic
plans designed and developed during the fourth quarter of the 2010 with the intention of alleviating ongoing operating losses.
The principal focus of these plans was 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 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. The Company received
$6,500,000 of funding from the sale of preferred stock and warrants during the year ended December 31, 2011. 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.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Acquisition:
On May 9, 2011, we purchased 50% of the
outstanding common stock of Home Shopping Express S.A. (“HSE”) for cash consideration of $75,154, and an option to
purchase the remaining 50% of the outstanding common stock of HSE based upon its forward revenue levels.
HSE,
which is located in Baleares, Spain, is engaged in the development and retail sale of consumer products throughout most of Europe,
in particular, HSE's flagship product the DualSaw™ by Startwin. Through this acquisition, we became the principle owners
of the intellectual property related to DualSaw™ in geographic regions whereby Startwin already took ownership of this trademark
right. By combining our enterprises, we believe this acquisition helps to unify the worldwide brand for DualSaw™. Moreover,
with a global presence we believe this acquisition will help open channels of distribution for cross border promotion of our other
respective branded products.
Our rights associated with our purchase
contractually provide for management and governance control over all operational and financial aspects of HSE. Upon our purchase,
all pre-acquisition HSE board members resigned and our Chief Executive Officer was appointed as the sole board member. We also
have rights to all earnings of HSE. As a result of the rights associated with our initial investment in HSE and following the guidance
in ASC 810
Consolidation
, we have concluded that HSE is a variable interest entity on the basis that our 50% interest in
the HSE common stock affords us symmetrically higher voting rights than would typically accompany a 50% ownership interest in common
stock; in this instance our voting rights effectively rise to 100%.
Further, we have concluded that the Company
is the primary beneficiary to the variable interest entity pursuant to ASC 810, because we have the controlling financial interest.
That is, we possess the power to direct the activities of HSE and we have the right to receive all of its residual returns.
Accordingly, the assets, liabilities and
results of operations of HSE have been consolidated commencing with May 1, 2011, which date was used for convenience after our
conclusion that there were no material intervening transactions between May 1, 2011 and May 9, 2011.
The following unaudited condensed pro forma
financial information gives effect to our acquisition of HSE as if it had occurred on January 1, 2011. Pro forma financial information
is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred on the dates
noted.
Unaudited pro forma results:
|
|
Three months
ended
March 31, 2011
|
|
Product sales
|
|
$
|
5,598,278
|
|
(Loss) income from continuing operations
|
|
$
|
(1,372,442
|
)
|
(Loss) income per common share:
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
Shares for (loss) income per common share:
|
|
|
|
|
Basic
|
|
|
170,480,175
|
|
Diluted
|
|
|
170,480,175
|
|
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Accounts payable and accrued
expenses:
Our accounts payable and accrued expenses consisted of the following
as of March 31, 2012 and December 31, 2011:
|
|
2012
|
|
|
2011
|
|
Accounts payable
|
|
$
|
2,554,986
|
|
|
$
|
3,045,063
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Dividends on Series G Preferred Stock
|
|
|
2,036,972
|
|
|
|
1,576,972
|
|
Professional service fees
|
|
|
80,830
|
|
|
|
200,095
|
|
Employment related
|
|
|
74,724
|
|
|
|
44,654
|
|
Warranty
|
|
|
33,935
|
|
|
|
37,947
|
|
Interest
|
|
|
7,890
|
|
|
|
8,008
|
|
Sales tax
|
|
|
3,758
|
|
|
|
—
|
|
Foreign income taxes
|
|
|
—
|
|
|
|
73,436
|
|
Other accrued expenses
|
|
|
98,157
|
|
|
|
174,236
|
|
Total accrued expenses
|
|
|
2,336,266
|
|
|
|
2,121,858
|
|
Total accounts payable and accrued expenses (1)
|
|
$
|
4,891,252
|
|
|
$
|
5,166,921
|
|
(1) Accounts payable and accrued expenses
with a carrying value of $394,514 and $927,678 at March 31, 2012 and December 31, 2011, respectively, related to the HSE operations
which are based in Spain.
On March 2, 2011, we entered into a media
funding arrangement with a financial institution that provides for the financing of certain of our defined media and marketing
material expenditures. The borrowing facility does not have a stated maximum, although borrowings are limited to certain defined
account receivable levels. The facility has an initial term of one year with consecutive one year renewal terms unless terminated
by either party. It provides for fees to the lender equal to 2.5% of the qualified amounts paid plus deferred payment arrangements
that provide for interest at an approximate rate of 8.7% per annum. The lender has a first creditor’s secured priority interest
in certain accounts receivable and inventories that are specific to the direct-response marketing campaign they finance. There
were no amounts outstanding as of March 31, 2012 or December 31, 2011 under this arrangement.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note
5 — Long-term debt and financing arrangements:
Long-term
debt consisted of the following at March 31, 2012 and December 31, 2011:
|
|
2012
|
|
|
2011
|
|
Initial $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.
|
|
$
|
1,881,997
|
|
|
$
|
1,891,542
|
|
|
|
|
|
|
|
|
|
|
4.25% bank loan, payable monthly at $2,500, plus interest through September 2013, with a balloon payment of $192,798 at maturity.
|
|
|
234,605
|
|
|
|
242,105
|
|
|
|
|
|
|
|
|
|
|
4.6% — 11.7% bank loans, payable monthly in principal amounts of $518 to $2,515.
|
|
|
208,412
|
|
|
|
213,790
|
|
|
|
|
2,325,014
|
|
|
|
2,347,437
|
|
Less current maturities
|
|
|
(105,763
|
)
|
|
|
(115,651
|
)
|
Long-term debt
|
|
$
|
2,219,251
|
|
|
$
|
2,231,786
|
|
|
|
|
|
|
|
|
|
|
Maturities of long-term are as follows:
|
|
|
|
|
|
|
|
|
Nine months ending December 31, 2012
|
|
$
|
93,228
|
|
|
|
|
|
Years ending December 31:
|
|
|
|
|
|
|
|
|
2013
|
|
|
293,426
|
|
|
|
|
|
2014
|
|
|
1,827,775
|
|
|
|
|
|
2015
|
|
|
17,152
|
|
|
|
|
|
2016
|
|
|
13,011
|
|
|
|
|
|
Thereafter
|
|
|
80,422
|
|
|
|
|
|
|
|
$
|
2,325,014
|
|
|
|
|
|
Accounts Receivable Financing Arrangement:
On January 28, 2011, we entered into an
accounts receivable sales and financing arrangement that provides for the assignment and sale of certain qualified accounts receivable
to a financial institution. The facility has an initial term of one year and provides for cash advances in amounts of 75% of qualified
accounts receivable balances assigned up to an amount of $1,000,000. The initial term may be extended in one year periods upon
the mutual agreement of the Company and the lender. The lender receives an initial discount of 1.75% of the net realizable value
of the qualified receivable for purchased receivables outstanding from 1-30 days. Subsequently, the lender receives an additional
1.0% discount for each 15 day period that the qualified receivable has not been collected. Further, the lender has a secured priority
interest in the accounts receivable that they finance. This arrangement does not qualify for sales accounting under current accounting
standards and is, therefore, subject to accounting as a financing arrangement wherein we will carry the assigned receivables in
our accounts until they are settled and advances that we receive from the lender will be reflected as liabilities. The discounts
will be classified as interest expense. There was $95,359 and $1,025,330 outstanding under this arrangement as of March 31, 2012
and December 31, 2011, respectively.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Redeemable preferred stock:
Redeemable preferred stock consists of
the following as of March 31, 2012 and December 31, 2011:
|
|
2012
|
|
|
2011
|
|
Series G Convertible Preferred Stock, 11,500,000 shares issued and outstanding as of March 31, 2012 and December 31, 2011; liquidation value $11,500,000 on each date.
|
|
$
|
25,133,308
|
|
|
$
|
20,471,818
|
|
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’
deficit (in the mezzanine section).
On June 30, 2010, we sold 5,000,000 shares
of Series G Convertible Preferred Stock to a certain accredited investor (“Investor”) for proceeds of $5,000,000. The
financing included the issuance of warrants to the investors to purchase 50,000,000 shares of our common stock for $0.10 per share.
Pursuant to the financing arrangement, we extended a secured priority interest in substantially all of our assets to the investor.
Subsequently, pursuant to inter-creditor agreements, the investor subordinated their interest in the assets that secure the media
funding finance agreement that is described in Note 4 and the accounts receivable financing agreement that is described in Note
5.
On March 16, 2011 and April 6, 2011, we entered into oral agreements with the Investor to sell the
Investor, subject to the filing of an amendment to the Certificate of Designation of our Series G Convertible Stock 1,000,000 and
2,000,000 shares of its Preferred Stock, respectively, and Series G Warrants to purchase an aggregate of 10,000,000 and 20,000,000
shares of the common stock, respectively. The purchase prices of $1,000,000 and $2,000,000 were received from the Investor in the
form of advances on March 16, 2011 and April 6, 2011, respectively. The Preferred Stock purchase agreements and other related transaction
documents (the “Transaction Documents”) were executed on July 8, 2011. On September 1, 2011, September 22, 2011 and
October 20, 2011, we entered into oral agreements with the Investor to sell the Investor, subject to the filing of an amendment
to the Certificate of Designation of our Series G Convertible Stock 1,000,000, 1,500,000 and 1,000,000 shares of our Preferred
Stock, respectively, and Series G Warrants to purchase an aggregate of 10,000,000, 15,000,000 and 10,000,000 shares of the common
stock, respectively. The purchase prices of $1,000,000, $1,500,000 and $1,000,000, respectively were received from the Investor
in the form of advances on September 1, 2011, September 22, 2011 and October 20, 2011, respectively. The Preferred Stock purchase
agreements and other related transaction documents (the “Transaction Documents”) were executed on December 14, 2011.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Redeemable preferred stock
(continued):
Terms, Features and Conditions of our Series
G Redeemable Preferred Stock are as follows:
Series
|
|
Date of
Designation
|
|
|
Number of
Shares
|
|
|
Par
Value
|
|
|
Stated
Value
|
|
|
Liquidation
Value
|
|
|
Dividend
Rate
|
|
|
Initial
Conversion
|
|
|
Current
Conversion
|
|
G
|
|
|
6/30/2010
|
|
|
|
8,000,000
|
|
|
$
|
0.00001
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
8.0
|
%
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
The conversion price is subject to adjustment
solely for traditional capital restructurings, such as splits, stock dividends and reorganizations (traditional restructuring events).
The Certificate of Designation also provides for voting rights equal to the “as if converted” number of common shares.
Dividends are cumulative and payable quarterly whether or not declared by our Board of Directors. Accordingly, we accrue dividends
payable as they are earned by the investors.
The outstanding 11,500,000 shares of Series
G Preferred are mandatorily redeemable for cash of $70,099,651, which is payable on June 30, 2013 as follows:
|
·
|
The stated value of $11,500,000 is payable
on June 30, 2013.
|
|
·
|
An additional dividend equal to $1.00
per share of Series G Preferred was 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 $11,500,000). The investor waived payment of this additional
dividend on the payment date, but it will continue to accrue dividends as provided in the Certificate of Designation at a rate
of 8.0%. That is, the original face value of the Series G Preferred accrues dividends at 8% from the issuance date and the unpaid
additional dividend amount accrues dividends at 8% from June 30, 2011.
|
|
·
|
A special preferred distribution equal
to $4.096 per share of Series G Preferred is payable on June 30, 2013 or earlier at our option (aggregate redemption value of $47,099,651).
This special preferred distribution could have been reduced by the amount of the additional dividend discussed in the preceding
bullet point if the additional dividend was paid on the June 30, 2011.
|
As of March 31, 2012 and December 31, 2011,
cumulative dividends of $2,036,972 and $1,576,972, respectively, were outstanding and included in accounts payable and accrued
liabilities. No dividends have been paid. The unpaid dividends are included in caption accounts payable and accrued expenses in
the accompanying balance sheet.
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:
|
|
Accretion
Table
|
|
Carrying value on December 31, 2011
|
|
$
|
25,133,308
|
|
Future accretion (charges to stockholders’ equity):
|
|
|
|
|
Nine months ending December 31, 2012
|
|
|
21,374,875
|
|
Year ending December 31, 2013
|
|
|
23,591,468
|
|
Redemption value
|
|
$
|
70,099,651
|
|
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Redeemable preferred stock
(continued):
Series G Preferred
The Series G Preferred, under its original
terms and conditions, embodied a conversion option which (i) meets the definition of a derivative and (ii) is 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 because there were no exemptions available based on the terms.
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.
On December 17, 2010, we amended the Certificate
of Designation and the warrants to exclude adjustment to the conversion and exercise prices in the event that we sell common shares
or share linked contracts for per share amounts that are less. By eliminating this feature, the Series G Preferred Stock became
a conventional convertible financial instrument which is exempt from bifurcation of its embedded conversion option. Similarly,
the elimination of this feature in the warrants resulted in them becoming indexed to our own stock and, therefore, exempt for derivative
classification.
The following table summarizes the allocation
of the proceeds from the Series G Preferred Stock and Warrant Financing Arrangements:
Classification
|
|
June 30,
2010
|
|
|
July 8,
2011
|
|
|
December 14,
2011
|
|
|
Total
|
|
Redeemable preferred stock
|
|
$
|
2,870,000
|
|
|
$
|
2,948,129
|
|
|
$
|
3,366,946
|
|
|
$
|
9,185,075
|
|
Warrants
|
|
|
1,330,000
|
|
|
|
51,871
|
|
|
|
133,054
|
|
|
|
1,514,925
|
|
Embedded derivatives
|
|
|
800,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
800,000
|
|
|
|
$
|
5,000,000
|
|
|
$
|
3,000,000
|
|
|
$
|
3,500,000
|
|
|
$
|
11,500,000
|
|
Our allocation methodology related to the
June 30, 2010 financing 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. Subsequent allocations wherein
no derivative classification resulted were allocated based upon the relative fair values of the Series G Preferred and the Series
G Warrants. We are accreting 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.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Equity (deficit):
Change in authorized shares:
On February 23, 2012, we increased the
number of our authorized common shares to 800,000,000.
Series C Convertible Preferred Stock:
On March 31, 2011, the Certificate of Designation
governing the Series C Convertible Preferred Stock was amended to remove a provision that, while improbable of occurrence, could
result in redemption in cash. Upon removal of that provision, the carrying value was reclassified to stockholders’ equity.
Terms, Features and Conditions of our Series C Preferred Stock are as follows:
Series
|
|
Date of
Designation
|
|
|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Stated
Value
|
|
|
Liquidation
Value
|
|
|
Dividend
Rate
|
|
|
Initial
Conversion
|
|
|
Current
Conversion
|
|
C
|
|
|
10/18/2007
|
|
|
|
1,024,210
|
|
|
$
|
0.00001
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
—
|
|
|
$
|
0.75
|
|
|
$
|
0.25
|
|
The conversion price is 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.
The Series C Preferred has voting rights
equal to the as if converted number of common shares and 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;
|
|
·
|
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.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Equity (deficit) (continued):
Series E Convertible Preferred Stock:
On December 3, 2008, we designated 13,000,000
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 a business acquisition. The Series
E Preferred Stock votes with the common shareholders on a one vote per share 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
at a conversion price of $0.84 per share. The Series E Preferred Stock provides for down-round price protection with a floor of
$0.50. Due to financings below that floor, the current conversion price is $0.50 per share. 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.
As of March 31, 2012, the remaining shares
of Series E Preferred are convertible into 5,053,552 shares of common stock.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Equity (deficit) (continued):
Stock Options and Warrants:
The following table summarizes the activity
related to warrants and stock options for the three months ended March 31, 2012 and 2011:
|
|
Linked Common
Shares
|
|
|
Exercise Prices
Per Share
|
|
|
Weighted Average
Exercise Prices Per Share
|
|
|
|
Warrants
|
|
|
Stock Options
|
|
|
Warrants
|
|
|
Stock Options
|
|
|
Warrants
|
|
|
Stock Options
|
|
Outstanding at January 1, 2012
|
|
|
128,758,209
|
|
|
|
30,689,671
|
|
|
$
|
0.10
|
|
|
$
|
0.01—1.00
|
|
|
$
|
0.10
|
|
|
$
|
0.05
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled or expired
|
|
|
—
|
|
|
|
(12,097,468
|
)
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
(0.01
|
)
|
Outstanding at March 31, 2012
|
|
|
128,758,209
|
|
|
|
18,601,203
|
|
|
$
|
0.10
|
|
|
$
|
0.01—0.35
|
|
|
$
|
0.10
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2011
|
|
|
128,758,209
|
|
|
|
32,960,337
|
|
|
$
|
0.10
|
|
|
$
|
0.01—1.00
|
|
|
$
|
0.10
|
|
|
$
|
0.05
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled or expired
|
|
|
—
|
|
|
|
(2,271,666
|
)
|
|
|
—
|
|
|
|
0.19—1.00
|
|
|
|
—
|
|
|
|
0.97
|
|
Outstanding at March 31, 2011
|
|
|
128,758,209
|
|
|
|
30,688,671
|
|
|
$
|
0.10
|
|
|
$
|
0.01—0.35
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable at March 31, 2012
|
|
|
128,758,209
|
|
|
|
—
|
|
|
$
|
0.10
|
|
|
|
—
|
|
|
$
|
0.10
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2012
|
|
|
|
|
|
$
|
1,114,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months March 31, 2012
|
|
|
|
|
|
$
|
53,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months March 31, 2011
|
|
|
|
|
|
$
|
80,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation subject to amortization in future periods as options vest at March 31, 2012
|
|
|
|
|
|
$
|
746,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Equity (deficit) (continued):
Grant date fair values of stock options are calculated using
the Binomial Lattice Valuation Technique.
On June 30, 2010, the Company entered into
consulting agreements with two then Board Members providing for cash compensation of $125,000 to each and stock options linked
to an aggregate 12,097,468 shares of common stock. On January 12, 2012, the consulting agreements were terminated and the stock
options were cancelled.
Common stock issued under a consulting
agreement:
On February 8, 2011, we issued 20,162,448
shares of common stock to a consultant as partial consideration under a consultancy agreement. The common shares that we issued
vested monthly during the year ended December 31, 2011, as the services are rendered. We expensed the costs associated with these
shares and related services monthly, based upon the trading market price of our shares at the vesting dates, which is the measurement
date for the share-based payment. We recorded $129,522 of consulting expense during the three months ended March 31, 2011.
In addition to the shares above, we also
agree to issue common shares to the consultant equaling 5.0% of our outstanding common stock after we redeem our Series G Convertible
Preferred Stock, which is more fully discussed in Note 8. Current accounting standards provide that when the quantity of shares
issuable in a share-based arrangement are dependent upon the achievement of a condition, the lowest possible value of all possible
outcomes should be used to value the shares. The lowest possible value under this condition is zero provided for under a scenario
where we are unable to pay the redemption on our Series G Convertible Preferred Stock.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 8 – Geographic areas:
Commencing May 9, 2011 with our acquisition
of Spain-based HSE, we operate and sell retail products to consumers in Europe. We also sell our products in New Zealand and Mexico.
The following tables summarize the composition of our operations, assets, liabilities, redeemable preferred stock and (deficit)
by geographic area that we have defined as North America and International:
|
|
Three months ended March 31, 2012
|
|
|
|
North America
|
|
|
International
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Product sales
|
|
$
|
1,289,062
|
|
|
$
|
888,486
|
|
|
|
—
|
|
|
$
|
2,177,548
|
|
Net loss
|
|
$
|
(1,662,126
|
)
|
|
$
|
(61,027
|
)
|
|
|
—
|
|
|
$
|
(1,723,153
|
)
|
|
|
March 31, 2012
|
|
|
|
North America
|
|
|
International
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
3,339,181
|
|
|
$
|
769,504
|
|
|
|
—
|
|
|
$
|
4,108,685
|
|
Long-lived and other assets
|
|
|
2,623,142
|
|
|
|
525,865
|
|
|
|
—
|
|
|
|
3,149,007
|
|
|
|
$
|
5,962,323
|
|
|
$
|
1,295,369
|
|
|
|
—
|
|
|
$
|
7,257,692
|
|
Liabilities, redeemable preferred stock and equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,680,953
|
|
|
$
|
430,496
|
|
|
|
—
|
|
|
$
|
5,111,449
|
|
Debt and other
|
|
|
2,046,821
|
|
|
|
172,430
|
|
|
|
—
|
|
|
|
2,219,251
|
|
Redeemable preferred stock
|
|
|
25,133,308
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,133,308
|
|
(Deficit) equity
|
|
|
(25,898,759
|
)
|
|
|
692,443
|
|
|
|
—
|
|
|
|
(25,206,316
|
)
|
|
|
$
|
5,962,323
|
|
|
$
|
1,295,369
|
|
|
|
—
|
|
|
$
|
7,257,692
|
|
Note 9 – Commitments and contingencies:
Litigation, claims and assessments:
We are involved in the following matters:
Mediaxposure Limited (Cayman) v. Kevin
Harrington, Timothy Harrington, Infusion Brands International, Inc. (f/k/a OminReliant Holdings, Inc.), Vicis Capital Master Fund
and Vicis Capital LLC:
United States District Court, Middle District
of Florida, Case No. 11-CV-410
On February 28, 2011, Mediaxposure Limited
(Cayman) (“Mediaxposure”) as purported assignee of claims of ResponzeTV, Ltd (“RETV”) commenced an action
in the United States District Court, Middle District of Florida against certain individuals alleging a single case of action for
breach of fiduciary duty arising from an alleged misconduct of former board members. On October 7, 2011, Mediaxposure filed an
amended complaint naming the Company and alleging that the Company breached a purported fiduciary duty to RETV. The amended complaint
seeks unspecified money damages as against all defendants.
The Company moved to dismiss the complaint
on December 6, 2011. On March 27, 2012, the Company’s motion was argued before the Court, and we are awaiting the Court’s
decision. The Company disputes the allegations of the amended complaint and intends to vigorously defend the action.
Infusion Brands International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 9 – Commitments and contingencies
(continued):
As of March 31, 2012, 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.
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 March 31, 2012, we do not believe
that our routine and customary business arrangements are material for reporting purposes.
Note 10 – Related party
transactions:
Significant Ownership
– Vicis,
which has provided significant funding, is the beneficial owner of 91.1% of our fully-diluted equity.
Note 11 – Subsequent events:
We have evaluated subsequent events arising
following the balance sheet date of March 31, 2012 through the date of May 17, 2012. On May 2
nd
, the Company, with the
approval of the Board of Directors, entered into a Stock Purchase Agreement with Red Sun Mining, Inc. n/k/a/ Zurvita Holdings,
Inc., whereby the Company sold their remaining interest in Zurvita Holdings, Inc. for $100,000. The investment had been written
down to zero on the Company’s books. There have been no other material subsequent events not provided elsewhere herein or
in filings on Form 8-K.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should
be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in this Form 10-Q and
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed on March 30, 2012 with the Securities and Exchange
Commission.
Business: We are a consumer products company
that leverages direct response programming to satisfy unmet market demands and solve every day problems, with an array of innovative
consumer products that have the potential to disrupt their categories with significant competitive advantages, features and benefits.
We accomplish this through our strategy of innovating or identifying potential profitable products and testing them through research
of markets, consumer tastes and test marketing. Once a product passes our initial evaluation, we move to secure all necessary rights
to the license or produce the product and place it in our funnel for further market testing.
Areas of Emphasis
Key priorities for the Company include
revenue growth, product innovation and brand line expansion, cash management and increasing our strategic relationships.
Revenue Growth
As evidenced by our recent product launch
tests for our SnoreRx and Drain Doctor products, we continuously look to diversify our revenue risk across multiple product lines. However, due to the uncertainty of new product launches and the sales cycle associated with building brands
organically, we anticipate the majority of our 2012 revenue to be driven by our flagship brand; DualSaw.
The Company anticipates DualSaw revenue
to be driven by the following key initiatives:
|
·
|
Establishing and Leveraging New Domestic
and International Retail Partners
|
|
·
|
Establishing and Leveraging New International
Distribution Partnerships
|
|
·
|
Launch New "DualSaw" Product
Innovation in Q4/2012 with Direct Response Programming to drive Retail and International Distributor Sales.
|
To accomplish our goal of establishing
and leveraging new retail partners and international distributors, the Company has attended key International Trade Shows and Industry
Conferences to date in 2012:
|
·
|
Koelnmesse International Hardware Show
- Cologne, Germany
|
|
·
|
Las Vegas International Hardware Show
- Las Vegas, Nevada
|
|
·
|
Electronic Retailers Association - Hong
Kong.
|
Through attendance of these
trade shows, as well as the acquisition of Home Shopping Express, S.A., the Company hopes to experience significant growth in
international markets.
We have expanded our sales in 2012 in:
|
·
|
Australia / New Zealand
|
Subsequent to March 31, 2012,
we have established the following new channel partner relationships:
|
·
|
The
largest Direct
Branding company
in Japan; Oak Lawn
Marketing. We anticipate
to begin testing
in Q3/2012 with
a full rollout
planned for Q4/2012
|
|
·
|
One
of Europe's largest
independent power
tool distributors—Varo
Power Tools, and
|
|
·
|
We are currently at letter of intent stage
with Canada's largest power tool distributor, King Canada, to begin marketing the DualSaw brand exclusively throughout the entire
Canadian footprint.
|
All of the Company's distribution partners
are provided the right to market the DualSaw branded products in exchange for acquiring DualSaw products directly from the Company
as supplier.
In addition to its flagship brand, the
Company continues to generate incremental revenue through its live television shopping division. The Company anticipates leveraging
this sales channel to enhance its revenue and test market acceptance for new product opportunities through the launch of new products
with key television celebrities. One such recent example of this is a venture between the Company and America's top health and
wellness expert, Tony Little, to sell a massage chair on Home Shopping Network. This venture has lead to the sale of more than
6,000 chairs representing more than $1,000,000 in revenue to date since Q4/2011.
The Company will also continue to look
for strategic acquisition opportunities which could add accretive revenue and earnings in exchange for stock in the Company.
Product Innovation and Brand Line
Expansion
Innovation and sourcing of new products,
as well as product line extensions of current brands has been and will continue to be critical to the Company’s overall revenue
growth.
Evidence of our commitment to this is our
recent efforts to innovate new product models for our DualSaw brand, beginning with our new Dual Reciprocating Saw. With the help
of our innovation partner and shareholder, Cleveland based Nottingham-Spirk, the Company has been hard at work designing, engineering
and producing the next generation of dual blade technologies to be placed under the DualSaw brand. Such innovations have already
lead to eight (8) new patents pending across the entire power saw category.
While the growth prospects of Company-owned
or exclusively licensed products appear promising, the cost of developing, marketing and distributing these brands is anticipated
to be significant.
Cash Management
The Company is intent on wisely using the
cash resources available to us. We utilize accounts receivable and purchase order financing whenever possible and media funding
when we have successful direct response campaigns. In addition, we have made some reduction of staffing changes in the second quarter
of 2012 that continues to reflect our commitment to run as cost effectively as possible.
Strategic Relationships
As noted in our explanation of 'Revenue
Growth', we continue to build strategic relationships with partners in areas of the world where we do not currently have a footprint.
Three months ended March 31, 2012 compared
to three months ended March 31, 2011:
Revenues and costs of revenues –
We derive the majority of our revenues from the sale of corporate owned and licensed consumer products through direct response
programming, traditional retail outlets and international channel partners. We also 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 decreased by $1,979,168 or 47.6% to $2,177,548 for the three months ended March 31, 2012 from
$4,156,716 for the three months ended March 31, 2011. HSE contributed $888,486 of product sales during the three months ended
March 31, 2012. However, since HSE was acquired effective May 1, 2011, there are no comparable product sales from the
comparable period of the prior year. The net decrease in product sales results largely from the decline in direct response
programming sales of our Dual Saw product. Of the Company's revenue for the three months ended 2011 ($4,156,716), 74% was
driven by a direct response media advertising campaign (excluding COGS, $2,189,287) related to our DualSaw brand. This
advertising spend generated revenue for the period and also created demand for our product in traditional retail channels
such as Menards and Costco, providing the Company its first entrance into retail distribution. This advertising expense
helped fuel further interest in our product in all channels of distribution, including international. Due to our ability to
sell-through at retail, we have since attracted new retailer interest, and equally as important, we have attracted additional
distribution partnerships around the world. Almost 50% of revenue for the three months ended 2012, can be attributed to our
new retail and international channel partners, as opposed to sales made via expensive direct response programming. The
reduction in revenue from one period to the next is directly attributable to our decision to spend less on direct response
programming for the DualSaw counter rotating circular saw campaign compared to the prior period. A decision based on the
length of time this television campaign had been on air and becoming a vehicle to drive retail demand and build
brand awareness as opposed to generating sales on television. Our 2012 plan to introduce 4 to 9 new products during the
current fiscal year is progressing as planned with two new products launched during Q1, SnoreRx and Drain Doctor. These
products began testing during the current quarter and, at this moment, it’s unclear whether either of these products
will make it to the next phase of distribution.
Cost of product sales
: Our
cost of product sales decreased by $268,028 or 13.7% to $1,692,395 for the three months ended March 31, 2012 from $1,960,423
for the three months ended March 31, 2011. HSE contributed $681,329 of consolidated cost of product sales during the three
months ended March 31, 2012. Our gross margin as a percent of product sales during the three months ended March 31, 2012
amounted to 22.3% compared to 52.8% during the three months ended March 31, 2011. During the three months ended March 31,
2012, the profit margin on our domestic operations amounted to 21.6% and the profit margins on our European operations
amounted to 23.3%. Margins on direct response programming campaigns, when initially launched, are typically much higher than
when selling a mature product into retail and distributor channels. Since the Company did not conduct a sizable direct
response programming campaign in the three months ended March 31, 2012, we experienced reduced gross margins in this period
compared to the prior period. Direct response programming commonly has gross margins of approximately 75% in order to cover
associated advertising expense. This margin is much higher than those seen
in retail and international distribution channels. Since the Company generated very little revenue from direct
response programming in Q1/2012, a sizable drop in gross margin compared to last year would be expected. However, the
Company doesn't have the advertising expense associated with a direct response programming campaign, so the overall
profitability of sales made in retail is greater. Since the Company sold most of its product in traditional retail and
international distribution markets during the three months ended 2012, it's difficult to compare gross margin from one period
to the next and our ongoing margins will likely be volatile until we establish more revenue driven through retail outlets
than we do through direct response programming.
Rental income
: Rental income of
commercial real estate that we own and occupy amounted to $59,399 for the three months ended March 31, 2012, a decrease of $3,828
or 6.1% when compared to $63,227 of rental income that we reported for the three months ended March 31, 2011. The decrease was
attributable to lower third-party occupancy as our operations expanded and we utilize more of the space for our own corporate use.
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:
Employment Costs
: Employment related
costs consist of salaries and payroll, employee insurance, and share-based payment. These costs increased by $234,106 or 34.5%
to $913,562 for the three months ended March 31, 2012 from $679,456 for the three months ended March 31, 2011. Non-cash, share-based
payment, included in our employment costs decreased by $27,310 or 33.0% to $53,402 for the three months ended March 31, 2012 from
$80,712 for the three months ended March 31, 2011. HSE’s employment costs contributed $154,652 of the increase in 2012. Our
employment costs otherwise increased due to our continued growing of the business. Non-cash share-based payment expense declined
due to a reduction in the number of employee stock options awarded.
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 $118,099 or 28.7% to $528,911 for the three months ended March 31, 2012
from $410,812 for the three months ended March 31, 2011. The main driver was an increase of $127,117 attributable to the
HSE operations during the three months ended March 31, 2012, which exceeds the overall increase in general and
administrative costs.
Accounting and professional expense
:
Accounting and consulting professional expenses increased by $7,076 or 1.9% to $381,668 for the three months ended March 31, 2012
from $374,592 for the three months ended March 31, 2011. These costs include fees relating to legal, professional consulting and
audit related expenses. These costs also include $129,320 of share-based payment expense during the three months ended March 31,
2011 for restricted stock issued to a consulting advisor with no similar charges during the three months ended March 31, 2012.
Accordingly, our accounting and professional expenses have otherwise substantially decreased due to bringing several of these categories
of services in-house and the conclusion of several legal matters during the past year.
Advertising and promotion
: Advertising
and promotion expense decreased by $1,833,655 or 83.8% for the three months ended March 31, 2012 to $355,632 from $2,189,287 for
the three months ended March 31, 2011. When we offer product for sale via direct response programming, 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 period; therefore we would expect a decrease in advertising expense. Advertising expenses as a percentage of sales decreased
from 52.7% for the three months ended March 31, 2011 to 16.3% for the three months ended March 31, 2012 as a result of our initiation
of the retail and international distribution channels. As a consumer products company, advertising and promotion expenses will
continue to be a material operating expense.
Depreciation and amortization
: Our
amortization of intangible assets and depreciation of property and equipment increased $13,971, or 26.2%, to $67,299 for the three
months ended March 31, 2012 compared to $53,328 during the three months ended March 31, 2011. The increase was a result of the
contribution of HSE, which incurred $9,428 in depreciation expense during the three months ended March 31, 2012, plus depreciation
on new asset purchases.
Interest expense
– Interest
expense includes amortization of deferred finance costs and interest on our mortgage loan and other notes payable. Interest expense
increased by $59,408 or 168.0% to $94,764 during the three months ended March 31, 2012 compared to $35,356 for the three months
ended March 31, 2011. Interest expense increased due to higher average balances resulting from the HSE acquisition and balances
associated with our purchase order, accounts receivable and media financing arrangements discussed below in Liquidity and Capital
Resources.
Interest and other income
–
Other income decreased by $65,723 or 93.3% to $4,704 during the three months ended March 31, 2012 from $70,427 the three months
ended March 31, 2011. The decrease is related to the collection of a legal settlement which ended in May 2011.
Loss before non-controlling interests
– We have reported loss before non-controlling interests of $1,792,580 during the three months ended March 31, 2012 compared
to a loss of $1,326,128 during the three months ended March 31, 2011. The decreases in many of our operating expenses, as discussed
above, did not fully offset the decrease in our revenues.
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. Non-controlling interests amounted to net credits of $69,427 during
the three months ended March 31, 2012, of which $61,027 in credits is associated with the income of HSE and $8,400 in credits is
associated with the minority interests in our studio real estate holding company.
Net loss
– We have reported
net loss of $1,723,153 during the three months ended March 31, 2012 compared to a net loss of $1,319,352 during the three months
ended March 31, 2011. The decrease is a result of the items discussed in the preceding discussion.
(Loss) income applicable to common stockholders
–
(Loss) income applicable to common stockholders represents our net (loss) income as adjusted for accrued dividends
and accretions on our preferred stock. Our loss applicable to common stockholders increased from a loss of $2,597,422 for the three
months ended March 31, 2011 to a loss of $6,844,643 for the three months ended March 31, 2012. The increase in the loss applicable
to common shareholders was due to significant accretion on our Series G Preferred Stock, which amounted to 4,661,490, plus related
accrued dividends of $460,000.
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 losses of $1,723,153 and $1,319,352 during the three months ended March 31, 2012 and 2011, respectively.
In addition, we have material redemption requirements associated with our Series G Preferred Stock during the year ended December
31, 2013, which is more fully discussed below. 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.
Our management began implementing strategic
plans designed and developed during the fourth quarter of 2010 with the intention of alleviating ongoing operating losses. The
principal focus of these plans was 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 being executed, will provide more consistent margins, 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-generation product lines and follow-on opportunities to those branded products. However, substantial investment
continues to be required to support this change. The Company received $6,500,000 of funding from the sale of preferred stock and
warrants during the year ended December 31, 2011. 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. While we have made significant tangible progress, 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 $1,113,842
as of March 31, 2012 compared to $1,890,806 at December 31, 2011. We have a working capital deficiency of $1,002,764 as of March
31, 2012 and we had working capital of $1,231,687 at March 31, 2011.
The following presents a condensed
overview of the changes in our cash flows for the three months ended March 31, 2012 and 2011:
Cash Flow from Operating Activities
– Our operating activities resulted in an increase in cash of $184,593 during the three months ended March 31, 2012 and
we used cash of $1,569,103 in our operating activities during the three months ended March 31, 2011.
We recorded net losses attributable to
Infusion Brands International, Inc. of $1,792,580 and $1,326,128 during the three months ended March 31, 2012 and 2011, respectively.
Our net losses are partially offset by net non-cash charges (credits) of $129,255 and $277,837 during the three months ended March
31, 2012 and 2011, respectively. Our analysis of the material components of changes in non-cash charges are as follows:
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·
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We recognized share-based payment expense
of $53,402 and $210,234 during the three months ended March 31, 2012 and 2011, respectively. During the three months ended March
31, 2011, share-based payments included $129,320 related to shares issued to compensate a consultant. There were no similar share-based
payments during the three months ended March 31, 2012.
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·
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We recognized depreciation and amortization
expense of $66,625 and $56,820 during the three months ended March 31, 2012 and 2011, respectively.
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Our cash from operating activities also
includes sources and (uses) of cash flow from changes in our operating assets and liabilities of $1,847,918 and ($520,812) for
three months ended March 31, 2012 and 2011, respectively. Significant sources of cash during the three months ended March 31, 2012
related principally to our liquidation of accounts receivable and inventories. These cash resources were used to pay accounts payable
and accrued liabilities, which is a use of cash.
Cash Flow from Investing Activities
– We used cash of $13,080 and $16,219 in our investing activities during the three months ended March 31, 2012 and 2011,
respectively, associated with fixed asset acquisition. We have no commitments for the purchase of property and equipment or other
long lived assets.
Cash Flow from Financing Activities
– We used cash of $943,994 in our financing activities during the three months ended March 31, 2012 and received $
976,929
cash in our financing activities during the three months ended March 31, 2011. Of the cash used during the three months ended March
31, 2012, $929,971 related to our accounts receivable factoring arrangement. During the same period in the prior year, we generated
$1,000,000 cash from an advance on the then impending sale of preferred stock and warrants. Uses of cash from financing activities
relate to the principal payments we made on our mortgage loan and other note balances.
Preferred Stock Redemption Requirements
– We have 11,500,000 shares of Series G Preferred Stock outstanding that are mandatorily redeemable for cash of $70,099,651
on June 30, 2013 as follows:
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·
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The stated value of $11,500,000 is payable
on June 30, 2013.
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An additional dividend equal to $1.00
per share of Series G Preferred was payable on June 30, 2011 if the special preferred distribution (discussed below) has not been
paid before that date (aggregate redemption value $11,500,000). The investor waived payment of this additional dividend on the
payment date, but it will continue to accrue dividends as provided in the Certificate of Designation at a rate of 8%. That is,
the original face value of the Series G Preferred accrues dividends at 8% from the issuance date and the unpaid additional dividend
amount accrues dividends at 8% from June 30, 2011.
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A special preferred distribution equal
to $4.096 per share of Series G Preferred is payable on June 30, 2013 or earlier at our option (aggregate redemption value of $47,099,651)
subject to offset by the additional dividend discussed above.
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In addition, during the three months ended
March 31, 2012 and 2011, dividends of $460,000 and $98,630, respectively were accrued and recorded as reductions in paid-in capital
in the absence of accumulated earnings. However, no dividends have been paid. These unpaid dividends which amount to $2,036,972,
plus the aforementioned redemption amount, will be payable on June 30, 2013.
Other Financing Activities
–
On January 28, 2011, we entered into an accounts receivable sales and financing arrangement that provides for the assignment and
sale of certain qualified accounts receivable to a financial institution. The facility provides for cash advances in amounts of
75% of qualified accounts receivable balances assigned up to an amount of $1,000,000. The financial institution receives an initial
discount of 1.75% of the net realizable value of the qualified receivable. Subsequently, the lender receives an additional 1.0%
discount for each 15 day period that the qualified receivable has not been collected. Further, the lender has a secured priority
interest in certain accounts receivable and inventories that are specific to the receivables. This arrangement does not qualify
for sales accounting under current accounting standards and is, therefore, subject to accounting as a financing arrangement wherein
we will carry the assigned receivables in our accounts until they are settled and advances that we receive from the lender will
be reflected as liabilities. The discounts will be classified as interest expense. There was $95,359 outstanding under this arrangement
as of March 31, 2012 compared to December 31, 2011 when the balance was $1,025,330.
On March 2, 2011, we entered into a media
funding arrangement with financial institution that provides for the financing of certain of our defined media and marketing material
expenditures. The borrowing facility does not have a stated maximum, although borrowings are limited to certain defined account
receivable levels. The facility has an initial term of one year with consecutive one year renewal terms unless terminated by either
party. It provides for fees to the lender equal to 2.5% of the qualified amounts paid plus deferred payment arrangements that provide
for interest at an approximate rate of 8.7% per annum. The creditor has a first creditor’s secured priority interest in the
accounts receivable that they finance. As of March 31, 2012, no balances were outstanding under this facility. We carry media funding
advances in the accounts payable and accrued liabilities classification in our balance sheet.
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.
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 fixed 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. 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.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting
Standards Board, or FASB, issued additional guidance for the presentation of comprehensive income. The new guidance changes the
way other comprehensive income (“OCI”) appears within the financial statements. Companies will be required to show
net income, OCI and total comprehensive income in one continuous statement or in two separate but consecutive statements. Components
of OCI may no longer be presented solely in the statement of changes in shareholders’ equity. Any reclassification between
OCI and net income will be presented on the face of the financial statements. The new guidance is effective for our company beginning
January 1, 2012. The adoption of the new guidance will not impact the measurement of net income or other comprehensive income.
In May 2011, FASB issued ASU 2011-04
,
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
This accounting update
generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International
Financial Reporting Standards. From a U.S. GAAP perspective, the amendments are largely clarifications, but some could have a significant
effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies
to public and nonpublic companies and is to be applied prospectively. For public companies and nonpublic companies, the amendments
are effective during interim and annual periods beginning after December 15, 2011. Early adoption by public companies is not permitted.
Nonpublic companies may apply the amendments early, but no earlier than for interim periods beginning after December 15, 2011.
Item 3. Quantitative and Qualitative Disclosures
About Market Risks.
The information required by this item does
not apply to smaller reporting companies.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the
Securities Exchange Act of 1934, we carried out an evaluation of the effectiveness, as of March 31 2012, of the design and operation
of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of March 31, 2012 to
ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer
in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s
management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure.
There were no changes in our internal control
over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Mediaxposure Limited (Cayman) v. Kevin
Harrington, Timothy Harrington, Infusion Brands International, Inc. (f/k/a OminReliant Holdings, Inc.), Vicis Capital Master Fund
and Vicis Capital LLC:
United States District Court, Middle District
of Florida, Case No. 11-CV-410
On February 28, 2011, Mediaxposure Limited
(Cayman) (“Mediaxposure”) as purported assignee of claims of ResponzeTV, Ltd (“RETV”) commenced an action
in the United States District Court, Middle District of Florida against certain individuals alleging a single case of action for
breach of fiduciary duty arising from an alleged misconduct of former board members. On October 7, 2011, Mediaxposure filed an
amended complaint naming the Company and alleging that the Company breached a purported fiduciary duty to RETV. The amended complaint
seeks unspecified money damages as against all defendants.
The Company moved to dismiss the complaint
on December 6, 2011. On March 27, 2012, the Company’s motion was argued before the Court, and we are awaiting the Court’s
decision. The Company disputes the allegations of the amended complaint and intends to vigorously defend the action.
Item 1A. Risk Factors.
There have been no material change in our
risk factors from those disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March
30, 2012.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds.
None.
Item 3. Defaults on Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other information
None.
Item 6. Exhibits
31.1
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Certification of Periodic Financial Reports by Robert John DeCecco III in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Periodic Financial Reports by Mary B. Mather in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification of Periodic Financial Reports by Robert John DeCecco III in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
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32.2
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Certification of Periodic Financial Reports by Mary B. Mather in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
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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.
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INFUSION BRANDS INTERNATIONAL, INC.
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Date: May 18, 2012
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By:
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/s/ Robert DeCecco III
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President and Chief Executive Officer (Principal Executive Officer)
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Date: May 18, 2012
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By:
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/s/ Mary B. Mather
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Chief Financial Officer (Principal Financial and Accounting Officer)
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Infusion Brands (CE) (USOTC:INBI)
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