UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington
D. C. 20549





FORM
10-Q





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


EXCHANGE
ACT OF 1934





For the
quarterly period ended December 31, 2008





 ̈   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 x No o




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 o
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Exchange Act).    Yes  ̈ No
x





The
number of shares of the registrant’s Common Stock, $0.00001 par value per share,
outstanding as of January 29, 2009 is 14,509,225.





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


QUARTERLY
PERIOD ENDED DECEMBER 31, 2008





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 Condition and Results
      of Operations
                          
                          62Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
                          
                          77Item
      4T. Controls and Procedures
                          
                          78Part
      II
                          
                          Other
      InformationItem
      1. Legal Proceedings
                          
                          79Item
      1A. Risk Factors
                          
                          79Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                          
                          79Item
      3. Defaults Upon Senior Securities
                          
                          79Item
      4. Submission of Matters to a Vote of Security Holders
                          
                          79Item
      5. Other Information
                          
                          79Item
      6. Exhibit Index
                          
                          79Signatures
                          
                          
                          
                          80





Exhibits: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 Paul Morrison 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 Paul Morrison in satisfaction of Section
      906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
      1350


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. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS





December
      31,
                            2008
                          
                          
                          June
      30,
                            2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          1,052,457
                          
                          
                          $
                          4,435,814Accounts
      receivable, net of $60,165 in allowances
                          
                          
                          50,204
                          
                          
                          
                          48,231Inventories
                          
                          
                          671,652
                          
                          
                          
                          232,425Prepaid
      expenses and other current assets
                          
                          
                          266,188
                          
                          
                          
                          69,200Total
      current assets
                          
                          
                          2,040,501
                          
                          
                          
                          4,785,670Property
      and equipment, net
                          
                          
                          2,701,658
                          
                          
                          
                          —Intangible
      assets, net
                          
                          
                          1,240,151
                          
                          
                          
                          1,278,512Investments
                          
                          
                          1,023,195
                          
                          
                          
                          426,558Other
      assets
                          
                          
                          1,036,871
                          
                          
                          
                          1,078,237Total
      assets
                          
                          $
                          8,042,376
                          
                          
                          $
                          7,568,977LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      liabilities:Accounts
      payable
                          
                          $
                          138,928
                          
                          
                          $
                          110,381Derivative
      liabilities
                          
                          
                          1,585,564
                          
                          
                          
                          6,361,100Current
      maturities of long-term debt
                          
                          
                          32,160
                          
                          
                          
                          —Total
      current liabilities
                          
                          
                          1,756,652
                          
                          
                          
                          6,471,481Long-term
      debt
                          
                          
                          1,962,534
                          
                          
                          
                          —Other
      non-current liabilities
                          
                          
                          11,734
                          
                          
                          
                          —Total
      liabilities
                          
                          
                          3,730,920
                          
                          
                          
                          6,471,481Minority
      interest
                          
                          
                          253,929
                          
                          
                          
                          —Redeemable
      preferred stock
                          
                          
                          35,969,634
                          
                          
                          
                          35,969,634Commitments
      and contingencies
                          
                          
                          —
                          
                          
                          
                          —Stockholders'
      (deficit):Common
      stock, $0.00001 par value 400,000,000 shares
                            authorized,
      14,509,225shares issued and
      outstanding
                          
                          
                          145
                          
                          
                          
                          145Other
      stockholders’ deficiency
                          
                          
                          (31,912,252
                          )
                          
                          
                          (34,872,283
                          )Total
      stockholders' (deficit)
                          
                          
                          (31,912,107
                          )
                          
                          
                          (34,872,138
                          )Total
      liabilities and stockholders' (deficit)
                          
                          $
                          8,042,376
                          
                          
                          $
                          7,568,977





See
accompanying notes.




4




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


UNAUDITED
CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS


THREE
MONTHS ENDED DECEMBER 31, 2008 AND 2007





Three
      Months Ended
                    December
      31,2008
                  
                  
                  2007(unaudited)
                  
                  
                  (unaudited)Revenues:Product
      sales
                  
                  $
                  1,067,624
                  
                  
                  $
                  30,850Rental
      revenue
                  
                  
                  70,670
                  
                  
                  
                  —Licensing
      revenues
                  
                  
                  —
                  
                  
                  
                  218,7671,138,294
                  
                  
                  
                  249,617Operating
      costs and expenses:Cost
      of product sales
                  
                  
                  570,983
                  
                  
                  
                  11,453Other
      operating expenses
                  
                  
                  1,796,700
                  
                  
                  
                  1,534,2902,367,683
                  
                  
                  
                  1,545,743Loss
      from operations
                  
                  
                  (1,229,389
                  )
                  
                  
                  (1,296,126
                  )Other
      income (expense):Derivative
      income (expense)
                  
                  
                  2,303,036
                  
                  
                  
                  (10,426,472
                  )Interest
      expense
                  
                  
                  (104,421
                  )
                  
                  
                  (44,867
                  )Interest
      income
                  
                  
                  36,863
                  
                  
                  
                  —Extinguishment
      of redeemable preferred stock
                  
                  
                  —
                  
                  
                  
                  (26,247,007
                  )Other
      income (expense), net
                  
                  
                  —
                  
                  
                  
                  (378,333
                  )Income
      (loss) before minority interests
                  
                  
                  1,006,089
                  
                  
                  
                  (38,392,805
                  )Minority
      interest in loss of subsidiary
                  
                  
                  46,082
                  
                  
                  
                  —Net
      income (loss)
                  
                  $
                  1,052,171
                  
                  
                  $
                  (38,392,805
                  )Reconciliation
      of net income (loss) to income (loss)applicable
      to common stockholdersNet
      income (loss)
                  
                  $
                  1,052,171
                  
                  
                  $
                  (38,392,805
                  )Preferred
      stock dividends and accretion
                  
                  
                  —
                  
                  
                  
                  (6,400,000
                  )Income
      (loss) applicable to common stockholders
                  
                  $
                  1,052,171
                  
                  
                  $
                  (44,792,805
                  )Income
      (loss) per common share:Basic
                  
                  $
                  0.07
                  
                  
                  $
                  (3.20
                  )Diluted
                  
                  $
                  0.01
                  
                  
                  $
                  (3.20
                  )Weighted
      average common shares—basic
                  
                  
                  14,509,225
                  
                  
                  
                  14,011,233Weighted
      average common shares—diluted
                  
                  
                  70,657,402
                  
                  
                  
                  14,011,233





See
accompanying notes.


5


OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES
 (A
DEVELOPMENT STAGE ENTERPRISE)
 UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 SIX
MONTHS ENDED DECEMBER 31, 2008 AND 2007 AND
 THE
PERIOD FROM INCEPTION (AUGUST 21, 2006) TO DECMEBER 31, 2008
 
 Six
      Months Ended
                    December
      31,
                  
                  
                  Inception
      to
                    December
      31,2008
                  
                  
                  2007
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)
                  
                  
                  (unaudited)Revenues:Product
      sales
                  
                  $
                  1,171,258
                  
                  
                  $
                  189,673
                  
                  
                  $
                  1,594,711Rental
      revenues
                  
                  
                  132,106
                  
                  
                  
                  —
                  
                  
                  
                  132,106Licensing
      revenues
                  
                  
                  —
                  
                  
                  
                  218,767
                  
                  
                  
                  546,9171,303,364
                  
                  
                  
                  408,440
                  
                  
                  
                  2,273,734Operating
      costs and expenses:Cost
      of product sales
                  
                  
                  615,019
                  
                  
                  
                  109,879
                  
                  
                  
                  903,377Other
      operating expenses
                  
                  
                  2,514,548
                  
                  
                  
                  2,022,715
                  
                  
                  
                  11,042,9873,129,567
                  
                  
                  
                  2,132,594
                  
                  
                  
                  11,946,364Loss
      from operations
                  
                  
                  (1,826,203
                  )
                  
                  
                  (1,724,154
                  )
                  
                  
                  (9,672,630
                  )Other
      income (expense):Derivative
      income (expense)
                  
                  
                  4,775,537
                  
                  
                  
                  (6,747,626
                  )
                  
                  
                  6,313,694Interest
      expense
                  
                  
                  (185,100
                  )
                  
                  
                  (260,732
                  )
                  
                  
                  (640,592
                  )Interest
      income
                  
                  
                  117,272
                  
                  
                  
                  —
                  
                  
                  
                  150,453Extinguishments
      of redeemable preferred stock
                  
                  
                  —
                  
                  
                  
                  (26,247,007
                  )
                  
                  
                  (26,247,007
                  )Impairment
      of investments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5,776,917
                  )Other
      income (expense), net
                  
                  
                  —
                  
                  
                  
                  (687,470
                  )
                  
                  
                  (813,189
                  )Income
      (loss) before minority interests
                  
                  
                  2,881,506
                  
                  
                  
                  (35,666,989
                  )
                  
                  
                  (36,686,188
                  )Minority
      interest in loss of subsidiary
                  
                  
                  66,071
                  
                  
                  
                  —
                  
                  
                  
                  66,071Net
      income (loss)
                  
                  $
                  2,947,577
                  
                  
                  $
                  (35,666,989
                  )
                  
                  $
                  (36,620,117
                  )Reconciliation
      of net income (loss) to (loss)
                    applicable
      to common shareholders:Net
      income (loss)
                  
                  $
                  2,947,577
                  
                  
                  $
                  (35,666,989
                  )
                  
                  $
                  (36,620,117
                  )Preferred
      stock dividends and accretion
                  
                  
                  —
                  
                  
                  
                  (6,400,000
                  )
                  
                  
                  (26,107,740
                  )Income
      (loss) applicable to common shareholders
                  
                  $
                  2,947,577
                  
                  
                  $
                  (42,066,989
                  )
                  
                  $
                  (62,727,857
                  )Income
      (loss) per common share:Basic
                  
                  $
                  0.20
                  
                  
                  $
                  (3.00
                  )
                  
                  $
                  (4.46
                  )Diluted
                  
                  $
                  0.04
                  
                  
                  $
                  (3.00
                  )
                  
                  $
                  (4.46
                  )Weighted
      average common shares—basic
                  
                  
                  14,497,568
                  
                  
                  
                  14,022,330
                  
                  
                  
                  14,067,070Weighted
      average common shares—diluted
                  
                  
                  74,066,738
                  
                  
                  
                  14,022,330
                  
                  
                  
                  14,067,070




See
accompanying notes.




6




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


SIX
MONTHS ENDED DECEMBER 31, 2008 AND 2007 AND


THE
PERIOD FROM INCEPTION (AUGUST 21, 2006) TO DECEMBER 31, 2008


Six
      Months Ended
                                    December
      31,
                                  
                                  
                                  Inception
      to
                                    December
      31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008(unaudited)
                                  
                                  
                                  (unaudited)
                                  
                                  
                                  (unaudited)Cash
      flows from operating activities:Net
      income (loss)
                                  
                                  $
                                  2,947,577
                                  
                                  
                                  $
                                  (35,666,989
                                  )
                                  
                                  $
                                  (36,620,117
                                  )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Derivative
      (income) expense
                                  
                                  
                                  (4,775,537
                                  )
                                  
                                  
                                  6,747,626
                                  
                                  
                                  
                                  (6,313,694
                                  )Amortization
      of intangible assets
                                  
                                  
                                  138,361
                                  
                                  
                                  
                                  184,989
                                  
                                  
                                  
                                  1,450,697Amortization
      of deferred finance costs
                                  
                                  
                                  125,638
                                  
                                  
                                  
                                  118,896
                                  
                                  
                                  
                                  545,887Depreciation
      expense
                                  
                                  
                                  103,529
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  103,529Minority
      interest in loss of subsidiary
                                  
                                  
                                  (66,071
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (66,071
                                  )Extinguishments
      of redeemable preferred stock
                                  
                                  
                                  —
                                  
                                  
                                  
                                  26,247,007
                                  
                                  
                                  
                                  26,247,007Share-based
      payment
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,134,705
                                  
                                  
                                  
                                  3,650,606Loss
      on extinguishment of liabilities
                                  
                                  
                                  —
                                  
                                  
                                  
                                  271,109
                                  
                                  
                                  
                                  271,109Equity
      in losses of equity method investment
                                  
                                  
                                  —
                                  
                                  
                                  
                                  107,224Impairments
      related to ResponzeTV
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  7,828,633Changes
      in operating assets and liabilities:Accounts
      receivable
                                  
                                  
                                  (1,973
                                  )
                                  
                                  
                                  (40,455
                                  )
                                  
                                  
                                  (50,204
                                  )Inventories
                                  
                                  
                                  (439,227
                                  )
                                  
                                  
                                  (190,612
                                  )
                                  
                                  
                                  (801,652
                                  )Prepaid
      expenses
                                  
                                  
                                  (196,988
                                  )
                                  
                                  
                                  19,017
                                  
                                  
                                  
                                  (266,188
                                  )Other
      assets
                                  
                                  
                                  (11,500
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (11,500
                                  )Accounts
      payable and accrued expenses
                                  
                                  
                                  7,527
                                  
                                  
                                  
                                  401,789
                                  
                                  
                                  
                                  53,663Other
      liabilities
                                  
                                  
                                  11,734
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  11,734Net
      cash used for operating activities
                                  
                                  
                                  (2,156,930
                                  )
                                  
                                  
                                  (665,694
                                  )
                                  
                                  
                                  (3,966,561
                                  )Cash
      flows from investing activities:Purchases
      of property and equipment
                                  
                                  
                                  (2,805,187
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (2,805,187
                                  )Purchases
      of investments
                                  
                                  
                                  (600,000
                                  )
                                  
                                  
                                  (5,100,000
                                  )
                                  
                                  
                                  (8,206,811
                                  )Minority
      shareholders investment in subsidiary
                                  
                                  
                                  320,000
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  320,000Payments
      for licenses
                                  
                                  
                                  (100,000
                                  )
                                  
                                  
                                  (6,811
                                  )
                                  
                                  
                                  (1,106,010
                                  )Net
      cash flow from investing activities
                                  
                                  
                                  (3,185,187
                                  )
                                  
                                  
                                  (5,106,811
                                  )
                                  
                                  
                                  (11,798,008
                                  )





Continued
on the next page.




7




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


SIX
MONTHS ENDED DECEMBER 31, 2008 AND 2007 AND


THE
PERIOD FROM INCEPTION (AUGUST 21, 2006) TO DECEMBER 31, 2008


(CONTINUED)





Six Months Ended
                            December 31,
                          
                          
                          Inception to
                            December 31,2008
                          
                          
                          2007
                          
                          
                          2008(unaudited)
                          
                          
                          (unaudited)
                          
                          
                          (unaudited)Cash
      flows from financing activities:Proceeds
      from long-term debt, net of $35,934 of direct loan costs
                          
                          
                          1,964,066
                          
                          
                          
                          —
                          
                          
                          
                          1,964,066Payments
      on long-term debt
                          
                          
                          (5,306
                          )
                          
                          
                          —
                          
                          
                          
                          (5,306
                          )Proceeds
      from sale of preferred stock
                          
                          
                          —
                          
                          
                          
                          5,814,078
                          
                          
                          
                          15,218,983Preferred
      stock dividends
                          
                          
                          —
                          
                          
                          
                          115,096
                          
                          
                          
                          115,096Purchase
      and retirement of common stock
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (475,813
                          )Net
      cash flow from financing activities
                          
                          
                          1,958,760
                          
                          
                          
                          5,929,174
                          
                          
                          
                          16,817,026Net
      change in cash and cash equivalents
                          
                          
                          (3,383,357
                          )
                          
                          
                          156,669
                          
                          
                          
                          1,052,457Cash
      and cash equivalents at beginning of period
                          
                          
                          4,435,814
                          
                          
                          
                          711,484
                          
                          
                          
                          —Cash
      and cash equivalents at end of period
                          
                          $
                          1,052,457
                          
                          
                          $
                          868,153
                          
                          
                          $
                          1,052,457





SUPPLEMENTAL
CASH FLOW INFORMATION





Six Months Ended
                        December 31,
                      
                      
                      Inception to
                        December 31,2008
                      
                      
                      2007
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)Cash
      paid for interest
                      
                      $
                      21,709
                      
                      
                      $
                      —
                      
                      
                      $
                      21,709Cash
      paid for income taxes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Non-cash
      investing and financing activities:Common
      stock issued for loan costs
                      
                      
                      43,333
                      
                      
                      
                      —
                      
                      
                      
                      —Fair
      value adjustments for investments
                      
                      
                      30,877
                      
                      
                      
                      —
                      
                      
                      
                      —Series
      C and Series D preferred stock issued in exchange
    transactions
                      
                      
                      —
                      
                      
                      
                      31,349,989
                      
                      
                      
                      47,452,123Non-cash
      investment in ResponzeTV
                      
                      
                      —
                      
                      
                      
                      6,538,240
                      
                      
                      
                      6,538,240Common
      stock issued for license arrangements
                      
                      
                      —
                      
                      
                      
                      300,000
                      
                      
                      
                      352,500Common
      stock issued for a patent
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,140,000Dividends
      paid with Series C preferred stock
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      309,564Non-monetary
      exchange of assets for investment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      328,914





See
accompanying notes




8




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)


PERIODS
FROM INCEPTION (AUGUST 21, 2006) TO DECEMBER 31, 2008





Common
      Stock
                    
                    
                    Paid-in
                    
                    
                    Other
                      comprehensive
                    
                    
                    AccumulatedShares
                    
                    
                    Amount
                    
                    
                    capital
                    
                    
                    income
                    
                    
                    deficit
                    
                    
                    TotalBalances
      at November 22, 2006
                    
                    
                    6,485,000
                    
                    
                    $
                    65
                    
                    
                    $
                    254,264
                    
                    
                    $
                    —
                    
                    
                    $
                    (254,329
                    )
                    
                    $
                    —Recapitalization
                    
                    
                    7,300,000
                    
                    
                    
                    73
                    
                    
                    
                    (400,215
                    )
                    
                    
                    —
                    
                    
                    
                    254,329
                    
                    
                    
                    (145,813
                    )Beneficial
      conversion on Series A Preferred offering
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,173,510
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,173,510Allocation
      of deferred finance costs
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (911,135
                    )
                    
                    
                    —
                    
                    
                    
                    (157,303
                    )
                    
                    
                    (1,068,438
                    )Placement
      agent warrants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,492,312
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,492,312Accretion
      to redemption value
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (3,000,000
                    )
                    
                    
                    (3,000,000
                    )Accrual
      of dividends on Series A Preferred
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (34,167
                    )
                    
                    
                    (34,167
                    )Net
      loss for the three months ended December 31, 2006
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (17,857,636
                    )
                    
                    
                    (17,857,636
                    )Balances
      at December 31, 2006
                    
                    
                    13,785,000
                    
                    
                    $
                    138
                    
                    
                    $
                    2,608,736
                    
                    
                    $
                    —
                    
                    
                    $
                    (21,049,106
                    )
                    
                    $
                    (18,440,232
                    )Issuance
      related to license agreement
                    
                    
                    15,000
                    
                    
                    
                    -
                    
                    
                    
                    52,500
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    52,500Accrual
      of Series A Preferred dividends
                    
                    
                    —
                    
                    
                    
                    -
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (41,687
                    )
                    
                    
                    (41,687
                    )Net
      income for the three months ended March 31, 2007
                    
                    
                    —
                    
                    
                    
                    -
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,884,327
                    
                    
                    
                    1,884,327Balances
      at March 31, 2007
                    
                    
                    13,800,000
                    
                    
                    $
                    138
                    
                    
                    $
                    2,661,236
                    
                    
                    $
                    —
                    
                    
                    $
                    (19,206,466
                    )
                    
                    $
                    (16,545,092
                    )Reclassification
      of amount out additional paid in capital
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (49,999
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (49,999
                    )Reclassification
      of Series A to a liability
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,600,270
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,600,270
                    )Reclassification
      of warrants to liability
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (4,202,366
                    )
                    
                    
                    —
                    
                    
                    
                    (909,504
                    )
                    
                    
                    (5,111,870
                    )Accrual
      of Series A Preferred dividends
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (112,781
                    )
                    
                    
                    (112,781
                    )Accrual
      of Series B Preferred dividends
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,833
                    )
                    
                    
                    (5,833
                    )Issuance
      of 1,000,000 warrants to consultant
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,471,401
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,471,401Issuance
      related to patent agreement
                    
                    
                    200,000
                    
                    
                    
                    2
                    
                    
                    
                    719,998
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    720,000Net
      loss for the three months ended June 30, 2007
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (8,190,594
                    )
                    
                    
                    (8,190,594
                    )Balances
      at June 30, 2007
                    
                    
                    14,000,000
                    
                    
                    $
                    140
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    (28,425,178
                    )
                    
                    $
                    (28,425,038
                    )





See accompanying
notes.




9




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)


PERIODS
FROM INCEPTION (AUGUST 21, 2006) TO DECEMBER 31, 2008


(CONTINUED)


Common
      Stock
                            
                            
                            Paid-in
                            
                            
                            Other
                              comprehensive
                            
                            
                            AccumulatedShares
                            
                            
                            Amount
                            
                            
                            capital
                            
                            
                            income
                            
                            
                            deficit
                            
                            
                            TotalBalances
      at July 1, 2007
                            
                            
                            14,000,000
                            
                            
                            $
                            140
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            (28,425,178
                            )
                            
                            $
                            (28,425,038
                            )Net
      income for the three months ended September 30, 2007
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,725,814
                            
                            
                            
                            2,725,814Balances
      at September 30, 2007
                            
                            
                            14,000,000
                            
                            
                            $
                            140
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            (25,699,364
                            )
                            
                            $
                            (25,699,224
                            )Beneficial
      conversion on Series C Preferred-Stock Financing (5)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,766,833
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,766,833Allocation
      of deferred finance costs associated with Series C Preferred-Stock
      Financing (6), (5)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (5,231,442
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (5,231,442
                            )Placement
      agent warrants on Series C Preferred-Stock Financing (5)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            5,198,797
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            5,198,797Investor
      warrants on Series C Preferred-Stock Financing (5)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,633,167
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,633,167Accretion
      to redemption value on Series C Preferred-Stock Exchange
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (6,400,000
                            )
                            
                            
                            (6,400,000
                            )Investor
      warrants-Stock Exchange
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            17,796,834
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            17,796,834Registration
      payments net of dividends rolled into financing
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Reclassification
      of warrants to equity (7)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            4,008,912
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            4,008,912Employee
      stock compensation
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            450,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            450,000Employee
      stock option compensation
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            607,705
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            607,705Employee
      exercise of stock options
                            
                            
                            27,778
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Stock
      issued for legal work associated with Preferred C and SB2
                            
                            
                            35,334
                            
                            
                            
                            —
                            
                            
                            
                            77,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            77,000Net
      loss for the three month period ended December 31, 2007
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (38,392,805
                            )
                            
                            
                            (38,392,805
                            )Balances
      at December 31, 2007
                            
                            
                            14,063,112
                            
                            
                            $
                            140
                            
                            
                            $
                            29,307,806
                            
                            
                            $
                            —
                            
                            
                            $
                            (70,492,169
                            )
                            
                            $
                            (41,184,223
                            )Cashless
      exercise of warrants
                            
                            
                            38,400
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Stock
      issued for patent
                            
                            
                            200,000
                            
                            
                            
                            2
                            
                            
                            
                            419,998
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            420,000Net
      loss for the three month period ended March 31, 2008
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            11,802,971
                            
                            
                            
                            11,802,971Balances
      at March 31, 2008
                            
                            
                            14,301,512
                            
                            
                            $
                            142
                            
                            
                            $
                            29,727,804
                            
                            
                            $
                            —
                            
                            
                            $
                            (58,689,198
                            )
                            
                            $
                            (28,961,252
                            )Preferred
      Series D issuance
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,553,378
                            
                            
                            
                            —
                            
                            
                            
                            (316,615
                            )
                            
                            
                            2,236,763Accretion
      of Series C Preferred
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (9,513,273
                            )
                            
                            
                            (9,513,273
                            )Accretion
      of Series D Preferred
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (7,000,000
                            )
                            
                            
                            (7,000,000
                            )Cashless
      exercise of warrants
                            
                            
                            131,880
                            
                            
                            
                            2
                            
                            
                            
                            (2
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Stock
      issued as compensation for services
                            
                            
                            42,500
                            
                            
                            
                            1
                            
                            
                            
                            51,624
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            51,625Fair
      value adjustment on available for sale securities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            $
                            (31,135
                            )
                            
                            
                            —
                            
                            
                            
                            (31,135
                            )Net
      income for the three month period ended June 30, 2008
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            8,345,134
                            
                            
                            
                            8,345,134Balances
      at June 30, 2008
                            
                            
                            14,475,892
                            
                            
                            $
                            145
                            
                            
                            $
                            32,332,804
                            
                            
                            $
                            (31,135
                            )
                            
                            $
                            (67,173,952
                            )
                            
                            $
                            (34,872,138
                            )





See
accompanying notes.




10




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)


PERIODS
FROM INCEPTION (AUGUST 21, 2006) TO DECEMBER 31, 2008


(CONTINUED)


Common Stock
                      
                      
                      Paid-in
                      
                      
                      Other
                        comprehensive
                      
                      
                      AccumulatedShares
                      
                      
                      Amount
                      
                      
                      capital
                      
                      
                      income
                      
                      
                      deficit
                      
                      
                      TotalBalances
      at July 1, 2008
                      
                      
                      14,475,892
                      
                      
                      $
                      145
                      
                      
                      $
                      32,332,804
                      
                      
                      $
                      (31,135
                      )
                      
                      $
                      (67,173,952
                      )
                      
                      $
                      (34,872,138
                      )Stock
      issued as compensation for services
                      
                      
                      33,333
                      
                      
                      
                      —
                      
                      
                      
                      43,333
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      43,333Fair
      value adjustment on available for sale securities
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (31,450
                      )
                      
                      
                      —
                      
                      
                      
                      (31,450
                      )Net
      income for the three months ended September 30, 2008
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,895,405
                      
                      
                      
                      1,895,405Balances
      at September 30, 2008
                      
                      
                      14,509,225
                      
                      
                      $
                      145
                      
                      
                      $
                      32,376,137
                      
                      
                      $
                      (62,586
                      )
                      
                      $
                      (65,278,547
                      )
                      
                      $
                      (32,964,850
                      )Fair
      value adjustments on available for sale securities
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      574
                      
                      
                      
                      —
                      
                      
                      
                      574Net
      income for the three months ended December 31, 2008
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,052,171
                      
                      
                      
                      1,052,171Balances
      at December 31, 2008
                      
                      
                      14,509,225
                      
                      
                      
                      145
                      
                      
                      
                      32,376,137
                      
                      
                      
                      (62,013
                      )
                      
                      
                      (64,226,376
                      )
                      
                      
                      (31,912,107
                      )




See
accompanying notes.




11




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -
ORGANIZATION AND NATURE OF BUSINESS:





Organization





Willowtree
Advisor, Inc. ("the Company" or “OmniReliant Holdings, Inc”) was incorporated on
June 16, 2004 under the laws of the State of Nevada to offer landscape advisory
services. On November 22, 2006, Willowtree Advisor, Inc. entered into a
Securities Purchase Agreement with OmniReliant Corporation (“OmniReliant”) and
Cynthia Allison, pursuant to which OmniReliant purchased 5,000,000 shares of the
Company's common stock from Ms. Allison for $475,813. Pursuant to the Common
Stock Purchase Agreement, OmniReliant transferred the 5,000,000 shares to the
Company for cancellation. The transaction with Ms. Allison was accounted for as
a reduction of additional paid in capital.





Also on
November 22, 2006, Willowtree entered into an exchange agreement pursuant to
which the Company acquired one hundred percent (100%) of the equity of
OmniReliant from, the stockholders of OmniReliant. Contemporaneously, the
Company entered into to a securities purchase agreement with an accredited
investor for the sale of convertible preferred stock and warrants for an
aggregate purchase price of $3,000,000. As a result of the Exchange Agreement,
OmniReliant became a wholly-owned subsidiary of the Company and the Company
succeeded to the business of OmniReliant as its sole business.





The
Exchange Transaction is deemed to be a reverse acquisition. In accordance with
the Accounting and Financial Reporting Interpretations and Guidance provided by
the staff of the U.S. Securities and Exchange Commission, WillowTree (the legal
acquirer) is considered the accounting acquiree and OmniReliant (the legal
acquiree) is considered the accounting acquirer. A reverse merger is accounted
for as the issuance of shares of the accounting acquirer for the net-monetary
assets or liabilities of the accounting acquiree, accompanied by a
recapitalization of stockholders’ equity. The consolidated financial statements
of the combined entity will, in substance, be those of the accounting acquiree,
OmniReliant, which, as discussed below, was organized on August 21,
2006.





Effective
December 29, 2006, the Registrant’s name changed from Willowtree Advisor, Inc.
to OmniReliant Holdings, Inc. ("the Company").





Nature
of Business





OmniReliant
Corporation was incorporated on August 21, 2006 under the laws of the State of
Florida. The Company is in the development stage and has realized only minor
revenues from its planned operations. OmniReliant Corporation (“OmniReliant”)
engages in the creation, design, distribution, and sale of affordable luxury
products. OmniReliant makes these products available to both domestic and
international consumers through infomercials, live shopping networks, ecommerce,
direct mail and traditional retail channels. OmniReliant will first focus on
bringing the Kathy Hilton “Private Beauty Spa” product line to market, after
which OmniReliant plans to develop other personalities and designer licenses.
Ms. Hilton, who is the wife of Rick Hilton, the grandson of the Hilton Hotel
founder, has agreed to appear in television segments and
infomercials.





Until the
Company’s products are successfully marketed on a live shopping network or via
infomercials, we will not generate significant revenues and may not be
successful. If we cannot generate sufficient revenues to continue operations, we
will be forced to suspend or cease operations.




12




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -
ORGANIZATION AND NATURE OF BUSINESS (CONTINUED):





During
the current fiscal year, the Company purchased an office building in Pinellas
County, Florida, which is largely being leased to unrelated tenants. While real
estate operations is not the Company’s principal business, the Company accounts
for this new business as an identifiable business segment. See Note
13.





Going
Concern





The
Company is in its development stage and has incurred losses and has used cash in
its operating activities while devoting substantially all of its efforts to
raising capital and identifying and pursuing businesses opportunities. The
Company's total liabilities exceed its total assets and the Company's liquidity
is substantially dependent on raising capital. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates continuing operations, realization of assets
and liquidation of liabilities in the ordinary course of business. The Company's
ability to continue as a going concern is dependent upon its ability to raise
sufficient capital to implement a successful business plan and to generate
profits sufficient to become financially viable. The consolidated financial
statements do not include adjustments relating to the recoverability of recorded
assets or liabilities that might be necessary should the Company be unable to
continue as a going concern.





NOTE 2 -
BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements as of
December 31, 2008 and for the three and six months ended December 31, 2008 and
2007, and the period from August 21, 2006 (inception) to December 31, 2008 are
unaudited, but 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 included in this
report 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 and six months ended December 31, 2008 are not
necessarily indicative of the results for the year ending June 30,
2009.





The
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 June 30, 2008 Annual Report on Form 10-KSB and
subsequent filings on Form 8-K.








13




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:





Use of estimates - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make estimates and assumptions that affect the reported amounts in
our consolidated financial statements. Significant estimates embodied in the
Company’s financial statements include (i) developing fair value measurements to
record financial instruments, including investments (ii) developing cash flow
projections for purposes of evaluating the recoverability of long-lActual
results could differ from those estimates.





Principles of consolidation –
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, OmniReliant Corporation and OmniResponse
Corporation, and its 60.0% owned subsidiary OmniComm Studios LLC. All
significant intercompany accounts, profits and transactions have been eliminated
in consolidation. Entities where the Company does not have voting control but
has significant influence over its operations are accounted for under the equity
method.





Business Segments—We apply
the management approach to the identification of our reportable operating
segments as provided in accordance with Statements on Financial Accounting
Standards (“SFAS”) No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No. 131”). This approach
requires us to report our segment information based on how our chief decision
making officer internally evaluates our operating performance. Our business
segments consist of (i) Retail Products and Licensing and (ii) Commercial Real
Estate Services. See Note 13.





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, and when terms
provide that title passes at destination. Estimated amounts for sales returns
and allowances are recorded at the time of sale. License revenue is recorded
over the term of the license arrangement, as it is earned.





Shipping costs – 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.





Inventories –Inventories
consist of 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.





Property and equipment –Property and equipmentare recorded at our
cost. The Company depreciates these assets using the straight-line method over
lives that we believe the assets will have utility. Our expenditures for
additions, improvements and renewals are capitalized, while normal expenditures
for maintenance and repairs are charged to expense.





Intangible assets - Trademarks and licenses are
recorded at cost and those with finite lives are amortized over the estimated
periods of benefit.





14




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





Impairments – The Company’s
management evaluates its tangible and definite-lived intangible assets for
impairment under Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144) annually at the
beginning of our fourth fiscal quarter or more frequently in the presence of
circumstances or trends that may be indicators of impairment. Our evaluation is
a two step process. The first step is to compare our undiscounted cash flows, as
projected over the remaining useful lives of the assets, to their respective
carrying values. In the event that the carrying values are not recovered by
future undiscounted cash flows, as a second step, we compare the carrying values
to the related fair values and, if 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 principally of notes receivable. Investments in these debt securities
are carried as available-for-sale securities under Statement’s on Financial
Accounting Standards No. 115. Debt securities classified as available-for-sale securitiesare reported at fair value, with unrealized gains and losses excluded
from earnings and reported in a separate component of shareholders’ equity. Fair
value is based upon the present value of the forward cash-flows, discounted at a
credit-risk adjusted rate for similar instruments. The conversion option is
considered a fair-value enhancement when such amount is readily convertible into
cash, which, as a private, closely held company, it is not currently. Changes in
the fair value of available-for-sale debt securities arise from changes in
market interest rates for similar instruments and the period remaining to
maturity.





Deferred finance costs –
Direct, incremental finance costs related to debt instruments and other
financial instruments that are recorded in liabilities are included in other
assets and amortized over the term of the respective instrument through charges
to interest expense using the effective method or the straight-line method, when
the difference would not be material. Total deferred financing cost included in
other assets amount to $1,025,371 and $1,078,237, as of December 31, 2008 and
June 30, 2008, respectively. These amounts are net of accumulated amortization
of $125,633 and $30,287 as of December 31, 2008 and June 30, 2008,
respectively.





Share-based payment – We
apply the grant-date fair value method to our share-based payment arrangements
with employees under the rules provided in Statement of Financial Accounting
Standards No. 123R Accounting for Share-Based
Payment (SFAS 123R). For share-based payment transactions with parties
other than employees we apply EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Under SFAS 123R, share-based
compensation cost to employees is measured at the grant date fair value based on
the value of the award and is recognized over the service period, which is
usually the vesting period for employees. Share-based payments to non-employees
are recorded at fair value on the measurement date and reflected in expense over
the service period.





15




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





The
Company uses the Black-Scholes option valuation model to determine the
grant-date fair value of stock options and employee stock purchase plan shares.
The determination of the fair value of share-based payment awards on the date of
grant using an option-valuation model is affected by the Company’s stock price
as well as assumptions regarding a number of complex variables. These variables
include the Company’s expected stock price volatility over the term of the
awards, projected employee stock option exercise behavior, expected risk-free
interest rate and expected dividends. The Company estimates the expected term
and volatility of options granted based on values derived from its industry peer
group. Our decision to use these measures of expected term and volatility was
based upon the lack of availability of actively traded options in the Company’s
own common stock and the Company’s assessment that the peer group measure of
volatility is more representative of future stock price trends than the
Company’s historical volatility. The Company bases the risk-free interest rate
for option valuation on Constant Maturity Rates provided by the U.S. Treasury
with remaining terms similar to the expected term of the options. The Company
does not anticipate paying any cash dividends in the foreseeable future and
therefore uses an expected dividend yield of zero in the option valuation model.
In addition, SFAS No. 123(R) requires forfeitures of share-based awards to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. As this is the
Company’s initial issuance and no historical data exists to estimate pre-vesting
option forfeitures the Company has recorded stock-based compensation expense for
the all the awards vested. The Company uses the straight-line attribution as its
expensing method of the value of share-based compensation for options and
awards.





Advertising – The Company
generally expenses advertising when it is incurred in accordance with Statement
of Position 93-7 Accounting for
Advertising. Commencing in the current 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 expenses.
During the three and six months ended December 31, 2008, the Company expensed
$1,178,436 of costs related to infomercials, which amount is included in other
costs and expenses in our condensed consolidated statements of operations. As of
December 31, 2008, prepaid expense includes $215,553 of deferred infomercial
production costs that will be expensed upon the first airing.





Financial instruments –Financial instruments, as defined in Financial Accounting Standard No.
107 Disclosures about
Fair Value of Financial Instruments (Statement 107), consist of cash,
evidence of ownership in an entity, and contracts that both (i) impose on one
entity a contractual obligation to deliver cash or another financial instrument
to a second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (ii) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity, or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Accordingly, our financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, derivative financial instruments, and redeemable preferred
stock that we have concluded is more akin to equity than debt.




16




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





We carry
cash and cash equivalents, accounts payable and accrued liabilities at
historical costs; their respective estimated fair values approximate carrying
values due to their current nature. We carry derivative financial instruments at
fair value in accordance with Financial Accounting Standard No. 133 Accounting for Derivative
Financial Instruments and Hedging Activities (Statement 133). 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 Statement 133 and Financial
Accounting Standard No. 150 Financial Instruments with
Characteristics of both Equity and Liabilities (Statement
150).





Derivative financial
instruments – Derivative financial instruments, as defined in Statement
133 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.





Redeemable preferred stock –
Redeemable preferred stock (and, if ever, any other redeemable financial
instrument we may enter into) is initially evaluated for possible classification
as liabilities under Statements of Financial Accounting Standards No. 150 Financial Instruments with
Characteristics of Both Liabilities and Equity. Redeemable preferred
stock classified as liabilities is recorded and carried at fair value.
Redeemable preferred stock that does not, in its entirety, require liability
classification is evaluated for embedded features that may require bifurcation
and separate classification as derivative liabilities under Statement 133. In
all instances, the classification of the redeemable preferred stock host
contract that does not require liability classification is evaluated for equity
classification or mezzanine classification based upon the nature of the
redemption features. Generally, any feature that could require cash redemption
for matters not within our control, irrespective of probability of the event
occurring, requires classification outside of stockholders’ equity. See Note 10
for further disclosures about our redeemable preferred stock.





Fair value measurements -
Fair value measurement requirements are embodied in certain accounting standards
applied in the preparation of our financial statements. Significant fair value
measurements resulted from the application of SFAS 133 to our preferred stock
and warrant financing arrangements and SFAS 123R to our share-based payment
arrangements.




17




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





Financial
Accounting Standard No. 157 Fair Value
Measurements defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. It is effective for our fiscal year beginning
October 1, 2008. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this new standard will not require any new
fair value measurements. We do not believe that this standard will result in a
material financial affect. However, we will be required to expand our
disclosures, commencing with our quarterly period ending December 31, 2008, in
areas where other accounting principles require fair value measurements to
provide information related to the hierarchy of fair value inputs.





Financial
Accounting Standard No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities permits entities to choose to
measure many financial instruments and certain other items at fair value. It is
effective for our fiscal year beginning October 1, 2008. At this time, we do not
intend to reflect any of our current financial instruments at fair value (expect
that we are required to carry our derivative financial instruments at fair
value). However, we will consider the appropriateness of recognizing financial
instruments at fair value on a case by case basis as they arise in future
periods.





Registration payment
arrangements–Certain financial
instruments, including convertible preferred stock and the related freestanding
warrants issued in connection with those convertible instruments, are subject to
registration rights agreements, which impose penalties for our failure to
register the underlying common stock by a defined date. These potential cash
penalties, which are referred to as registration payment arrangements, are
recorded when payments are both probable and reasonably estimable, in accordance
with FAS No. 5, Accounting for
Contingencies.
These liquidated damages were included in the liabilities that were exchanged
for the Series C Preferred Stock. Accordingly, we no longer have an obligation
to pay registration payments.





Loss per common share - We
have applied the provisions in Statement of Financial Accounting Standards No.
128, Earnings per
Share (SFAS 128) in calculating our basic and diluted loss per common
share. Basic loss per common share represents our loss applicable to common
shareholders divided by the weighted average number of common shares outstanding
during the period. Diluted loss per common share gives effect to all potentially
dilutive securities. We compute the effects on diluted loss per common share
arising from warrants and options using the treasury stock method. We compute
the effects on diluted loss per common share arising from convertible securities
using the if-converted method. The effects, if anti-dilutive are excluded. The
following table illustrates the reconciliation of the weighted average common
shares to the denominator for diluted loss per common share:





18




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





Three
      Months Ended
                  December
      31,
                
                
                Six
      Months Ended
                  December
      31,
                
                
                Inception
      to
                  December
      312008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008Weighted
      average shares
                
                
                14,509,225
                
                
                
                14,011,233
                
                
                
                14,497,568
                
                
                
                14,022,330
                
                
                
                14,067,070Dilutive
      instruments:Warrants
      and stock options
                
                
                21,529,049
                
                
                
                *
                
                
                
                24,950,042
                
                
                
                *
                
                
                
                *Convertible
      securities:Series
      C Preferred Stock
                
                
                20,619,128
                
                
                
                *
                
                
                
                20,619,128
                
                
                
                *
                
                
                
                *Series
      D Preferred Stock
                
                
                14,000,000
                
                
                
                *
                
                
                
                14,000,000
                
                
                
                *
                
                
                
                *Denominator
      for dilutive shares
                
                
                70,657,402
                
                
                
                14,011,233
                
                
                
                74,066,738
                
                
                
                14,022,330
                
                
                
                14,067,070


*
These instruments were excluded during the respective periods because the effect
was anti-dilutive.





Reclassifications – Certain
reclassifications have been made to the prior period financial statements for
them to conform to the condensed classifications in the current
period.





Recent accounting
pronouncements -We have reviewed accounting
pronouncements and interpretations thereof that have effectiveness dates during
the periods reported and in future periods. We believe that the following
impending standards may have an impact on our future filings. Also see Fair
Value Measurements, above. The applicability of any standard is subject to the
formal review of our financial management and certain standards are under
consideration.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS 141(R)"), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination.  SFAS 141R is effective as of the beginning of
the first fiscal year beginning on or after December 15, 2008. Earlier adoption
is prohibited. As more fully discussed in the Subsequent Events footnote, the
Company is currently seeking to complete a purchase business combination. If the
purchase is completed before July 1, 2009, the Company will be required to apply
SFAS 141. However, if the transaction is completed on or after July 1, 2009, the
Company will be required to apply SFAS 141(R).





In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and132(R) (“SFAS 158”).  SFAS 158
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. SFAS 158
also improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions.  The effective date for an employer with
publicly traded equity securities is as of the end of the fiscal year ending
after December 15, 2006. The adoption of SFAS 158 did not have a material impact
on our financial position, results of operations or cash flows because we do not
have a defined benefit plan for our employees.





19





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No.
51. This statement amends ARB No. 51 to establish accounting and
reporting standards for the Non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS 160 will change the
classification and reporting for minority interest and non-controlling interests
of variable interest entities.  Following the effectiveness of SFAS
160, the minority interest and non-controlling interest of variable interest
entities will be carried as a component of stockholders’ equity. Accordingly,
upon the effectiveness of this statement, we will begin to reflect
non-controlling interest in our consolidated variable interest entities as a
component of stockholders’ equity. This statement is effective for fiscal years
and interim periods within those fiscal years, beginning on or after December
15, 2008 and earlier adoption is prohibited. Since we do not currently have
Variable Interest Entities consolidated in our financial statements, adoption of
this standard is not expected to have a material effect.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133 (“SFAS 161”).  SFAS 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. Entities
are required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations; and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years beginning after November 15, 2008, with early
adoption encouraged. We are currently evaluating the impact of SFAS 161, if any,
will have on our financial position, results of operations or cash flows. This
standard will affect the disclosures in our financial statements to provide the
required information.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." The Company does not expect the adoption of
SFAS 162 will have a material effect on its financial position, results of
operations or cash flows.





In July
2006, the FASB issued Interpretation No. 48, Accountingfor
uncertainty in Income Taxes(“FIN 48”). FIN No. 48
clarifies the accounting for Income Taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition and clearly scopes income taxes out of SFAS No. 5,
Accounting
for Contingencies. FIN 48 was effective for
fiscal years beginning after December 15, 2006. Accordingly, we have implemented
FIN 48 by summarizing and evaluating all potential uncertain tax positions. As a
result of our implementation, FIN No. 48 did not have a material impact on our
financial position, results of operations or cash flows, although, as discussed
in our income tax disclosures, certain positions are present that require our
periodic review in maintaining compliance with this standard.




20




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





In
December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements (FSP 00-19-2) which addresses accounting for
registration payment arrangements. FSP 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies.  FSP 00-19-2 further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other applicable generally accepted accounting principles
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement.  For registration payment
arrangements and financial instruments subject to those arrangements that were
entered into prior to the issuance of EITF 00-19-2, this guidance shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2006 and interim periods within those fiscal years. The adoption of
EITF 00-19-02 did not have a material impact on our financial position, results
of operations or cash flows, because we have no current transactions that embody
Registration Payment Arrangements, as defined in the standard.





In April
2008, the FASB issued FSP No. FAS 142-3 Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. The Company is required to adopt FSP 142-3 on October
1, 2008. The guidance in FSP 142-3 for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. The Company is currently evaluating the impact of FSP 142-3 on its
financial position, results of operations or cash flows, and believes that the
established lives will continue to be appropriate under the FSP.





In May
2008, the FASB issued FSP Accounting Principles Board 14-1 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
Company is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its financial position, results of operations or cash
flows.





21





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock,
which supersedes the definition in EITF 06-01 for periods beginning after
December 15, 2008 (our fiscal year ending September 30, 2010). The objective of
this Issue is to provide guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity's own stock
and it applies to any freestanding financial instrument or embedded feature that
has all the characteristics of a derivative in of Statement 133, for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception in paragraph 11(a) of Statement 133 (the “Paragraph
11(a) Exemption). This Issue also applies to any freestanding financial
instrument that is potentially settled in an entity's own stock, regardless of
whether the instrument has all the characteristics of a derivative in Statement
133, for purposes of determining whether the instrument is within the scope of
Issue 00-19. We currently have warrants that embody terms and conditions that
require the reset of their strike prices upon our sale of shares or
equity-indexed financial instruments and amounts less than the conversion
prices. These features will no longer be treated as “equity” under the EITF once
it becomes effective. Rather, such instruments will require classification as
liabilities and measurement at fair value. Early adoption is precluded.
Accordingly, this standard will be adopted in our quarterly period ended
September 30, 2009.





In June
2008, the Emerging Issues Task Force issue EITF Consensus No. 08-04 Transition
Guidance for Conforming Changes to Issue 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, which is effective for years ending after December 15,
2008 (our fiscal year ending June 30, 2009). Early adoption is not permitted.
The overall objective of the Issue is to conform the requirements of EITF 00-27
and Financial Accounting Standard No. 150 with EITF 98-5 to provide for
consistency in application of the standard. We computed and recorded a
beneficial conversion feature in connection with certain of our prior financing
arrangements and do not believe that this standard has any material effect on
that accounting.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future financial
statements.





22





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4 –
INVESTMENTS:





The
Company’s investments consisted of the following on December 31, 2008 and June
30, 2008:





December
      31,
                  2008
                
                
                June
      30,
                  2008Available-for-sale
      investments:Abazias,
      Inc., face value $500,000, 10.0% convertible note
                  receivable,
      due December 31, 2009 (Cost basis: $500,000)
                
                $
                491,229
                
                
                $
                —Carolyn
      & Company, face value $450,000, 6.0%
                  convertible
      note receivable, due
                  February
      2010 (Cost basis: $450,000)
                
                
                431,966
                
                
                
                426,558Total
      available-for-sale type investments
                
                
                923,195
                
                
                
                426,558Other
      investments, at cost
                
                
                100,000
                
                
                
                —Total
      investments
                
                $
                1,023,195
                
                
                $
                426,558





Abazias,
Inc:





As more
fully discussed in Subsequent Events, on December 3, 2008, the Company entered
into a securities purchase agreement (the “Purchase Agreement”) with Abazias,
Inc. (“Abazias”), a Delaware corporation and Abazias.com, Inc., (“Abazias”), a
Nevada corporation and wholly owned subsidiary of Abazias, pursuant to which the
Company has agreed to purchase substantially all of the assets of Abazias Sub
for an aggregate purchase price of: (i) a loan in the amount of Five Hundred
Thousand Dollars ($500,000) (the “Loan”) and; (ii) the issuance of up to
thirteen million one thousand (13,001,000) shares of the Company’s zero coupon
convertible preferred stock (the “Preferred Stock”) to the Shareholders of
Abazias, subject to adjustment and approval of the shareholders of each company.
During the quarterly period ended September 30, 2008, the Company funded the
loan. The underlying Note bears interest at 10% per annum and matures on
December 31, 2009 (the “Maturity Date”). The full principal amount of the Note,
along with any interest accrued thereon, is due upon a default under the terms
of the Note.





Carolyn
& Company:





On
February 12, 2008, we obtained a Convertible Promissory Note for $150,000 which
accrues interest at 6% per On February 12, 2008, we purchased a face-value
$150,000, 6.0% per annum, Convertible Promissory Note from an early-stage,
Member-Managed Limited Liability Company in the Media Sector. Principal and
interest are payable on February 12, 2010. The Convertible Promissory Note is
convertible at our option into Member Units representing an aggregate of 2.0% of
the investee’s aggregate member units. On April 3, 2008, we amended the
Convertible Promissory Note to add full-ratchet anti-dilution protection and a
“Most Favored Nation” provision which would allow us to exchange the promissory
note for any securities issued by the Investee in a subsequent financing on a
dollar by dollar basis. On April 4, 2008, we invested an additional $300,000 and
received a Convertible Promissory Note which accrues interest at 6% per year and
is due and payable on February 12, 2010. We have the option to convert the note
any time prior to maturity and we would receive Membership Interests equal to
the principle balance on the note divided by $10,000,000. This note contains
full ratchet anti-dilution protection and a “Most Favored Nation”
provision.





23





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4 –
INVESTMENTS (CONTINUED):





Valcom
Investment:





On
January 6, 2009, subsequent to the close of the current quarter, the Company
entered into a note purchase agreement (the “Purchase Agreement”) with Valcom,
Inc. (“Valcom”), a Delaware corporation, whereby it purchased a 10% secured
convertible promissory note (the “Note”) in the principal amount of $100,000
with a conversion price of $0.10 per share, which is secured pursuant to a
security agreement (the “Security Agreement”) and a warrant to purchase
1,000,000 shares of Valcom’s Common Stock at an exercise price of $0.20 (the
“Warrant” and together with the Agreement, the Note and the Security Agreement,
the “Transaction Documents”). Pursuant to the Transaction Documents, Valcom
promises to pay to the Company $100,000 in cash on January 6, 2010. The Note
bears interest at the rate of 10% per annum until the maturity
date.





NOTE 5 –
PROPERTY AND EQUIPMENT:





The
Company’s property and equipment consisted of the following on December 31, 2008
and June 30, 2008:





December 31,
                    2008
                  
                  
                  June
      30,
                    2008Land
                  
                  $
                  500,000
                  
                  
                  $
                  —Buildings
      and building improvements
                  
                  
                  1,529,755
                  
                  
                  
                  —Furnishings
      and office equipment
                  
                  
                  775,432
                  
                  
                  
                  —2,805,187
                  
                  
                  
                  —Less
      accumulated depreciation
                  
                  
                  (103,529
                  )
                  
                  
                  —$
                  2,701,658
                  
                  
                  $
                  —





The
Company depreciates buildings and improvements and furnishings and office
equipment over estimated useful lives of 15 and 5 years,
respectively.





Depreciation
expense amounted to $61,377 and $103,529 during the three and six months ended
December 31, 2008, respectively.





24





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6 –
INTANGIBLE ASSETS:





The
Company’s intangible assets consisted of the following on December 31, 2008 and
June 30, 2008:





December
      31,
                  2008
                
                
                June
      30,
                  2008Patent
      costs
                
                $
                1,169,412
                
                
                $
                1,169,412License
      agreement
                
                
                753,502
                
                
                
                653,005Other
      fully-amortized intangibles
                
                
                79,402
                
                
                
                79,4022,002,316
                
                
                
                1,901,819Less
      accumulated amortization
                
                
                (762,165
                )
                
                
                (623,307
                )$
                1,240,151
                
                
                $
                1,278,512





Aggregate
      Amortization Expense:Three
      months ended December 31, 2008
                  
                  $
                  69,429Six
      months ended December 31, 2008
                  
                  $
                  138,361Inception
      (August 21, 2006) to December 31, 2008
                  
                  $
                  762,165Estimated
      Amortization Expense:Period
      from January 1, 2009 to June 30, 2009:
                  
                  $
                  113,594Year
      ending June 30:2010
                  
                  
                  187,7112011
                  
                  
                  180,6862012
                  
                  
                  42,7842013
                  
                  
                  38,6672014
                  
                  
                  38,667Thereafter
                  
                  
                  638,042$
                  1,240,151





Patent costs— On June 18,
2007, the Company entered into an Agreement for Acquisition of a Patent
Application with Product & Technology Partners LLC. Pursuant to the
Agreement, the Company acquired from Seller the rights to a patent-pending
self-warming topical pharmaceutical product capable of delivering salicylic acid
foam suitable for consumer use. In consideration for the rights to the product,
the Company agreed to pay Seller in the following manner:





a)
            Upon
      execution of the Agreement, the Company paid Seller (i) an aggregate of
      Twenty Five Thousand dollars ($25,000) and (ii) issued to the Seller Two
      Hundred Thousand (200,000) shares of the Company’s common
      stock.




b)
            Following
      the completion of due diligence (which shall be six months from the date
      of the Agreement), if the Company is satisfied with the Product and
      intends to offer Product for sale, the Company shall pay to Seller Twenty
      Five Thousand dollars ($25,000), paid January 22,
  2008.




c)
            The
      Company shall also pay Seller installment payments of up to a maximum of
      Four Hundred Thousand Dollars ($400,000), payable over a period of 4 years
      beginning six months from the date of the Agreement. If no revenues are
      generated from the sale of the Product, no installment payments shall be
      due.




25




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6 –
INTANGIBLE ASSETS (CONTINUED):





The
Company has received a written opinion issued by the USPTO as International
Search Authority and a response was filed as entering Chapter ii of the PCT
designating the USPTO as International Examining Authority. The Company has
consulted with the scientist regarding the application and we believe the
technology has many future uses.  Once approved, the Company plans to
market and sell products using the technology acquired.





The
Company estimates the patent pending application will take up to 3 years to go
through the approval process. At such time the Company will begin amortizing the
cost over 20 years, the useful life of the asset. In the event additional
assistance is required with the patent pending application or development of a
product the members of Product & Technology Partners, LLC have agreed to
work with the Company on a consulting basis.





Licensing Agreement – On
October 13, 2006, the Company entered into an agreement with a related party.
This agreement was subsequently amended on November 20, 2006. Under the terms of
the Licensing Agreement the Company has obtained the exclusive right and license
to certain licensed products through December 31, 2011 with an option to renew
for an additional five year period provided all the minimum royalty payments
have been paid during the initial term. In consideration of the license granted
and the services to be performed, the Company will compensate the other party an
annual guaranteed minimum (payable semi-annually) royalty as
follows:





Annual
                                    
                                    
                                    
                                    MinimumPeriod
                                    
                                    Dates
                                    
                                    Royalty1
                                    
                                    Effective
      Date to 12/31/07
                                    
                                    $
                                    1,000,0002
                                    
                                    1/1/08
      to 12/31/08
                                    
                                    $
                                    400,0003
                                    
                                    1/1/09
      to 12/31/09
                                    
                                    $
                                    400,0004
                                    
                                    1/1/10
      to 12/31/10
                                    
                                    $
                                    400,0005
                                    
                                    1/1/11
      to 12/31/11
                                    
                                    $
                                    400,0006
                                    
                                    1/1/12
      to 12/31/15
                                    
                                    $
                                    400,000





In
addition to the minimum royalty payment the Company will also compensate the
other party a sales royalty of eight percent (8%) on each annual period's net
sales made in all venues other than infomercials; a minimum of three percent
(3%) on each annual period's net sales made through infomercials and four
percent (4%) should the revenues exceed media expenditures by a three to one
media ratio. The sales royalty is payable on a quarterly basis within forty-five
(45) days after the close of the prior quarter's sales. The payment of sales
royalties are credited against the guaranteed minimum royalty payment for any
annual period.





In
addition to the sales royalties and guaranteed minimum royalties being paid the
Company also delivered three million (3,000,000) shares of the Company's common
stock, which represented 25% of the issued and outstanding common stock on that
date.





26





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6 –
INTANGIBLE ASSETS (CONTINUED):





On
November 20, 2006 the Licensing Agreement was amended to change the date of the
first annual Guaranteed Minimum Royalty payment from thirty (30) days following
the effective date to January 3, 2007. In addition, the amendment revised
subsequent payments to occur on January 1st and
July 1st of each
annual period. On November 22, 2006 the Company made a payment of $850,000
pursuant to this agreement. On January 10, 2007 the Company made a payment of
$150,000 pursuant to the licensing agreement. The payment was the final payment
of the $1,000,000 initial installment due under the agreement.





For
purposes of the agreement, Adjusted Gross Collected Revenues (“AGCR”) means
ORH’s Gross Revenue from sales of the Products, less all of the
following:





·
            Shipping
      and Handling, credit card fees, refunds, credits or other allowances on
      business, as actually incurred and as reserved for (“Returns”);
      not





·
            Sales,
      excise, use, value added or any like
taxes;





·
            Cost
      of goods for purposes of liquidation or closeout (“Liquidation Sales”).
      Licensor shall have the first right of refusal to purchase the liquidation
      inventory at a penny above ORH’s best
offer.





The
reserve for Returns and un-collectibles shall initially be ten percent (10%) of
Adjusted Gross Revenues, and shall be adjusted periodically based upon actual
experience.





The
Company has the right to sell and distribute the Products at such prices and on
such terms and conditions (including shipping and handling charges) as ORH may
establish. In the event that ORH fails, during the one-year period commencing
upon Rollout and continuing thereafter, to generate $2,000,000 in Product sales
per year (“Minimum Quantities”), Licensor may provide 30 days prior written
notice to ORH and make ORH’s rights hereunder non-exclusive. For the life of the
Product, ORH or a designated third party, such as the manufacturer, on behalf of
ORH will maintain and keep in force product liability insurance with an insurer
approved by Licensor in the amounts not less than $2,000,000 per occurrence and
$5,000,000 in the aggregate covering all Products licensed by ORH from Licensor.
ORH, Licensor and, upon ORH’s request, any of ORH’s subsidiaries, affiliates or
sub-licensees who are involved with the marketing and distribution of the
Products shall be named as additional insured on all such insurance policies,
each of which shall be endorsed so as to provide at least 30 days notice to ORH
of its cancellation, termination or non-renewal.





27





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 7 –
LONG-TERM DEBT:





The
Company’s long-term debt consisted of the following at December 31,
2008:





AmountInitial
      $2,000,000 six-year, variable rate mortgage note, with interest at the
      Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75%
      during the first three years and a floor of 6.75% and a cap of 8.75%
      during the second three years; principal and interest payments of $13,507
      are payable over the six year term based upon a twenty-five year
      amortization schedule, with $1,773,655 payable at maturity; secured by
      real estate; guaranteed by related parties.
                  
                  $
                  1,994,694Less
      current maturities
                  
                  
                  (32,160
                  )Long-term
      debt
                  
                  $
                  1,962,534Maturities
      of long-term debt are as follows:Six
      months ending June 30, 2009
                  
                  $
                  15,817Year
      ending June 30:2010
                  
                  
                  33,2302011
                  
                  
                  35,4772012
                  
                  
                  37,8762013
                  
                  
                  40,4372014
                  
                  
                  43,172Thereafter
                  
                  
                  1,788,685$
                  1,994,694





The
Company has concluded that the interest rate collar is clearly and closely
related to the host debt instrument and, accordingly, it does not require
bifurcation and recognition at fair value. The interest rate in effect during
the current quarterly period was at the 6.5% floor. Interest paid in cash during
the quarterly period amounted to $21,709.





28





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 8 -
COMMITMENTS & CONTINGENCIES:





Consulting Agreement - On
October 1, 2006 the Company entered into a six month consulting agreement with
Harrington Business Development, LLC (“HBD”) to provide services related to the
creation, production, and editing of infomercials and also to consult the
Company on marketing and distribution of its products. In consideration for the
services performed the Company will compensate HBD $15,000 per month. On April
1, 2007 the Company verbally extended the term of the Harrington Business
Development, LLC consulting agreement for an additional three months. The
agreement was not renewed subsequent to June 30, 2007. The shareholders of HBD
are also shareholders of the Company.  Further, on July 14, 2008 the
Company entered into a one year consulting agreement with HBD to provide
services related to, but not be limited to, the media production related to The
Franklin Mint, Inc., media purchase and management, supervision of editing and
dubbing of productions, shipping of tapes or DVDs to television or radio
networks and stations, assistance in website development, assistance in
establishing call centers and scripting for inbound calls, tracking of media
results, and any other assistance that is needed from the Company. In
consideration for the services performed the Company will compensate HBD $50,000
per month net of $5,000 for office rent. The Company has right to extend the
term of the Harrington Business Development, LLC consulting agreement for an
additional year.





Employment Agreement - On
October 31, 2006 the Company entered into an employment agreement with Paul
Morrison to act as its Chief Operating Officer and President. Under the terms of
the agreement Mr. Morrison's contract will be for a term of two (2) years with
automatic successive two (2) year term renewals subject to a notice of
non-renewal. In consideration for the services he is to receive a base salary of
$120,000 per year with annual pay increases of ten percent (10%); incentive
bonus of one and half percent (1.5%) of pretax profits on the sales of certain
products payable the day after the Company's 10-KSB annual report is filed with
the SEC; the issuance of 300,000 shares the Company's restricted common stock
payable as follows: 150,000 shares upon execution of the agreement and 150,000
shares on the first anniversary of employment with the Company. On October 31,
2006, prior to the recapitalization, OmniReliant Corporation issued Mr. Morrison
150,000 shares and recorded $15,000 of stock compensation expense related to
this agreement.





Assignment of Contract - On
November 10, 2006 the Company entered into an agreement with Reliant
International Media, LLC (“RIM”) to assume a marketing and distribution
agreement RIM had with a third party manufacturer of spa related products. The
original agreement was entered into on September 25, 2006 for a term of twelve
(12) months. The agreement gives the Company exclusive rights to market and
distribute the product in the United States and Canada. The Company also
received the non-exclusive right to all other countries. The shareholders of RIM
are also shareholders of the Company.





International Distribution Agreement
- On March 19, 2007, the Company entered into an International
Distribution Agreement with Reliant International Media LLC. Pursuant to the
Agreement, the Company has granted Reliant the exclusive right to represent the
Company with respect to sales of certain products through retail distribution
channels in the United Kingdom, Japan and Korea. The products covered by the
agreement include any and all products marketed by the Company under the Kathy
Hilton name, likeness or brand, excluding all perfume and perfume related
products. In consideration for Reliant’s marketing services, the Company has
agreed to pay to Reliant a royalty equal to ten percent of the Company’s gross
revenues. The shareholders of Reliant International Media are also shareholders
of the Company.





29





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 8 -
COMMITMENTS & CONTINGENCIES (CONTINUED):





Public Relations Agreement -On April 27, 2007 the Company entered into a three year consulting
agreement with a public relations firm. Pursuant to the terms of the agreement
the Company will pay the following as compensation for services: $7,500 payable
each month; 1,000,000 warrants with a term of 3 years, issued at the onset,
entitling the holder to purchase shares of the Company’s common stock at an
exercise price of $1.00 per share; exclusive rights to all future public
relation contracts awarded to the Company for Kathy Hilton licenses; and
compensation at the rate of 3% of projected gross wholesale sales per year on
all future Kathy Hilton licenses awarded to the Company. For the year ended June
30, 2007 the Company recognized $2,490,151 of expense related to this agreement,
of which $2,471,401 was associated with the 1,000,000 warrants which were
issued. The value of the warrants was determined by using the Black-Scholes
option pricing model. The Company used a volatility percentage of 23.6%, a risk
free interest rate of 5.00%, and an expected life of 1 1⁄2 years in calculating
the fair value. In January 2008 the Company notified the public relations firm
of their desire to terminate their agreement early. The Company believes it has
no further obligation pursuant to this agreement.





NOTE 9 –
STOCKHOLDERS’ EQUITY (DEFICIT):





Change
in Authorized Shares:





Effective
August 25, 2008, the Company amended its articles of incorporation to increase
the number of authorized shares from 100,000,000 to 500,000,000, including
100,000,000 authorized shares of preferred stock.





Common Stock Purchase
Agreement:





On
November 22, 2006 the Company and OmniReliant entered into a securities purchase
agreement with the Company's then principal stockholder, Cynthia Allison,
pursuant to which OmniReliant purchased 5,000,000 shares of the Company's common
stock from Ms. Allison for a purchase price of $475,813. Pursuant to the Common
Stock Purchase Agreement, OmniReliant transferred the 5,000,000 shares to the
Company for cancellation. The transaction with Ms. Allison was accounted for as
a reduction of additional paid in capital.





Exchange
Agreement:





Pursuant
to the Exchange Agreement, dated November 22, 2006, the Company issued
12,300,000 shares of common stock to the OmniReliant stockholders. The common
stock was issued to the following stockholders pursuant to the Exchange
Agreement:




Number
      ofName
                
                SharesApogee
      Financial Investments, Inc.
                
                
                3,000,000ZTZ
      Trust Inc.
                
                
                3,000,000Kevin
      Harrington
                
                
                1,500,000Tim
      Harrington
                
                
                1,500,000KRH
      Licensing Company, LLC
                
                
                3,000,000Paul
      Morrison
                
                
                300,000Total
                
                
                12,300,000





30





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 9 –
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED):





Stock
Options and Warrants:





The
following table summarizes the activity related to all Company stock options and
warrants for the period from August 21, 2006 (inception) through December 31,
2008:





Weighted
      AverageExercise
      Price
                
                
                Exercise
      PriceStock
                
                
                Per
      Share
                
                
                Per
      ShareWarrants
                
                
                Options
                
                
                Warrants
                
                
                Options
                
                
                Warrants
                
                
                OptionsOutstanding
      at August 21, 2006
                
                
                —
                
                
                
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Outstanding
      at June 30, 2006
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Granted
                
                
                9,004,000
                
                
                
                —
                
                
                
                1.00-3.75
                
                
                
                —
                
                
                
                2.13
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
      or Expired
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Outstanding
      at June 30, 2007
                
                
                9,004,000
                
                
                
                —
                
                
                
                1.00-3.75
                
                
                
                —
                
                
                
                2.13
                
                
                
                —Granted
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
      or Expired
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Outstanding
      at September 30, 2007
                
                
                9,004,000
                
                
                
                —
                
                
                
                1.00-3.75
                
                
                
                —
                
                
                
                2.13
                
                
                
                —Granted
                
                
                23,092,171
                
                
                
                350,000
                
                
                
                0.75-2.00
                
                
                
                1.00
                
                
                
                1.72
                
                
                
                1.00Exercised
                
                
                —
                
                
                
                (50,000
                )
                
                
                —
                
                
                
                (1.00
                )
                
                
                —
                
                
                
                (1.00
                )Outstanding
      at December 31, 2007
                
                
                32,096,171
                
                
                
                300,000
                
                
                
                0.75-3.75
                
                
                
                1.00
                
                
                
                1.70
                
                
                
                1.00Granted
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                (96,000
                )
                
                
                —
                
                
                
                (1.25-3.75
                )
                
                
                —
                
                
                
                (2.29
                )
                
                
                —Outstanding
      at March 31, 2008
                
                
                32,000,171
                
                
                
                300,000
                
                
                
                0.75-3.75
                
                
                
                1.00
                
                
                
                1.46
                
                
                
                1.00Granted
                
                
                30,100,000
                
                
                
                —
                
                
                
                0.50-0.75
                
                
                
                —
                
                
                
                0.74
                
                
                
                —Exercised
                
                
                (139,200
                )
                
                
                —
                
                
                
                (075-3.75
                )
                
                
                —
                
                
                
                (1.69
                )
                
                
                —Cancelled
      or expired
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Outstanding
      at June 30, 2008
                
                
                61,960,971
                
                
                
                300,000
                
                
                
                0.75-3.75
                
                
                
                1.00
                
                
                
                0.63
                
                
                
                1.00Granted
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Cancelled
      or expired
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Outstanding
      at September 30, 2008
                
                
                61,960,971
                
                
                
                300,000
                
                
                
                0.75-3.75
                
                
                
                1.00
                
                
                
                0.63
                
                
                
                1.00Granted
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Cancelled
      or expired
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                —Outstanding
      at December 31, 2008
                
                
                61,960,971
                
                
                
                300,000
                
                
                
                0.75-3.75
                
                
                
                1.00
                
                
                
                0.63
                
                
                
                1.00Exercisable
      at December 31, 2008
                
                
                61,960,971
                
                
                
                300,000
                
                
                
                0.75-3.75
                
                
                
                1.00
                
                
                
                0.63
                
                
                
                1.00





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





On
January 15, 2009, the Company issued 1,845,000 stock options to employees. The
options have strike prices of $0.50 and expire in five years. The award vests to
the benefit of the employee over a three year period. Total grant date fair
value of these options amounted to $344,339 and will be recorded as compensation
over the vesting period.





31





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 9 –
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED):





2007
Long Term Incentive Plan:





On
November 21, 2007 the Company established a Long Term Incentive Plan (the “2007
Incentive Plan”) for the purposes of advancing the interests of the Company and
our shareholders by providing incentives to certain of our employees and other
key individuals who perform services for us, including those who contribute
significantly to the strategic and long-term performance objectives and growth
of the Company. The 2007 Incentive Plan is administered by a committee (the
“Committee”) appointed by the Board of Directors. Currently, the Committee is
comprised of all members of the Board of Directors acting as a group. The
Committee has the power to interpret the 2007 Incentive Plan and to prescribe
rules, regulations and procedures in connection with the operations of the 2007
Incentive Plan. The Committee may delegate administrative responsibilities under
the 2007 Incentive Plan to any one or more of its members or other persons,
except as may otherwise be required under applicable law or listing standards
for an exchange on which the Company’s common stock may be listed. The 2007
Incentive Plan provides for the granting of several types of awards, including
stock options, performance grants and other awards deemed by the Committee to be
consistent with the purposes of the 2007 Incentive Plan. Awards may be granted
alone, or in conjunction with one or more other awards, as determined by the
Committee.





The 2007
Incentive Plan was effective as of November 21, 2007, and was approved by the
Company’s board of directors. The Company’s shareholders have not voted on
approval of the 2007 Incentive Plan. A maximum of two million shares (2,000,000)
of common stock has been authorized to be issued under the 2007 Incentive Plan
in connection with the grant of awards, subject to adjustment for corporate
transactions, including, without limitation, any stock dividend, forward stock
split, reverse stock split, merger or recapitalization. Of this amount, no more
than two million (2,000,000) shares of common stock may be issued as incentive
stock options. Common stock issued under the 2007 Incentive Plan may be either
newly issued shares, treasury shares, reacquired shares or any combination
thereof. If common stock issued as restricted stock, restricted stock units or
otherwise subject to repurchase or forfeiture rights is reacquired by us
pursuant to such rights, or if any award is cancelled, terminates, or expires
unexercised, the common stock which would otherwise have been issuable pursuant
to such awards will be available for issuance under new awards. All awards under
the 2007 Incentive Plan shall be granted within 10 years of the date the plan
was adopted.





The
Committee has exclusive discretion to select to whom awards will be granted; to
determine the type, size, terms and conditions of each award; to modify or
waive, within certain limits, the terms and conditions of any award; to
determine the time when awards will be granted; to establish performance
objectives; to prescribe the form of documents representing awards under the
2007 Incentive Plan; and to make all other determinations which it deems
necessary, advisable or desirable in the interpretation and administration of
the 2007 Incentive Plan. At the discretion of the Committee, awards may be made
under the 2007 Incentive Plan in assumption of, or in substitution for,
outstanding awards previously granted by the Company, any predecessor or a
company acquired by the Company or with which it combines. The Committee has the
authority to administer and interpret the 2007 Incentive Plan, and its decisions
are final, conclusive and binding. We anticipate that all of our employees and
directors will be eligible to participate in the 2007 Incentive
Plan.





32





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 9 –
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED):





Common
Stock Equivalents:





Below is
a detailed list of the Company’s common stock equivalents:


CommonEquivalentsSecurities:Series
      C Preferred Stock
                    
                    
                    20,619,128Series
      D Preferred Stock
                    
                    
                    14,000,000Warrants:Class
      A-1 Warrants
                    
                    
                    3,000,000Class
      A-2 Warrants
                    
                    
                    3,000,000Class
      B-1 Warrants
                    
                    
                    480,000Class
      B-2 Warrants
                    
                    
                    480,000Class
      BD-1 Warrants
                    
                    
                    300,000Class
      BD-2 Warrants
                    
                    
                    300,000Class
      BD-3 Warrants
                    
                    
                    300,000Class
      BD-4 Warrants
                    
                    
                    1,600Class
      BD-5 Warrants
                    
                    
                    1,600Class
      BD-6 Warrants
                    
                    
                    1,600Class
      BD-7 Warrants
                    
                    
                    821,333Class
      BD-8 Warrants
                    
                    
                    821,333Class
      BD-9 Warrants
                    
                    
                    821,333Class
      BD-10 Warrants
                    
                    
                    700,000Class
      BD-11 Warrants
                    
                    
                    1,400,000Warrant
      issued to consultants
                    
                    
                    1,000,000Class
      C-1 Warrants
                    
                    
                    10,266,086Class
      C-2 Warrants
                    
                    
                    10,266,086Class
      D-1 Warrants
                    
                    
                    28,000,000Employee
      Stock Options
                    
                    
                    300,000Total
      common stock equivalent shares
                    
                    
                    96,880,099





33





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS:





This
footnote includes (i) the details of our redeemable preferred stock, (ii) our
accounting for the Series A, Series B, Series C, and Series D Financing
Transactions both on the inception dates and thereafter, (iii) our consideration
related to and accounting for warrants issued in these transactions and (iv)
registration payment arrangements extended to the investors.





Redeemable
preferred stock consists of the following as of December 31, 2008 and June 30,
2008:





December 31,
                  2008
                
                
                June
      30,
                  2008Series
      A 10% Convertible Preferred Stock, 3,000 shares
                  issued,
      none outstanding
                
                $
                —
                
                
                $
                —Series
      B 10% Convertible Preferred Stock, 1,000 shares
                  issued,
      none outstanding
                
                
                —
                
                
                
                —Series
      C Convertible Preferred Stock, 10,620,000 shares
                  issued
      and outstanding (liquidation value $10,620,000)
                
                
                28,969,634
                
                
                
                28,969,634Series
      D Convertible Preferred Stock, 7,000,000 shares
                  Issued
      and outstanding (liquidation value $7,000,000)
                
                
                7,000,000
                
                
                
                7,000,000$
                35,969,634
                
                
                $
                35,969,634





Series
A, Series B, Series C, and Series D Convertible Preferred Stock:





On
November 22, 2006, we designated 3,000 shares of our preferred stock as Series A
10% Convertible Preferred Stock (“Series A Preferred”). On May 25, 2007, we
designated 1,000 shares of our preferred stock as Series B 10% Convertible
Preferred Stock (“Series B Preferred”). On October 18, 2007, we designated
10,620,000 shares of our preferred stock as Series C Convertible Preferred Stock
(“Series C Preferred”). On April 30, 2008, we designated 7,000,000 shares of our
preferred stock as Series D Convertible Preferred Stock (“Series D
Preferred”).The Series A has a par value of $0.0001, a stated value of $1,000
and a liquidation preference of $1,000, plus accrued dividends, if any. The
Series B has a par value of $0.0001, a stated value of $1,000 and a liquidation
preference of $1,000.  The Series C has a par value of $0.0001, a
stated value of $1.00 and a liquidation preference of $1.00. The Series D has a
par value of $0.0001, a stated value of $1.00 and a liquidation preference of
$1,000. The Series A Preferred, Series B Preferred, Series C Preferred and
Series D Preferred were convertible into our common stock at stated conversion
prices of $1.00, $1.25, $0.75, and $0.50 respectively, based upon the stated
value. The conversion prices are subject to anti-dilution protection for (i)
traditional capital restructurings, such as splits, stock dividends and
reorganizations and (ii) sales or issuances of common shares or contracts to
which common shares are indexed at less than the stated conversion
prices.





34





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





Holders
of the Company’s Series C and D Preferred are not entitled to
dividends.  Holders of the Company’s Series A Preferred and the Series
B Preferred (collectively the “Series A and B Preferred”) were entitled to
cumulative dividends at the rate per share of 10% per annum, payable quarterly
on January 1, April 1, July 1 and October 1. Dividends were payable in cash or
common stock, as follows: (a) if funds were legally available and certain equity
conditions, described below, have not been met during the preceding five
consecutive trading days payment must be in cash; (b) if funds were available
and the equity conditions have been met during the five preceding trading days
the payment may be made, at the sole election of the Company, in either cash or
common shares (at a 10% discount to the trading market price, as defined in the
Certificate of Designation).





The
Certificate of Designation provided that dividends were cumulative and
unconditionally payable, even in the absence of a Board declaration.
Accordingly, we accrued dividends as they were earned. As of October 18, 2007,
(the date the Series A and B Preferred were exchanged for Series C Preferred),
we had accrued $285,355 and $24,209 in dividends related to the Series A and B
Preferred shares, respectively. Preferred stock dividends are recorded as a
reduction of stockholders’ equity. However, we also reflect preferred stock
dividends as a reduction of our net loss for purposes of calculating income
(loss) applicable to common stockholders and our net loss per common
share.





As discussed in more detail in this
footnote, the Series A and B Preferred Stock were exchanged for Series C
Preferred Stock and Warrants.





The
Series C and Series D 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 this 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;





·
            Any
      monetary judgment, writ or similar final process shall be entered or filed
      against the Corporation, any Subsidiary or any of their respective
      property or other assets for greater than
  $100,000.





35





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





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 it is paid in full.





Sales
of Series A and Series B Preferred Stock and Warrants:





On
November 22, 2006 and May 25, 2007, we sold 3,000 Series A Preferred shares and
600 Series B Preferred shares, respectively, plus two tranches of warrants with
each financing. We also issued warrants to placement agents. The following table
illustrates details of the sales of these financial instruments:





Series
      A
                
                
                Series
      B
                
                
                TotalGross
      proceeds
                
                $
                3,000,000
                
                
                $
                600,000
                
                
                $
                3,600,000Financing
      costs paid in cash
                
                
                (475,000
                )
                
                
                (95,000
                )
                
                
                (570,000
                )Net
      proceeds
                
                $
                2,525,000
                
                
                $
                505,000
                
                
                $
                3,030,000Common
      shares indexed to financial instruments:Series
      A and B Preferred
                
                
                3,000,000
                
                
                
                480,000
                
                
                
                3,480,000Investor
      warrants:Tranche
      A/B-1
                
                
                3,000,000
                
                
                
                480,000
                
                
                
                3,480,000Tranche
      A/B-2
                
                
                3,000,000
                
                
                
                480,000
                
                
                
                3,480,000Placement
      agent warrants
                
                
                900,000
                
                
                
                144,000
                
                
                
                1,044,0009,900,000
                
                
                
                1,584,000
                
                
                
                11,484,000





Apogee
Financial Investments, Inc., a company owned by certain of our stockholders,
received cash fees of $125,000 for consulting and due diligence services
rendered in connection with the transactions, which amount is included in the
financing costs paid in cash in the table above.





The
following table illustrates the terms of the warrants issued in connection with
the Series A and B Preferred Financings:





Warrant
      terms:
                  
                  Strike
      Price
                  
                  TermTranche
      A-1
                  
                  
                  $1.50
                  
                  5
      yearsTranche
      A-2
                  
                  
                  $1.00
                  
                  10
      yearsTranche
      B-1
                  
                  
                  $1.87
                  
                  3
      yearsTranche
      B-2
                  
                  
                  $3.75
                  
                  5
      yearsPlacement
      agents:Series
      A Financing
                  
                  
                  $1.00—$3.00
                  
                  10
      yearsSeries
      B Financing
                  
                  
                  $1.25—$3.75
                  
                  10
      years





36





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
following tables illustrate (i) how the net proceeds arising from each of the
Series A Preferred and Series B Preferred financing was allocated on the financing inception
dates and (ii) how the aggregate financing costs (both cash and warrant
consideration) were allocated on the inception
dates:





Classification
                
                Series
      A
                
                
                Series
      B
                
                
                TotalRedeemable
      preferred stock (mezzanine)
                
                $
                —
                
                
                $
                —
                
                
                $
                —Redeemable
      preferred stock (liability)
                
                
                —
                
                
                
                (780,000
                )
                
                
                (780,000
                )Derivative
      warrants (investor warrants)
                
                
                (16,342,550
                )
                
                
                (1,655,567
                )
                
                
                (17,998,117
                )Beneficial
      conversion feature
                
                
                (1,173,510
                )
                
                
                —
                
                
                
                (1,173,510
                )Derivative
      put liability
                
                
                (834,826
                )
                
                
                —
                
                
                
                (834,826
                )Day-one
      derivative loss
                
                
                15,350,886
                
                
                
                1,835,567
                
                
                
                17,186,453Gross
      proceeds
                
                $
                (3,000,000
                )
                
                $
                (600,000
                )
                
                $
                (3,600,000
                )





The
accounting and reporting for complex financing transactions that embody multiple
financial instruments, some of which are features embedded within financial
instruments, can best be described as a step-by-step process where the terms and
features of the financial instruments are compared to multiple standards in a
hierarchy of decision making. The following summarizes this process and
conclusions during the process.





As an
initial consideration, we are required to consider whether the Series A and B
Preferred Stock are, by their terms, financial instruments that require
liability classification under Statements on Financial Accounting Standards No.
150 Accounting for
Certain Financial Instruments with Characteristics of both Equity and
Liability. Statement 150 generally provides that financial instruments
that are issued in the form of shares that are mandatorily redeemable on a fixed
or determinable date or upon an event certain to occur be classified as
liabilities. Neither the Series A Preferred nor the Series B Preferred provide
for their redemption on fixed or determinable date. In addition, events that
could give rise to cash redemption are conditional and not certain to
occur.





·
            Series
      A Preferred—November 22, 2006—The Series A Preferred did not require
      liability classification on the inception date because the contract did
      not provide for a fixed or determinable redemption (an unconditional
      payment requirement) and events that could give rise to cash redemption
      were conditional and not certain to occur on the inception date. However,
      other standards exist that provide for classification of redeemable
      securities outside of stockholders’ equity when, irrespective of
      probability, contingent redemption events are outside of the issuer’s
      control. As a result, the Series A Preferred required classification
      outside of stockholders’ equity on the inception
  date.





·
            Series
      B Preferred—May 25, 2007—The Series B Preferred has terms and features
      consistent with those embodied in the Series A Preferred. However, as more
      fully discussed below, on the issuance date the Company’s ability to share
      settle any of its share-indexed financial instruments was not within its
      control, due to the triggering of the variable-share-indexed conversion
      feature in the Series A Preferred. Because share settlement was not within
      the Company’s control, net cash settlement was assumed and the Series B
      Preferred was initially classified in liabilities, at fair
      value.




37




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The terms
and conditions of the Series A Preferred were also subject to evaluation under
Statement 133. Derivative financial instruments, as defined in Statement 133
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.





In
considering the application of Statement 133, we identified those specific terms
and features embedded in the contracts that possess the characteristics of
derivative financial instruments. Those features included the conversion option,
redemption features and other equity-indexed terms and conditions. In evaluating
the respective classification of these embedded derivatives, we are required to
determine whether the host contract (the Series A and B Preferred) is more akin
to a debt or equity instrument in regards to the risks. This determination is
subjective. However, in complying with the guidance provided in EITF D-109
Determining the Nature of a Host Contract Related to a Hybrid Financial
Instrument Issued in the Form of a Share under Statement No. 133 we concluded,
based upon the preponderance and weight of all terms, conditions and features of
the host contracts, that the Series A Preferred was more akin to an equity
instrument for purposes of considering the clear and close relation of the
embedded feature to the host contract. Based upon this conclusion, we further
concluded that (i) the equity indexed and settled embedded features did require
derivative liability classification and (ii) certain redemption features (that
is, features that afford the investor the right to put the instruments for cash)
required bifurcation and classification as compound embedded derivative
liabilities, at fair value on the inception date. These amounts are reflected in
the table above as derivative put liabilities and are valued using multiple,
probability-weighted cash flow outcomes and market discount rates that are
commensurate with our estimated credit risk.





Although,
as described above, the embedded conversion feature did not require liability
classification under Statement 133, we were required to consider if the hybrid
preferred contracts embodied beneficial conversion features (“BCF”). A BCF is
present when the “effective” conversion price ascribed to the conversion feature
has intrinsic value. Further, a BCF is accounted for as a component of paid-in
capital on the inception date. As reflected in the tables above, the Series A
Preferred was found to have a BCF. The aggregate BCF at its intrinsic value
amounted to $9,326,490. This amount gives effect to the (i) the trading market
price on the contract dates and (ii) the effective conversion price of each
preferred issuance after allocation of proceeds to all financial instruments
sold based upon their relative fair values. Notwithstanding, BCF was limited to
the value ascribed to the remaining hybrid contract (using the relative fair
value approach). Accordingly, the BCF allocated to paid-in capital amounted to
$1,173,510.





38





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





In
determining how the basis of the hybrid instruments would be allocated to the
host contracts, detachable warrants, and the embedded conversion features, we
utilized the guidance of Statement 133 Implementation Issue No. B-6 (“DIG Issue
B6”) provided by the Derivatives Implementation Group.  DIG Issue B6
provides that the initial carrying values of the host contract component and the
embedded derivative components of a hybrid instrument should be determined by
recording the embedded derivative at fair value and determining the initial
carrying value assigned to the host contract as the difference between the basis
of the hybrid instrument and the fair value of the embedded derivatives (a “with
and without” method based on the fair value of the embedded derivative). Since
there were warrants issued concurrently with the host instrument and a BCF
calculated upon inception, these components also needed to be considered when
calculating the value to be assigned to the host instrument. When we evaluated
the warrants, we concluded that equity classification was not appropriate for
the investor warrants under EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock”. Accordingly the proceeds from the issuance of the debt and the
detachable warrants was first allocated to the debt and the warrants based on
their relative fair values as described in APB 14.  The embedded
derivatives in the debt instrument that required bifurcation (put liability)
were then bifurcated at their fair values from the proceeds allocated to the
debt under APB 14 and then the BCF was calculated.  After the
allocation process, any residual proceeds would be allocated to the debt host,
however, the aggregate fair values of the warrants, put and BCF exceeded the
gross proceeds so we recognized a day-one derivative loss as
indicated.





As
discussed above, the initial allocation of the basis in the Series A Preferred
Financing transaction resulted in no basis ascribed to the redeemable preferred
stock. According to EITF D-98 Classification and
Measurement of Redeemable Securities, if the security is not currently
redeemable and it is not probable that the security will be become redeemable,
accretion to face value is not necessary.  The Series A Preferred is
convertible upon inception and there was no persuasive evidence that the
Preferred Stock would not be redeemed.  Based on this information,
redemption could not be considered “not probable” of occurring and accretion was
necessary. Redeemable preferred stock is required to be accreted to its
redemption values through periodic charges to retained earnings or, if no term
of redemption is embodied in the contract, as is the case of the Series A
Preferred, on the date of issuance. As a result, a day-one deemed dividend of
$3,000,000 was recorded to accrete the Series A Preferred to its redemption
value.





The
allocation of the basis of the Series A and Series B Financing transactions
required the allocation to certain financial instruments at their respective
fair values, and these fair values in each instance exceeded the cash proceeds
obtained from the transactions. As a result, we were required to record day-one
derivative losses in connection with these transactions because fair value was
the required standard.





39





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





Subsequent
and Ongoing Classification Considerations:





The
evaluation of the classification of the Series A and B Preferred was required at
each reporting date. Statement 150 requires reclassification of financial
instruments otherwise classified in stockholders’ equity or redeemable preferred
stock to liabilities when the conditional redemption becomes certain of
occurrence. On May 21, 2007 and thereafter we were in default under the terms
and conditions of the Series A Preferred due to non-registration of the
underlying common shares (also see registration rights, below). On that date,
the Series A Preferred Stock became redeemable for cash at 130% of the stated
value, or $3,900,000, or, at the holder’s option, in the number of common shares
equal to the cash redemption price divided by the 75% of the trading market
price. The operation of the feature related to the holder’s rights to redeem in
common shares has rendered the number of shares necessary to share-settle the
contract (and our other share-indexed financial instruments) indeterminate.
Therefore, share settlement of the Series A Preferred, and all other of our
share-indexed financial instruments was presumed to no longer to be within our
control. The triggering of the redemption and the share-settlement feature of
the Series A Preferred had the following financial effects:





·
            The
      Series A Preferred required reclassification from its mezzanine
      classification to liabilities, at fair value, because the redemption is no
      longer conditional. This reclassification was accomplished by transferring
      the fair value from the mezzanine classification and joining the put
      derivative (that was fair valued on the date of the redemption triggering
      event with a charge to income).





·
            The
      Series B Preferred Stock, although possessing terms and conditions similar
      to those of the Series A Preferred was not afforded equity classification
      because share-settlement is presumed not to be within the Company’s
      control. In addition, investor and placement agent warrants issued with
      the Series B Preferred did not achieve equity classification for this same
      reason.





·
            Other
      share-indexed financial instruments, such as warrants, required
      reclassification to liabilities because our ability to share-settle those
      instruments was no longer within our control. This reclassification was
      accomplished by transferring the fair value of these instruments from
      stockholders’ equity to liabilities at their fair values. They require
      ongoing fair value measurement. See “Warrant Considerations,”
      below.





40





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
following table illustrates the activity with respect to each of the Series A
and Series B Preferred from their respective inception dates to December 31,
2008:





Series
      A
                        
                        
                        Series
      B
                        
                        
                        TotalMezzanineInitial
      allocation of Series A Preferred in the mezzanine
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —Accretion
      to redemption value
                        
                        
                        3,000,000
                        
                        
                        
                        —
                        
                        
                        
                        3,000,000Reclassification
      to liabilities
                        
                        
                        (3,000,000
                        )
                        
                        
                        —
                        
                        
                        
                        (3,000,000
                        )Redeemable
      preferred stock
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —LiabilitiesReclassification
      from mezzanine
                        
                        $
                        3,000,000
                        
                        
                        $
                        —
                        
                        
                        $
                        3,000,000Reclassification
      from paid-in capital
                        
                        
                        1,600,270
                        
                        
                        
                        —
                        
                        
                        
                        1,600,270Reclassification
      from derivative
                        
                        
                        599,730
                        
                        
                        
                        —
                        
                        
                        
                        599,730Initial
      allocation of Series B Preferred in liabilities
                        
                        
                        —
                        
                        
                        
                        780,000
                        
                        
                        
                        780,000Redeemable
      preferred stock (liabilities)
                        
                        
                        5,200,000
                        
                        
                        
                        780,000
                        
                        
                        
                        5,980,000Exchanged
      for Series C Preferred
                        
                        
                        (5,200,000
                        )
                        
                        
                        (780,000
                        )
                        
                        
                        (5,980,000
                        )$
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —





When the
redeemable preferred stock was reflected in liabilities, the value was based
upon the redemption values calculated as follows:





·
            Series
      A—This amount represents the common stock equivalent value associated with
      the holders’ redemption alternative to require the Company to settle the
      debt in common stock, in the number of shares equal to the cash redemption
      amount (130% of the stated value) divided by 75.0% of the trading market
      value.





·
            Series
      B—This amount represents only the cash redemption value because, unlike
      the Series A Preferred holders, the Series B Preferred holders did not
      have the right to require redemption in common
  stock.





·
            The
      shares underlying the investor warrants were subject to firm registration
      rights. That is, we were required to deliver registered shares, and the
      Registration Rights Agreement did not specify how the warrant contract
      would be settled in the event that we are unable to deliver registered
      shares. As a result, net-cash settlement was assumed under the standard.
      That ultimate assumption required us to classify the warrants as
      derivative liabilities at their fair values and account for the warrants
      at fair value with changes recognized in
income.





41





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





·
            The
      shares underlying the placement agent warrants are not subject to the
      registration rights. Accordingly, the placement agent warrants issued with
      the Series A Preferred Financing were afforded equity classification. On
      May 21, 2007, however, our ability to share-settle our share-indexed
      financial instruments was placed out of our control because the number of
      shares necessary to share-settle the Series A Preferred became
      indeterminate and we potentially could have insufficient authorized shares
      to settle all of our share-indexed financial instruments. On that date,
      the warrants issued with the Series A Preferred required reclassification
      to liabilities. Subsequently, on May 25, 2007, the placement agent
      warrants issued with the Series B Preferred Financing did not achieve
      equity classification for this reason. The Series A and Series B Preferred
      Stock were exchanged for Series C Preferred Stock and warrants on October
      18, 2007, as discussed in the following section. Upon the exchange of the
      Series A and B Preferred Stock for Series C Preferred Stock, there was no
      longer a variable conversion rate associated with the Preferred Stock
      Financings. Accordingly, share settlement was again determined to be
      within the Company’s control and the placement agent warrants from the
      Series A and B Financings were reclassed to
  equity.





Note: In
accordance with SFAS 150, the carrying amount of the Series A and B Preferred
Stock were measured at fair value when the instruments were classified as
liabilities.  Certain provisions in the Preferred Stock were
considered when determining the fair value of the instrument. There was no right
to participate in earnings, the liquidation preference of the Preferred Stock
was the same as the stated rate, there were no voting rights and the Preferred
Stock was not redeemable by the Company, so no value was ascribed to these
provisions.  There was also no value ascribed to the cumulative
dividend feature since the Company was unable to pay its dividend from
earnings.    Accordingly, the fair value approximates the
redemption value of the Preferred Stock which is calculated as a common stock
equivalent value based upon observable market prices.





42





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





Sale
and Exchange of Series C Preferred Stock:





On
October 18, 2007, we sold 6,400,000 Series C Preferred shares plus two tranches
of warrants. We also issued warrants to placement agents. On October 18, 2007,
we also exchanged all outstanding Series A Preferred, and Series B Preferred,
for 3,909,564 shares of Series C Preferred and two tranches of warrants. The
following table illustrates details of the sales of these financial
instruments:





Series
      C
                  Financing
                
                
                Series
      C
                  Exchange
                
                
                TotalGross
      proceeds
                
                $
                6,400,000
                
                
                $
                —
                
                
                $
                6,400,000Financing
      costs paid in cash
                
                
                (340,000
                )
                
                
                —
                
                
                
                (340,000
                )Net
      proceeds
                
                $
                6,060,000
                
                
                $
                —
                
                
                $
                6,060,000Common
      shares indexed to financial instruments:Series
      C Preferred
                
                
                8,533,333
                
                
                
                5,212,752
                
                
                
                13,746,085Investor
      warrants:Tranche
      C-1
                
                
                8,533,334
                
                
                
                5,212,752
                
                
                
                13,746,086Tranche
      C-2
                
                
                8,533,334
                
                
                
                5,212,752
                
                
                
                13,746,086Placement
      agent warrants
                
                
                2,559,999
                
                
                
                —
                
                
                
                2,559,99928,160,000
                
                
                
                15,638,256
                
                
                
                43,798,256





Apogee
Financial Investments, Inc., a company owned by certain of our stockholders, and
Midtown Partners & Company LLC, a related company, received cash fees of
$340,000 for consulting and due diligence services rendered in connection with
the transactions, which amount is included in the financing costs paid in cash
in the table above.





The
following table illustrates the terms of the warrants issued in connection with
the Series C Preferred Financing:





Warrant
      terms:
                Strike
      Price
                
                TermTranche
      C-1
                $1.50
                
                5
      yearsTranche
      C-2
                $2.00
                
                10
      yearsPlacement
      agents
                $0.75-$2.00
                
                10
      years





43




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
following tables illustrate how the net proceeds arising from each of the Series
C Preferred Financing and Exchange was allocated on the inception
dates:





Series
      C
                  Financing
                
                
                Series
      C
                  Exchange
                
                
                TotalRedeemable
      preferred stock (mezzanine)
                
                $
                —
                
                
                $
                (13,553,155
                )
                
                $
                (13,553,155
                )Beneficial
      conversion feature (paid-in capital)
                
                
                (2,766,833
                )
                
                
                —
                
                
                
                (2,766,833
                )Derivative
      put liability
                
                
                (399,150
                )
                
                
                —
                
                
                
                (399,150
                )Sub-total
      redeemable preferred
                
                
                (3,165,983
                )
                
                
                (13,553,155
                )
                
                
                (16,719,138
                )Paid-in
      capital (investor warrants)
                
                
                (3,633,167
                )
                
                
                (17,796,834
                )
                
                
                (21,430,001
                )Loss
      on extinguishment of redeemablepreferred
      stock
                
                
                —
                
                
                
                26,247,006
                
                
                
                26,247,006Day-one
      derivative loss
                
                
                399,150
                
                
                
                —
                
                
                
                399,150Loss
      on extinguishment of other liabilities
                
                
                —
                
                
                
                271,109
                
                
                
                271,109Gross
      proceeds (financing) basis (exchange)
                
                $
                (6,400,000
                )
                
                $
                (4,831,874
                )
                
                $
                (11,231,874
                )





The
Exchange of Series A and B Preferred for Series C Preferred and related
warrants, was accounted for as the settlement of the former financial
instruments resulting in (i) an extinguishment loss, to the extent that the fair
value of the Series C Preferred and related warrants exceeded the carrying
values of the Series A and B Preferred (included in liabilities). The following
table illustrates the calculations related to the Exchange.





Fair
      value of Series C Preferred
                
                $
                13,553,155Fair
      value of Series C investor warrants
                
                
                17,796,83431,349,989Carrying
      values of financialinstruments
      exchanged:Series
      A Preferred
                
                
                (5,200,000
                )Series
      B Preferred
                
                
                (780,000
                )Accrued
      dividends
                
                
                (309,564
                )Accrued
      damages
                
                
                (542,080
                )Unamortized
      finance costs
                
                
                1,999,771Total
      carrying values
                
                
                (4,831,873
                )Excess
      of fair values over carrying values
                
                $
                26,518,116Allocation
      of excess:Extinguishment
      of redeemable preferred
                
                $
                26,247,007Extinguishment
      of other liabilities
                
                
                271,109Excess
      of fair values over carrying values
                
                $
                26,518,116





44





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
investor warrants were valued using BSM. Significant assumptions underlying the
BSM calculations are as follows:





Financing
      Inception Dates:
                
                
                A-1
                
                
                
                A-2
                
                
                
                B-1
                
                
                
                B-2Trading
      market price
                
                $
                3.50
                
                
                $
                3.50
                
                
                $
                3.50
                
                
                $
                3.50Strike
      or exercise price
                
                $
                1.50
                
                
                $
                1.00
                
                
                $
                1.87
                
                
                $
                3.75Expected
      term in years
                
                5yrs
                
                
                10yrs
                
                
                3yrs
                
                
                5yrsVolatility
                
                
                43.91
                %
                
                
                51.15
                %
                
                
                39.86
                %
                
                
                42.19
                %Risk-free
      rate
                
                
                4.57
                %
                
                
                4.57
                %
                
                
                4.81
                %
                
                
                4.80
                %Expected
      dividend rate
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00





October
      18, 2007:
                
                
                A-1
                
                
                
                A-2
                
                
                
                B-1
                
                
                
                B-2Trading
      market price
                
                $
                2.60
                
                
                $
                2.60
                
                
                $
                2.60
                
                
                $
                2.60Strike
      or exercise price:Contract
      price
                
                $
                1.50
                
                
                $
                1.00
                
                
                $
                1.87
                
                
                $
                3.75Repriced
                
                $
                0.75
                
                
                $
                0.75
                
                
                $
                0.75
                
                
                $
                0.75Expected
      term in years
                
                4.10yrs
                
                
                9.10yrs
                
                
                2.60yrs
                
                
                4.60yrsVolatility
                
                
                39.73
                %
                
                
                50.03
                %
                
                
                34.98
                %
                
                
                40.08
                %Risk-free
      rate
                
                
                4.17
                %
                
                
                4.52
                %
                
                
                3.98
                %
                
                
                4.17
                %Expected
      dividend rate
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00





On
October 18, 2007, certain warrants were repriced from their original exercise
price to $0.75 in connection with the Series C Preferred
financing.  On April 30, 2008 certain warrants were repriced to $0.50
in connection with the Series D Preferred Financing. We recorded an expense of
approximately $3.2 million resulting from repricing of warrants.





The fair
value of the warrants issued to placement agents in connection with the Series A
Preferred and Series B Preferred financing transactions amounted to $2,492,312
and $384,034, respectively; $2,876,346 in the aggregate. The fair values were
calculated using the Black-Scholes-Merton (“BSM”) valuation
technique.





Notes to
BSM: We did not have a historical trading history sufficient to develop an
internal volatility rate for use in BSM. As a result, we have used a peer
approach wherein the historical trading volatilities of certain companies with
similar characteristics as ours and who had a sufficient trading history were
used as an estimate of our volatility. In developing this model, no one company
was weighted more heavily. We do not have a history to develop the expected term
for our warrants. Accordingly, we have used the contractual remaining term in
our calculations. Finally, for purposes of our risk-free rate, we have used the
publicly-available yields on zero-coupon Treasury securities with remaining
terms to maturity consistent with the remaining contractual term of the
warrants. These assumptions are estimates of future trends. Actual results
during the periods that the warrants are outstanding will most likely be
different.





45





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





Sales
of Series D Preferred Stock and Warrants:





On April
30, 2008, we entered into securities purchase agreement (the “Purchase
Agreement”) with Vicis Capital Master Fund (“Vicis”) pursuant to which Vicis
purchased 7,000,000 shares of our Series D Convertible Preferred Stock (“Series
D Preferred Stock”), respectively for an aggregate purchase price of $7,000,000.
The Series D Preferred Stock has a conversion price of $0.50 and is convertible
into an aggregate amount of 14,000,000 shares of common stock. The Series D
Preferred Stock does not pay annual dividends but each holder of Series D
Preferred Stock has the right to such number of votes equal to the number of
shares of common stock that the Series D Preferred Stock may be converted into,
subject to the beneficial ownership limitation described below.





In
connection with the Agreement, Vicis received a Series D warrant to purchase
28,000,000 shares of common stock of the Company (“Series D Warrants”). The
Series D Warrants are exercisable for a period of seven years from the date of
issuance at an initial exercise price of $0.75. Vicis may exercise the Series D
Warrants on a cashless basis if the shares of common stock underlying the Series
D Warrants are not then registered pursuant to an effective registration
statement. In the event Vicis exercises the Series D Warrants on a cashless
basis, then we will not receive any proceeds.





The
conversion price of the Series D Preferred Stock and the exercise price of the
Series D Warrants are subject to full ratchet and anti-dilution adjustment for
subsequent lower price issuances by the Company, as well as customary adjustment
provisions for stock splits, stock dividends, and
recapitalizations.





In
addition, the Company, Vicis and Dynamic Decisions Strategic Opportunities
(“Dynamic Decisions”) have entered into Amendment No. 1 to its amended and
restated registration rights agreement (“Amended Registration Rights Agreement”)
pursuant to which if at any time after the date of the Amended Registration
Rights Agreement we shall decide to prepare and file with the Commission a
registration statement relating to an offering for our own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with the stock option or other employee
benefit plans, then we will send to each holder a written notice of such
determination and, if within fifteen days after the date of such notice, any
such holder shall so request in writing, we will include in the registration
statement, all or any part of such Registrable Securities (as defined in Amended
Registration Rights Agreement) such holders request to be
registered.





Vicis has
contractually agreed to restrict their ability to convert the Series D Preferred
Stock and exercise the Series D Warrants and receive shares of our common stock
such that the number of shares of the Company common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of our
issued and outstanding shares of common stock.





At any
time before the one year anniversary of the date we initially issued the shares
of Series D Preferred Stock, we may, upon written notice, redeem the outstanding
shares of Series D Preferred Stock in cash at a price equal to 110% of Stated
Value (as such term is defined in the Certificate of Designations).





46





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
following table illustrates (i) how the net proceeds arising from the Series D
Preferred financing were allocated on the financing inception
date and (ii) how the aggregate financing costs (both cash and warrant
consideration) were allocated on the inception
date:





Classification
                    
                    Series
      DRedeemable
      Preferred Stock (Mezzanine)
                    
                    $
                    —Derivative
      warrants (investor warrants)
                    
                    
                    (18,174,800
                    )Derivative
      warrants (agent warrants)
                    
                    
                    (1,131,620
                    )Beneficial
      conversion feature
                    
                    
                    (2,839,864
                    )Derivative
      put liability
                    
                    
                    (1,024,605
                    )Deferred
      financing costs
                    
                    
                    1,077,268Retained
      earnings (financing fees)
                    
                    
                    316,615Paid
      in capital (financing fees)
                    
                    
                    286,487Day-one
      derivative loss
                    
                    
                    14,965,519Net
      proceeds
                    
                    $
                    6,525,000





The
accounting and reporting for complex financing transactions that embody multiple
financial instruments, some of which are features embedded within financial
instruments, can best be described as a step-by-step process where the terms and
features of the financial instruments are compared to multiple standards in a
hierarchy of decision making. The following summarizes this process and
conclusions during the process.





As an
initial consideration, we are required to consider whether the Series D
Preferred Stock are, by its terms, financial instruments that require liability
classification under Statements on Financial Accounting Standards No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Equity and Liability.
Statement 150 generally provides that financial instruments that are issued in
the form of shares that are mandatorily redeemable on a fixed or determinable
date or upon an event certain to occur be classified as
liabilities.





·
            The
      Series D Preferred did not require liability classification on the
      inception date because the contract did not provide for a fixed or
      determinable redemption (an unconditional payment requirement) and events
      that could give rise to cash redemption were conditional and not certain
      to occur on the inception date. However, other standards exist that
      provide for classification of redeemable securities outside of
      stockholders’ equity when, irrespective of probability, contingent
      redemption events are outside of the issuer’s control. As a result, the
      Series D Preferred required classification outside of stockholders’ equity
      on the inception date.





The terms
and conditions of the Series D Preferred were also subject to evaluation under
Statement 133. Derivative financial instruments, as defined in Statement 133
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.




47




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





In
considering the application of Statement 133, we identified those specific terms
and features embedded in the contracts that possess the characteristics of
derivative financial instruments. Those features included the conversion option,
redemption features and other equity-indexed terms and conditions. In evaluating
the respective classification of these embedded derivatives, we are required to
determine whether the host contract (the Series D Preferred) is more akin to a
debt or equity instrument in regards to the risks. This determination is
subjective. However, in complying with the guidance provided in EITF D-109 Determining the Nature of a
Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a
Share under Statement No. 133 we concluded, based upon the preponderance
and weight of all terms, conditions and features of the host contracts, that the
Series D Preferred was more akin to an equity instrument for purposes of
considering the clear and close relation of the embedded feature to the host
contract. Based upon this conclusion, we further concluded that (i) the equity
indexed and settled embedded features did not require derivative liability
classification and (ii) certain redemption features (that is, features that
afford the investor the right to put the instruments for cash) required
bifurcation and classification as compound embedded derivative liabilities, at
fair value on the inception date. These amounts are reflected in the table above
as derivative put liabilities and are valued using multiple,
probability-weighted cash flow outcomes and market discount rates that are
commensurate with our estimated credit risk.





Although,
as described above, the embedded conversion feature did not require liability
classification under Statement 133, we were required to consider if the hybrid
preferred contracts embodied beneficial conversion features (“BCF”). A BCF is
present when the “effective” conversion price ascribed to the conversion feature
has intrinsic value. Further, a BCF is accounted for as a component of paid-in
capital on the inception date. As reflected in the tables above, the Series D
Preferred was found to have a BCF. The aggregate BCF at its intrinsic value
amounted to $38,460,136. This amount gives effect to the (i) the trading market
price on the contract dates and (ii) the effective conversion price of each
preferred issuance after allocation of proceeds to all financial instruments
sold based upon their relative fair values. Notwithstanding, BCF was limited to
the value ascribed to the remaining hybrid contract (using the relative fair
value approach). Accordingly, the BCF allocated to paid-in capital amounted to
$2,839,864.





As
discussed above, the initial allocation of the basis in the Series D Preferred
Financing transaction resulted in no basis ascribed to the redeemable preferred
stock. According to EITF D-98 Classification and
Measurement of Redeemable Securities, if the security is not currently
redeemable and it is not probable that the security will be become redeemable,
accretion to face value is not necessary.  The Series D Preferred is
convertible upon inception and there was no persuasive evidence that the
Preferred Stock would not be redeemed.  Based on this information,
redemption could not be considered “not probable” of occurring and accretion was
necessary. Redeemable preferred stock is required to be accreted to its
redemption values through periodic charges to retained earnings or, if no term
of redemption is embodied in the contract, as is the case of the Series D
Preferred, on the date of issuance. As a result, a day-one deemed dividend of
$7,000,000 was recorded to accrete the Series D Preferred to its redemption
value.





48




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
allocation of the basis of the Series D Financing transaction required the
allocation to certain financial instruments at their respective fair values, and
these fair values in each instance exceeded the cash proceeds obtained from the
transactions. As a result, we were required to record a day-one derivative loss
in connection with this transaction because fair value was the required
standard.





Subsequent
and Ongoing Classification Considerations:





The
evaluation of the classification of the Series D Preferred is required at each
reporting date. Statement 150 requires reclassification of financial instruments
otherwise classified in stockholders’ equity or redeemable preferred stock to
liabilities when the conditional redemption becomes certain of occurrence. As of
December 31, 2008, the conditional redemption was not considered certain to
occur and the Series D Preferred continued to be recorded in the mezzanine
section.





Midtown
Partners & Co., LLC, (“Midtown”), which served as the Company’s placement
agent in connection with the Purchase Agreement, received aggregate placement
agent fees of approximately $350,000, as well as the following common stock
purchase warrants: (a) a Series BD-10 warrant entitling Midtown to purchase
700,000 shares of the Company's common stock at an exercise price of fifty cents
($0.50) per share, and (b) a Series BD-11 warrant entitling Midtown to purchase
1,400,000 shares of our common stock at an exercise price of seventy-five cents
($0.75) per share. The Series BD-10 and BD-11 warrants have a term of five years
from the date of issuance. Midtown is a FINRA registered broker-dealer. Pursuant
to the terms of the Registration Rights Agreement by and between the Company and
Midtown, if at any time after the date of the Registration Rights Agreement the
Company decides to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or Form
S-8 (each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with the stock option or other employee benefit plans, then the
Company shall send to each holder a written notice of such determination and, if
within fifteen days after the date of notice, the holder requests in writing,
the Company will include in such registration statement, all or any part of such
Registrable Securities (as defined in Registration Rights Agreement) the holders
request to be registered.





The
Series D Preferred Stock is convertible into shares of common stock at a
conversion price of $0.50.  Any previously issued and outstanding financial
instruments afforded full ratchet protection with a conversion price greater
than $0.50 automatically had their conversion price ratcheted down to the lower
conversion price. These financial instruments included the Series C Preferred
Financing and the investor and placement agent warrants related to the Series A,
Series B, and Series C Financings.





49





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
investor warrants were valued using BSM. Significant assumptions underlying the
BSM calculations are as follows:





April
      30, 2008 (inception):
                  
                  Series
      DTrading
      market price
                  
                  $
                  2.95Strike
      or exercise price:
                  
                  $
                  0.75Expected
      term in years
                  
                  7yrsVolatility
                  
                  
                  43.82
                  %Risk-free
      rate
                  
                  
                  3.34
                  %Expected
      dividend rate
                  
                  $
                  0.00





Warrant
Considerations





The
overall accounting for the Series A, B, C, and D Preferred Financings required
consideration regarding the classification of the investor and placement agent
warrants. Warrants are derivative financial instruments that are indexed to the
Company’s own stock and, accordingly, equity classification of the warrants is
dependent upon meeting eight specific conditions for equity classification
provided in EITF 00-19 Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock. In evaluating the warrants under EITF 00-19, we noted that there
were no explicit conditions that required net cash settlement. However, equity
classification is permissible only in instances where the contract permits us to
settle in unregistered shares.





·
            The
      shares underlying the Series A and B investor warrants were subject to
      firm registration rights. That is, we were required to deliver registered
      shares, and the Registration Rights Agreement did not specify how the
      warrant contract would be settled in the event that we are unable to
      deliver registered shares. As a result, net-cash settlement was assumed
      under the standard. That ultimate assumption requires us to classify the
      warrants as derivative liabilities at their fair values and account for
      the warrants at fair value each reporting period with changes recognized
      in income. The Series C investor warrants are not subject to firm
      registration rights and they meet the criteria in EITF 00-19 paragraphs
      12-32 for equity classification. The Series D warrants are redeemable for
      cash upon certain events not considered within our control, as such, they
      require liability classification under SFAS 150, and must by classified as
      liabilities and adjusted to fair value each reporting period with changes
      in fair value recognized in income.





50





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





·
            The
      shares underlying the placement agent warrants are not subject to the
      registration rights. Accordingly, the placement agent warrants issued with
      the Series A Preferred Financing were afforded equity classification. On
      May 21, 2007, however, our ability to share-settle our share-indexed
      financial instruments was placed out of our control because the number of
      shares necessary to share-settle the Series A Preferred became
      indeterminate and we potentially could had insufficient authorized shares
      to settle all of our share-indexed financial instruments. On that date,
      the warrants issued with the Series A Preferred required reclassification
      to liabilities. Subsequently, on May 25, 2007, the placement agent
      warrants issued with the Series B Preferred Financing did not achieve
      equity classification for this reason. Upon the exchange of the Series A
      and B Preferred Stock for Series C Preferred Stock, there was no longer a
      variable conversion rate associated with the Preferred Stock Financings.
      Accordingly, share settlement was again determined to be within the
      Company’s control and the placement agent warrants from the Series A and B
      Preferred Financings were reclassed to equity. The placement agent
      warrants issued with the Series C Preferred were afforded equity
      classification. The placement agent warrants issued with the Series D
      Preferred were redeemable for cash upon the occurrence of certain events
      not considered within our control, as such, they require liability
      classification under SFAS 150, and must be classified as liabilities and
      adjusted to fair value each reporting period with changes in fair value
      recognized in income.





The
warrants were valued using BSM. Significant assumptions underlying the BSM
calculations are as follows as of December 31, 2008:





A-1
                      
                      
                      
                      A-2
                      
                      
                      
                      B-1
                      
                      
                      
                      B-2Trading
      market price
                      
                      $
                      1.00
                      
                      
                      $
                      1.00
                      
                      
                      $
                      1.00
                      
                      
                      $
                      1.00Strike
      or exercise price
                      
                      $
                      0.50
                      
                      
                      $
                      0.50
                      
                      
                      $
                      0.50
                      
                      
                      $
                      0.50Expected
      term in years
                      
                      2.89yrs
                      
                      
                      7.89yrs
                      
                      
                      1.39yrs
                      
                      
                      3.39yrsVolatility
                      
                      
                      47.55
                      %
                      
                      
                      44.77
                      %
                      
                      
                      56.93
                      %
                      
                      
                      45.54
                      %Risk-free
      rate
                      
                      
                      1.00
                      %
                      
                      
                      1.87
                      %
                      
                      
                      0.37
                      %
                      
                      
                      1.00
                      %Expected
      dividend rate
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      0.00





D
                  
                  
                  BD-10
                  
                  
                  BD-11Trading
      market price
                  
                  $
                  1.00
                  
                  
                  $
                  1.00
                  
                  
                  $
                  1.00Strike
      or exercise price
                  
                  $
                  0.75
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.75Expected
      term in years
                  
                  6.33yrs
                  
                  
                  4.33yrs
                  
                  
                  4.33yrsVolatility
                  
                  
                  43.13
                  %
                  
                  
                  43.28
                  %
                  
                  
                  43.28
                  %Risk-free
      rate
                  
                  
                  1.87
                  %
                  
                  
                  1.55
                  %
                  
                  
                  1.55
                  %Expected
      dividend rate
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.00





51





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
warrants were valued using BSM. Significant assumptions underlying the BSM
calculations are as follows as of December 31, 2007:





A-1
                  
                  
                  
                  A-2
                  
                  
                  
                  B-1
                  
                  
                  
                  B-2Trading
      market price
                  
                  $
                  4.75
                  
                  
                  $
                  4.75
                  
                  
                  $
                  4.75
                  
                  
                  $
                  4.75Strike
      or exercise price
                  
                  $
                  0.75
                  
                  
                  $
                  0.75
                  
                  
                  $
                  0.75
                  
                  
                  $
                  0.75Expected
      term in years
                  
                  3.89yrs
                  
                  
                  8.89yrs
                  
                  
                  2.40yrs
                  
                  
                  4.40yrsVolatility
                  
                  
                  38.82
                  %
                  
                  
                  48.43
                  %
                  
                  
                  34.49
                  %
                  
                  
                  39.32
                  %Risk-free
      rate
                  
                  
                  3.45
                  %
                  
                  
                  4.04
                  %
                  
                  
                  3.07
                  %
                  
                  
                  3.45
                  %Expected
      dividend rate
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.00





Direct
Financing Costs:





Aggregate
financing costs arising from the Series A, Series B, Series C, and Series D
Preferred financings amounted to $2,967,313, $479,034, $5,538,797, and
$1,680,370 respectively. As noted in the tables below, these financing
costs were allocated among deferred financing costs, paid-in capital and
retained earnings based upon the relative fair values of the components of the
financing. That is, liability classified financial instruments (i.e.
derivatives), mezzanine financial instruments and equity classified financial
instruments (i.e. BCF). Since, as previously discussed, no basis was ascribed to
the redeemable preferred stock, the amount of financing costs allocated to this
category were reflected as a charge to retained earnings.





The
following table illustrates the allocation of financing costs associated with
the Series A, Series B, and Series D Financing Transactions:





Classification
                  
                  Series
      A
                  
                  
                  Series
      B
                  
                  
                  Series
      C
                  
                  
                  Series
      D
                  
                  
                  TotalDeferred
      financing  costs (asset)
                  
                  $
                  1,898,875
                  
                  
                  $
                  479,034
                  
                  
                  $
                  43,079
                  
                  
                  $
                  1,077,268
                  
                  
                  $
                  3,498,256Paid-in
      capital
                  
                  
                  911,135
                  
                  
                  
                  —
                  
                  
                  
                  4,998,925
                  
                  
                  
                  286,487
                  
                  
                  
                  6,196,547Series
      C preferred mezzanine
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  496,793
                  
                  
                  
                  —
                  
                  
                  
                  496,793Accumulated
      deficit (deemeddividend)
                  
                  
                  157,303
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  316,615
                  
                  
                  
                  473,918Aggregate
      finance costs
                  
                  $
                  2,967,313
                  
                  
                  $
                  479,034
                  
                  
                  $
                  5,538,797
                  
                  
                  $
                  1,680,370
                  
                  
                  $
                  10,665,514





52





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





Derivative
Financial Instruments





The
following table summarizes the components of derivative liabilities as of
December 31, 2008 and June 30, 2008:





Financing
      and Financial Instrument
              
              December
      31,
                2008
              
              
              June
      30,
                2008Series
      A Preferred Financing—Investor warrants
              
              $
              317,084
              
              
              $
              1,093,500Series
      B Preferred Financing—Investor warrants
              
              
              13,199
              
              
              
              42,384Series
      C Preferred Financing—Put derivative
              
              
              197,010
              
              
              
              733,144Series
      D Preferred Financing—Investor warrants
              
              
              772,882
              
              
              
              3,329,200Series
      D Preferred Financing—Placement agent warrants
              
              
              33,170
              
              
              
              148,509Series
      D Preferred Financing—Put derivative
              
              
              252,219
              
              
              
              1,014,363Derivative
      liabilities
              
              $
              1,585,564
              
              
              $
              6,361,100





The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the three and six months ended December 31,
2008 and 2007:





Three
      months ended
                  December
      31,
                
                
                Six
      months ended
                  December
      31,Financing
      and Financial Instrument
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Series
      A Preferred Financing—Investorwarrants
                
                $
                251,116
                
                
                $
                (7,870,627
                )
                
                $
                776,416
                
                
                $
                (4,606,068
                )Series
      B Preferred Financing—Investorwarrants
                
                
                3,745
                
                
                
                (2,556,370
                )
                
                
                29,185
                
                
                
                (2,141,558
                )Series
      C Preferred Financing—Put derivative
                
                
                525,465
                
                
                
                525
                
                
                
                536,134Series
      D Preferred Financing—Investorwarrants
                
                
                771,929
                
                
                
                —
                
                
                
                2,671,659
                
                
                
                —Series
      D Preferred Financing—Put derivative
                
                
                750,781
                
                
                
                —
                
                
                
                762,143
                
                
                
                —Derivative
      income (expense)
                
                $
                2,303,036
                
                
                $
                (10,426,472
                )
                
                $
                4,775,537
                
                
                $
                (6,747,626
                )





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. 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.





53





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





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 historical 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.





Registration
Rights Agreements





In connection with the Series A and B
Preferred financings, the Company and the Investors entered into a registration
rights agreement pursuant to which the Company agreed to file, within 90 days
after the closing (the Filing Date), a registration statement covering the
common stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants. If (i) a Registration Statement is not filed on or prior to its Filing
Date (if the Company files a Registration Statement without affording the
Holders the opportunity to review and comment on the same as required or (ii)
the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be “reviewed,” or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 10 calendar days after the receipt of
comments by or notice from the Commission that such amendment is required in
order for a Registration Statement to be declared effective, or (iv) a
Registration Statement filed or required to be filed hereunder is not declared
effective by the Commission by its “Effectiveness Date” (the 150th calendar day
following the date the  agreement was entered into or the 180th
calendar day in the event of a “full review” of the initial Registration
Statement by the Commission), or (v) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective as
to all Registrable Securities, for which it is required to be effective, or the
Holders are otherwise not permitted to utilize the Prospectus therein to resell
such Registrable Securities for more than 10 consecutive calendar days or more
than an aggregate of 15 calendar days during any 12-month period (which need not
be consecutive calendar days) then, in addition to any other rights the Holders
may have hereunder or under applicable law, on each such Event Date and on each
monthly anniversary of each such Event Date (if the applicable Event shall not
have been cured by such date) until the applicable Event is cured, the Company
shall pay to each Holder an amount in cash or shares of Common Stock, or
combination thereof, as partial liquidated damages and not as a penalty, equal
to 1.5% of the aggregate purchase price paid by such Holder pursuant to the
Purchase Agreement for any Registrable Securities then held by such Holder
(calculated as if all convertible securities had been fully
converted.)




54




OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
PAYMENT ARRANGEMENTS (CONTINUED):





The
parties agree that (1) the Company will not be liable for liquidated damages
under this Agreement with respect to any Warrants or Warrant Shares, (2) in no
event will the Company be liable for liquidated damages under this Agreement in
excess of 1.5% of the aggregate Subscription Amount of the Holders in any 30-day
period and (3) the maximum aggregate liquidated damages payable to a Holder
under this Agreement shall be 9% of the aggregate Subscription Amount paid by
such Holder pursuant to the Purchase Agreement. The price at which shares of
Common Stock issuable in lieu of cash hereunder shall be equal to the lesser of
(x) [90% of the average of the 5 consecutive VWAPs immediately prior to the
applicable Event Date, (y) [90% of the average of the 5 consecutive VWAPs
immediately prior to the date such damages are due or (z) the then applicable
Conversion Price. Notwithstanding anything herein to the contrary, payment in
shares of Common Stock may only occur if during the period from the applicable
Event Date until such issuance is made in full all of the Equity Conditions (as
defined above-“Convertible Preferred Stock Rights and Preferences”) have been
met and the Company shall have given the Holder written irrevocable notice
within 2 Trading Days of the Event Date. Subject to the terms and conditions
described above, the decision whether to pay partial liquidated damages in
shares of Common Stock or cash shall be at the discretion of the Company.
Subject to the aforementioned conditions, failure to timely provide such written
notice shall be deemed an election by the Company to pay the partial liquidated
damages on such Event Date in cash. Except as otherwise provided, if at any time
the Company pays partial liquidated damages partially in cash and partially in
shares of Common Stock, then such payment shall be distributed ratably among the
Holders based upon the subscription amount paid by each Holder. If the Company
fails to pay any partial liquidated damages in full within seven days after the
date payable, the Company will pay interest thereon at a rate of 18% per annum
(or such lesser maximum amount that is permitted to be paid by applicable law)
to the Holder, accruing daily from the date such partial liquidated damages are
due until such amounts, plus all such interest thereon, are paid in full. The
partial liquidated damages pursuant to the terms hereof shall apply on a daily
pro-rata basis for any portion of a month prior to the cure of an
Event.





On
October 18, 2007, when the Series A and B Preferred were exchanged for the
Series C Preferred, the Registration Rights Agreement was amended. The Amended
Registration Rights Agreement calls for piggy-back registration rights only and
the Company’s best efforts at obtaining and maintaining
effectiveness.  There are no stipulations or damages if the
registration does not occur.





55





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 11 –
RELATED PARTY TRANSACTIONS:





Consulting Agreement - On
October 1, 2006 the Company entered into a six (6) month consulting agreement
with Harrington Business Development, LLC (“HBD”). The shareholders of HBD are
also shareholders of the Company.  This agreement was not renewed
subsequent to June 30, 2007 and therefore The Company did not recognize any
expense related to this agreement for the year quarter ended December 31, 2008
or the six months ended December, 31 2008. On July 14, 2008 the Company entered
into a one (1) year consulting agreement with HBD.





Licensing Agreement - On
October 13, 2006, the Company entered into a licensing agreement with a
shareholder of the Company. On November 22, 2006 the Company made a payment of
$850,000 pursuant to the agreement. On January 10, 2007, pursuant to the
agreement, the Company paid the remaining balance due of $150,000. The Company
has recognized expense related to this agreement in the amount of $56,964 for
the quarter ended December 31, 2008. See “Licensing agreement” above
for further details.





Assignment of Contract - On
November 10, 2006 the Company entered into an agreement with Reliant
International Media, LLC (“RIM”). The members of RIM are also shareholders of
the Company. See “Assignment
of Contract” above for further details.





Preferred Stock Purchase Agreement
- Midtown Partner & Co. LLC, served as the Company's placement agent
in connection with the Series A, B and C Preferred Stock Purchase Agreements.
Midtown Partners & Co. LLC received an aggregate placement agent fee related
to Series A Preferred Stock Purchase agreement of approximately $300,000, as
well as the following common stock purchase warrants: (a) series BD-1 common
stock purchase warrants entitling Midtown Partners to purchase 300,000 shares of
the Company's common stock at an exercise price of one dollar ($1.00) per share,
(b) series BD-2 common stock purchase warrants entitling Midtown Partners to
purchase 300,000 shares of the Company's common stock at an exercise price of
one dollar and fifty cents ($1.50) per share, and (c) series BD-3 common stock
purchase warrants entitling Midtown Partners to purchase 300,000 shares of the
Company's common stock at an exercise price of three dollars ($3.00) per share.
The Series BD warrants have a term of ten years.





In
addition, Midtown Partner & Co. LLC received an aggregate placement agent
fee related to the Series B Preferred Stock Purchase agreement of approximately
$60,000, as well as the following common stock purchase warrants: (a) series
BD-4 common stock purchase warrants entitling Midtown Partners to purchase
48,000 shares of the Company's common stock at an exercise price of one dollar
and eighty-seven cents ($1.87) per share, and (b) series BD-5 common stock
purchase warrants entitling Midtown Partners to purchase 48,000 shares of the
Company's common stock at an exercise price of three dollars and seventy-five
cents ($3.75) per share and (c) series BD-6 common stock purchase warrants
entitling Midtown Partners to purchase 48,000 shares of the Company's common
stock at an exercise price of one dollar and twenty five cents ($1.25) per
share. The Series BD warrants have a term of ten years. The member’s of Midtown
Partners & Co. LLC are also shareholders of the Company. See “Preferred Stock Purchase
Agreement” above for further details.





56





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 11 –
RELATED PARTY TRANSACTIONS (CONTINUED):





Midtown
Partner & Co. LLC received an aggregate placement agent fee related to the
Series C Preferred Stock Purchase agreement of approximately $340,000, as well
as the following common stock purchase warrants: (a) series BD-7 common stock
purchase warrants entitling Midtown Partners to purchase 853,333 shares of the
Company's common stock at an exercise price of seventy five cents ($0.75) per
share, and (b) series BD-8 common stock purchase warrants entitling Midtown
Partners to purchase 853,333 shares of the Company's common stock at an exercise
price of one dollar and fifty cents ($1.50) per share and (c) series BD-8 common
stock purchase warrants entitling Midtown Partners to purchase 853,333 shares of
the Company's common stock at an exercise price of two dollars ($2.00) per
share. The Series BD warrants have a term of ten years. The member’s of Midtown
Partners & Co. LLC are also shareholders of the Company. See “Preferred Stock Purchase
Agreement” above for further details.





Preferred Stock Purchase Agreement
-Pursuant to a verbal agreement, Apogee Financial Investments,
Inc., a merchant bank, received a cash fee of $125,000 for consulting and due
diligence services rendered in connection with the Preferred Stock Purchase
Agreement, Exchange Agreement and the Common Stock Purchase Agreement. Apogee
Financial Investments, Inc. is owned by shareholders of the Company. See “Preferred Stock Purchase
Agreement” above for further details.





Consulting Agreement - On
December 8, 2006 the Company entered into a verbal agreement with TotalCFO, LLC.
TotalCFO, LLC is owned by a shareholder of the Company. The Company has
recognized $120,175 of expense related to this agreement for the six
months ended December 31, 2008.





International Distribution Agreement
- On March 19, 2007, the Company entered into an International
Distribution Agreement with Reliant International Media LLC. The shareholders of
Reliant International Media, LLC are also shareholders of the Company. See
“International Distribution
Agreement” above for further details.





57





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 12 –
TRANSACTIONS WITH RESPONZETV:





On
October 19, 2007, we entered into a sublicense arrangement with ResponzeTV PLC
providing for restricted rights to use the Kathy Hilton Trademark, as provided
in our Principal License Agreement with KHL Holdings, Inc., without territorial
restriction. The only restriction is as to fragrance related products. The
structure of this arrangement was accomplished, as follows:





·
            We
      created a wholly-owned subsidiary named KHL Holdings, Inc. with minimal
      capitalization on October 12, 2007. This subsidiary had no operations; nor
      were any operations transferred to the
  subsidiary.


·
            Also
      on October 12, 2007, we executed a formal sublicense agreement with the
      newly formed for the use of the licensed trademark, which agreement
      required and received the formal acknowledgement of Kathy
      Hilton.


·
            On
      October 19, 2007 all outstanding common stock KHL Holdings, Inc. was sold
      to ResponzeTV for 10,000,000 shares of their common stock, which had a
      value of $6,538,240 based upon ResponzeTV’s trading market
      price.


·
            Also
      on October 19, 2007, we executed a formal assignment agreement providing
      for the assignment of KHL Holdings, Inc. rights in the sublicense
      agreement to ResponzeTV.





The
sublicense agreement provides for Minimum Annual Guaranteed Payments that
coincide with the Principal License Agreement (although in lower amounts in
recognition of the restriction as to product types) and royalty payments in
amounts consistent with the Principal License Agreement.


The
substance of the above series of transactions is that of a sublicense
arrangement between us and ResponzeTV; that is, a revenue arrangement. Our
accounting for the activity arising from this arrangement, which will commence
in the second fiscal quarter of our year ending June 30, 2008, provides for
recognition of deferred revenue to the extent of the consideration received for
the sublicense, which amounts will be recognized in our earnings when amounts
are earned. As of December 31, 2008 we had recognized $546,917 of
earnings.





Investment
in ResponzeTV:





On
October 19, 2007, we purchased 8,500,000 shares of ResponzeTV common stock
(valued at $5,557,504 based upon the trading market price of $0.653824, as
translated to US$) and warrants to purchase ResponzeTV common stock at prices
between $0.75 and $2.04 for $5,100,000. The common shares purchased were, then,
freely trading in the United Kingdom; however, the warrants are not traded. We
issued 500,000 of the purchased shares to brokers.





Upon the
completion of the aforementioned sublicense agreement, the purchase and the
issuance of shares to the brokers, we owned 16.78% of ResponzeTV’s outstanding
common stock. Our voting control coupled with our representation on ResponzeTV’s
board of directors indicated that we have substantial influence with respect to
ResponzeTV. As a result, the Company is accounting for the investment under the
equity method of accounting in accordance with Accounting Principles Board
Opinion No.18, “The Equity Method for Accounting for Investments in Common
Stock” (APB 18).





58





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 12 –
TRANSACTIONS WITH RESPONZETV (CONTINUED):





During
the second half of our prior fiscal year ended June 30, 2008, ResponzeTV began
experiencing financial difficulties and delisted its shares for trading. Based
upon the preponderance of all available information, the Company’s management
concluded that the Company’s investment was not recoverable and impaired the
investment in the amount of $5,776,919. There have been no further developments
related to the investment’s recovery.





NOTE 13 –
SEGMENT INFORMATION:





Our
business segments consist of (i) Retail Products and Licensing and (ii) Real
Estate. Our real estate business commenced during the current fiscal year upon
the purchase of an office building in Pinellas County, Florida. Our chief
decision making officer considers income (loss) from operations as the basis to
measure segment profitability. The following table summarizes important
financial information about our business segments as of December 31, 2008 and
for the three and six months ended December 31, 2008:





Retail
                              Products
                              and
                              Licensing
                            
                            
                            Real
                              Estate
                            
                            
                            ConsolidatedThree
      Months Ended December 31, 2008Revenues
      from external customers
                            
                            $
                            1,067,624
                            
                            
                            $
                            70,670
                            
                            
                            $
                            1,138,294Depreciation
      expense
                            
                            
                            1,290
                            
                            
                            
                            60,087
                            
                            
                            
                            61,377Income
      (loss) from operations
                            
                            
                            (1,137,059
                            )
                            
                            
                            (92,330
                            )
                            
                            
                            (1,229,389
                            )Capital
      expenditures
                            
                            
                            54,203
                            
                            
                            
                            —
                            
                            
                            
                            54,203Six
      Months Ended December 31, 2008Revenue
      from external customers
                            
                            $
                            1,171,259
                            
                            
                            $
                            132,105
                            
                            
                            $
                            1,303,364Depreciation
      expense
                            
                            
                            3,248
                            
                            
                            
                            100,281
                            
                            
                            
                            103,529Income
      (loss) from operations
                            
                            
                            (1,673,930
                            )
                            
                            
                            (152,273
                            )
                            
                            
                            (1,826,203
                            )Capital
      expenditures
                            
                            
                            80,596
                            
                            
                            
                            2,724,591
                            
                            
                            
                            2,805,187December
      31, 2008Total
      assets
                            
                            $
                            5,359,959
                            
                            
                            $
                            2,682,417
                            
                            
                            $
                            8,042,376





During
the three and six months ended December 31, 2008, the Real Estate operation
received $21,377 $35,628, respectively, in rental revenue from the Retail
Products and Licensing business, which amount is eliminated in the table
above.





59





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14 -
SUBSEQUENT EVENTS:





Issuance
of Stock Options:





On
January 15, 2009, the Company awarded 1,845,000 stock options to employees. The
options have strike prices of $0.50 and expire in five years. The award vests to
the benefit of the employee over a three year period. Total grant date fair
value of these options amounted to $344,339 and will be recorded as compensation
over the vesting period.





Valcom
Investment:





On
January 6, 2009, the Company entered into a note purchase agreement (the
“Purchase Agreement”) with Valcom, Inc. (“Valcom”), a Delaware corporation,
whereby it purchased a 10% secured convertible promissory note (the “Note”) in
the principal amount of $100,000 with a conversion price of $0.10 per share,
which is secured pursuant to a security agreement (the “Security Agreement”) and
a warrant to purchase 1,000,000 shares of Valcom’s Common Stock at an exercise
price of $0.20 (the “Warrant” and together with the Agreement, the Note and the
Security Agreement, the “Transaction Documents”). Pursuant to the Transaction
Documents, Valcom promises to pay to the Company $100,000 in cash on January 6,
2010. The Note bears interest at the rate of 10% per annum until the maturity
date.





Abazias
Purchase Transaction:





On
December 3, 2008, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with Abazias, Inc. (“Abazias”), a Delaware corporation and
Abazias.com, Inc., (“Abazias”), a Nevada corporation and wholly owned subsidiary
of Abazias, pursuant to which the Company has agreed to purchase substantially
all of the assets of Abazias Sub for an aggregate purchase price of: (i) a loan
in the amount of Five Hundred Thousand Dollars ($500,000) (the “Loan”) and; (ii)
the issuance of up to thirteen million one thousand (13,001,000) shares of the
Company’s zero coupon convertible preferred stock (the “Preferred Stock”) to the
Shareholders of Abazias, subject to adjustment. Under the Purchase Agreement,
upon closing of the transaction the Company shall issue the Preferred Stock to
the shareholders of Abazias, Inc. in exchange for all of the issued and
outstanding shares of capital stock of Abazias. The Loan, in the form of a Note,
was made on August 12, 2008 (see Investments). The Note bears interest at 10%
per annum and matures on December 31, 2009 (the “Maturity Date”). The full
principal amount of the Note, along with any interest accrued thereon, is due
upon a default under the terms of the Note.





Upon the
Closing of this transaction, Abazias, will become a wholly owned subsidiary of
the Company. Commensurate with the entering into of the Agreement, Abazias Sub
has entered into Employment Agreements with Oscar Rodriguez and Jesus Diaz, with
Mr. Rodriguez serving as Chief Executive Officer and President of Abazias Sub
and Mr. Diaz serving as Vice President, Chief Financial Officer and Chief
Operating Officer of Abazias Sub. The Employment Agreements shall become
effective upon the closing of the transaction.





60





OMNIRELIANT
HOLDINGS, INC. & SUBSIDIARIES


(A
DEVELOPMENT STAGE ENTERPRISE)


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14 -
SUBSEQUENT EVENTS (CONTINUED):





Additionally,
the Company and Abazias shall jointly prepare and the Company shall file with
the Securities and Exchange Commission (the “SEC”) a Form S-4, which shall
include a document or documents that will constitute (i) the prospectus forming
part of the registration statement on the S-4 and (ii) the Joint Proxy
Statement/Prospectus. Both the Company and Abazias are required under the
Purchase Agreement to use all commercially reasonable efforts to cause the S-4
to become effective as promptly as practicable, and, prior to the effective date
of the S-4, the Company and Abazias shall take all action required under any
applicable laws in connection with the issuance of the Shares and the Preferred
Stock.





The
Company anticipates accounting for the purchase of Abazias as a purchase
business combination, applying Statements of Financial Accounting Standards No.
141 Business
Combinations (“SFAS 141”). In the unlikely event that the purchase occurs
on or after July 1, 2009, we will be required to apply Statements of Financial
Accounting Standards No. 141(R) Business Combinations
(“SFAS 141(R)”), which would result in substantial differences from SFAS 141.
SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, the effective date
for our application of SFAS 141(R) will be commencing with our fiscal year
beginning July 1, 2009. Early adoption of SFAS 141(R) is prohibited by the
standard. The Company’s application of SFAS 141 will provide for the allocation
of the total estimated purchase price to the tangible and intangible assets of
Abazias acquired at their respective fair values. The excess of the estimated
purchase price over the tangible and intangible assets will be reflected in our
post-acquisition financial statements as goodwill.





61





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 financial statements ("Notes").





Reverse
Acquisition – OmniReliant Corporation was incorporated on August 21, 2006 under
the laws of the State of Florida. On November 22, 2006, Willowtree Advisor,
Inc., an entity which was incorporated on June 16, 2004 under the laws of the
State of Nevada, entered into an exchange agreement with the stockholders of
OmniReliant Corporation (the “Exchange Transaction”). As a result of the
Exchange Transaction, OmniReliant Corporation became a wholly-owned subsidiary
of Willowtree Advisor, Inc. and succeeded to the business of OmniReliant
Corporation as its sole business. The Exchange Transaction is deemed to be a
reverse acquisition for accounting purposes. As a result, in accordance with the
Accounting and Financial Reporting Interpretations and Guidance provided by the
staff of the U.S. Securities and Exchange Commission, Willowtree Advisor, Inc.
(the legal acquirer) is considered the accounting acquiree and OmniReliant
Corporation (the legal acquiree) is considered the accounting acquirer. The
discussions below, and the consolidated financial statements attached hereto,
will in substance be those of OmniReliant Corporation, with the assets and
liabilities, and revenues and expenses, of Willowtree Advisor, Inc. being
included effective from the date of consummation of the Exchange
Transaction.





Plan of
Operation – Development Stage Company – The Company is a development stage
company with limited revenues and limited historical information upon which to
base an evaluation of its performance.




62




The
Company engages in the creation, design, distribution, and sale of affordable
luxury products. The Company plans to make these products available to U.S. and
international consumers through direct response infomercials, live shopping
networks, ecommerce, direct mail and traditional retail channels. The Company
will first focus on bringing the Kathy Hilton fragrance product line to market,
after which OmniReliant plans to develop other personalities and designer
licenses. Ms. Hilton, who is the wife of Rick Hilton, the grandson of the Hilton
Hotel founder, has agreed to appear in television segments and infomercials. We
have entered into a license agreement with KRH Licensing Company, LLC, an
affiliate of Rick and Kathy Hilton.





It is the
Company’s intention to design, manufacture, market and distribute prestige
fragrances and related products. In addition, the Company has an agreement to
market and distribute hair straightening irons. The Company plans to engage
contract packagers and professionals in the field. In the United States, our
plan is to enter into agreements to distribute our products through a targeted
group of department and specialty stores, such as Macy's, Foley's, Marshall
Fields, Famous Barr, Belks, Elder Beerman, Carson Pirie Scott, and Filenes. In
international markets, we plan to distribute our products through established
prestige distribution channels. We hope to sell products under private label
that have already reached its market entry point.





As a
development stage company, we may not be successful in implementing our plan to
manufacture, market and distribute prestige fragrances and related products.
Until our products are successfully manufactured and marketed on a live shopping
network or via infomercials, we will not generate significant revenues and may
not be successful. If we cannot generate sufficient revenues to continue
operations, we will be forced to suspend or cease operations, and may forfeit
our rights under license agreements.





We do not
expect to make any significant purchases of equipment nor do we expect a
significant change in the number of our employees.





Our
officers and directors will handle our administrative duties with the help of a
consultant, TotalCFO, LLC.





We cannot
guarantee that we will be successful in our business operations. Our business is
subject to risks inherent in the establishment of a new business
enterprise.





63





Discussion
and Analysis of Results of Operations, Liquidity and Financial
Condition





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements included
herewith. This discussion should not be construed to imply that the results
discussed herein will necessarily continue into the future, or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future.





Three
months ended December 31, 2008 compared to three months ended December 31,
2007:





Revenues –We derive revenues
from the sale and licensing of products in our Retail Products and Licensing
business. Commencing in the current year, we purchased certain real estate in
Pinellas County, Florida and leased a substantial portion of this building to
third-party tenants. We are accounting for each of these businesses as
identifiable segments.





·
            Product
      sales: Our product sales increased $1,036,774 to $1,067,624 for the three
      months ended December 31, 2008 compared to $30,850 for the three months
      ended December 31, 2007. This increase reflects our maturation in
      identifying new retail products to sell through our distribution
      networks.


·
            Licensing
      revenue: Licensing revenue was derived from sub-licensing our rights to
      certain licensed products. We discontinued recording licensing revenue
      when the licensee began experiencing significant financial difficulties
      and the collection of our licensing revenue could not be assured beyond a
      reasonable doubt.


·
            Rental
      revenue: Our rental of commercial real estate commenced during the current
      fiscal year. Accordingly, we reported no similar balances in prior
      periods. We anticipate rental revenues to be higher in future periods that
      will reflect rentals for the entire period and as we increase the
      percentage of our building that is available to be
  rented.





Cost of product sales – Our
cost of product sales increased $559,530 to $570,983 for the three months ended
December 31, 2008 compared to $11,453 for the three months ended December 31,
2007. This increase reflects our increasing retail product sales. Our margin
during the current period amounted to 47% compared to 63% in the prior period.
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.





Other operating expenses –Other operating expenses consists of advertising expense, general and
administrative expenses, depreciation and amortization, and expenses of our real
estate operations:





·
            Advertising
      expense: We began incurring substantial advertising expense during the
      current fiscal year as we launch infomercials related to our retail
      products business. We generally expense advertising when it is incurred in
      accordance with Statement of Position 93-7 Accounting for
      Advertising. Commencing in the current 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 expenses. During the three and six months ended
      December 31, 2008, the Company expensed $1,178,436 of costs related to
      infomercials, which amount is included in other operating expenses in our
      condensed consolidated statements of operations. As of December 31, 2008,
      prepaid expense includes $215,553 of deferred infomercial production costs
      that will be expensed upon the first
airing.













64




·
              General
      and administrative: These costs and expenses include compensation,
      professional fees, occupancy costs and general office expenses. Our
      general and administrative costs decreased $959,028 to $398,799 for the
      three months ended December 31, 2008 compared to $1,357,827 for the three
      months ended December 31, 2007. The principal reason for this decline
      relates to our recognition of $1,134,705 in non-cash share-based
      compensation payment expense during the 2007 period and none in the 2008
      period. Excluding the effects of the non-cash share based payments, our
      general and administrative expenses increased approximately $223,000 which
      generally relates to higher professional fees that we incurred to evaluate
      our complex accounting issues and
filings.
 ·
              Depreciation
      and amortization: Our amortization of intangible assets and depreciation
      of property and equipment amounted to $82,418 and $61,377, respectively
      for the three months ended December 31, 2008. Our amortization of
      intangible assets amounted to $176,463 during the three months ended
      December 31, 2007. The decrease in the amortization is due to the full
      amortization of certain intangible assets during the prior and current
      periods. The addition of depreciation expense relates to our recently
      acquired real estate, along with improvements and fixtures. Our
      depreciation expense will continue and increase in the near term as our
      operations reflect the depreciation for the full periods
      reported.
 ·
              Real
      estate operations: Our real estate operation expenses include property
      taxes, utilities, repairs and maintenance and insurance costs. These items
      amounted to $123,362 for the three months ended December 31, 2008; none in
      the prior year because we did not run this operation during that period.
      We expect our real estate related costs to increase in the near term to
      give effect to its operation during full fiscal
  periods.




Other income (expense)–
Other income and expense include fair value adjustments related to our
derivative financial instruments, interest expense and income, extinguishments
and impairments.





·
            Derivative
      income (expense): 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.





Three
      months ended
                          December
      31,Financing
      and Financial Instrument
                        
                        2008
                        
                        
                        2007Series
      A Preferred Financing—Investorwarrants
                        
                        $
                        251,116
                        
                        
                        $
                        (7,870,627
                        )Series
      B Preferred Financing—Investorwarrants
                        
                        
                        3,745
                        
                        
                        
                        (2,556,370
                        )Series
      C Preferred Financing—Put derivative
                        
                        
                        525,465
                        
                        
                        
                        525Series
      D Preferred Financing—Investorwarrants
                        
                        
                        771,929
                        
                        
                        
                        —Series
      D Preferred Financing—Put derivative
                        
                        
                        750,781
                        
                        
                        
                        —Derivative
      income (expense)
                        
                        $
                        2,303,036
                        
                        
                        $
                        (10,426,472
                        )





·
            Interest
      expense: Interest expense includes amortization of deferred finance costs
      and interest on our new mortgage loan. Interest expense increased $59,554
      to $104,421 during the three months ended December 31, 2008 compared to
      $44,867 for the three months ended December 31, 2007. The increase in
      interest expense relates to interest on the mortgage loan. We anticipate
      that our interest expense will increase in future periods as our
      operations reflect mortgage interest for the full periods
      presented.







65




·
              Other
      expenses: Other expenses in 2007 include the expense related to the
      extinguishment of certain issued of our preferred stock ($26,247,007) and
      registration payments made to investors. Our capital structure is complex
      and we have entered into transactions that have significant effects on our
      financial statements. See our footnotes to the financials included
      elsewhere herein for more information. While we currently do not
      anticipate the need for these types of transactions in future periods,
      there can be no assurance that financing and other transactions that we
      enter into would not have the same effects on our
  income.




Minority interest – Minority
interests arises from the consolidation of or 60% owned subsidiary OmniCom
Studios LLC. This company constitutes our real estate business and was
capitalized by cash by us and other unrelated investors. Minority interest
arises from recognition of the minority shareholders proportionate share of
OmniComm’s losses.





Net income (loss) –We have
reported net income of $1,052,171 during the three months ended December 31,
2008 compared to a loss of $(38,392,805) during the three months ended December
31, 2008. Our loss from operations amounted to $(1,229,389) and $(1,296,126) for
the three months ended December 31, 2008 and 2007, respectively. Our net income
(loss) has been largely influenced by our other income (expense), which as
discussed above, gives effect to fair value adjustments and the effects of
financing transactions necessary to support our capital
requirements.





Income (loss) applicable to common
stockholders – Income (loss) applicable to common stockholders represents
our net income (loss) as adjusted for cumulative dividends and accretions on our
Series A, B, and C Preferred Stock, if any. These amounts are necessary to
compute income (loss) per common share.





66




Six
months ended December 31, 2008 compared to six months ended December 31,
2007:





Revenues –We derive revenues
from the sale and licensing of products in our Retail Products and Licensing
business. Commencing in the current year, we purchased certain real estate in
Pinellas County, Florida and leased a substantial portion of this building to
third-party tenants. We are accounting for each of these businesses as
identifiable segments.





·
            Product
      sales: Our product sales increased $981,585 to $1,171,258 for the six
      months ended December 31, 2008 compared to $189,673 for the six months
      ended December 31, 2007. This increase reflects our maturation in
      identifying new retail products to sell through our distribution
      networks.


·
            Licensing
      revenue: Licensing revenue was derived from sub-licensing our rights to
      certain licensed products. We discontinued recording licensing revenue
      when the licensee began experiencing significant financial difficulties
      and the collection of our licensing revenue could not be assured beyond a
      reasonable doubt.


·
            Rental
      revenue: Our rental of commercial real estate commenced during the current
      fiscal year. Accordingly, we reported no similar balances in prior
      periods. We anticipate rental revenues to be higher in future periods that
      will reflect rentals for the entire period and as we increase the
      percentage of our building that is available to be
  rented.





Cost of product sales – Our
cost of product sales increased $505,140 to $615,019 for the six months ended
December 31, 2008 compared to $109,879 for the six months ended December 31,
2007. This increase reflects our increasing retail product sales. Our margin
during the current period amounted to 47% compared to 42% in the prior period.
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.





Other operating expenses –Other operating expenses consists of advertising expense, general and
administrative expenses, depreciation and amortization, and expenses of our real
estate operations:





·
            Advertising
      expense: We began incurring substantial advertising expense during the
      current fiscal year as we launch infomercials related to our retail
      products business. We generally expense advertising when it is incurred in
      accordance with Statement of Position 93-7 Accounting for
      Advertising. Commencing in the current 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 expenses. During the six and six months ended
      December 31, 2008, the Company expensed $1,178,436 of costs related to
      infomercials, which amount is included in other operating expenses in our
      condensed consolidated statements of operations. As of December 31, 2008,
      prepaid expense includes $215,553 of deferred infomercial production costs
      that will be expensed upon the first
airing.


·
            General
      and administrative: These costs and expenses include compensation,
      professional fees, occupancy costs and general office expenses. Our
      general and administrative costs decreased $959,028 to $915,576 for the
      six months ended December 31, 2008 compared to $1,661,353 for the six
      months ended December 31, 2007. The principal reason for this decline
      relates to our recognition of $1,134,705 in non-cash share-based
      compensation payment expense during the 2007 period and none in the 2008
      period. Excluding the effects of the non-cash share based payments, our
      general and administrative expenses increased approximately $175,000 which
      generally relates to higher professional fees that we incurred to evaluate
      our complex accounting issues and
filings.










67




·
            Depreciation
      and amortization: Our amortization of intangible assets and depreciation
      of property and equipment amounted to $138,361 and $103,529, respectively
      for the six months ended December 31, 2008. Our amortization of intangible
      assets amounted to $184,989 during the six months ended December 31, 2007.
      The decrease in the amortization is due to the full amortization of
      certain intangible assets during the prior and current periods. The
      addition of depreciation expense relates to our recently acquired real
      estate, along with improvements and fixtures. Our depreciation expense
      will continue and increase in the near term as our operations reflect the
      depreciation for the full periods
reported. ·
              Real
      estate operations: Our real estate operation expenses include property
      taxes, utilities, repairs and maintenance and insurance costs. These items
      amounted to $173,883 for the six months ended December 31, 2008; none in
      the prior year because we did not run this operation during that period.
      We expect our real estate related costs to increase in the near term to
      give effect to its operation during full fiscal
  periods.




Other income (expense)–
Other income and expense include fair value adjustments related to our
derivative financial instruments, interest expense and income, extinguishments
and impairments.





·
            Derivative
      income (expense): 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.





Six
      months ended
                                  December
      31,Financing
      and Financial Instrument
                                
                                2008
                                
                                
                                2007Series
      A Preferred Financing—Investorwarrants
                                
                                $
                                776,416
                                
                                
                                $
                                (4,606,068
                                )Series
      B Preferred Financing—Investorwarrants
                                
                                
                                29,185
                                
                                
                                
                                (2,141,558
                                )Series
      C Preferred Financing—Put derivative
                                
                                
                                536,134Series
      D Preferred Financing—Investorwarrants
                                
                                
                                2,671,659
                                
                                
                                
                                —Series
      D Preferred Financing—Put derivative
                                
                                
                                762,143
                                
                                
                                
                                —Derivative
      income (expense)
                                
                                $
                                4,775,537
                                
                                
                                $
                                (6,747,626
                                )





·
            Interest
      expense: Interest expense includes amortization of deferred finance costs
      and interest on our new mortgage loan. Interest expense decreased $75,632
      to $185,100 during the six months ended December 31, 2008 compared to
      $260,732 for the six months ended December 31, 2007. The decrease in
      interest expense generally relates to the lower amortization of deferred
      loan costs, but reflects an increase 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.




68




·
            Other
      expenses: Other expenses in 2007 include the expense related to the
      extinguishment of certain issued of our preferred stock ($26,247,007) and
      registration payments made to investors. Our capital structure is complex
      and we have entered into transactions that have significant effects on our
      financial statements. See our footnotes to the financials included
      elsewhere herein for more information. While we currently do not
      anticipate the need for these types of transactions in future periods,
      there can be no assurance that financing and other transactions that we
      enter into would not have the same effects on our
  income.





Minority interest – Minority
interests arises from the consolidation of or 60% owned subsidiary OmniCom
Studios LLC. This company constitutes our real estate business and was
capitalized by cash by us and other unrelated investors. Minority interest
arises from recognition of the minority shareholders proportionate share of
OmniComm’s losses.





Net income (loss) –We have
reported net income of $2,947,577 during the six months ended December 31, 2008
compared to a loss of $(35,666,989) during the six months ended December 31,
2008. Our loss from operations amounted to $(1,826,203) and $(1,724,154) for the
six months ended December 31, 2008 and 2007, respectively. Our net income (loss)
has been largely influenced by our other income (expense), which as discussed
above, gives effect to fair value adjustments and the effects of financing
transactions necessary to support our capital requirements.





Income (loss) applicable to common
stockholders – Income (loss) applicable to common stockholders represents
our net income (loss) as adjusted for cumulative dividends and accretions on our
Series A, B, and C Preferred Stock, if any. These amounts are necessary to
compute income (loss) per common share.





69




Liquidity
and Capital Resources





We are in
our development stages and have reported recurring losses while devoting
substantially all of its efforts to raising capital, identifying and pursuing
businesses opportunities and developing our retail products and distribution
networks. During our development period, we have used cash of $2,156,930 and
$665,694 during the six months ended December 31, 2008 and 2007, respectively,
and $3,966,561 since our inception. These conditions raise substantial doubt
about our ability to continue as a going concern for a reasonable period. The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates continuing operations, realization of assets
and liquidation of liabilities in the ordinary course of business. Our ability
to continue as a going concern is dependent upon its ability to raise sufficient
capital to implement a successful business plan and to generate profits
sufficient to become financially viable. To the extent that it becomes necessary
to raise additional cash in the future as our current cash and working capital
resources are depleted, we will seek to raise it through the public or private
sale of debt or equity securities, the procurement of advances on contracts or
licenses, funding from joint-venture or strategic partners, debt financing or
short-term loans, or a combination of the foregoing. We also may seek to satisfy
indebtedness without any cash outlay through the private issuance of debt or
equity securities.





There can
be no assurance that future financings will be available to us on acceptable
terms. If financing is not available to us on acceptable terms, we may be unable
to continue our operations.





Cash and
cash equivalents amounted to $1,052,457 as of December 31, 2008 compared to
$4,435,814 at June 30, 2008. We have working capital of $283,849 as of December
31, 2008 while we reported a working capital deficiency of $1,685,811 at June
30, 2008. Our working capital fluctuates significantly due to reflecting certain
financial instruments at fair value. Our improved working capital gives effect
to reductions in the fair value of these financial instruments by $4,775,536
from June 30, 2008 to December 31, 2007. 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 ($2,156,930) and ($665,694) in our operating activities
during the six months ended December 31, 2008 and 2007,
respectively.





We
recorded net income (loss) of $2,947,577 and $(35,666,989) during the six months
ended December 31, 2008 and 2007, respectively that was offset by non-cash
charges (credits) of $4,474,080 and $(34,811,556), respectively. Non-cash
charges and (credits) relate principally to changes in the fair value of
derivative financial instruments and other activity associated with our
financial instruments. Non-cash charges included amortization and depreciation
of $241,890 and $184,989 and amortization of finance costs of $125,638 and
$118,896 during the six months ended December 31, 2008 and 2007, respectively.
Our depreciation will increase in future periods reflecting higher average
balances of property and equipment. Our net operating assets increased by
$637,155 during the six months ended December 31, 2008, compared to a decrease
of $(189,739) in the prior year, reflecting the ramping up of our retail
products operations.





Cash Flow from Investing
Activities– We used cash of ($3,185,187) and ($5,106,811) in our
investing activities during the six months ended December 31, 2008 and 2007,
respectively.





We
purchased property and equipment amounting to $2,805,187 during the six months
ended December 31 2008. This property is used in our real estate business. We
also invested $600,000 and $100,000 in investments and licenses during the six
months ended December 31, 2008. During the prior year, we made investment of
$5,100,000. Finally, our cash flow from investing activities reflects the cash
infusion of the minority shareholders of OmniComm Studios, LLC, which is our
real estate holding company.




70


Cash Flow from Financing Activities– We generated $1,958,760 and $5,929,174 in cash from our financing
activities during the six months period ended December 31, 2008 and
2007.





Cash was
received during the six months ended December 31, 2008 from proceeds on a
mortgage loan. These funds were used to fund the purchase of the property and
equipment of OmniComm Studios LLC. In the prior year, we received net proceeds
from the sale of preferred stock amounting to $5,814,078.





We have
no commitments for the purchase of property and equipment. We have entered into
the Valcom Investment and Abazias Purchase Transactions subsequent to December
31, 2008. These transactions are more fully discussed below:





Valcom
Investment:





On
January 6, 2009, the Company entered into a note purchase agreement (the
“Purchase Agreement”) with Valcom, Inc. (“Valcom”), a Delaware corporation,
whereby it purchased a 10% secured convertible promissory note (the “Note”) in
the principal amount of $100,000 with a conversion price of $0.10 per share,
which is secured pursuant to a security agreement (the “Security Agreement”) and
a warrant to purchase 1,000,000 shares of Valcom’s Common Stock at an exercise
price of $0.20 (the “Warrant” and together with the Agreement, the Note and the
Security Agreement, the “Transaction Documents”). Pursuant to the Transaction
Documents, Valcom promises to pay to the Company $100,000 in cash on January 6,
2010. The Note bears interest at the rate of 10% per annum until the maturity
date.





Abazias
Purchase Transaction:





On
December 3, 2008, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with Abazias, Inc. (“Abazias”), a Delaware corporation and
Abazias.com, Inc., (“Abazias”), a Nevada corporation and wholly owned subsidiary
of Abazias, pursuant to which the Company has agreed to purchase substantially
all of the assets of Abazias Sub for an aggregate purchase price of: (i) a loan
in the amount of Five Hundred Thousand Dollars ($500,000) (the “Loan”) and; (ii)
the issuance of up to thirteen million one thousand (13,001,000) shares of the
Company’s zero coupon convertible preferred stock (the “Preferred Stock”) to the
Shareholders of Abazias, subject to adjustment. Under the Purchase Agreement,
upon closing of the transaction the Company shall issue the Preferred Stock to
the shareholders of Abazias, Inc. in exchange for all of the issued and
outstanding shares of capital stock of Abazias. The Loan, in the form of a Note,
was made on August 12, 2008 (see Investments). The Note bears interest at 10%
per annum and matures on December 31, 2009 (the “Maturity Date”). The full
principal amount of the Note, along with any interest accrued thereon, is due
upon a default under the terms of the Note.





Upon the
Closing of this transaction, Abazias, will become a wholly owned subsidiary of
the Company. Commensurate with the entering into of the Agreement, Abazias Sub
has entered into Employment Agreements with Oscar Rodriguez and Jesus Diaz, with
Mr. Rodriguez serving as Chief Executive Officer and President of Abazias Sub
and Mr. Diaz serving as Vice President, Chief Financial Officer and Chief
Operating Officer of Abazias Sub. The Employment Agreements shall become
effective upon the closing of the transaction.





Additionally,
the Company and Abazias shall jointly prepare and the Company shall file with
the Securities and Exchange Commission (the “SEC”) a Form S-4, which shall
include a document or documents that will constitute (i) the prospectus forming
part of the registration statement on the S-4 and (ii) the Joint Proxy
Statement/Prospectus. Both the Company and Abazias are required under the
Purchase Agreement to use all commercially reasonable efforts to cause the S-4
to become effective as promptly as practicable, and, prior to the effective date
of the S-4, the Company and Abazias shall take all action required under any
applicable laws in connection with the issuance of the Shares and the Preferred
Stock.




71




The
Company anticipates accounting for the purchase of Abazias as a purchase
business combination, applying Statements of Financial Accounting Standards No.
141 Business
Combinations (“SFAS 141”). In the unlikely event that the purchase occurs
on or after July 1, 2009, we will be required to apply Statements of Financial
Accounting Standards No. 141(R) Business Combinations
(“SFAS 141(R)”), which would result in substantial differences from SFAS 141.
SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, the effective date
for our application of SFAS 141(R) will be commencing with our fiscal year
beginning July 1, 2009. Early adoption of SFAS 141(R) is prohibited by the
standard. The Company’s application of SFAS 141 will provide for the allocation
of the total estimated purchase price to the tangible and intangible assets of
Abazias acquired at their respective fair values. The excess of the estimated
purchase price over the tangible and intangible assets will be reflected in our
post-acquisition financial statements as goodwill.





Segment
Reporting:





Our
business segments consist of (i) Retail Products and Licensing and (ii) Real
Estate. Our real estate business commenced during the current fiscal year upon
the purchase of an office building in Pinellas County, Florida. Our chief
decision making officer considers income (loss) from operations as the basis to
measure segment profitability. The following table summarizes important
financial information about our business segments as of December 31, 2008 and
for the three and six months ended December 31, 2008:





Retail
                              Products
                              and
                              Licensing
                            
                            
                            Real
                              Estate
                            
                            
                            ConsolidatedThree
      Months Ended December 31, 2008Revenues
      from external customers
                            
                            $
                            1,067,624
                            
                            
                            $
                            70,670
                            
                            
                            $
                            1,138,294Depreciation
      expense
                            
                            
                            1,290
                            
                            
                            
                            60,087
                            
                            
                            
                            61,377Income
      (loss) from operations
                            
                            
                            (1,1370,59
                            )
                            
                            
                            (92,330
                            )
                            
                            
                            (1,229,389
                            )Capital
      expenditures
                            
                            
                            54,203
                            
                            
                            
                            —
                            
                            
                            
                            54,203Six
      Months Ended December 31, 2008Revenue
      from external customers
                            
                            $
                            1,171,259
                            
                            
                            $
                            132,105
                            
                            
                            $
                            1,303,364Depreciation
      expense
                            
                            
                            3,248
                            
                            
                            
                            100,281
                            
                            
                            
                            103,529Income
      (loss) from operations
                            
                            
                            (1,673,930
                            )
                            
                            
                            (152,273
                            )
                            
                            
                            (1,826,203
                            )Capital
      expenditures
                            
                            
                            80,596
                            
                            
                            
                            2,724,591
                            
                            
                            
                            2,805,187December
      31, 2008Total
      assets
                            
                            $
                            5,359,959
                            
                            
                            $
                            2,682,417
                            
                            
                            $
                            8,042,376





During
the three and six months ended December 31, 2008, the Real Estate operation
received $21,377 and $35,628, respectively, in rental revenue from the
Retail Products and Licensing business, which amount is eliminated in the table
above.




72




Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations are
based upon our 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. For a description of those estimates, see Note 3, Summary of
Significant Accounting Policies, contained in the explanatory notes to our
audited financial statements for the six months ended December 31, 2008 attached
to this Form 10-Q. 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 equity instruments issued to
consultants for services and estimates of costs to complete contracts. 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.





Effect
of Recently Issued Accounting Pronouncements:





We have
reviewed accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. We
believe that the following impending standards may have an impact on our future
filings. Also see Fair Value Measurements, above. The applicability of any
standard is subject to the formal review of our financial management and certain
standards are under consideration.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS 141(R)"), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination.  SFAS 141R is effective as of the beginning of
the first fiscal year beginning on or after December 15, 2008. Earlier adoption
is prohibited. As more fully discussed in the Subsequent Events footnote, the
Company is currently seeking to complete a purchase business combination. If the
purchase is completed before July 1, 2009, the Company will be required to apply
SFAS 141. However, if the transaction is completed on or after July 1, 2009, the
Company will be required to apply SFAS 141(R).





In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and132(R) (“SFAS 158”).  SFAS 158
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. SFAS 158
also improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions.  The effective date for an employer with
publicly traded equity securities is as of the end of the fiscal year ending
after December 15, 2006. The adoption of SFAS 158 did not have a material impact
on our financial position, results of operations or cash flows because we do not
have a defined benefit plan for our employees.




73




In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No.
51. This statement amends ARB No. 51 to establish accounting and
reporting standards for the Non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS 160 will change the
classification and reporting for minority interest and non-controlling interests
of variable interest entities.  Following the effectiveness of SFAS
160, the minority interest and non-controlling interest of variable interest
entities will be carried as a component of stockholders’ equity. Accordingly,
upon the effectiveness of this statement, we will begin to reflect
non-controlling interest in our consolidated variable interest entities as a
component of stockholders’ equity. This statement is effective for fiscal years
and interim periods within those fiscal years, beginning on or after December
15, 2008 and earlier adoption is prohibited. Since we do not currently have
Variable Interest Entities consolidated in our financial statements, adoption of
this standard is not expected to have a material effect.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133 (“SFAS 161”).  SFAS 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. Entities
are required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations; and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years beginning after November 15, 2008, with early
adoption encouraged. We are currently evaluating the impact of SFAS 161, if any,
will have on our financial position, results of operations or cash flows. This
standard will affect the disclosures in our financial statements to provide the
required information.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." The Company does not expect the adoption of
SFAS 162 will have a material effect on its financial position, results of
operations or cash flows.





In July
2006, the FASB issued Interpretation No. 48, Accountingfor
uncertainty in Income Taxes(“FIN 48”). FIN No. 48
clarifies the accounting for Income Taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition and clearly scopes income taxes out of SFAS No. 5,
Accounting
for Contingencies. FIN 48 was effective for
fiscal years beginning after December 15, 2006. Accordingly, we have implemented
FIN 48 by summarizing and evaluating all potential uncertain tax positions. As a
result of our implementation, FIN No. 48 did not have a material impact on our
financial position, results of operations or cash flows, although, as discussed
in our income tax disclosures, certain positions are present that require our
periodic review in maintaining compliance with this standard.




74


In
December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements (FSP 00-19-2) which addresses accounting for
registration payment arrangements. FSP 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies.  FSP 00-19-2 further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other applicable generally accepted accounting principles
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement.  For registration payment
arrangements and financial instruments subject to those arrangements that were
entered into prior to the issuance of EITF 00-19-2, this guidance shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2006 and interim periods within those fiscal years. The adoption of
EITF 00-19-02 did not have a material impact on our financial position, results
of operations or cash flows, because we have no current transactions that embody
Registration Payment Arrangements, as defined in the standard.





In April
2008, the FASB issued FSP No. FAS 142-3 Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. The Company is required to adopt FSP 142-3 on October
1, 2008. The guidance in FSP 142-3 for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. The Company is currently evaluating the impact of FSP 142-3 on its
financial position, results of operations or cash flows, and believes that the
established lives will continue to be appropriate under the FSP.





In May
2008, the FASB issued FSP Accounting Principles Board 14-1 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
Company is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its financial position, results of operations or cash
flows.





In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock,
which supersedes the definition in EITF 06-01 for periods beginning after
December 15, 2008 (our fiscal year ending September 30, 2010). The objective of
this Issue is to provide guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity's own stock
and it applies to any freestanding financial instrument or embedded feature that
has all the characteristics of a derivative in of Statement 133, for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception in paragraph 11(a) of Statement 133 (the “Paragraph
11(a) Exemption). This Issue also applies to any freestanding financial
instrument that is potentially settled in an entity's own stock, regardless of
whether the instrument has all the characteristics of a derivative in Statement
133, for purposes of determining whether the instrument is within the scope of
Issue 00-19. We currently have warrants that embody terms and conditions that
require the reset of their strike prices upon our sale of shares or
equity-indexed financial instruments and amounts less than the conversion
prices. These features will no longer be treated as “equity” under the EITF once
it becomes effective. Rather, such instruments will require classification as
liabilities and measurement at fair value. Early adoption is precluded.
Accordingly, this standard will be adopted in our quarterly period ended
September 30, 2009.




75




In June
2008, the Emerging Issues Task Force issue EITF Consensus No. 08-04 Transition
Guidance for Conforming Changes to Issue 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, which is effective for years ending after December 15,
2008 (our fiscal year ending June 30, 2009). Early adoption is not permitted.
The overall objective of the Issue is to conform the requirements of EITF 00-27
and Financial Accounting Standard No. 150 with EITF 98-5 to provide for
consistency in application of the standard. We computed and recorded a
beneficial conversion feature in connection with certain of our prior financing
arrangements and do not believe that this standard has any material effect on
that accounting.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future financial
statements.





76





ITEM 3 –
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





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





77





ITEM 4T –
CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures – The Company’s Chief Executive Officer
and Chief Financial Officer has evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the fiscal period ending December 31, 2008 covered
by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief
Executive Officer and Chief Financial Officer has concluded that, as of the end
of such period, the Company’s disclosure controls and procedures were not
effective as required under Rules 13a-15(e) and 15d-15(e) under the
Exchange Act.





Changes
in Internal Controls over Financial Reporting – During the quarter ended
December 31, 2008, there have been no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





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.





78





PART II –
OTHER INFORMATION





ITEM 1 –
LEGAL PROCEEDINGS





From time
to time we may be a defendant and plaintiff in various legal proceedings arising
in the normal course of our business. We are currently not a party to any
material pending legal proceedings or government actions, including any
bankruptcy, receivership, or similar proceedings. In addition, management is not
aware of any known litigation or liabilities involving the operators of our
properties that could affect our operations. Should any liabilities be incurred
in the future, they will be accrued based on management’s best estimate of the
potential loss. As such, there is no adverse effect on our consolidated
financial position, results of operations or cash flow at this time.
Furthermore, Management of the Company does not believe that there are any
proceedings to which any director, officer, or affiliate of the Company, any
owner of record of the beneficially owned more than five percent of the common
stock of the Company, or any associate of any such director, officer, affiliate
of the Company, or security holder is a party adverse to the Company or has a
material interest adverse to the Company.





ITEM 1A –
RISK FACTORS





There has
been no material change in our risk factors from those disclosed in our Annual
Report on Form10-KSB filed with the SEC for the year ended June 30,
2008.





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





None.





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





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 Paul Morrison 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 Paul Morrison in satisfaction of Section
      906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
      1350





79





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





OmniReliant
      Holdings, Inc.Date: February
      5, 2009
                By:
                /s/
      Paul MorrisonPaul
      MorrisonChief
      Executive Officer and Chief Financial Officer (Principal Accounting
      Officer





80