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 September 30, 2009





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number 000-51599





OmniReliant
Holdings, 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 √ 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  ̈ 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 ̈Noþ





Applicable
only to issuers involved in bankruptcy proceedings during the preceding five
years:





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes o  
No o




Applicable
only to corporate issuers:





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





The
number of shares of the registrant’s Common Stock, $0.00001 par value per share,
outstanding as of November 20, 2009 is 159,108,787.





OMNIRELIANT
HOLDINGS, INC. AND SUBSIDIARIES


QUARTERLY
PERIOD ENDED


SEPTEMBER
30, 2009





Table
of Contents





Part
                          
                          Item
      and Description
                          
                          PagePart
      I
                          
                          Financial
      InformationForward-Looking
      Statements
                          
                          3Item
      1. Financial Statements
                          
                          4Item
      2. Management’s Discussion and Analysis of Financial
      Conditionand
      Results of Operations
                          
                          30Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
                          
                          43Item
      4T. Controls and Procedures
                          
                          44Part
      II
                          
                          Other
      InformationItem
      1. Legal Proceedings
                          
                          46Item
      1A. Risk Factors
                          
                          46Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                          
                          46Item
      3. Defaults Upon Senior Securities
                          
                          46Item
      4. Submission of Matters to a Vote of Security Holders
                          
                          46Item
      5. Other Information
                          
                          46Item
      6. Exhibit Index
                          
                          46Signatures
                          
                          
                          
                          48




2


PART
I - FINANCIAL INFORMATION





FORWARD-LOOKING
STATEMENTS





This Form
10-Q contains “forward-looking statements” relating to OmniReliant Holdings,
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.


3


ITEM
1 – FINANCIAL STATEMENTS





OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Balance Sheets





September
      30, 2009
                        
                        
                        June
      30, 2009(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        5,448,560
                        
                        
                        $
                        2,005,702Investments,
      available for sale
                        
                        
                        5,237,842
                        
                        
                        
                        1,729,448Accounts
      receivable, net of $487,763 and $187,763
                        
                        
                        3,002,299
                        
                        
                        
                        1,864,465Inventories
                        
                        
                        2,886,677
                        
                        
                        
                        1,294,250Prepaid
      expenses and other current assets
                        
                        
                        262,107
                        
                        
                        
                        632,200Total
      current assets
                        
                        
                        16,837,485
                        
                        
                        
                        7,526,065Intangible
      assets, net
                        
                        
                        20,888,700
                        
                        
                        
                        1,123,335Property
      and equipment, net
                        
                        
                        2,592,064
                        
                        
                        
                        2,579,548Investments
                        
                        
                        2,170,466
                        
                        
                        
                        2,215,309Investments,
      available-for-sale
                        
                        
                        —
                        
                        
                        
                        732,227Other
      assets
                        
                        
                        23,678
                        
                        
                        
                        909,714Total
      assets
                        
                        $
                        42,512,393
                        
                        
                        $
                        15,086,198Liabilities
      and Equity (Deficit)Current
      liabilities:Notes
      payable
                        
                        $
                        250,000
                        
                        
                        $
                        —Accounts
      payable and accrued expenses
                        
                        
                        1,388,033
                        
                        
                        
                        556,747Current
      maturities of long-term debt
                        
                        
                        33,778
                        
                        
                        
                        33,230Derivative
      liabilities
                        
                        
                        21,714,843
                        
                        
                        
                        6,481,839Total
      current liabilities
                        
                        
                        23,386,654
                        
                        
                        
                        7,071,816Long-term
      debt
                        
                        
                        1,939,509
                        
                        
                        
                        1,945,647Security
      deposits on leases
                        
                        
                        7,293
                        
                        
                        
                        11,734Total
      liabilities
                        
                        
                        25,333,456
                        
                        
                        
                        9,029,197Commitments
      and contingencies (Note 11)
                        
                        
                        —
                        
                        
                        
                        —Redeemable
      preferred stock
                        
                        
                        4,946,910
                        
                        
                        
                        45,969,634Equity
      (deficit):OmniReliant
      shareholders’ equity:Series
      E Preferred Stock, $0.00001 par, 13,000,000 shares
                          authorized,
      issued and outstanding
                        
                        
                        13,236,165
                        
                        
                        
                        —Common
      Stock, $0.00001 par, 400,000,000 shares
                          authorized;
      147,356,917 and 14,509,225 outstanding
                        
                        
                        1,473
                        
                        
                        
                        145Paid-in
      capital
                        
                        
                        36,311,482
                        
                        
                        
                        6,532,238Accumulated
      deficit
                        
                        
                        (37,663,848
                        )
                        
                        
                        (46,570,028
                        )Other
      comprehensive items
                        
                        
                        11,126
                        
                        
                        
                        (72,102
                        )Total
      OmniReliant shareholders’ equity (deficit)
                        
                        
                        11,896,398
                        
                        
                        
                        (40,109,747
                        )Non-controlling
      interests
                        
                        
                        335,629
                        
                        
                        
                        197,114Total
      equity (deficit)
                        
                        
                        12,232,027
                        
                        
                        
                        (39,912,633
                        )Total
      liabilities and equity (deficit)
                        
                        $
                        42,512,393
                        
                        
                        $
                        15,086,198





See
accompanying notes.


4


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations





Three
      Months Ended September 30,2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)Product
      sales
                          
                          $
                          7,627,821
                          
                          
                          $
                          103,634Cost
      of product sales (excluding depreciation expensereflected
      in other operating expenses)
                          
                          
                          4,477,325
                          
                          
                          
                          44,036Gross
      profit
                          
                          
                          3,150,496
                          
                          
                          
                          59,598Real
      estate income
                          
                          
                          86,979
                          
                          
                          
                          61,436Other
      operating expenses:Advertising
      and promotional
                          
                          
                          2,997,923
                          
                          
                          
                          30,396Employment
      costs
                          
                          
                          800,416
                          
                          
                          
                          32,295Other
      general and administrative
                          
                          
                          800,409
                          
                          
                          
                          88,280Accounting
      and professional
                          
                          
                          555,036
                          
                          
                          
                          416,329Depreciation
      and amortization
                          
                          
                          111,288
                          
                          
                          
                          115,3075,265,072
                          
                          
                          
                          682,607Loss
      from operations
                          
                          
                          (2,027,597
                          )
                          
                          
                          (561,573
                          )Other
      income (expense):Extinguishment
                          
                          
                          (22,328,516
                          )
                          
                          
                          —Derivative
      income
                          
                          
                          9,948,085
                          
                          
                          
                          2,472,501Inducement
      expense
                          
                          
                          (1,473,855
                          )
                          
                          
                          —Interest
      income
                          
                          
                          248,047
                          
                          
                          
                          20,947Equity
      in (losses) of investees
                          
                          
                          (104,672
                          )
                          
                          
                          —Interest
      expense
                          
                          
                          (54,216
                          )
                          
                          
                          (56,460
                          )Total
      other income (expense)
                          
                          
                          (13,765,127
                          )
                          
                          
                          2,436,988Net
      (loss) income
                          
                          
                          (15,792,724
                          )
                          
                          
                          1,875,415Net
      income (loss) attributable to non-controlling interests
                          
                          
                          24,935
                          
                          
                          
                          19,990Net
      (loss) income attributable to OmniReliant
                          
                          $
                          (15,767,789
                          )
                          
                          $
                          1,895,405





Continued
on next page.


5


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations (continued)





Three
      Months Ended September 30,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Unaudited)Reconciliation
      of net (loss) income attributable to OmniReliant to
      loss applicable to OmniReliant common
      shareholders:Net
      (loss) income attributable to OmniReliant
                    
                    $
                    (15,767,789
                    )
                    
                    $
                    1,895,405Deemed
      dividend to preferred stockholders
                    
                    
                    (66,948,653
                    )
                    
                    
                    —Loss
      applicable to OmniReliant common shareholders
                    
                    $
                    (82,716,442
                    )
                    
                    $
                    1,895,405Loss
      per common share:Basic
                    
                    $
                    (1.03
                    )
                    
                    $
                    0.13Diluted
                    
                    $
                    (1.03
                    )
                    
                    $
                    0.02Weighted
      average common shares—basic
                    
                    
                    80,434,068
                    
                    
                    
                    14,485,782Weighted
      average common shares—diluted
                    
                    
                    80,434,068
                    
                    
                    
                    77,277,235





See
accompanying notes.


6





OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows





Three
      Months Ended September 30,2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)Cash
      flows from operating activities:Net
      (loss) income
                          
                          $
                          (15,767,789
                          )
                          
                          $
                          1,895,405Adjustments
      to reconcile net (loss) to netcash
      from operating activities:Extinguishment
                          
                          
                          22,328,516
                          
                          
                          
                          —Derivative
      income
                          
                          
                          (9,948,085
                          )
                          
                          
                          (2,472,501
                          )Inducement
      expense
                          
                          
                          1,473,855
                          
                          
                          
                          —Bad
      debts expense
                          
                          
                          300,762
                          
                          
                          
                          —Amortization
      of intangible assets
                          
                          
                          105,218
                          
                          
                          
                          74,887Equity
      in losses of investees
                          
                          
                          104,672
                          
                          
                          
                          —Non-controlling
      interests
                          
                          
                          (24,935
                          )
                          
                          
                          (19,990
                          )Depreciation
      expense
                          
                          
                          6,070
                          
                          
                          
                          40,420Amortization
      of deferred finance costs
                          
                          
                          4,871
                          
                          
                          
                          56,460Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          (1,227,549
                          )
                          
                          
                          25,930Inventories
                          
                          
                          (345,740
                          )
                          
                          
                          (23,768
                          )Prepaid
      expenses and other assets
                          
                          
                          413,638
                          
                          
                          
                          (65,877
                          )Accounts
      payable and accrued expenses
                          
                          
                          353,158
                          
                          
                          
                          210,172Net
      cash from operating activities
                          
                          
                          (2,223,338
                          )
                          
                          
                          (278,862
                          )Cash
      flows from investing activities:Purchases
      of investments
                          
                          
                          (5,651,887
                          )
                          
                          
                          (375,000
                          )Acquisition
      of Designer Liquidators
                          
                          
                          612,702
                          
                          
                          
                          —Acquisition
      of Abazias
                          
                          
                          127,530
                          
                          
                          
                          —Purchases
      of property and equipment
                          
                          
                          (16,559
                          )
                          
                          
                          (2,750,984
                          )Loan
      Receivable from ResponzeTV
                          
                          
                          —
                          
                          
                          
                          (104,966
                          )Payments
      for licenses and patents
                          
                          
                          —
                          
                          
                          
                          (100,000
                          )Security
      deposits and other activities
                          
                          
                          —
                          
                          
                          
                          (11,285
                          )Net
      cash flow from investing activities
                          
                          
                          (4,928,214
                          )
                          
                          
                          (3,342,235
                          )Cash
      flows from financing activities:Proceeds
      from exercise of warrants
                          
                          
                          5,600,000
                          
                          
                          
                          —Proceeds
      from exchange of warrants
                          
                          
                          5,000,000
                          
                          
                          
                          —Principal
      payments on long-term debt
                          
                          
                          (5,590
                          )
                          
                          
                          —Non-controlling
      interests
                          
                          
                          —
                          
                          
                          
                          320,000Security
      deposits on leases
                          
                          
                          —
                          
                          
                          
                          11,734Net
      cash flow from financing activities
                          
                          
                          10,594,410
                          
                          
                          
                          331,734Net
      change in cash and cash equivalents
                          
                          
                          3,442,858
                          
                          
                          
                          (3,289,363
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          2,005,702
                          
                          
                          
                          4,435,814Cash
      and cash equivalents at end of period
                          
                          $
                          5,448,560
                          
                          
                          $
                          1,146,451





Continued
on the next page.


7


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows





Supplemental
Cash Flow Information





Three
      Months Ended September 30,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Cash
      paid for interest
                
                $
                32,418
                
                
                $
                —Cash
      paid for income taxes
                
                $
                —
                
                
                $
                —Non-cash
      investing and financing activities:Issuance
      of 100,000 shares of common stock for partialconsideration
      transferred in acquiring Designer Liquidators
                
                $
                101,000
                
                
                $
                —Issuance
      of 13,000,000 shares of Series E Preferred Stockfor
      consideration transferred in acquiring AbaziasClassified
      as preferred stock
                
                $
                13,236,165
                
                
                $
                —Classified
      in paid-in capital, representing beneficial conversion
                
                
                2,605,159Total
      fair value of Series E Preferred Stock
                
                $
                15,841,323
                
                
                $
                —Common
      stock issued for loan
                
                $
                —
                
                
                $
                43,333





See
accompanying notes


8





OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Stockholders’ Equity (Deficiency)


Three
Months Ended September 30, 2009





Series
      E
                  
                  
                  Common
      Stock
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  OmniReliant
                  
                  
                  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 forderivatives
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (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
                  
                  
                  
                  324,417Acquisition:
      Abazias
                  
                  
                  13,236,165
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,886,188
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  18,122,353
                  
                  
                  
                  —
                  
                  
                  
                  18,122,353Warrant
      exercises
                  
                  
                  —
                  
                  
                  
                  27,606,276
                  
                  
                  
                  276
                  
                  
                  
                  12,811,450
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  12,811,4726
                  
                  
                  
                  —
                  
                  
                  
                  12,811,726Unrealized
      gains (losses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  83,228
                  
                  
                  
                  
                  
                  
                  
                  83,228
                  
                  
                  
                  
                  
                  
                  
                  83,228Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (15,767,789
                  )
                  
                  
                  (15,767,789
                  )
                  
                  
                  (24,935
                  )
                  
                  
                  (15,792,724
                  )Balances,
      September 30, 2009
                  
                  $
                  13,236,165
                  
                  
                  
                  147,356,917
                  
                  
                  $
                  1,473
                  
                  
                  $
                  36,311,482
                  
                  
                  $
                  11,126
                  
                  
                  $
                  (37,663,848
                  )
                  
                  $
                  11,896,398
                  
                  
                  $
                  335,629
                  
                  
                  $
                  12,232,027





See
accompanying notes.


9


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 1 –
Basis of presentation:





The
accompanying unaudited condensed consolidated financial statements as of and for
the three months ended September 30, 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-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 September 30, 2009 are not necessarily indicative of the results
for the year ending June 30, 2010.





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 June 30, 2009, filed with the Securities and Exchange
Commission.





Commencing
with this quarterly report on Form 10-Q, our references to accounting principles
generally accepted in the Unites States of America are to those standards
promulgated and described in the Accounting Standards Codification (“ASC”) of
the Financial Accounting Standards Board.





Note 2 –
Going concern:





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States contemplates that operations will be
sustained for a reasonable period. However, we have incurred operating losses of
$(2,027,597) and $(561,573) during the three months ended September 30, 2009 and
2008, respectively. In addition, during these periods, we used cash of
$(2,223,338) and $(278,862), respectively, in our operating activities. Since
our inception, we have been substantially dependent upon funds raised through
the sale of preferred and common stock and warrants. These conditions raise
substantial doubt about our ability to continue as a going concern for a
reasonable period.





Our
ability to continue as a going concern for a reasonable period is dependent upon
our ability to raise sufficient capital to implement our business plan and to
generate profits sufficient to become financially viable. During the three
months ended September 30, 2009, we raised $10,600,000 from the sale and
exercise of warrants. During the same period, we also made cash investments of
$5,651,887 in ventures that we believe will provide a foundation for the
development of our Retail Products Segment. Finally, in July and August of 2009,
we acquired two operating and revenue-producing businesses more fully discussed
in Note 3. These acquisitions resulted in the acquisition of cash aggregating
$740,232. We cannot give any assurances regarding the success of our current
operations or those of our investees. 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.


10


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 3 –
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 is engaged in the manufacture and wholesale
distribution of brand-name apparel and the retail sale of other accessories. We
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 is
an online retailer of high quality loose diamonds and fine jewelry settings for
diamonds. We acquired Abazias for the purpose of building brand recognition and
increasing retail market penetration.





We have
accounted for our acquisitions applying the Acquisition Method in Accounting
Standards Codification (“ASC”) 805, Business Combinations
(“ASC 805”). 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 is recorded as goodwill.





The
following table summarizes the results of the allocation:





Abazias
                
                
                Designer
                
                
                TotalCurrent
      assets, including cash of $127,530 and $762,702from
      Abazias and Designer, respectively
                
                $
                523,307
                
                
                $
                1,824,660
                
                
                $
                2,347,966Property
      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
                
                
                
                1,873,318
                
                
                
                6,337,674Consideration
      transferred (excluding direct expenses):Cash
      consideration
                
                
                —
                
                
                
                150,000
                
                
                
                150,000Fair
      value of OmniReliant Securities
                
                
                15,841,323
                
                
                
                101,000
                
                
                
                15,942,323Investments
      (see Note 4)
                
                
                1,042,789
                
                
                
                1,857,383
                
                
                
                2,900,172Non-controlling
      interest in RPS Traders 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
                
                
                $
                398,515
                
                
                $
                12,818,271





Valuation
techniques are more fully discussed in Note 5 Intangible Assets. Certain of the
above intangible amounts arising from these valuation techniques are preliminary
and we anticipate that the final valuations will be completed prior to the end
of our quarterly period ended December 31, 2009.


11


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 3 –
Business acquisitions (continued):





The
principal factor giving rise to the amount of goodwill is the expected synergies
that will result from the combined companies’ efforts to jointly promote
existing and new retail product offerings. Goodwill is required to be evaluated
annually for impairment under ASC 350, Intangible Assets
(“ASC 350”). The evaluation involves a two-step process where, first, we will
compare the carrying value of our assets and liabilities to our consolidated
enterprise value. If, and only if, the carrying value exceeds the enterprise
value, we will calculate the implied value of goodwill by considering our assets
and liabilities at fair value, in a manner similar to the purchase allocation
above.





If the
carrying value of goodwill on the impairment measurement date exceeds the
implied value, an impairment charge would be made to operating expenses. We will
perform the impairment review during the fourth fiscal quarter of each fiscal
year ending June 30.





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 prime
lending rate and is due on demand.





Our
acquisition of Designer included a 50% equity interest in RPS Traders 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 9.





Abazias’
operations are consolidated with our operations commencing with the closest
monthly closing date near the date of acquisition, or September 1, 2009.
Designer operations are consolidated with our operations commencing August 1,
2009. The following table summarizes the pro forma affects on our unaudited
condensed consolidated statements of operations, as if the acquisition had
occurred on July 1, 2009 and 2008, respectively:





Three
      months ended September 30,2009
                
                
                2008Sales
                
                $
                8,730,047
                
                
                $
                1,677,060Net
      (loss) income attributable to OmniReliant
                
                
                (16,214,654
                )
                
                
                1,598,101(Loss)
      income per common share—basic
                
                
                (1.03
                )
                
                
                0.11(Loss)
      income per common share—diluted
                
                
                (1.03
                )
                
                
                0.12





Pro forma
financial information is not necessarily indicative of the results that we would
have achieved had the acquisitions occurred on the dates referred to
above.


12


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 4 –
Investments:





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


September
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2009Available-for-sale
      investments:Beyond
      Commerce, 10%, face value $4,920,000 notesreceivable,
      plus $819,988 in accrued interest due June 26, 2010through
      September 4, 2010 (1)
                  
                  $
                  5,130,355
                  
                  
                  $
                  976,083Valcom,
      10% face value $100,000 convertible note receivable,
      plusaccrued
      interest of $7,315, due January 6, 2010
                  
                  
                  107,487
                  
                  
                  
                  103,365Abazias,
      Inc., face value $700,000, 10.0% convertible notereceivable,
      due December 31, 2009 (2)
                  
                  
                  —
                  
                  
                  
                  732,227Held-to-maturity
      investments:RPS
      Trading, LLC, variable rate (currently 4.75%), facevalue
      $650,000 notes receivable, due in Novemberand
      December 2009 (2)
                  
                  
                  —
                  
                  
                  
                  650,0005,237,842
                  
                  
                  
                  2,461,675Current
      portion of investments
                  
                  
                  —
                  
                  
                  
                  (1,729,448
                  )Total
      non-current investments
                  
                  $
                  5,237,842
                  
                  
                  $
                  732,227





(1)
            See
      Note 13.


(2)
            As
      discussed in Note 3, on July 31, 2009 and August 24, 2009, we acquired the
      common stock of Abazias and the assets of Designer Liquidator (parent to
      RPS Trading LLC) in transactions accounted for by applying the acquisition
      method of accounting. As a result, our pre-acquisition investments, which
      amounted to $1,042,789 and $1,857,383, respectively, were included in the
      consideration transferred.





Non-marketable
equity method and other investments accounted for at cost or method of
accounting consisted of the following as of September 30, 2009 and June 30,
2009:





Voting
                  Ownership
                
                
                Initial
                  Investment
                
                
                Equity
      in
                  Earnings
                
                
                September
      30, 2009
                
                
                June
      30,
                  2009Equity
      method investees:Cellular
      Blowout
                
                
                50.0
                %
                
                $
                1,030,000
                
                
                $
                21,358
                
                
                $
                1,051,358
                
                
                $
                1,030,000Wineharvest
                
                
                30.0
                %
                
                
                278,050
                
                
                
                (12,632
                )
                
                
                247,611
                
                
                
                260,243A
      Perfect Pear
                
                
                49.5
                %
                
                
                375,000
                
                
                
                (36,607
                )
                
                
                267,310
                
                
                
                244,088Webcarnation
                
                
                40.0
                %
                
                
                250,000
                
                
                
                (47,246
                )
                
                
                183,732
                
                
                
                230,978For
      Your Imagination
                
                
                20.0
                %
                
                
                200,000
                
                
                
                (29,545
                )
                
                
                170,455
                
                
                
                200,0002,133,000
                
                
                
                (104,672
                )
                
                
                1,920,466
                
                
                
                1,965,309Cost
      method investees:Nested
      Media
                
                
                —
                
                
                
                250,000
                
                
                
                —
                
                
                
                250,000
                
                
                
                250,000Total
      non-marketable andother
      equity investments
                
                
                
                
                
                $
                2,383,050
                
                
                $
                (104,672
                )
                
                $
                2,170,466
                
                
                $
                2,215,309


We
recorded interest income of $247,862 during the three months ended September 30,
2009 related to available for sale debt-type investments. Changes in fair value
of available for sale investments are recorded in other comprehensive income.
During the three months ended September 30, 2009 the fair value of our available
for sale investments increased $83,228.


13


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 5 –
Intangible assets:





Intangible
assets consisted of the following on September 30, 2009 and June 30,
2009:





September
      30,
                
                
                June
      30,EUL
      (Years)
                
                
                2009
                
                
                2009Customer
      lists and related
                
                
                3-7
                
                
                $
                3,030,283
                
                
                $
                —Dealer
      network
                
                
                7
                
                
                
                2,133,679
                
                
                
                —Patent
      costs
                
                
                5
                
                
                
                1,169,412
                
                
                
                1,169,412Employment
      contracts
                
                
                2
                
                
                
                210,928
                
                
                
                —Software
      and processes
                
                
                2
                
                
                
                35,000
                
                
                
                —Other
                
                
                3
                
                
                
                79,899
                
                
                
                79,4026,659,201
                
                
                
                1,248,814Less
      accumulated amortization
                
                
                
                
                
                
                (231,194
                )
                
                
                (125,479
                )Total
                
                
                
                
                
                
                6,428,007
                
                
                $
                1,123,335Trademarks
      and trade dress
                
                
                —
                
                
                
                1,642,420
                
                
                
                —Goodwill
                
                
                
                
                
                
                12,818,273$
                20,888,700
                
                
                $
                1,123,335





Amortization
      expense:Three
      months ended September 30, 2009
                  
                  $
                  105,218Three
      months ended September 30, 2008
                  
                  $
                  74,887Estimated
      Amortization Expense:Nine
      months ended June 30, 2010
                  
                  $
                  751,757Year
      ending June 30:2011
                  
                  
                  1,041,0092012
                  
                  
                  938,5402013
                  
                  
                  770,0502014
                  
                  
                  756,5952015
                  
                  
                  1,180,916Thereafter
                  
                  
                  989,140$
                  6,428,007





Customer
lists and dealer network were fair valued in connection with our acquisitions of
Abazias and Designer. We valued these assets using the income approach wherein
future cash flows over the periods of benefit were discounted to present value
using industry-specific, risk-adjusted rates. Rates for Abazias ranged from
27.18% to 34.37%. Rates for Designer amounted to 29.86%. Trademarks were fair
valued using the relief-from-royalty method wherein cash flows from hypothetical
royalty returns directly associated with the trademark were discounted to
present value. The royalty rate of 7.68% was developed based upon empirical
market data for similar licensing arrangements. Other intangible assets acquired
were fair valued based upon practical approaches using, to the extent possible,
market data.





The
methods for valuing intangible assets required us to develop highly subjective
cash flow projections. Such projections were made by competent employees, under
the direct supervision of our management. Discount rates and royalty rates were
derived from reliable market sources based upon the best available comparable
data. Notwithstanding, valuation is imprecise. Ongoing evaluation of prospective
and market information may result in the recognition of impairment
charges.


14


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments:





The
following table summarizes the components of derivative liabilities as of
September 30, 2009 and June 30, 2009:





Financing—Financial
      Instrument
              
              September
      30,
                2009
              
              
              June
      30,
                2009New
      Vicis Warrant
              
              $
              19,257,000
              
              
              $
              —Series
      A Preferred Financing—Investor warrants
              
              
              —
              
              
              
              716,700Series
      B Preferred Financing—Investor warrants
              
              
              198,288
              
              
              
              75,312Series
      C Preferred Financing—Investor warrants
              
              
              697,965
              
              
              
              —Series
      C Preferred Financing—Put derivative
              
              
              14,663
              
              
              
              199,993Series
      D Preferred Financing—Investor warrants
              
              
              —
              
              
              
              1,752,800Series
      D Preferred Financing—Placement agent warrants
              
              
              —
              
              
              
              166,950Series
      D Preferred Financing—Put derivative
              
              
              —
              
              
              
              253,417Series
      F Preferred Financing—Investor warrants
              
              
              —
              
              
              
              2,946,667Series
      F Preferred Financing—Placement agent warrants
              
              
              1,164,166
              
              
              
              370,000Warrant
      Financing Transaction—Placement agent warrants
              
              
              382,761Derivative
      liabilities
              
              $
              21,714,843
              
              
              $
              6,481,839





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





Financing—Financial
      Instrument
              
              September
      30,
                2009
              
              
              June
      30,
                2009New
      Vicis Warrant
              
              
              70,000,000
              
              
              
              —Series
      A Preferred Financing—Investor warrants
              
              
              —
              
              
              
              6,000,000Series
      B Preferred Financing—Investor warrants
              
              
              960,000
              
              
              
              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
              
              
              
              4,166,666Warrant
      Financing Transaction—Placement agent warrants
              
              
              1,380,314
              
              
              
              —79,238,208
              
              
              
              74,559,999





As
discussed in Note 7, 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 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 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.


15


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





Also, as
discussed in Note 7, 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 derivative income (expense) arising
from fair value adjustments during the three months ended September 30,
2009:





Financing—Financial
      Instrument
              
              Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              TotalNew
      Vicis Warrant
              
              $
              —
              
              
              $
              11,712,753
              
              
              $
              11,712,753Series
      A Preferred Financing
              
              
              —
              
              
              
              (833
              )
              
              
              (833
              )Series
      B Preferred Financing
              
              
              —
              
              
              
              (139,562
              )
              
              
              (139,562
              )Series
      C Preferred Financing
              
              
              (4,923
              )
              
              
              (757,486
              )
              
              
              (762,409
              )Series
      D Preferred Financing
              
              
              (11,032
              )
              
              
              (56,666
              )
              
              
              (67,698
              )Series
      F Preferred Financing—Warrants
              
              
              —
              
              
              
              (794,166
              )
              
              
              (794,166
              )Derivative
      income (expense)
              
              $
              (15,955
              )
              
              $
              9,964,040
              
              
              $
              9,948,085





The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the three months ended September 30,
2008:





Financing—Financial
      Instrument
              
              Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              TotalNew
      Vicis Warrant
              
              $
              —
              
              
              $
              —
              
              
              $
              —Series
      A Preferred Financing
              
              
              —
              
              
              
              525,300
              
              
              
              525,300Series
      B Preferred Financing
              
              
              —
              
              
              
              25,440
              
              
              
              25,440Series
      C Preferred Financing
              
              
              10,668
              
              
              
              —
              
              
              
              10,668Series
      D Preferred Financing
              
              
              11,363
              
              
              
              1,899,730
              
              
              
              1,911,093Series
      F Preferred Financing—Warrants
              
              
              —Derivative
      income (expense)
              
              $
              22,031
              
              
              $
              2,450,470
              
              
              $
              2,472,501





We apply
the provisions of ASC 820 Fair Value Measurement in valuing our derivative
financial instruments. Assets and liabilities measured at fair value are
classified in their entirety based on the lowest level of input that is
significant to their fair value measurement. Our derivative financial
instruments which are required to be measured at fair value on a recurring are
all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.





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 option valuation technique because it embodies all of the
requisite assumptions (including trading volatility, estimated terms and risk
free rates) necessary to fair value these instruments.


16





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





For
forward contracts that contingently require net-cash settlement as the principal
means of settlement, we project and discount future cash flows applying
probability-weightage to multiple possible outcomes.





The
following 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 three months ended September 30, 2009
and 2008:





2009
                
                
                2008Balances
      at June 30
                
                $
                6,481,839
                
                
                
                6,361,100Change
      in accounting, described above
                
                
                4,045,146
                
                
                
                —Balances
      at July 1
                
                
                10,526,985
                
                
                
                6,361,100Issuances
      (Note 7):Exchange
      transaction
                
                
                37,090,385
                
                
                
                —Warrant
      financing transaction
                
                
                382,761
                
                
                
                —Total
                
                
                37,473,146
                
                
                
                —Conversions
      and cancellations (Note 7):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 7)
                
                
                1,473,855
                
                
                
                —Other
      assumption changes (1)
                
                
                (11,384,820
                )
                
                
                (2,472,501
                )Total
                
                
                (8,474,230
                )
                
                
                (2,472,501
                )Balances
      at September 30
                
                $
                21,714,843
                
                
                
                3,888,599





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





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.


17


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





The
warrants were valued using Black-Scholes-Merton (“BSM”). Our trading market
price on September 30, 2009 was $0.99. Significant assumptions underlying the
BSM calculations are as follows as of September 30, 2009:





Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateNew
      Vicis Warrant
                
                
                70,000,000
                
                
                $
                0.2029
                
                
                
                9.81
                
                
                
                65.60
                %
                
                
                3.31
                %Series
      B Preferred Financing:B-1
      Investor Warrants
                
                
                480,000
                
                
                $
                0.25
                
                
                
                0.65
                
                
                
                156.56
                %
                
                
                0.18
                %B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.25
                
                
                
                2.65
                
                
                
                114.42
                %
                
                
                1.45
                %Series
      C Preferred Financing:C-1
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.25
                
                
                
                3.05
                
                
                
                106.35
                %
                
                
                1.45
                %C-2
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.25
                
                
                
                8.05
                
                
                
                68.87
                %
                
                
                2.93
                %Series
      F Preferred Financing:BD-12
      Placement agent warrants
                
                
                833,333
                
                
                $
                0.25
                
                
                
                9.37
                
                
                
                66.24
                %
                
                
                3.31
                %BD-13
      Placement agent warrants
                
                
                3,333,333
                
                
                $
                0.25
                
                
                
                9.37
                
                
                
                65.24
                %
                
                
                3.31
                %Warrant
      Financing Transaction—Placement agent warrants
                
                
                1,380,314
                
                
                $
                0.2029
                
                
                
                10.00
                
                
                
                65.61
                %
                
                
                3.31
                %





The
warrants were valued using BSM. Our trading market price on September 30, 2008
was $1.18. Significant assumptions underlying the BSM calculations are as
follows as of September 30, 2008:





Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateSeries
      A Preferred Financing:A-1
      Investor Warrants
                
                
                3,000,000
                
                
                $
                0.50
                
                
                
                3.14
                
                
                
                40.32
                %
                
                
                2.28
                %A-2
      Investor Warrants
                
                
                3,000,000
                
                
                $
                0.50
                
                
                
                8.14
                
                
                
                45.31
                %
                
                
                3.38
                %Series
      B Preferred Financing:B-1
      Investor Warrants
                
                
                480,000
                
                
                $
                0.50
                
                
                
                1.65
                
                
                
                43.21
                %
                
                
                2.00
                %B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.50
                
                
                
                3.65
                
                
                
                39.78
                %
                
                
                2.28
                %Series
      D Preferred Financing:D-1
      Investor Warrants
                
                
                28,000,000
                
                
                $
                0.75
                
                
                
                6.58
                
                
                
                42.90
                %
                
                
                3.38
                %BD-10
      Placement agent warrants
                
                
                700,000
                
                
                $
                0.50
                
                
                
                4.58
                
                
                
                41.96
                %
                
                
                2.98
                %BD-11
      Placement agent warrants
                
                
                1,400,000
                
                
                $
                0.75
                
                
                
                4.58
                
                
                
                41.96
                %
                
                
                2.98
                %





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, we use a
weighted average of our history for two years of trading and 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 put
derivatives, which were bifurcated from our Series C and Series D Preferred
Stock, are estimated based upon a multiple, probability-weighted outcomes, cash
flow model that is present valued using risk-adjusted 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 10.40% to 13.56%
for periods from one to five years, respectively.





18


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 7 –
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 OmniReliant 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 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. 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 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, OmniReliant is precluded
from changing the designations of the Series E Preferred Stock without the
approval of at least 80% of the holders.


19


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 7 –
Equity (deficit) (continued):





The fair
value of the Series E Preferred Stock issued as consideration for the Abazias
transaction amounted to $15,841,323. Fair value was determined based upon the
common stock equivalent value, plus the fair value of enhancements, such as the
anti-dilution protection. Upon issuance, the Series E Preferred Stock embodied a
beneficial conversion feature, which is the amount by with the trading market
price exceeds the effective conversion price applied to the total number of
indexed common shares. The beneficial conversion feature which amounted to
$2,605,159 was recorded as a component of paid-in capital. The balance of
$13,236,165 is recorded in Series E Preferred Stock within equity because the
instrument met all of the conditions for equity classification.





Exchange
and conversion transactions:





On July
20, 2009, we entered into a securities purchase agreement (the “Purchase
Agreement”) with Vicis Capital Master Fund (“Vicis”), a sub-trust of the Vicis
Capital Series Master Trust, a unit trust organized under the laws of the Cayman
Islands, 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.





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.


20


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 7 –
Equity (deficit) (continued):





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.





The
following table summarizes the effects on our capital structure (reflected as
common and equivalent common shares) of the Exchange and Conversion Transactions
if these transactions had occurred on June 30, 2009:





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
      E
                
                
                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.


21


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 7 –
Equity (deficit) (continued):





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
                  
                  
                  25,377,632Extinguishment
      loss
                  
                  $
                  1,473,855





Stock
Options and Warrants:





The
following table summarizes the activity related to warrants and stock options
for the three months ended September 30, 2009:





Weighted
      AverageExercise
      Price
                
                
                Exercise
      PricePer
      Share
                
                
                Per
      ShareWarrants
                
                
                Options
                
                
                Warrants
                
                
                Options
                
                
                Warrants
                
                
                OptionsJuly
      1, 2009
                
                
                106,464,170
                
                
                
                2,145,000
                
                
                
                0.50-3.75
                
                
                
                0.50-1.00
                
                
                
                0.92
                
                
                
                0.57Granted
                
                
                98,986,590
                
                
                
                —
                
                
                
                0.25
                
                
                
                —
                
                
                
                0.25
                
                
                
                —Exercised
                
                
                (27,606,276
                )
                
                
                —
                
                
                
                0.20
                
                
                
                —
                
                
                
                0.20
                
                
                
                —Cancelled
      or expired
                
                
                (97,606,276
                )
                
                
                —
                
                
                
                0.50-3.75
                
                
                
                —
                
                
                
                0.92
                
                
                
                —September
      30, 2009
                
                
                80,238,208
                
                
                
                2,145,000
                
                
                
                0.20-1.00
                
                
                
                0.50-1.00
                
                
                
                0.20
                
                
                
                0.57Exercisable
      at September 30, 2009
                
                
                80,238,208
                
                
                
                915,000





The
warrants expire at various dates ranging from April 2010 through October
2017.


22


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 7 –
Equity (deficit) (continued):





(Loss)
income per common share:





The
following table reflects the components of our calculation of (loss) income per
common share for the three months ended September 30, 2009 and
2008:





2009
                  
                  
                  2008Net
      (loss) income
                  
                  $
                  (15,767,789
                  )
                  
                  $
                  1,895,405Deemed
      dividend on preferred stock
                  
                  
                  (66,948,653
                  )
                  
                  
                  —Numerator
      for basic
                  
                  $
                  (82,716,442
                  )
                  
                  $
                  1,895,405Denominator:Weighted
      averages shares
                  
                  
                  80,434,068
                  
                  
                  
                  14,485,782Potentially
      dilutive equity-linked contracts:Warrants
                  
                  
                  —
                  
                  
                  
                  28,100,613Stock
      Options
                  
                  
                  —
                  
                  
                  
                  71,713Convertible
      preferred stock
                  
                  
                  —
                  
                  
                  
                  34,619,12780,434,068
                  
                  
                  
                  77,277,235(Loss)
      income per common share:Basic
                  
                  $
                  (1.03
                  )
                  
                  $
                  0.13Diluted
                  
                  $
                  (1.03
                  )
                  
                  $
                  0.02





The
effects of warrants, stock options and convertible preferred stock are excluded
from the denominator because their effect is anti-dilutive.





Note 8 –
Redeemable preferred stock:





Redeemable
preferred stock consists of the following as of September 30, 2009 and June 30,
2009:





September
      30,
                    2009
                  
                  
                  June
      30,
                    2009Series
      C Convertible Preferred Stock, 1,024,210 and 10,620,000
                    shares
      issued and outstanding at September 30, 2009 (liquidation
                    value
      $1,024,210) and June 30, 2009 (liquidation value
                    $10,620,000),
      respectively
                  
                  $
                  4,946,910
                  
                  
                  $
                  28,969,634Series
      D Convertible Preferred Stock, -0- and 7,000,000 shares
                    issued
      and outstanding at September 30, 2009 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 September 30, 2009 and June 30, 2009
                    (liquidation
      value $10,000,000), respectively
                  
                  
                  —
                  
                  
                  
                  10,000,000$
                  4,946,910
                  
                  
                  $
                  45,969,634


23


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 8 –
Redeemable preferred stock (continued):





See Note
7 for information on the conversion of redeemable preferred stock. See Note 7
for information on our Series E Convertible Preferred Stock.





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
                
                
                $
                0.25





Conversion price
adjustments: The conversion prices of our outstanding 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.





Redemption features:
The Series C Preferred are redeemable for cash in an amount representing the
stated value. The following events give rise to a redemption triggering
event:





·
            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 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.





Events
that may result in the redemption for cash of preferred stock, and that are not
within a company’s control, are required to be classified outside of
stockholders’ equity (in the mezzanine section), as required in EITF D-98 Classification and
Measurement of Redeemable Securities (EITF D-98). The specific triggering
event presumed not to be within our control is the change of control redemption
event. Accordingly, these instruments are recorded in our balance sheet in the
caption Redeemable Preferred Stock, which is outside of stockholders’
equity.


24


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 9 –
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 two entities that have non-controlling interests. Our
subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated because we own the
majority of the voting control. Our subsidiary, RPS Trading LLC (“RPS”) is
consolidated because we own a 50% voting interest and it meets the definition of
a variable interest entity of which we are the primary beneficiary.





Effective
July 1, 2009, we adopted the amended requirements of ASC 810 Consolidations that
require (i) presentation of non-controlling interests as a component of equity
and (ii) presentation of income (loss) associated with OmniReliant 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. The
following table summarizes the contribution to our consolidated results of
operations and financial condition of consolidated subsidiaries with
non-controlling interests:





OmniReliant
      and
                  wholly-owned
                  subsidiaries
                
                
                OmniComm
                
                
                RPS
                
                
                ConsolidatedOperating
      InformationSales
      or other revenues
                
                $
                7,465,743
                
                
                $
                86,979
                
                
                $
                162,078
                
                
                $
                7,714,800Loss
      from operations
                
                
                (1,996,444
                )
                
                
                (15,557
                )
                
                
                (15,596
                )
                
                
                (2,027,597
                )Net
      (loss) income
                
                
                (15,761,689
                )
                
                
                (15,439
                )
                
                
                (15,596
                )
                
                
                (15,792,724
                )Non-controlling
      interests
                
                
                —
                
                
                
                (20,154
                )
                
                
                (4,781
                )
                
                
                (24,935
                )Net
      (loss) income applicable to
                  OmniReliant
                
                
                (15,761,689
                )
                
                
                4,715
                
                
                
                (10,815
                )
                
                
                (15,767,789
                )Balance
      Sheet InformationTotal
      assets
                
                $
                36,089,031
                
                
                $
                2,589,461
                
                
                $
                3,833,901
                
                
                $
                42,512,393Total
      liabilities
                
                
                (20,166,417
                )
                
                
                (2,042,960
                )
                
                
                (3,124,079
                )
                
                
                (25,333,456
                )Redeemable
      preferred stock
                
                
                (4,946,910
                )
                
                
                —
                
                
                
                —
                
                
                
                (4,946,910
                )Total
      equity
                
                
                10,975,704
                
                
                
                546,501
                
                
                
                709,822
                
                
                
                12,232,027Non-controlling
      interests
                
                
                —
                
                
                
                (181,226
                )
                
                
                (158,669
                )
                
                
                (335,629
                )Equity
      of OmniReliant shareholders
                
                $
                10,975,704
                
                
                $
                358,275
                
                
                $
                551,153
                
                
                $
                11,896,398





OmniComm
is engaged in managing real estate in Clearwater, Florida. RPS is engaged in the
manufacture of apparel and the sale of accessories. As a variable interest
entity, RPS exposes us to loss which amount is based upon the aggregate of our
investment in and advances to RPS. This amount is $2,108,383.


25


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 10 –
Income taxes:





As more
fully discussed in Note 3, we acquired Abazias and Designer during the three
month period ended September 30, 2009. The acquisitions, and associated
accounting allocations, resulted in differences between financial reporting and
tax bases of assets acquired and liabilities assumed. While accounting
principles generally accepted in the United States do not require adjustment to
deferred tax accounts during interim periods, the following table reflects the
details of our deferred tax accounts as of June 30, 2009, as reported, and as
affected by the acquisitions.





June
      30, 2009
                  (with
      acquisitions)
                
                
                June
      30, 2009
                  (as
      reported)Investments
                
                $
                3,087,292
                
                
                $
                3,087,929Net
      operating losses
                
                
                3,066,879
                
                
                
                2,898,060Share-based
      payment
                
                
                1,490,114
                
                
                
                1,490,114Impairment
      charges
                
                
                74,024
                
                
                
                74,024Bad
      debts
                
                
                51,790
                
                
                
                51,790Inventory
      reserves
                
                
                35,972
                
                
                
                35,972Unconsolidated
      investee
                
                
                34,592
                
                
                
                34,592Intangible
      assets
                
                
                (2,879,101
                )
                
                
                (368,286
                )Net
      deferred tax assets, before allowances
                
                
                4,962,199
                
                
                
                7,304,195Less:
      Valuation allowances
                
                
                (4,962,199
                )
                
                
                (7,304,195
                )$
                —
                
                
                $
                —





Reductions
in valuation allowances arising from acquisition accounting are recorded as a
component of paid-in capital. The following table reflects the components of
paid-in capital arising from the reduction in valuation allowances in connection
with each acquisition:





Acquisition:
      Abazias
                  
                  $
                  2,281,029Acquisition:
      Designer
                  
                  
                  60,967$
                  2,341,996





Note 11 –
Commitments and contingencies:





Geographic
and product concentrations:





As
discussed in Note 3, during the current fiscal quarter we purchased Designer.
The acquisition of Designer resulted in our consolidation of RPS, in which we
have separately invested $1,857,383, based upon our 50% voting interest and the
fact that we are the primary beneficiary of this variable interest entity. RPS
is largely engaged in the manufacture of apparel and relies on outsourced
manufacturing facilities in foreign countries that provide low-cost labor. As of
September 30, 2009, RPS carries approximately $1,850,000 of inventories that are
located in a foreign country. While we and RPS take precautions against loss,
there is a higher risk associated with these assets due to their physical
location. Risks include theft and nationalization events that could result in a
total loss of the assets.


26


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 11 –
Commitments and contingencies (continued):





Due to
the nature of the 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 three
months ended September 30, 2009, two products comprised 73% and 18%,
respectively, of our consolidated product sales.





Employment
Agreements:





Abazias,
Inc. – As more fully discussed in Note 3, we completed our acquisition of
Abazias on August 27, 2009. In connection with this acquisition, we entered into
employment arrangements with its two principal officers. The arrangements
provide for base annual salaries ranging from $85,000 to $100,000, discretionary
bonuses, participation in existing employee benefit program, and non-competition
and non-solicitation. The arrangements also provide for contingent incentive
compensation that is payable in the event that we sell Abazias at certain
levels. Finally, the employment arrangements provide for the payment of signing
bonuses to the Abazias officers, aggregating $417,650 upon the completion of our
acquisition. The signing bonuses have been expensed.





Other
contingencies:





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 OmniReliant Corporation of $293,600 plus interest and
court costs. Management believes the lawsuit is without merit.





In
connection with our Retail Products Segment, 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 September 30, 2009, we do not believe that our routine
and customary business arrangements are material.


27


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 12 –
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.





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
our financing and other strategic transactions. These companies are owned by
certain shareholders and Board Members. We compensated these companies in
warrants with fair values of $382,761 during the three months ended September
30, 2009, related to financing arrangements.





Financial Consulting Agreement
– We have engaged TotalCFO to provide financial services. TotalCFO is
owned by certain shareholders and Board members. We recognized $122,000 and
$18,000 of expense related to this arrangement for the three months ended
September 30, 2009 and 2008.





Designer Liquidator – As more
fully discussed in Note 3, we acquired Designer on July 31, 2009. Designer was
owned by a relative of a member of our Board of Directors.





Note 13 –
Subsequent events:





We have
evaluated subsequent events arising following the balance sheet date of
September 30, 2009 through the date of filing, which is November 20,
2009.





Asset
Purchase Agreement





On
October 9, 2009, we entered into an asset purchase agreement (the “Agreement”)
with Beyond Commerce, Inc. (“BYOC”) and BYOC’s wholly-owned subsidiary,
LocalAdLink, Inc. (the “Sub”) whereby we purchased the LocalAdLink Software
(“LAL”), including source codes, as updated, the LAL name rights, and the LAL
trademark, as well as any additional third party codes that has been modified or
integrated into the source codes to enable the business process operations of
LAL, including but not limited to the domain URL assets (collectively, the
“Software”) from BYOC and the Sub in consideration for which we forgave
$4,000,000 worth of debt in the form of surrendered original issue discount
convertible debentures and warrants to purchase 18,321,037shares of BYOC’s
common stock. Additionally, as further consideration for the purchase of the
Software, we agreed to extend the maturity date on all remaining original issue
discount convertible debentures it holds that were issued by BYOC until October
9, 2010 with an interest rate of 10%.





We are
currently reviewing application of accounting standards to this
transaction.





License
Agreement





On
October 9, 2009, we entered into a license 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. Additionally, pursuant to the terms of the License Agreement, we
granted Zurvita the right to market and sell the Software through its
independent sales representatives in consideration for a 6% promissory note in
the principal amount of Two Million Dollars ($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.





28




OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 13 –
Subsequent events:





We are
currently reviewing application of accounting standards to this
transaction.





Webcarnation





On
November 9, 2009, we acquired 1,073,000 member units of Webcarnation for an
aggregate $65,000. Our Chief Operating Officer is the principal executive
officer of this company.





We are
currently reviewing application of accounting standards to this
transaction.




Conversion
of Series E Preferred Stock
  From
October 1, 2009 to November 19, 2009, certain holders of Series E Preferred
Stock, which as discussed in Note 3, above, was issued in connection with our
acquisition of Abazias, converted 9,875,143 shares of Series E Preferred Stock
in to 11,751,420 shares of our common stock. As a result of these conversions,
3,124,857 shares of Series E Preferred Stock remain outstanding on November 19,
2009, which are linked to approximately 3,720,000 shares of our common stock.
The conversions were made at the contractual $0.84 conversion price without
adjustment.


29


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





Special
Note on Forward-Looking Statements: Some of the statements contained in this
Form 10-Q that are not historical facts are "forward-looking statements" which
can be identified by the use of terminology such as "estimates," "projects,"
"plans," "believes," "expects," "anticipates," "intends," or the negative or
other variations, or by discussions of strategy that involve risks and
uncertainties. We urge you to be cautious of the forward-looking statements,
that such statements, which are contained in this Form 10-Q, reflect our current
beliefs with respect to future events and involve known and unknown risks,
uncertainties and other factors affecting our operations, market growth,
services, products and licenses. No assurances can be given regarding the
achievement of future results, as actual results may differ materially as a
result of the risks we face, and actual events may differ from the assumptions
underlying the statements that have been made regarding anticipated events.
Factors that may cause actual results, our performance or achievements, or
industry results, to differ materially from those contemplated by such
forward-looking statements include without limitation:





1.
            Our
      ability to attract and retain management, and to integrate and maintain
      technical information and management information
  systems;


2.
            Our
      ability to generate customer demand for our
  services;


3.
            The
      intensity of competition; and


4.
            General
      economic conditions.





All
written and oral forward-looking statements made in connection with this Form
10-Q that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.





Overview





The
following discussion and analysis is intended to help the reader understand the
results of operations, financial condition, and cash flows of OmniReliant
Holdings, 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 herein and in our Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.





ITEM 2 –
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





We are a
holding company engaged, through our wholly and partially owned subsidiaries,
and our investee companies, in the creation, design, distribution, and sale of
affordable products and make these products available to U.S. and international
consumers through direct response infomercials, live shopping networks,
ecommerce, direct mail and traditional retail channels.





Business
acquisitions:





During
the three months ended September 30, 2009, we completed two significant 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 is engaged in the
manufacture and wholesale distribution of brand-name apparel and the retail sale
of other accessories. We 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 is an online retailer of high quality loose diamonds
and fine jewelry settings for diamonds. We acquired Abazias for the purpose of
building brand recognition and increasing retail market
penetration.


30


We have
accounted for our acquisitions applying the Acquisition Method in Accounting
Standards Codification (“ASC”) 805, Business Combinations
(“ASC 805”). 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 is recorded as goodwill.





The
following table summarizes the results of the allocation:





Abazias
                  
                  
                  Designer
                  
                  
                  TotalCurrent
      assets, including cash of $127,530 and $762,702 from Abazias and Designer,
      respectively
                  
                  $
                  523,307
                  
                  
                  $
                  1,824,660
                  
                  
                  $
                  2,347,966Property
      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
                  
                  
                  
                  1,873,318
                  
                  
                  
                  6,337,674Consideration
      transferred (excluding direct expenses):Cash
      consideration
                  
                  
                  —
                  
                  
                  
                  150,000
                  
                  
                  
                  150,000Fair
      value of OmniReliant Securities
                  
                  
                  15,841,323
                  
                  
                  
                  101,000
                  
                  
                  
                  15,942,323Investments
      (see Note 4)
                  
                  
                  1,042,789
                  
                  
                  
                  1,857,383
                  
                  
                  
                  2,900,172Non-controlling
      interest in RPS Traders 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
                  
                  
                  $
                  398,515
                  
                  
                  $
                  12,818,271





The
principal factor giving rise to the amount of goodwill is the expected synergies
that will result from the combined companies’ efforts to jointly promote
existing and new retail product offerings. Our acquisitions of Abazias and
Designer contributed significantly to our operational analysis, as
follows:





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 OmniReliant 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 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.


31





Commencing
with this quarterly report on Form 10-Q, our references to accounting principles
generally accepted in the Unites States of America are to those standards
promulgated and described in the Accounting Standards Codification (“ASC”) of
the Financial Accounting Standards Board. The ASC did not change accounting
principles.





Three
months ended September 30, 2009 compared to three months ended September 30,
2008:





We
reported our Retail Products and the Real Estate Operations separately as
identifiable segments in prior periods. During the current three-month period,
the Real Estate Operations and related assets declined to below 10% and,
accordingly, we have discontinued reporting Real Estate Operations, other than
revenues separately. The reduction in contribution to our operations and assets
of the real estate operation is due to a combination of our overall growth and
the contributions of Abazias and Designer that, as discussed above, were
acquired in the current period. Further, we now consolidate RPS Traders LLC
(“RPS”), a variable interest entity that is a 50% owned subsidiary of Designer.
RPS is engaged in the manufacture of apparel, which may be reported separately
as an identifiable segment should its operations increase to a level where
accounting principles would require it to be reported as such.





Revenues –We derive revenues
substantially from the sale of products in our Retail Products business.
Commencing in the prior year, we purchased certain real estate in Pinellas
County, Florida and leased a substantial portion of this building to third-party
tenants. Our analysis of the material components of changes in revenues are as
follows:





·
            Product
      sales: Our product sales increased $7,524,187 to $7,627,821 for the three
      months ended September 30, 2009 compared to $103,634 for the three months
      ended September 30, 2008. Abazias and Designer contributed an aggregate
      $681,498 of this increase. Otherwise, this increase reflects our
      maturation in identifying new retail products to sell through our media
      distribution networks. Due to the nature of the 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 three months
      ended September 30, 2009, two products comprised 73% and 18%,
      respectively, of our consolidated product
sales.





·
            Cost
      of product sales:
      Our cost of product sales increased $4,433,289 to $4,477,325 for the three
      months ended September 30, 2009 compared to $44,036 for the three months
      ended September 30, 2008. This increase reflects our increasing retail
      product sales, including cost of products, freight and shipping and
      merchant account fees. Our margin during the current quarter amounted to
      41% compared to 58% during the quarter ended September 30, 2008. Margins
      on retail products are largely dependent upon the types and demands for
      retail 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.





·
            Rental
      revenue: Rental revenue of commercial real estate amounted to $86,979, an
      increase of $25,543 when compare to $61,436 of commercial real estate
      revenue that we reported for the three months ended September 30, 2008. We
      anticipate rental revenues to be consistent with levels experienced in the
      current quarterly period.





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


32


·
            Advertising
      expense: Advertising and marketing expense increased $2,967,527 (or
      9,763%) for the three months ended September 30, 2009 to $2,997,923 as
      compared to $30,396 for the three months ended September 30, 2008. We
      began incurring substantial advertising media expense during the prior
      fiscal year which is necessary to promote our Retail Products. We
      generally expense advertising when it is incurred in accordance with
      Financial the Accounting Standards Boards’ Accounting Standards
      Codification (“ASC”) 720-35, Accounting for
      Advertising Costs. Commencing in the prior fiscal year the Company
      began engaging for the production of infomercials related to its Retail
      Products Business, which is expected to be an increasing activity and
      cost. The Company’s accounting policy provides that the costs of
      infomercials are deferred in prepaid assets until the first airing, at
      which time the cost is expensed.





·
            Employment
      Costs: Employment related costs consist of employee insurance, salaries
      and payroll. These costs increased by $768,121 (or 2,378%) to $800,416 for
      the three months ended September 30, 2009. During the three months ended
      September 30, 2008, employment expenses amounted to $32,295. The increase
      is due to higher employment levels and executive signing bonuses of
      approximately $579,000 related to our acquisition of Abazias. Further, we
      hired a Chief Operating Officer in July of 2009 and a Chief Financial
      Officer in September of 2009. Employment costs of these newly hired
      officers will increase our total employment costs in future
      periods.





·
            Other
      general and administrative: These costs and expenses include compensation,
      occupancy costs and general office expenses. Our general and
      administrative costs increased $712,129 (or 807%) to $800,409 for the
      three months ended September 30, 2009 compared to $88,280 for the three
      months ended September 30, 2008. Our general and administrative expenses
      for the current fiscal quarter include bad debt charges of $300,761, which
      is a result of our higher sales volume. Overall, we believe that our
      reserves are reasonable and appropriate for our current levels of
      operations. Also included in other general and administrative expenses for
      the current fiscal quarter is $232,764 in royalty expenses that we
      incurred to sell licensed products. Engaging in licensing agreements to
      sell products is an industry practice and, accordingly, we will likely
      incur higher levels of royalty charges as our operations mature and we add
      additional products to our retail offerings. Finally, included within
      general and administrative expenses are real estate operation expenses of
      approximately $89,000 and $50,500 during the three months ended September
      30, 2009 and 2008, respectively. Our real estate operation expenses
      include property taxes, utilities, repairs and maintenance and insurance
      costs. These expenses are expected to remain consistent with levels
      experienced in the current period.





·
            Accounting
      and professional expense: Accounting and consulting professional expenses
      increased $138,707 (or 33%) to $555,036 for the three months ended
      September 30, 2009. During the three months ended September 30, 2008 these
      expenses amounted to $416,329. These costs include fees relating to audit
      and other consulting related expenses. Our audit fees have increased due
      to our increased operating activities. Our legal and consulting expenses
      have increased due to the increase in our investment and other activities,
      including our acquisitions of Abazias and Designer. Unlike previous
      accounting standards, our direct costs related to our investing activities
      are expensed as they are incurred. We continue to utilize third-party
      consultants to assist in the application of complex accounting principles
      and valuation of our derivative financial instruments. We believe that our
      professional fees will continue at current levels until we can further
      develop our operating and financial
  infrastructure.





·
            Depreciation
      and amortization: Our amortization of intangible assets and depreciation
      of property and equipment amounted to $105,218 and $6,070, respectively
      for the three months ended September 30, 2009. Our amortization of
      intangible assets and depreciation of property and equipment amounted to
      $74,887 and $40,420, respectively for the three months ended September 30,
      2008. This amounted to a decrease of $4,019 (or 3%) in amortization and
      depreciation for the quarter ended September 30, 2009. As a result of the
      higher levels of intangible assets arising from our acquisitions of
      Abazias and Designer, amortization expense will be significantly higher in
      future periods as reflected on the following
  table:




33




Estimated
      future amortization expense:Nine
      months ended June 30, 2010
                
                $
                751,757Year
      ending June 30:2011
                
                
                1,041,0092012
                
                
                938,5402013
                
                
                770,0502014
                
                
                756,5952015
                
                
                1,180,916Thereafter
                
                
                989,140$
                6,428,007





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





·
            Extinguishment expense:
      On July 20, 2009, we entered into a securities purchase agreement (the
      “Purchase Agreement”) with Vicis Capital Master Fund (“Vicis”), a
      sub-trust of the Vicis Capital Series Master Trust, a unit trust organized
      under the laws of the Cayman Islands, 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 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





·





·
            Derivative
      income (expense): Derivative income (expense) increased $7,475,584 (or
      302%) to $9,948,085 during the three months ended September 30, 2009
      compared to $2,472,501 for the three months ended September 30, 2008. The
      following table reflects comparative information related to our derivative
      income (expense). Derivative income (expense) results from certain
      financial instruments (including embedded derivative financial
      instruments) that are required to be measured at fair value. The changes
      in the fair value of these derivatives are 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. Following are the components of our derivative (income) expense
      for the three months ended September 30, 2009 and
  2008:


34





2009
                    
                    
                    2008Fair
      value adjustments:Anti-dilution
      re-pricing events (see extinguishment,above)
                    
                    $
                    1,436,735
                    
                    
                    $
                    —Other
      assumption changes
                    
                    
                    (11,384,820
                    )
                    
                    
                    (2,472,501
                    )Total
                    
                    $
                    (9,948,085
                    )
                    
                    $
                    (2,472,501
                    )





·
            Inducement expense: 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
                  
                  
                  25,377,632Extinguishment
      loss
                  
                  $
                  1,473,855





·
            Interest income: Income
      generated from interest on notes receivable from investees increased
      $227,100 to $248,047 during the three months ended September 30, 2009
      compared to $20,947 for the three months ended September 30, 2008. The
      increase is attributable to higher balances of notes receivable, which
      increased from $2,461,675 at June 30, 2009 to $5,237,842. Subsequent to
      September 30, 2009, we exchanged $4,000,000 face value of notes receivable
      for an intangible asset. As a result, interest income is expected to
      decline in the ensuing quarterly
periods.





·
            Equity in losses of
      investees: We hold investments accounted for under the equity
      method. Our pro rata share of net loss and related book adjustments in
      these investments equaled $104,672 for the three months ended September
      30, 2009. We reported no similar balances during the quarter ended
      September 30, 2008. We will continue to report our interests in the
      earnings or losses of these equity investees so long as our investments
      remain at levels required for accounting treatment under this
      method.





·
            Interest expense:
      Interest expense includes amortization of deferred finance costs and
      interest on our mortgage loan. Interest expense decreased $2,244 (or 4%)
      to $54,216 during the three months ended September 30, 2009 compared to
      $56,460 for the three months ended September 30, 2008. An increase in
      interest expense is present due to interest on our new mortgage loan. We
      anticipate that our interest expense will increase in future periods as
      our operations reflect mortgage interest for the full periods
      presented.





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 two entities that have non-controlling interests. Our
subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated because we own the
majority of the voting control. Our subsidiary, RPS Trading LLC (“RPS”) is
consolidated because we own a 50% voting interest and it meets the definition of
a variable interest entity of which we are the primary beneficiary.
Non-controlling interests in the (income) loss of these consolidated entities
amounted to $24,935 and $19,990 during the three months ended September 30, 2009
and 2008, respectively.





Net (loss) income – We have
reported net loss of ($15,792,724) during the three months ended September 30,
2009 compared to income of $1,875,415 during the three months ended September
30, 2008, a decrease of ($17,668,139). Net (loss) income, after giving effect to
the non-controlling interests, or net (loss) income attributable to OmniReliant,
amounted to ($15,767,789) and $1,895,405 during the three months ended September
30, 2009 and 2008, respectively. These changes result from the items discussed
in the preceding discussion.


35





Loss applicable to common
stockholders– Loss applicable to common
stockholders represents our net loss or income as adjusted for dividends and
accretions on our Preferred Stock. 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. Accordingly, our loss applicable to common
shareholders and our loss per common share (basic and diluted) amounted to
($82,716,442) and ($1.03), respectively, for the three months ended September
30, 2009. Our income applicable to common shareholders and our income per common
share, basic and diluted, amounted to $1,895,405, $0.13 and $0.02, respectively,
for the three months ended September 30, 2008.





Our
weighted average outstanding common shares amounted to 80,434,068 and 14,485,782
during the three months ended September 30, 2009 and 2008, respectively. Our
weighted average outstanding common shares, plus potentially dilutive securities
amounted to 80,434,068 and 77,277,235, respectively for the same periods. The
weighted average outstanding shares increased due to the issuance of 132,847,692
common shares in connection with conversions of preferred stock, exercise of
warrants and issuances in connection with the Designer acquisition. No
potentially dilutive securities were included in the 2009 denominator because
the effects would have been anti-dilutive. During the 2008 period, 62,791,453
potentially dilutive shares were included in the denominator of our income per
common share computation.





Liquidity
and Capital Resources





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States contemplates that operations will be
sustained for a reasonable period. However, we have incurred operating losses of
$(2,027,597) and $(561,573) during the three months ended September 30, 2009 and
2008, respectively. In addition, during these periods, we used cash of
$2,223,338 and $278,862, respectively, in our operating activities. Since our
inception, we have been substantially dependent upon funds raised through the
sale of preferred and common stock and warrants. These conditions raise
substantial doubt about our ability to continue as a going concern for a
reasonable period.





Our
ability to continue as a going concern for a reasonable period is dependent upon
our ability to raise sufficient capital to implement our business plan and to
generate profits sufficient to become financially viable. During the three
months ended September 30, 2009, we raised $10,600,000 from the sale and
exercise of warrants. During the same period, we also made cash investments of
$5,651,887 in ventures that we believe will provide a foundation for the
development of our Retail Products Segment. Finally, in July and August of 2009,
we acquired two operating and revenue-producing businesses more fully discussed
in Note 3. These acquisitions resulted in the acquisition of cash aggregating
$740,232. We cannot give any assurances regarding the success of our current
operations or those of our investees. 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 $5,448,560 as of September 30, 2009 compared to
$2,005,702 at June 30, 2009. We have working capital deficiency of $6,549,169 as
of September 30, 2009 and a working capital of $454,249 at June 30, 2009. Our
working capital declined as a result of our Series F Preferred Stock and Warrant
Financing Arrangement, proceeds from which were used to purchase current assets.
Our working capital fluctuates significantly, reflecting the changes in fair
value of our financial instruments. Our decline in working capital gives effect
to increase in the fair value of these financial instruments by $19,765,365 for
the three months ended September 30, 2009. Future changes in the fair value of
these financial instruments could increase or decrease our working capital based
upon changes in the assumptions underlying our fair value
calculations.





Cash Flow from
Operating Activities– We used cash of
$2,223,338 and $278,862 in our operating activities during the three months
ended September 30, 2009 and 2008, respectively.


36





We
recorded net income (loss) of ($15,767,789) and $1,895,405 during the three
months ended September 30, 2009 and 2008, respectively that was offset by
non-cash charges (credits) of ($14,350,944) and $2,320,724, respectively. Our
analysis of the material components of changes in non-cash charges are as
follows:





·
            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). For
      further information over the extinguishment expense, refer to Note 7 of
      the accompanying consolidated financial statements in this Form
      10-Q.





·
            Derivative
      income: 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 ($9,948,085) and ($2,472,501) during
      the three months ended September 30, 2009 and 2008, 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 dilution, because it embodies all of
      the requisite assumptions (including trading volatility, estimated terms,
      dilution 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. Since derivative financial
      instruments are initially and subsequently carried at fair values, our
      income (loss) will reflect the volatility in these estimate and assumption
      changes.





·
            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,
      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.





·
            Bad
      debts expense: Bad debt expense was comprised of $300,762 and $-0- during
      the quarters ended September 30, 2009 and 2008,
    respectively.





·
            Amortization
      of intangible assets: Amortization costs consisted of $105,218 and $74,887
      during the three months ended September 30, 2009 and 2008,
      respectively.





·
            Other
      material components of change in our non-cash charges and (credits) were
      related to equity in losses of investees of $104,672 and $-0-;
      non-controlling interests of ($24,935) and ($19,990); depreciation expense
      of $6,070 and $40,420; and amortization of finance costs of $4,871 and
      $56,460 during the three months ended September 30, 2009 and 2008,
      respectively.





Our cash
from operating activities also includes cash flow from changes in our operating
assets and liabilities of ($806,493) for the three months ended September 30,
2009 compared to a source of cash of $146,457 for the three months ended
September 30, 2008.


37





·
            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 an increase of $926,787, (net of
      $300,762 in doubtful accounts) in our accounts receivable (a use of cash)
      for the three months ended September 30, 2009 as compared to a decrease of
      25,930 in our accounts receivable (a source of cash) for the three months
      ended September 30, 2008.





·
            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 increased (a use of cash)
      $345,740 during the three months ended September 30, 2009 as compared to
      an increase (a use of cash) of $23,768 during the three months ended
      September 30, 2008.





As
discussed in above, during the current fiscal quarter we purchased Designer. The
acquisition of Designer resulted in our consolidation of RPS, in which we have
separately invested $1,857,383, based upon our 50% voting interest and the fact
that we are the primary beneficiary of this variable interest entity. RPS is
largely engaged in the manufacture of apparel and relies on outsourced
manufacturing facilities in foreign countries that provide low-cost labor. As of
September 30, 2009, RPS carries approximately $1,850,000 of inventories that are
located in a foreign country. While we and RPS take precautions against loss,
there is a higher risk associated with these assets due to their physical
location. Risks include theft and nationalization events that could result in a
total loss of the assets.





·
            Prepaid
      expenses and other assets: We experienced a decrease in our prepaid
      expenses and other assets (a source of cash) of $413,638 and an increase
      in our prepaid expenses and other assets (a use of cash) of $65,877 during
      the three months ended September 30, 2009 and 2008,
      respectively.





·
            Accounts
      payable and accrued expenses: Our accounts payable and accrued liabilities
      increased (a source of cash) 68%, an aggregate of $353,158 and $210,172
      during the three months ended September 30, 2009 and 2008,
      respectively.





Cash Flow from
Investing Activities– We used cash of $4,928,214 and $3,342,235 in our
investing activities during the three months ended September 30, 2009 and 2008,
respectively. Our analysis of the material components of the changes in our
investing activities is as follows:





·
            We
      invested $5,651,887 and $375,000 during the three months ended September
      30, 2009 and 2008, respectively. This increase in investments from
      September 30, 2008 to the three months ended September 30, 2009 was as a
      result of our increased commitment to further invest in meaningful
      ventures in support of our Retail Products
  business.





·
            We
      were also a party to two acquisitions for the quarter ended September 30,
      2009. On July 31, 2009 we acquired Designer Liquidators 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. Refer to Note 3 of the accompanying
      condensed consolidated financial statements for further analysis on the
      acquisitions.


38





·
            Other
      material components of change in our investing activities were related to
      purchase of property and equipment of $16,559 and $2,750,984; loan
      receivable from ResponzeTV of $-0- and $104,966; payments for licenses and
      patents of $-0- and $100,000; and security deposits and other activities
      of $-0- and $11,285 during the three months ended September 30, 2009 and
      2008, respectively.





Cash Flow from
Financing Activities– We generated
$10,594,410 and $331,734 in cash from our financing activities during the three
months ended September 30, 2009 and 2008. Our analysis of the material
components of the changes in our financing activities is as
follows:





·
            $5,600,000
      in cash was received during the three months ended September 30, 2009 from
      the proceeds on the exercise of warrants, pursuant to an inducement offer
      wherein we reduced the strike price on the Vicis warrants on 97,606,276
      warrants, Vicis exercised 27,606,276
warrants.





·
            In
      addition, cash was received from the proceeds from exchange of warrants
      related to the July 20, 2009 Purchase Agreement, in the amount of
      $5,000,000. Refer to Note 7 of the accompanying condensed consolidated
      financial statements for further analysis on the July 20, 2009 Purchase
      Agreement.





·
            Other
      material components of change in our financing activities were related to
      principal payments on long-term debt of $5,590 during the three months
      ended September 30, 2009. We incurred no such charge during the three
      months ended September 30, 2008, as these charges relate to investments
      that have commenced subsequent to September 30, 2008. We also received
      cash from non-controlling interests of $-0- and 320,000 and cash from
      security deposits and other activities of $-0- and $11,734 for the three
      months ended September 30, 2009 and 2008,
  respectively.





We have
no commitments for the purchase of property and equipment, or other long lived
assets, except as described below:





Subsequent
to the quarterly period ended September 30, 2009, we entered into the following
transactions:





Asset
Purchase Agreement





On
October 9, 2009, we entered into an asset purchase agreement (the “Agreement”)
with Beyond Commerce, Inc. (“BYOC”) and BYOC’s wholly-owned subsidiary,
LocalAdLink, Inc. (the “Sub”) whereby we purchased the LocalAdLink Software
(“LAL”), including source codes, as updated, the LAL name rights, and the LAL
trademark, as well as any additional third party codes that has been modified or
integrated into the source codes to enable the business process operations of
LAL, including but not limited to the domain URL assets (collectively, the
“Software”) from BYOC and the Sub in consideration for which we forgave
$4,000,000 worth of debt in the form of surrendered original issue discount
convertible debentures and warrants to purchase 18,321,037shares of BYOC’s
common stock. Additionally, as further consideration for the purchase of the
Software, we agreed to extend the maturity date on all remaining original issue
discount convertible debentures it holds that were issued by BYOC until October
9, 2010 with an interest rate of 10%.





We are
currently reviewing application of accounting standards to this
transaction.




39




License
Agreement


On
October 9, 2009, we entered into a license 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. Additionally, pursuant to the terms of the License Agreement, we
granted Zurvita the right to market and sell the Software through its
independent sales representatives in consideration for a 6% promissory note in
the principal amount of Two Million Dollars ($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 are
currently reviewing application of accounting standards to this
transaction.





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, 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.





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 three
months ended September 30, 2009, two products comprised 73% and 18%,
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.
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. 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.


40





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. Our available-for-sale investments
include:





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.




41




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 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”).





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.


42


ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





The
information required by this item does not apply to smaller reporting
companies.


43





ITEM
4T – CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act, as of September 30, 2009, to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commission's rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that as of
September 30, 2009, our disclosure controls and procedures were not effective
due to the material weaknesses described below.





In light
of the material weaknesses described below, we performed additional analysis and
other post-closing procedures to ensure our financial statements were prepared
in accordance with generally accepted accounting principles. Accordingly, we
believe that the financial statements included in this report fairly present, in
all material respects, our financial condition, results of operations and cash
flows for the periods presented.





A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified the following three
material weaknesses which have caused management to conclude that, as of
September 30, 2009, our disclosure controls and procedures were not
effective:





The
material weaknesses we have identified include:





Deficiencies pertaining to a lack of
human resources within our finance and accounting functions: We currently
only have 9 employees. 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.





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 undocumented, where established policies and procedures were not
defined, and controls were not in place.





Deficiencies related to information
technology control design and operating effectiveness weaknesses:This
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 factors could
lead to material errors and misstatements to financial statements occurring
without timely detection.





Deficiencies related to failures in
operating effectiveness of the internal control over financial reporting:Our procedures relating to operating effectiveness, including monitoring
activities, of financial reporting internal controls continue to be ineffective.
When an assessment was done to confirm the effectiveness of the internal control
over financial reporting, controls were not operating effectively. We need to
remediate our material weakness in internal control.


44





This
quarterly report does not include an attestation report of 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 temporary rules of the Securities and
Exchange Commission





(c)
Changes in Internal Control over Financial Reporting





There has
been no change in our internal control over financial reporting, as defined in
Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. However, we have initiated or intend
to initiate a number of remediation measures to address the control deficiencies
and material weaknesses identified above. The remediation measures include or
are expected to include the following:





·
            Hiring
      of an outside consultant to evaluate the derivative and fair value
      accounting rules, which are material to our financial
      statements.


·
            Hiring
      of more qualified and experienced accounting personnel to perform
      month-end reviews and closing processes as well as to allow additional
      oversight and supervision.





Inherent
Limitations of the Effectiveness of Internal Control





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal control system are
met. Because of the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.


45





PART
II – OTHER INFORMATION





ITEM
1 – LEGAL PROCEEDINGS





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.
This motion was fully submitted to the Court on September 22, 2009.





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 OmniReliant Corporation of $293,600 plus interest and
court costs. Management believes the lawsuit is without merit.





ITEM
1A – RISK FACTORS





There has
been no material change in our risk factors from those disclosed in our Annual
Report on Form10-K filed with the SEC for the year ended June 30,
2009.





ITEM
2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Warrant
issued to Vicis Capital Master Fund to purchase 97,606,276 shares of the
Company’s common stock at an exercise price of $0.25.





ITEM
3 – DEFAULTS UPON SENIOR SECURITES





None.





ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM
5 – OTHER MATTERS





None.





ITEM
6 – EXHIBIT INDEX





4.1
                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)4.2
                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)4.3
                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)10.1
                Form
      of Securities Purchase Agreement dated July 20, 2009 (Incorporated by
      reference to the Current Report on Form 8-K filed with the SEC on July 21,
      2009)10.2
                Form
      of Warrant (Incorporated by reference to the Current Report on Form 8-K
      filed with the SEC on July 21,
2009)
  46
  10.3
                      Form
      of Kathy Hilton Agreement (Incorporated by reference to the Current Report
      on Form 8-K filed with the SEC on August 13, 2009)10.4
                      Securities
      Purchase Agreement (Incorporated by reference to the Current Report on
      Form 8-K filed with the SEC on September 11, 2009)10.5
                      Form
      of Debenture (Incorporated by reference to the Current Report on Form 8-K
      filed with the SEC on September 11, 2009)10.6
                      Form
      of Warrant (Incorporated by reference to the Current Report on Form 8-K
      filed with the SEC on September 11, 2009)10.7
                      Security
      Interest and Pledge Agreement (Incorporated by reference to the Current
      Report on Form 8-K filed with the SEC on September 11,
    2009)10.8
                      Form
      of Merger Agreement (Incorporated by reference to the Current Report on
      Form 8-K filed with the SEC on September 24, 2009)10.9
                      Form
      of Employment Agreement (Incorporated by reference to the Current Report
      on Form 8-K filed with the SEC on September 24, 2009)10.10
                      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)10.11
                      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)10.12
                      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)31.1
                      Certification
      of Periodic Financial Reports by Paul Morrison in satisfaction of Section
      302 of the Sarbanes-Oxley Act of 200231.2
                      Certification
      of Periodic Financial Reports by Robert John DeCecco III in satisfaction
      of Section 302 of the Sarbanes-Oxley Act of 200232.1
                      Certification
      of Periodic Financial Reports by Paul Morrison in satisfaction of Section
      906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
      135032.2
                      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


47


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.





OmniReliant
      Holdings, Inc.Date:
      November 20, 2009
                      By:
                      /s/
      Paul
      MorrisonPaul
      MorrisonPresident
      and Chief Executive Officer (Principal
                        Executive
      Officer)Date:
      November 20, 2009
                      By:
                      /s/Robert John DeCecco
      IIIRobert
      John DeCecco IIIChief
      Financial Officer (Principal Financial Officer and
                        Principal
      Accounting
Officer)


48