UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington
D. C. 20549





FORM
10-Q





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





For the
quarterly period ended September 30,
2010





 ̈   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
            54-2153837(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            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.YesþNo ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  ̈ Yes
 ̈No.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer  ̈
                Accelerated filer ̈Non-accelerated
      filer  ̈
                Smaller
      reporting company þ





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





The
number of shares of the registrant’s Common Stock, $0.00001 par value per share,
outstanding as of November 19, 2010 is 158,732,336.





OMNIRELIANT HOLDINGS, INC. AND
SUBSIDIARIES


QUARTERLY
PERIOD ENDED


SEPTEMBER
30, 2010





Table
of Contents





Part
                          
                          Item and Description
                          
                          PagePart
      I
                          
                          Financial
      InformationForward-Looking
      Statements
                          
                          3Item
      1. Financial Statements
                          
                          3Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                          
                          41Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
                          
                          53Item
      4T. Controls and Procedures
                          
                          54Part
      II
                          
                          Other
      InformationItem
      1. Legal Proceedings
                          
                          56Item
      1A. Risk Factors
                          
                          58Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                          
                          58Item
      3. Defaults Upon Senior Securities
                          
                          58Item
      4. Removed and Reserved
                          
                          58Item
      5. Other Information
                          
                          58Item
      6. Exhibit Index
                          
                          58Signatures
                          
                          59


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


OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Balance Sheets





September 30,
                    2010
                  
                  
                  June 30,
                    2010(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  3,818,515
                  
                  
                  $
                  5,691,422Accounts
      receivable, net of allowances for doubtful accounts of $273,043 and
      $168,355
                  
                  
                  842,726
                  
                  
                  
                  1,464,254Inventories,
      net
                  
                  
                  3,013,509
                  
                  
                  
                  3,326,346Investments
                  
                  
                  250,000
                  
                  
                  
                  180,000Prepaid
      expenses and other current assets
                  
                  
                  122,760
                  
                  
                  
                  140,575Total
      current assets
                  
                  
                  8,047,510
                  
                  
                  
                  10,802,597Property
      and equipment, net
                  
                  
                  2,519,962
                  
                  
                  
                  2,527,816Investments,
      equity method
                  
                  
                  281,848
                  
                  
                  
                  1,340,583Other
      assets
                  
                  
                  77,391
                  
                  
                  
                  29,519Total
      assets
                  
                  $
                  10,926,711
                  
                  
                  $
                  14,700,515Liabilities,
      Redeemable Preferred Stock and DeficitCurrent
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  982,450
                  
                  
                  $
                  996,138Deferred
      revenue
                  
                  
                  —
                  
                  
                  
                  53,833Notes
      payable and maturities of long-term debt
                  
                  
                  282,835
                  
                  
                  
                  284,985Derivative
      liabilities
                  
                  
                  9,767,226
                  
                  
                  
                  4,185,956Total
      current liabilities
                  
                  
                  11,032,511
                  
                  
                  
                  5,520,912Deferred
      revenue
                  
                  
                  2,000,000
                  
                  
                  
                  2,000,000Long-term
      debt
                  
                  
                  1,940,361
                  
                  
                  
                  1,946,900Security
      deposits on leases
                  
                  
                  9,193
                  
                  
                  
                  9,193Total
      liabilities
                  
                  
                  14,982,065
                  
                  
                  
                  9,477,005Commitments
      and contingencies (Note 13)
                  
                  
                  —
                  
                  
                  
                  —Redeemable
      preferred stock
                  
                  
                  8,560,777
                  
                  
                  
                  7,816,910Deficit:OmniReliant
      shareholders’ deficit:Series
      E Preferred Stock, $0.00001 par, 13,000,000shares
      authorized and, 2,331,031 and 2,884,601shares
      issued outstanding
                  
                  
                  2,373,378
                  
                  
                  
                  2,937,004Common
      Stock, $0.00001 par, 400,000,000 sharesauthorized;
      158,732,336 and 158,073,323 outstanding
                  
                  
                  1,588
                  
                  
                  
                  1,581Paid-in
      capital
                  
                  
                  46,882,174
                  
                  
                  
                  47,029,421Accumulated
      deficit
                  
                  
                  (62,022,910
                  )
                  
                  
                  (52,707,780
                  )Other
      comprehensive items
                  
                  
                  100,000
                  
                  
                  
                  30,000Total
      OmniReliant shareholders’ deficit
                  
                  
                  (12,665,770
                  )
                  
                  
                  (2,709,774
                  )Non-controlling
      interests
                  
                  
                  49,639
                  
                  
                  
                  116,374Total
      deficit
                  
                  
                  (12,616,131
                  )
                  
                  
                  (2,593,400
                  )Total
      liabilities, redeemable preferred stock and deficit
                  
                  $
                  10,926,711
                  
                  
                  $
                  14,700,515


See accompanying
notes.


4


OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Statements of Operations





Three months ended September 30,2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)Product
      sales
                
                $
                3,189,951
                
                
                $
                7,627,821Cost
      of product sales (excluding depreciation expensereflected
      in other operating expenses)
                
                
                2,792,091
                
                
                
                4,477,325Gross
      profit
                
                
                397,860
                
                
                
                3,150,496Services
      and other revenues
                
                
                53,833
                
                
                
                —Rental
      income
                
                
                38,403
                
                
                
                86,97992,236
                
                
                
                86,979Other
      operating expenses:Other
      general and administrative
                
                
                950,552
                
                
                
                800,409Advertising
      and promotional
                
                
                846,039
                
                
                
                2,997,923Accounting
      and professional
                
                
                840,111
                
                
                
                555,036Employment
      costs
                
                
                594,363
                
                
                
                800,416Depreciation
      and amortization
                
                
                57,722
                
                
                
                111,2883,288,787
                
                
                
                5,265,072Loss
      from operations
                
                
                (2,798,691
                )
                
                
                (2,027,597
                )Other
      income (expense):Derivative
      (expense) income
                
                
                (5,581,270
                )
                
                
                9,948,085Equity
      in losses of investees
                
                
                (1,064,485
                )
                
                
                (104,672
                )Interest
      and other income
                
                
                97,567
                
                
                
                248,047Interest
      expense
                
                
                (34,986
                )
                
                
                (54,216
                )Extinguishment
      expense
                
                
                —
                
                
                
                (22,328,516
                )Inducement
      expense
                
                
                —
                
                
                
                (1,473,855
                )Total
      other income (expense)
                
                
                (6,583,174
                )
                
                
                (13,765,127
                )Net
      loss
                
                
                (9,381,865
                )
                
                
                (15,792,724
                )Net
      loss attributable to non-controlling interests
                
                
                66,735
                
                
                
                24,935Net
      loss attributable to OmniReliant
                
                $
                (9,315,130
                )
                
                $
                (15,767,789
                )




Continued
on next page.








5


OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Statements of Operations





Three months ended September 30,2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)Reconciliation
      of net loss attributable to OmniReliantto
      loss applicable to OmniReliant common shareholders:Net
      loss attributable to OmniReliant
                
                $
                (9,315,130
                )
                
                $
                (15,767,789
                )Preferred
      stock dividends and accretion
                
                
                (846,819
                )
                
                
                (66,948,653
                )Loss
      applicable to OmniReliant common shareholders
                
                $
                (10,161,949
                )
                
                $
                (82,716,442
                )Loss
      per common share:Basic
                
                $
                (0.06
                )
                
                $
                (1.03
                )Diluted
                
                $
                (0.06
                )
                
                $
                (1.03
                )Weighted
      average common shares—basic
                
                
                158,732,336
                
                
                
                80,434,068Weighted
      average common shares—diluted
                
                
                158,732,336
                
                
                
                80,434,068








6


OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows





Three
      months ended September 30,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Cash flows from operating activities:Net
      loss
                  
                  $
                  (9,315,130
                  )
                  
                  $
                  (15,767,789
                  )Adjustments
      to reconcile net loss to netcash
      from operating activities:Derivative
      expense (income)
                  
                  
                  5,581,270
                  
                  
                  
                  (9,948,085
                  )Equity
      in losses of investees
                  
                  
                  1,064,485
                  
                  
                  
                  104,672Share-based
      payment
                  
                  
                  135,953
                  
                  
                  
                  —Bad
      debts expense
                  
                  
                  111,768
                  
                  
                  
                  300,762Non-controlling
      interests
                  
                  
                  (66,735
                  )
                  
                  
                  (24,935
                  )Depreciation
      expense
                  
                  
                  57,266
                  
                  
                  
                  6,070Amortization
      of deferred revenue
                  
                  
                  (53,833
                  )
                  
                  
                  —Amortization
      of deferred finance costs
                  
                  
                  8,905
                  
                  
                  
                  4,871Extinguishment
                  
                  
                  —
                  
                  
                  
                  22,328,516Inducement
      expense
                  
                  
                  —
                  
                  
                  
                  1,473,855Amortization
      of intangible assets
                  
                  
                  —
                  
                  
                  
                  105,218Total
      adjustments
                  
                  
                  6,839,079
                  
                  
                  
                  14,350,944Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  509,760
                  
                  
                  
                  (1,227,549
                  )Inventories
                  
                  
                  312,837
                  
                  
                  
                  (345,740
                  )Prepaid
      expenses and other assets
                  
                  
                  17,815
                  
                  
                  
                  413,638Accounts
      payable and accrued expenses
                  
                  
                  (116,640
                  )
                  
                  
                  353,158Total
      changes
                  
                  
                  723,772
                  
                  
                  
                  (806,493
                  )Net
      cash used in operating activities
                  
                  
                  (1,752,279
                  )
                  
                  
                  (2,223,338
                  )Cash
      flows from investing activities:Purchases
      of property and equipment
                  
                  
                  (49,412
                  )
                  
                  
                  (16,559
                  )Payments
      for licenses and intangible assets
                  
                  
                  (46,060
                  )
                  
                  
                  —Security
      deposits
                  
                  
                  (10,717
                  )
                  
                  
                  —Purchases
      of investments
                  
                  
                  (5,750
                  )
                  
                  
                  (5,651,887
                  )Acquisition
      of Designer Liquidators
                  
                  
                  —
                  
                  
                  
                  612,702Acquisition
      of Abazias
                  
                  
                  —
                  
                  
                  
                  127,530Net
      cash flow from investing activities
                  
                  
                  (111,939
                  )
                  
                  
                  (4,928,214
                  )Cash
      flows from financing activities:Principal
      payments on long-term debt
                  
                  
                  (8,689
                  )
                  
                  
                  (5,590
                  )Proceeds
      from sale of preferred stock and warrants
                  
                  
                  —
                  
                  
                  
                  10,600,000Net
      cash flow from financing activities
                  
                  
                  (8,689
                  )
                  
                  
                  10,594,410Net
      change in cash and cash equivalents
                  
                  
                  (1,872,907
                  )
                  
                  
                  3,442,858Cash
      and cash equivalents at beginning of period
                  
                  
                  5,691,422
                  
                  
                  
                  2,005,702Cash
      and cash equivalents at end of period
                  
                  $
                  3,818,515
                  
                  
                  $
                  5,448,560




Continued
on the next page.








7




OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows





Supplemental
Cash Flow Information





Three months ended September 30,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Cash
      paid for interest
                  
                  $
                  70,567
                  
                  
                  $
                  32,418Cash
      paid for income taxes
                  
                  $
                  —
                  
                  
                  $
                  —Non-cash
      investing and financing activities:Issuance
      of 100,000 shares of common stock for partialconsideration
      transferred in acquiring Designer Liquidators
                  
                  $
                  —
                  
                  
                  $
                  101,000Issuance
      of 13,000,000 shares of Series E Preferred Stockfor
      consideration transferred in acquiring Abazias:Classified
      as preferred stock
                  
                  $
                  —
                  
                  
                  $
                  13,236,165Classified
      in paid-in capital, representing beneficialconversion
                  
                  
                  —
                  
                  
                  
                  2,605,158Total
      fair value of Series E Preferred Stock
                  
                  $
                  —
                  
                  
                  $
                  15,841,323








8


OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Statements of Stockholders’ Equity (Deficit)





Three
months ended September 30, 2010 (unaudited)





Series E
                    
                    
                    Common Stock
                    
                    
                    Paid-in
                    
                    
                    Comprehensive
                    
                    
                    Accumulated
                    
                    
                    OmniReliant
                    
                    
                    Non-Controlling
                    
                    
                    TotalPreferred Stock
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Income Items
                    
                    
                    Deficit
                    
                    
                    Equity (deficit)
                    
                    
                    Interests
                    
                    
                    Equity (deficit)Balances,
      July 1, 2010
                    
                    $
                    2,937,004
                    
                    
                    
                    158,073,323
                    
                    
                    $
                    1,581
                    
                    
                    $
                    47,029,421
                    
                    
                    $
                    30,000
                    
                    
                    $
                    (52,708,780
                    )
                    
                    $
                    (2,709,774
                    )
                    
                    $
                    116,374
                    
                    
                    $
                    (2,593,400
                    )Conversions
      of Series E Preferred
                    
                    
                    (563,626
                    )
                    
                    
                    659,013
                    
                    
                    
                    7
                    
                    
                    
                    563,619
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Share-based
      payment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    135,953
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    135,953
                    
                    
                    
                    —
                    
                    
                    
                    135,953Unrealized
      gains (losses)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    70,000
                    
                    
                    
                    —
                    
                    
                    
                    70,000
                    
                    
                    
                    —
                    
                    
                    
                    70,000Accretion
      of Series G Preferred
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (743,867
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (743,867
                    )
                    
                    
                    —
                    
                    
                    
                    (743,867
                    )Preferred
      Stock Dividends
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (102,952
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (102,952
                    )
                    
                    
                    —
                    
                    
                    
                    (102,952
                    )Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (9,315,130
                    )
                    
                    
                    (9,315,130
                    )
                    
                    
                    (66,735
                    )
                    
                    
                    (9,381,865
                    )Balances,
      September 30, 2010
                    
                    $
                    2,373,378
                    
                    
                    
                    158,732,336
                    
                    
                    $
                    1,588
                    
                    
                    $
                    46,882,174
                    
                    
                    $
                    100,000
                    
                    
                    $
                    (62,022,910
                    )
                    
                    $
                    (12,665,770
                    )
                    
                    $
                    49,639
                    
                    
                    $
                    (12,616,131
                    )








9


OmniReliant
Holdings, Inc. and Subsidiaries


Consolidated
Statements of Stockholders’ Equity (Deficit)





Three
months ended September 30, 2009 (unaudited)





Series E
                  
                  
                  Common Stock
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  OmniReliant
                  
                  
                  Non-Controlling
                  
                  
                  TotalPreferred Stock
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Income Items
                  
                  
                  Deficit
                  
                  
                  Equity (deficit)
                  
                  
                  Interests
                  
                  
                  Equity (deficit)Balances,
      July 1, 2009
                  
                  $
                  —
                  
                  
                  
                  14,509,225
                  
                  
                  $
                  145
                  
                  
                  $
                  6,532,238
                  
                  
                  $
                  (72,102
                  )
                  
                  $
                  (46,570,028
                  )
                  
                  $
                  (40,109,747
                  )
                  
                  $
                  197,114
                  
                  
                  $
                  (39,912,633
                  )Change
      in accounting for derivatives
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (28,719,115
                  )
                  
                  
                  —
                  
                  
                  
                  24,673,969
                  
                  
                  
                  (4,045,146
                  )
                  
                  
                  —
                  
                  
                  
                  (4,045,146
                  )Warrant
      exchange
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )Conversions
      of preferred
                  
                  
                  —
                  
                  
                  
                  105,141,416
                  
                  
                  
                  1,051
                  
                  
                  
                  107,587,408
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  107,588,459
                  
                  
                  
                  —
                  
                  
                  
                  107,588,459Acquisition:
      Designer Liquidator
                  
                  
                  —
                  
                  
                  
                  100,000
                  
                  
                  
                  1
                  
                  
                  
                  161,966
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  161,967
                  
                  
                  
                  163,450
                  
                  
                  
                  324,417Acquisition:
      Abazias
                  
                  
                  13,236,165
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,886,188
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  18,122,353
                  
                  
                  
                  —
                  
                  
                  
                  18,122,353Warrant
      exercises
                  
                  
                  —
                  
                  
                  
                  27,606,276
                  
                  
                  
                  276
                  
                  
                  
                  12,811,450
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  12,811,4726
                  
                  
                  
                  —
                  
                  
                  
                  12,811,726Unrealized
      gains (losses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  83,228
                  
                  
                  
                  
                  
                  
                  
                  83,228
                  
                  
                  
                  
                  
                  
                  
                  83,228Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (15,767,789
                  )
                  
                  
                  (15,767,789
                  )
                  
                  
                  (24,935
                  )
                  
                  
                  (15,792,724
                  )Balances,
      September 30, 2009
                  
                  $
                  13,236,165
                  
                  
                  
                  147,356,917
                  
                  
                  $
                  1,473
                  
                  
                  $
                  36,311,482
                  
                  
                  $
                  11,126
                  
                  
                  $
                  (37,663,848
                  )
                  
                  $
                  11,896,398
                  
                  
                  $
                  335,629
                  
                  
                  $
                  12,232,027








10


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 1 –
Basis of presentation:





The
accompanying unaudited condensed consolidated financial statements as of and for
the three months ended September 30, 2010 and 2009 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission for Form 10-Q.
Accordingly, they do not include all the information and footnotes required for
complete financial statements. However, the unaudited condensed consolidated
financial information includes all adjustments which are, in the opinion of
management, necessary to fairly present the consolidated financial position and
the consolidated results of operations for the interim periods presented. The
operations for the three months ended September 30, 2010 are not necessarily
indicative of the results for the year ending June 30, 2011. The unaudited
condensed consolidated financial statements included in this report should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended June 30,
2010, filed with the Securities and Exchange Commission.





Note 2 –
Going concern and management’s plans:





The
preparation of financial statements in accordance with generally accepted
accounting principles contemplates that operations will be sustained for a
reasonable period. However, we have incurred operating losses of $2,798,691 and
$2,027,597 during the three months ended September 30, 2010 and 2009,
respectively. In addition, during these periods, we used cash of $1,752,279 and
$2,223,338, respectively, in support of our operating activities. As of
September 30, 2010, we have cash on hand of $3,818,515 and a working capital
deficiency of $2,985,001. Since our inception, we have been substantially
dependent upon funds raised through the sale of preferred and common stock and
warrants to sustain our operating and investing activities. However, recent
reviews of the current market, which included discussions with prior and
potential funding sources by our executive management, indicate that additional
funding at levels to maintain operations at their historical levels and under
the existing structure are doubtful. As more fully discussed in the next
paragraphs, our management team has commenced certain significant initiatives
focused on restructuring and redirection. These initiatives will require
substantially all available liquid resources and, if positive outcomes from
these initiatives are not realized by approximately April 2011, much of our
liquid resources may be depleted. These conditions would raise substantial doubt
about our ability to continue as a going concern for a reasonable
period.





Our
management has developed strategic plans during the fourth quarter of the prior
fiscal year with the intention of alleviating ongoing operating losses. The
principal focus of these plans is an intensified emphasis on the redesign of the
Consumer Products Segment, shifting its focus from the highly expensive product
based distribution model to a global brand development and brand ownership
model. Compared to the historical model for the Consumer Products Segment, the
exorbitant advertising, distribution and administrative costs are able to be
shifted to third party organizations that are more entrenched in those types of
activities and networks, while allowing the Company to develop and brand
specific products that management believes have substantive market potential.
Management believes that the planned model, which is currently under
development, will provide better current and long-term profitability by
curtailing the cost structure, allowing for longer product life, and providing
for next-version, next-generation and follow-on opportunities to those products
ultimately developed. However, substantial investment is required to support
this change and, as a result, the Company will be unable to continue to provide
significant operating capital to the operating entities within eCommerce
Segment. As a result, while developing the new Consumer Products Model,
management has also been engaged in overseeing subsidiary managements’ efforts
to both curtail costs and, to the extent possible, develop alternative operating
models that have the result of minimally achieving a state of neutral cash flow.
There can be no assurances that either the aforementioned Response Model can be
accomplished nor, if accomplished, can there be any assurances of its
operational success.


11


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





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





The
Company received $10,600,000 in funding from the sale of preferred stock and
warrants and similar transactions during the three months ended September 30,
2009. However, since further funding of our operating structure in its current
form has been determined to be doubtful, our ability to continue as a going
concern for a reasonable period is initially dependent upon achieving our
management’s plans for the Company’s reorganization and, ultimately, generating
profitable operations from those restructured operations. We cannot give any
assurances regarding the success of management’s plans. Our consolidated
financial statements do not include adjustments relating to the recoverability
of recorded assets or liabilities that might be necessary should we be unable to
continue as a going concern.





Note 3 –
Business acquisitions:





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





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


12


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 3 –
Business acquisitions (continued):





The
following table summarizes the results of the allocation:





Abazias
                
                
                Designer
                
                
                TotalCurrent
      assets, including cash of $127,530 and $612,702from
      Abazias and Designer, respectively
                
                $
                523,307
                
                
                $
                1,964,119
                
                
                $
                2,487,425Property
      and equipment
                
                
                2,027
                
                
                
                —
                
                
                
                2,027Intangible
      assets:Customer
      lists and customer related
                
                
                2,545,930
                
                
                
                484,353
                
                
                
                3,030,283Dealer
      network intangibles
                
                
                2,133,679
                
                
                
                —
                
                
                
                2,133,679Registered
      trademarks, trade names and dress
                
                
                1,642,420
                
                
                
                —
                
                
                
                1,642,420Executive
      employment contracts
                
                
                210,928
                
                
                
                —
                
                
                
                210,928Software
      and operational processes
                
                
                35,000
                
                
                
                —
                
                
                
                35,000Trade
      liabilities assumed
                
                
                (347,905
                )
                
                
                (124,728
                )
                
                
                (472,633
                )Notes
      payable
                
                
                —
                
                
                
                (250,000
                )
                
                
                (250,000
                )Deferred
      income taxes
                
                
                (2,281,029
                )
                
                
                (60,967
                )
                
                
                (2,341,966
                )4,464,357
                
                
                
                2,012,777
                
                
                
                6,477,133Consideration
      transferred (excluding direct expenses):Cash
      consideration
                
                
                —
                
                
                
                150,000
                
                
                
                150,000Fair
      value of OmniReliant Securities
                
                
                15,841,323
                
                
                
                101,000
                
                
                
                15,942,323Investments
                
                
                1,042,789
                
                
                
                1,857,383
                
                
                
                2,900,172Non-controlling
      interest in RPS Trading LLC
                
                
                —
                
                
                
                163,450
                
                
                
                163,450Consideration
      transferred, plus non-controlling interests
                
                
                16,884,112
                
                
                
                2,271,833
                
                
                
                19,155,945Goodwill
      arising from the acquisitions under ASC 805
                
                $
                12,419,756
                
                
                $
                259,056
                
                
                $
                12,678,812





The
principal factor giving rise to the amount of goodwill at the time of our
acquisitions was the expected synergies that would have resulted from the
combined companies’ efforts to jointly promote existing and new retail product
offerings. However, as more fully discussed in Note 2, our management’s plans no
longer contemplate integration of these companies with the Consumer Products
Segment. As a result, substantially all identifiable intangible assets and
goodwill were impaired during the fourth quarter of the year ended June 30,
2010.





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





Our
acquisition of Designer included a 50% equity interest in RPS Trading LLC
(“RPS”), which is engaged in the manufacture of apparel and the sale of
accessories. RPS is a variable interest entity which is an entity that has (i)
an insufficient amount of equity to absorb the entity’s expected losses, (2)
equity owners as a group that are not able to make decisions about the entity’s
activities, or (3) equity that does not absorb the entity’s losses or receive
the entity’s residual returns. Prior to our acquisition of Designer, we invested
$1,857,383 in RPS secured notes, which was the principal funding of RPS’s early
operations. Our interests in these notes, and rights there under, coupled with
our purchase of the 50% equity interest held by Designer place us as the primary
beneficiary to RPS expected losses. As a result, the values of RPS assets are
included in the assets acquired from RPS and the non-controlling interest is
reflected as a component of the consideration transferred for purposes of
computing goodwill. Also see Note 11.





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


13


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 3 –
Business acquisitions (continued):





The
following table summarizes the unaudited pro forma affects on our consolidated
statements of operations, as if the acquisition had occurred on July 1,
2009:





Three Months ended
                  September 30, 2009Sales
      and other revenues
                
                $
                8,730,047Net
      loss attributable to OmniReliant
                
                
                (16,214,655
                )Loss
      per common share—basic
                
                
                (1.03
                )Loss
      per common share—diluted
                
                
                (1.03
                )





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





Note 4 –
Inventories:





Our
inventories consist of the following as of September 30, 2010 and June 30,
2010:





September 30,
                  2010
                
                
                June 30,
                  2010(Unaudited)Finished
      goods
                
                $
                3,133,509
                
                
                $
                2,708,974Work-in-process
                
                
                —
                
                
                
                897,6813,133,509
                
                
                
                3,606,655Reserves
      for obsolescence and excess quantities
                
                
                (120,000
                )
                
                
                (280,309
                )$
                3,013,509
                
                
                $
                3,326,346





Note 5 –
Investments:





Investments
have been made in certain Internet retail and other businesses. Available for
sale and held-to-maturity investments consisted of the following on September
30, 2010 and June 30, 2010:





September 30,
                  
                  
                  June 30,2010
                  
                  
                  2010(Unaudited)Available-for-sale
      investments:NetTalk.com,
      Inc., 1,000,000 shares of common stock; cost basis
$150,000
                  
                  $
                  250,000
                  
                  
                  $
                  180,000Less:
      current portion of investments
                  
                  
                  (250,000
                  )
                  
                  
                  (180,000
                  )Total
      non-current investments
                  
                  $
                  —
                  
                  
                  $
                  —





Unrealized
(gains) losses related to available for sale investments are recorded as a
component of other comprehensive income in stockholders’
equity.


14


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 5 –
Investments (continued):





Equity
method investments consisted of the following as of September 30, 2010 and June
30, 2010:





Common
                        Ownership
                      
                      
                      Investment
                        Cost
                      
                      
                      Equityin
                        Earnings
                      
                      
                      September30,
                        2010
                      
                      
                      June30,
                        2010(Unaudited)
                      
                      
                      (Unaudited)Investees:Zurvita
      Holdings
                      
                      
                      25.0
                      %
                      
                      $
                      2,646,000
                      
                      
                      $
                      (1,045,786
                      )
                      
                      $
                      —
                      
                      
                      $
                      1,045,786Webcarnation
                      
                      
                      40.0
                      %
                      
                      
                      420,750
                      
                      
                      
                      (18,699
                      )
                      
                      
                      281,848
                      
                      
                      
                      294,797Total
                      
                      
                      
                      
                      
                      $
                      3,066,750
                      
                      
                      $
                      (1,064,485
                      )
                      
                      $
                      281,848
                      
                      
                      $
                      1,340,583





Equity in
earnings (losses) of investments carried under the equity method amounted
to $(104,672) during the three months ended September 30, 2009.





Note 6 –
Accounts payable and accrued expenses:





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





September 30,
                  2010
                
                
                June 30,
                  2010(Unaudited)Accounts
      payable
                
                $
                688,843
                
                
                $
                750,103Accrued
      expenses:Dividends
      on Series G Preferred
                
                
                102,952
                
                
                
                —Warranty
                
                
                71,324
                
                
                
                71,324Interest
                
                
                44,257
                
                
                
                44,257Employment
      related
                
                
                37,500
                
                
                
                75,000Real
      estate taxes
                
                
                —
                
                
                
                15,000Other
      accrued expenses
                
                
                37,574
                
                
                
                40,454Total
      accrued expenses
                
                
                293,607
                
                
                
                246,035Total
      accounts payable and accrued expenses
                
                $
                982,450
                
                
                $
                996,138


15


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 7 –
Derivative financial instruments:





The
following table summarizes the components of derivative liabilities as of
September 30, 2010 and June 30, 2010 by financing transaction from which they
originated and by category:





Financing—Financial Instrument
              
              September 30,
                2010
              
              
              June 30,
                2010(Unaudited)Freestanding
      Warrants:Series
      B Preferred Financing—Investor warrants
              
              $
              29,088
              
              
              $
              15,312Series
      C Preferred Financing—Investor warrants
              
              
              172,614
              
              
              
              78,250Series
      F Preferred Financing—Placement agent warrants
              
              
              259,166
              
              
              
              104,166Series
      G Preferred Financing-Investor warrants
              
              
              3,135,000
              
              
              
              1,330,000Warrant
      financing Transaction—Investor warrants
              
              
              4,368,000
              
              
              
              1,806,000Warrant
      Financing Transaction—Placement agent warrants
              
              
              86,270
              
              
              
              35,750Total
      derivative warrants
              
              
              8,050,138
              
              
              
              3,369,478Embedded
      Derivatives:Series
      C Preferred Financing—Put derivative
              
              
              17,088
              
              
              
              16,478Series
      G Preferred Financing—Conversion option
              
              
              1,700,000
              
              
              
              800,000Total
      embedded derivatives
              
              
              1,717,088
              
              
              
              816,478Derivative
      liabilities
              
              $
              9,767,226
              
              
              $
              4,185,956





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





Financing—Financial Instrument
                
                September 30,
                  2010
                
                
                June 30,
                  2010(Unaudited)Freestanding
      Warrants:Series
      B Preferred Financing—Investor warrants
                
                
                480,000
                
                
                
                480,000Series
      C Preferred Financing—Investor warrants
                
                
                2,731,228
                
                
                
                2,731,228Series
      F Preferred Financing—Placement agent warrants
                
                
                4,166,666
                
                
                
                4,166,666Series
      G Preferred Financing—Investor warrants
                
                
                50,000,000
                
                
                
                50,000,000Warrant
      Financing Transaction—Investor warrants
                
                
                70,000,000
                
                
                
                70,000,000Warrant
      Financing Transaction—Placement agent warrants
                
                
                1,380,314
                
                
                
                1,380,314Total
      derivative warrants
                
                
                128,758,208
                
                
                
                128,758,208Embedded
      Derivative:Series
      G Preferred Financing—Conversion options
                
                
                50,000,000
                
                
                
                50,000,000178,758,208
                
                
                
                178,758,208





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


16


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 7 –
Derivative financial instruments (continued):





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





Changes
in the fair value of derivative financial instruments are recorded in income.
The following table summarizes the components of derivative income (expense)
arising from fair value adjustments during the three months ended September 30,
2010:





Financing—Financial Instrument
                
                Embedded
                  Derivatives
                
                
                Warrant
                  Derivatives
                
                
                TotalSeries
      B Preferred Financing
                
                $
                —
                
                
                $
                (13,776
                )
                
                $
                (13,776
                )Series
      C Preferred Financing
                
                
                (610
                )
                
                
                (94,364
                )
                
                
                (94,974
                )Series
      F Preferred Financing
                
                
                —
                
                
                
                (155,000
                )
                
                
                (155,000
                )Series
      G Preferred Financing
                
                
                (900,000
                )
                
                
                (1,805,000
                )
                
                
                (2,705,000
                )Warrant
      Financing
                
                
                —
                
                
                
                (2,612,520
                )
                
                
                (2,612,520
                )Derivative
      income (expense)
                
                $
                (900,616
                )
                
                $
                (4,680,660
                )
                
                $
                (5,581,270
                )





The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the three months ended September 30,
2009:





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


17


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 7 –
Derivative financial instruments (continued):





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





2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)Balances
      at the beginning of the period
                
                $
                4,185,956
                
                
                $
                6,481,839Change
      in accounting, described above
                
                
                —
                
                
                
                4,045,146Balances
      at July 1
                
                
                4,185,956
                
                
                
                10,526,985Issuances
      (Note 10):Exchange
      transaction
                
                
                —
                
                
                
                37,090,385Warrant
      financing transaction
                
                
                —
                
                
                
                382,761Total
                
                
                —
                
                
                
                37,473,146Conversions
      and cancellations (Note 10):Exchange
      transaction
                
                
                —
                
                
                
                (9,761,869
                )Conversion
      transaction
                
                
                —
                
                
                
                (454,702
                )Exercises
                
                
                —
                
                
                
                (7,594,487
                )Total
                
                
                —
                
                
                
                (17,811,058
                )Fair
      value adjustments:Anti-dilution
      re-pricing events (1)
                
                
                —
                
                
                
                1,436,735Inducement
      adjustment (Note 10)
                
                
                —
                
                
                
                1,473,855Other
      assumption changes (1)
                
                
                5,581,270
                
                
                
                (11,384,820
                )Total
                
                
                5,581,270
                
                
                
                (8,474,230
                )Balances
      at the end of the period
                
                $
                9,767,226
                
                
                $
                21,714,843





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





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


18


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 7 –
Derivative financial instruments (continued):





Freestanding
derivative warrants were valued using the Black-Scholes-Merton (“BSM”) option
value technique. Significant assumptions underlying the calculations are as
follows as of September 30, 2010, June 30, 2010 and September 30,
2009:





September 30, 2010:
                
                Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateWarrant
      Financing:Investor
      Warrants
                
                
                70,000,000
                
                
                $
                0.10
                
                
                
                8.80
                
                
                
                87.22
                %
                
                
                2.53
                %Placement
      agent warrants
                
                
                1,380,314
                
                
                $
                0.10
                
                
                
                9.01
                
                
                
                86.10
                %
                
                
                2.53
                %Series
      B Preferred Financing:B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.10
                
                
                
                1.65
                
                
                
                193.90
                %
                
                
                0.42
                %Series
      C Preferred Financing:C-1
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.10
                
                
                
                2.05
                
                
                
                193.90
                %
                
                
                0.42
                %C-2
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.10
                
                
                
                7.05
                
                
                
                98.65
                %
                
                
                1.91
                %Series
      F Preferred Financing:BD-12
      Placement agent warrants
                
                
                833,333
                
                
                $
                0.10
                
                
                
                8.38
                
                
                
                89.44
                %
                
                
                2.53
                %BD-13
      Placement agent warrants
                
                
                3,333,333
                
                
                $
                0.10
                
                
                
                8.38
                
                
                
                89.44
                %
                
                
                2.53
                %Series
      G Investor Warrants
                
                
                50,000,000
                
                
                $
                0.10
                
                
                
                9.76
                
                
                
                82.84
                %
                
                
                2.53
                %





June 30, 2010:
                
                Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateWarrant
      Financing:Investor
      Warrants
                
                
                70,000,000
                
                
                $
                0.10
                
                
                
                9.05
                
                
                
                70.88
                %
                
                
                2.97
                %Placement
      agent warrants
                
                
                1,380,314
                
                
                $
                0.10
                
                
                
                9.26
                
                
                
                70.00
                %
                
                
                2.97
                %Series
      B Preferred Financing:B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.10
                
                
                
                1.90
                
                
                
                186.22
                %
                
                
                0.61
                %Series
      C Preferred Financing:C-1
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.10
                
                
                
                2.30
                
                
                
                173.21
                %
                
                
                0.61
                %C-2
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.10
                
                
                
                7.31
                
                
                
                77.86
                %
                
                
                2.42
                %Series
      F Preferred Financing:BD-12
      Placement agent warrants
                
                
                833,333
                
                
                $
                0.10
                
                
                
                8.63
                
                
                
                71.47
                %
                
                
                2.97
                %BD-13
      Placement agent warrants
                
                
                3,333,333
                
                
                $
                0.10
                
                
                
                8.63
                
                
                
                71.47
                %
                
                
                2.97
                %Series
      G Investor Warrants
                
                
                50,000,000
                
                
                $
                0.10
                
                
                
                10.01
                
                
                
                68.01
                %
                
                
                2.97
                %





September 30, 2009:
                
                Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateWarrant
      Financing:Investor
      Warrant
                
                
                70,000,000
                
                
                $
                0.2029
                
                
                
                9.81
                
                
                
                65.60
                %
                
                
                3.31
                %Placement
      agent warrants
                
                
                1,380,314
                
                
                $
                0.2029
                
                
                
                10.00
                
                
                
                65.61
                %
                
                
                3.31
                %Series
      B Preferred Financing:B-1
      Investor Warrants
                
                
                480,000
                
                
                $
                0.25
                
                
                
                0.65
                
                
                
                156.56
                %
                
                
                0.18
                %B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.25
                
                
                
                2.65
                
                
                
                114.42
                %
                
                
                1.45
                %Series
      C Preferred Financing:C-1
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.25
                
                
                
                3.05
                
                
                
                106.35
                %
                
                
                1.45
                %C-2
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.25
                
                
                
                8.05
                
                
                
                68.87
                %
                
                
                2.93
                %Series
      F Preferred Financing:BD-12
      Placement agent warrants
                
                
                833,333
                
                
                $
                0.25
                
                
                
                9.37
                
                
                
                66.24
                %
                
                
                3.31
                %BD-13
      Placement agent warrants
                
                
                3,333,333
                
                
                $
                0.25
                
                
                
                9.37
                
                
                
                65.24
                %
                
                
                3.31
                %





The
trading market price for our common stock was $0.10, $0.06 and $0.99 at
September 30, 2010, June 30, 2010 and September 30, 2009,
respectively.


19


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 7 –
Derivative financial instruments (continued):





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





Our
embedded conversion option derivative represents the conversion option, certain
redemption and put features in our Series G Preferred Stock. See Note 9 for
additional information about our Series G Preferred Stock. These embedded
features (i) met the definition of derivatives individually and (ii) were not
clearly and closely related to the host preferred stock based upon economic
characteristics and risks. This is because the Series G Preferred Stock, being
both redeemable for cash on a specific future date, coupled with a periodic
return (i.e. cumulative dividend) that was consistent with returns for debt,
caused us to conclude that the Series G Preferred Stock bore risks more closely
associated with debt-type financial instruments. Accordingly, when comparing the
risks of the debt-type host contract with the risks of the equity-type embedded
features, they were not clearly and closely related.





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





RangeAssumptions
      at September 30, 2010:
                
                Low
                
                
                High
                
                
                EquivalentVolatility
                
                
                64.35
                %
                
                
                97.97
                %
                
                
                81.86
                %Market
      adjusted interest rates
                
                
                4.01
                %
                
                
                8.00
                %
                
                
                5.52
                %Credit
      risk adjusted rates
                
                
                11.79
                %
                
                
                12.66
                %
                
                
                12.22
                %Implied
      expected life (years)
                
                
                —
                
                
                
                —
                
                
                
                2.70





RangeAssumptions
      at June 30, 2010 (inception date):
                
                Low
                
                
                High
                
                
                EquivalentVolatility
                
                
                65.99
                %
                
                
                92.51
                %
                
                
                82.57
                %Market
      adjusted interest rates
                
                
                4.28
                %
                
                
                8.00
                %
                
                
                5.70
                %Credit
      risk adjusted rates
                
                
                12.34
                %
                
                
                13.77
                %
                
                
                13.04
                %Implied
      expected life (years)
                
                
                —
                
                
                
                —
                
                
                
                2.38


20


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 7 –
Derivative financial instruments (continued):





Our
embedded put derivative represent features embedded in the Series C Preferred
Stock that (i) met the definition of a derivative and (ii) were not clearly and
closely related to the host preferred contract. Accordingly, we were required to
bifurcate these derivatives from our Series C Preferred Stock, classify them in
liabilities and carry them at fair value. The put derivative fair values are
estimated based upon a multiple, probability-weighted outcomes, cash flow model
that is present valued using risk-adjusted market interest rates. We use
publicly available bond-rate curves for companies that we estimate have credit
ratings similar to what ours may be based upon Standard & Poors and Moody’s
rating scales. Those ratings generally fall in the highly speculative to
in-poor-standing categories of these ratings, and ranged from 7.52% to 8.39% for
periods from one to five years, respectively, as of September 30, 2010. The
range at June 30, 2010 was 8.07% and 10.29%, respectively.





Note 8 —
Long-term debt:





Long-term
debt consisted of the following at September 30, 2010 and June 30,
2010:





September 30,
                    2010
                  
                  
                  June 30,
                    2010(Unaudited)Initial
      $2,000,000 six-year, variable rate mortgage note, with interest at the
      Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75%
      during the first three years and a floor of 6.75% and a cap of 8.75%
      during the second three years; principal and interest payments of $13,507
      are payable over the six year term based upon a twenty-five year
      amortization schedule, with $1,775,557 payable at maturity; secured by
      real estate; guaranteed by related parties.
                  
                  $
                  1,938,391
                  
                  
                  $
                  1,947,080Bank
      lending rate (3.8% at June 30, 2010) demand bank note
                  
                  
                  249,605
                  
                  
                  
                  249,605Other
      long-term debt
                  
                  
                  35,200
                  
                  
                  
                  35,2002,223,196
                  
                  
                  
                  2,231,885Less
      current maturities
                  
                  
                  (282,835
                  )
                  
                  
                  (284,985
                  )Long-term
      debt
                  
                  $
                  1,940,361
                  
                  
                  $
                  1,946,900Maturities
      of long-term debt for the nine months ended June 30, 2011
                  
                  
                  
                  
                  
                  $
                  276,356Maturities
      of long-term for each year ended June 30 are as follows:2012
                  
                  
                  
                  
                  
                  
                  37,7732013
                  
                  
                  
                  
                  
                  
                  40,3272014
                  
                  
                  
                  
                  
                  
                  43,0542015
                  
                  
                  
                  
                  
                  
                  14,9891,810,697$
                  2,223,196





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


21


OmniReliant
Holdings, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements




Note 9 –
Redeemable preferred stock:





Redeemable
preferred stock consists of the following as of September 30, 2010 and June 30,
2010:





September 30,
                  2010
                
                
                June 30,
                  2010(Unaudited)Series
      C Convertible Preferred Stock, 1,024,210 shares issued and outstanding
      (liquidation value $10,620,000)
                
                $
                4,946,910
                
                
                $
                4,946,910Series
      G Convertible Preferred Stock, 5,000,000 shares issued and outstanding at
      June 30, 2010 (liquidation value $5,000,000)
                
                
                3,613,867
                
                
                
                2,870,000$
                8,560,777
                
                
                $
                7,816,910





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





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





Terms,
Features and Conditions of our Redeemable Preferred Stock:





Series
                    
                    Date of
                      Designation
                    
                    Number of
                      Shares
                    
                    
                    Par
                      Value
                    
                    
                    Stated
                      Value
                    
                    
                    Liquidation
                      Value
                    
                    
                    Dividend
                      Rate
                    
                    
                    Initial
                      Conversion
                    
                    
                    Current
                      ConversionC
                    
                    10/18/2007
                    
                    
                    10,620,000
                    
                    
                    $
                    0.00001
                    
                    
                    $
                    1.00
                    
                    
                    $
                    1.00
                    
                    
                    
                    —
                    
                    
                    $
                    0.75
                    
                    
                    $
                    0.25G
                    
                    6/30/2010
                    
                    
                    5,000,000
                    
                    
                    $
                    0.00001
                    
                    
                    $
                    1.00
                    
                    
                    $
                    1.00
                    
                    
                    
                    8.0
                    %
                    
                    $
                    0.10
                    
                    
                    $
                    0.10





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





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


22


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 9 –
Redeemable preferred stock (continued):





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





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


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


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


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





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





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





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


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


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





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





The
mandatory redemption feature embodied in the Series G Preferred Stock is
probable of payment. Accordingly, we are required to accrete the carrying value
of the Series G Preferred Stock to its redemption value by charges to paid in
capital using the effective interest method. The following summarizes the annual
accretion for each fiscal year ending June 30: 2011-$4,345,109;
2012-$10,923,495; and, 2013-$27,461,396.


23


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 9 –
Redeemable preferred stock (continued):





Fiscal 2010 Series G
Preferred Stock and Warrant Financing Arrangement:





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





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





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





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





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





Financial
      Instrument:
                
                AllocationSeries
      G Preferred
                
                $
                2,870,000Embedded
      Conversion Feature
                
                
                800,000Series
      G Warrants
                
                
                1,330,000$
                5,000,000





Our
allocation methodology provided that the proceeds were allocated first to the
Series G Warrants at their fair value, second to the Embedded Conversion Feature
at its fair value and, lastly, the residual to the Series G Preferred.
Information about the valuation of these derivative financial instruments is
provided in Note 10. We are accreting the Series G Preferred to its redemption
value with charges to stockholders’ equity over the term to its mandatory
redemption date using the effective interest method. Accretion during the three
months ended September 30, 2010 amounted to $743,867.


24


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 10 –
Equity (deficit):





Changes in
accounting:





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





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





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





Series
E Convertible Preferred Stock:





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


25


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 10 –
Equity (deficit) (continued):





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





Shares
                
                
                AmountShares
      issued to acquire Abazias, Inc. on August 27, 2009
                
                
                13,000,000
                
                
                $
                15,841,323Beneficial
      conversion feature
                
                
                —
                
                
                
                (2,605,158
                )Conversion
      into 12,012,239 shares of common stock
                
                
                (10,115,399
                )
                
                
                (10,299,161
                )Balances
      at June 30, 2010
                
                
                2,884,601
                
                
                
                2,937,004Conversion
      into 659,013 shares of common stock
                
                
                (553,570
                )
                
                
                (563,626
                )Balances
      at September 30, 2010
                
                
                2,331,031
                
                
                $
                2,373,378





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





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





As of
September 30, 2010, the remaining shares of Series E Preferred are convertible
into 5,215,630 shares of common stock.





Exchange
and conversion transactions:





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





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





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


26


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 10 –
Equity (deficit) (continued):





Fair
      value of Warrant
                
                $
                37,090,385Fair
      value of surrendered warrants
                
                
                (9,761,869
                )Consideration
                
                
                (5,000,000
                )Extinguishment
      loss
                
                $
                22,328,516





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





Changes
in fair value are summarized as follows:





Incremental
      value of derivative warrants linked to 7,857,894 shares of common stock,
      recorded in derivative expense
                
                $
                1,436,735Incremental
      value of redeemable preferred stock linked to 42,952,461 shares of common
      stock before the anti-dilution trigger and 109,238,256 after, recorded in
      paid-in capital
                
                $
                66,948,653





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


27


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 10 –
Equity (deficit) (continued):





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





Pre-Exchange
                  and
                  Conversion
                
                
                Exchange (1)
                
                
                Conversion
                
                
                Post-Exchange
                  and
                  ConversionCommon
      shares outstanding
                
                
                14,509,225
                
                
                
                
                
                
                105,141,416
                
                
                
                119,650,641Preferred
      Stock:Series
      C Convertible Preferred
                
                
                20,619,128
                
                
                
                20,619,128
                
                
                
                (37,141,416
                )
                
                
                4,096,840Series
      D Convertible Preferred
                
                
                14,000,000
                
                
                
                14,000,000
                
                
                
                (28,000,000
                )
                
                
                —Series
      F Convertible Preferred
                
                
                8,333,333
                
                
                
                31,666,667
                
                
                
                (40,000,000
                )
                
                
                —42,952,461
                
                
                
                66,285,795
                
                
                
                (105,141,416
                )
                
                
                4,096,840Warrants
      and Stock Options:Exchange
      Warrant
                
                
                —
                
                
                
                97,606,276
                
                
                
                
                
                
                
                97,606,276Class
      A Warrants
                
                
                6,900,000
                
                
                
                (6,900,000
                )
                
                
                
                
                
                
                —Class
      B-1 and B-2
                
                
                1,008,000
                
                
                
                (48,000
                )
                
                
                
                
                
                
                960,000Class
      C-1 and C-2
                
                
                29,956,171
                
                
                
                (27,224,943
                )
                
                
                
                
                
                
                2,731,428Class
      D-1
                
                
                30,100,000
                
                
                
                (30,100,000
                )
                
                
                
                
                
                
                —Class
      F
                
                
                37,499,999
                
                
                
                (33,333,333
                )
                
                
                
                
                
                
                4,166,666Other
      Warrants
                
                
                1,000,000
                
                
                
                —
                
                
                
                
                
                
                
                1,000,000Employee
      stock options
                
                
                2,145,000
                
                
                
                —
                
                
                
                
                
                
                
                2,145,000108,609,170
                
                
                
                —
                
                
                
                
                
                
                
                108,609,170Common
      and common equivalent shares
                
                
                166,070,856
                
                
                
                66,285,795
                
                
                
                —
                
                
                
                232,356,561





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





Warrant
exercise:





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





Fair
      value of warrants following inducement
                
                $
                26,851,487Fair
      value of warrants preceding inducement
                
                
                25,377,632Inducement
      expense
                
                $
                1,473,855


28


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements




Note 10 –
Equity (deficit) (continued):





Stock
Options and Warrants:





The
following table summarizes the activity related to warrants and stock options
for the year ended June 30, 2010 and three months ended September 30,
2010:





Linked Common
                          Shares
                        
                        
                        Exercise Prices
                          Per Share
                        
                        
                        Weighted Average
                          Exercise Prices Per ShareWarrants
                        
                        
                        Stock Options
                        
                        
                        Warrants
                        
                        
                        Stock Options
                        
                        
                        Warrants
                        
                        
                        Stock OptionsOutstanding
      at July 1, 2009
                        
                        
                        106,464,170
                        
                        
                        
                        2,145,000
                        
                        
                        
                        0.50-3.75
                        
                        
                        
                        0.50-1.00
                        
                        
                        
                        0.92
                        
                        
                        
                        0.57Granted
                        
                        
                        148,986,590
                        
                        
                        
                        37,448,671
                        
                        
                        
                        0.10-0.25
                        
                        
                        
                        0.01-0.35
                        
                        
                        
                        0.20
                        
                        
                        
                        0.06Exercised
                        
                        
                        (27,606,275
                        )
                        
                        
                        (8,334
                        )
                        
                        
                        0.20
                        
                        
                        
                        0.50
                        
                        
                        
                        0.25
                        
                        
                        
                        0.50Exchanged
                        
                        
                        (97,606,276
                        )
                        
                        
                        (4,800,000
                        )
                        
                        
                        0.25
                        
                        
                        
                        0.19-0.35
                        
                        
                        
                        0.25
                        
                        
                        
                        0.22Cancelled
      or expired
                        
                        
                        (1,480,000
                        )
                        
                        
                        (1,825,000
                        )
                        
                        
                        0.10-1.00
                        
                        
                        
                        0.05-1.00
                        
                        
                        
                        0.76
                        
                        
                        
                        0.58Outstanding
      at June 30, 2010
                        
                        
                        128,758,209
                        
                        
                        
                        32,960,337
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.01-0.50
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.05Granted
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Cancelled
      or expired
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Outstanding
      at September 30, 2010
                        
                        
                        128,758,209
                        
                        
                        
                        32,960,337
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.01-0.50
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.05Exerciseable
      at June 30, 2010
                        
                        
                        126,758,209
                        
                        
                        
                        311,666
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.50
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.50Exerciseable
      at September 30, 2010
                        
                        
                        126,758,209
                        
                        
                        
                        311,666
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.50
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.50Compensation
      expense:Grant
      date fair values:Year
      ended June 30, 2010
                        
                        
                        
                        
                        
                        $
                        2,942,415Year
      ended June 30, 2009
                        
                        
                        
                        
                        
                        $
                        344,339Compensation
      expense recorded:Three
      months ended September 30, 2010
                        
                        
                        
                        
                        
                        $
                        135,953Three
      months ended September 30, 2009
                        
                        
                        
                        
                        
                        $
                        —Compensation
      subject to amortization in future periods as options vest
                        
                        
                        
                        
                        
                        $
                        2,287,577


29


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements




Note 10 –
Equity (deficit) (continued):





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





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





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


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


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





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





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





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


30





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 10 –
Equity (deficit) (continued):





(Loss)
income per common share:





The
following table reflects the components of our calculation of loss per common
share:





ThreemonthsendedSeptember30,
                  
                  2010
                  
                  
                  2009Net
      loss
                  
                  $
                  (9,315,130
                  )
                  
                  $
                  (15,767,789
                  )Adjustments:Accretion
      of Series G Preferred Stock
                  
                  
                  (743,867
                  )
                  
                  
                  —Cumulative
      dividends on Series G Preferred Stock
                  
                  
                  (102,952
                  )
                  
                  
                  —Deemed
      dividend on Preferred Stock Exchange
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )Numerator
      for basic
                  
                  $
                  (10,161,949
                  )
                  
                  $
                  (82,716,442
                  )Denominator:Weighted
      averages shares
                  
                  
                  158,732,336
                  
                  
                  
                  80,434,068Potentially
      dilutive equity-linked contracts:
                  
                  
                  —
                  
                  
                  
                  —Warrants
      and options
                  
                  
                  —
                  
                  
                  
                  —Convertible
      preferred stock
                  
                  
                  —
                  
                  
                  
                  -158,732,336
                  
                  
                  
                  80,434,068Loss
      per common share:Basic
                  
                  $
                  (0.06
                  )
                  
                  $
                  (1.03
                  )Diluted
                  
                  $
                  (0.06
                  )
                  
                  $
                  (1.03
                  )





Note 11 –
Non-controlling interests:





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





Three months ended
                    September 30, 2010:
                  
                  Parent and
                    Wholly-
                    Owned
                    Subsidiaries
                  
                  
                  OmniComm
                    Studios
                  
                  
                  RPS
                  
                  
                  Wine
                    Harvest
                  
                  
                  ConsolidatedOperationsRevenues
                  
                  $
                  2,384,137
                  
                  
                  $
                  38,403
                  
                  
                  $
                  833,922
                  
                  
                  $
                  25,725
                  
                  
                  $
                  3,282,187Loss
      from operations
                  
                  
                  (2,419,613
                  )
                  
                  
                  (98,848
                  )
                  
                  
                  (234,903
                  )
                  
                  
                  (45,327
                  )
                  
                  
                  (2,798,691
                  )Net
      loss
                  
                  
                  (9,002,787
                  )
                  
                  
                  (98,848
                  )
                  
                  
                  (234,903
                  )
                  
                  
                  (45,327
                  )
                  
                  
                  (9,391,865
                  )Non-controlling
      interests
                  
                  
                  —
                  
                  
                  
                  39,539
                  
                  
                  
                  —
                  
                  
                  
                  27,196
                  
                  
                  
                  66,735Net
      loss applicable to Omni
                  
                  
                  (9,002,787
                  )
                  
                  
                  (59,309
                  )
                  
                  
                  (234,903
                  )
                  
                  
                  (18,131
                  )
                  
                  
                  (9,315,130
                  )Balance
      SheetTotal
      assets
                  
                  $
                  8,072,299
                  
                  
                  $
                  2,377,863
                  
                  
                  $
                  341,519
                  
                  
                  $
                  135,030
                  
                  
                  $
                  10,926,711Total
      liabilities
                  
                  
                  (12,946,970
                  )
                  
                  
                  (1,988,476
                  )
                  
                  
                  (6,730
                  )
                  
                  
                  (39,889
                  )
                  
                  
                  (14,982,065Redeemable
      preferred
                  
                  
                  (8,560,777
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (8,560,777
                  )Total
      deficit
                  
                  
                  (13,435,448
                  )
                  
                  
                  389,387
                  
                  
                  
                  334,789
                  
                  
                  
                  95,151
                  
                  
                  
                  (12,616,131
                  )Non-controlling
      interests
                  
                  
                  —
                  
                  
                  
                  36,171
                  
                  
                  
                  —
                  
                  
                  
                  13,468
                  
                  
                  
                  49,639Deficit
      of Omni
                  
                  $
                  (13,435,448
                  )
                  
                  $
                  353,216
                  
                  
                  $
                  334,789
                  
                  
                  $
                  81,673
                  
                  
                  $
                  (12,665,770
                  )




31





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 11 –
Non-controlling interests (continued):





June 30, 2010:
                  
                  Parent and
                    Wholly-
                    Owned
                    Subsidiaries
                  
                  
                  OmniComm
                    Studios
                  
                  
                  RPS
                  
                  
                  Wine
                    Harvest
                  
                  
                  ConsolidatedBalance
      SheetTotal
      assets
                  
                  $
                  10,490,041
                  
                  
                  $
                  2,495,802
                  
                  
                  $
                  1,582,580
                  
                  
                  $
                  132,092
                  
                  
                  $
                  14,700,515Total
      liabilities
                  
                  
                  (3,682,291
                  )
                  
                  
                  (2,101,083
                  )
                  
                  
                  (3,296,035
                  )
                  
                  
                  (397,596
                  )
                  
                  
                  (9,477,005
                  )Redeemable
      preferred
                  
                  
                  (7,816,910
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (7,816,910
                  )Equity
      of Omni
                  
                  
                  (1,009,160
                  )
                  
                  
                  394,719
                  
                  
                  
                  (1,713,455
                  )
                  
                  
                  (265,504
                  )
                  
                  
                  (2,593,400
                  )Non-controlling
      interests
                  
                  
                  —
                  
                  
                  
                  75,710
                  
                  
                  
                  —
                  
                  
                  
                  40,664
                  
                  
                  
                  116,374Equity
      of Omni
                  
                  $
                  (1,009,160
                  )
                  
                  $
                  319,009
                  
                  
                  $
                  (1,713,455
                  )
                  
                  $
                  (306,168
                  )
                  
                  $
                  (2,709,774
                  )





Three months ended
                        September 30, 2009
                      
                      OmniReliant and
                        wholly-owned
                        subsidiaries
                      
                      
                      OmniComm
                      
                      
                      RPS
                      
                      
                      ConsolidatedOperating
      InformationSales
      or other revenues
                      
                      $
                      7,465,743
                      
                      
                      $
                      86,979
                      
                      
                      $
                      162,078
                      
                      
                      $
                      7,714,800Loss
      from operations
                      
                      
                      (1,996,444
                      )
                      
                      
                      (15,557
                      )
                      
                      
                      (15,596
                      )
                      
                      
                      (2,027,597
                      )Net
      (loss) income
                      
                      
                      (15,761,689
                      )
                      
                      
                      (15,439
                      )
                      
                      
                      (15,596
                      )
                      
                      
                      (15,792,724
                      )Non-controlling
      interests
                      
                      
                      —
                      
                      
                      
                      (20,154
                      )
                      
                      
                      (4,781
                      )
                      
                      
                      (24,935
                      )Net
      (loss) income applicable to OmniReliant
                      
                      
                      (15,761,689
                      )
                      
                      
                      4,715
                      
                      
                      
                      (10,815
                      )
                      
                      
                      (15,767,789
                      )Balance
      Sheet InformationTotal
      assets
                      
                      $
                      36,089,031
                      
                      
                      $
                      2,589,461
                      
                      
                      $
                      3,833,901
                      
                      
                      $
                      42,512,393Total
      liabilities
                      
                      
                      (20,166,417
                      )
                      
                      
                      (2,042,960
                      )
                      
                      
                      (3,124,079
                      )
                      
                      
                      (25,333,456
                      )Redeemable
      preferred stock
                      
                      
                      (4,946,910
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (4,946,910
                      )Total
      equity
                      
                      
                      10,975,704
                      
                      
                      
                      546,501
                      
                      
                      
                      709,822
                      
                      
                      
                      12,232,027Non-controlling
      interests
                      
                      
                      —
                      
                      
                      
                      (181,226
                      )
                      
                      
                      (158,669
                      )
                      
                      
                      (335,629
                      )Equity
      of OmniReliant shareholders
                      
                      $
                      10,975,704
                      
                      
                      $
                      358,275
                      
                      
                      $
                      551,153
                      
                      
                      $
                      11,896,398





Note 12 –
Segment information:





We
operate in three distinct industry segments, as determined by our Chief
Executive Officer.





Consumer
Products Segment: Our Consumer Products Segment has historically been engaged in
the creation, design, distribution and sale of affordable retail products, made
principally to domestic customers through direct response infomercials, live
shopping networks, ecommerce, direct mail and traditional retail channels.
Commencing in the fourth quarter of most recently completed fiscal year, our
executive management team has commenced the strategic redirection of the
Consumer Products Segment away from a retailer or reseller to becoming more
focused on product development, product enhancement and, ultimately, ownership
and branding of specific products that will be strategically distributed through
third party providers. As such, our management believes that the shift in focus
from solely reseller status to one of product ownership, branding and wholesale
positioning will result in overall better performance for the Consumer Products
Segment.


32





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 12 –
Segment information (continued):





eCommerce
Segment: Our eCommerce Segment is engaged in retail and wholesale distribution
of specific products and types or categories of products that do not fit into
our Consumer Products Segment, service businesses and general investment assets.
The eCommerce Segment combines the existing operations of our wholly owned
subsidiary, OmniReliant Acquisition Sub, Inc. (“Abazias”), which is an Internet
retailer of diamonds and jewelry, Wineharvest LLC, which is an Internet retailer
of fine wines, and two equity method investees. As more fully discussed in Note
2 Going Concern, the companies within the eCommerce Segment, while revenue
producing, have been largely dependent upon the holding company to fund their
individual ongoing operations and development. In light of the continuing
depressed economy, among other reasons, our new management team has determined
that funds are not available to continue to fund these operations for the
foreseeable future; rather, funding sources that are available will be directed
toward the development of the Consumer Products Segment. Accordingly,
substantial operational restructuring activities have been initiated and are
ongoing to curtail costs of the companies within this segment giving rise to
substantial doubt surrounding their ability to continue.





Fashion
Goods Segment: Our newly formed Fashion Goods Segment is engaged in the
manufacture of apparel and as a retail product liquidator. Fashion Safari, under
which this segment will be known in the marketplace, combines the existing
operations of our wholly owned subsidiary Designer Liquidator Inc., which is a
liquidator of principally consumer goods, and RPS, which is a wholesale
manufacture of consumer apparel. Similar to the eCommerce Segment, while also
revenue producing, these companies have been largely dependent upon the holding
company to fund their individual ongoing operations and development. For reasons
similar to those discussed in the previous section related to eCommerce Segment,
our new management team has determined that funds are not available to continue
to fund these operations for the foreseeable future. Accordingly, substantial
operational restructuring activities have been initiated and are ongoing to
curtail costs of the companies within this segment giving rise to substantial
doubt surrounding their ability to continue.





Three months ended
                                  September 30, 2010:
                                
                                Consumer
                                  Products
                                
                                
                                eCommerce
                                
                                
                                Fashion
                                  Goods
                                
                                
                                ConsolidatedOperationsRevenues
                                
                                $
                                1,566,020
                                
                                
                                $
                                720,261
                                
                                
                                $
                                995,906
                                
                                
                                $
                                3,282,187Depreciation
      and amortization
                                
                                
                                (54,334
                                )
                                
                                
                                (2,845
                                )
                                
                                
                                (573
                                )
                                
                                
                                (57,722
                                )Operating
      loss
                                
                                
                                (2,019,259
                                )
                                
                                
                                (219,649
                                )
                                
                                
                                (559,783
                                )
                                
                                
                                (2,798,691
                                )Equity
      in investee losses
                                
                                
                                —
                                
                                
                                
                                (1,064,485
                                
                                
                                
                                —
                                
                                
                                
                                (1,064,485
                                )Interest
      expense
                                
                                
                                (32,866
                                )
                                
                                
                                —
                                
                                
                                
                                (2,120
                                )
                                
                                
                                (34,986
                                )Net
      loss
                                
                                
                                (7,496,291
                                )
                                
                                
                                (1,256,938
                                )
                                
                                
                                (561,901
                                )
                                
                                
                                (9,315,130
                                )Balance
      SheetTotal
      assets
                                
                                
                                9,253,786
                                
                                
                                
                                830,867
                                
                                
                                
                                842,058
                                
                                
                                
                                10,926,711Equity
      investments
                                
                                
                                —
                                
                                
                                
                                281,848
                                
                                
                                
                                —
                                
                                
                                
                                281,848Capital
      expenditures
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                49,412
                                
                                
                                
                                49,412




33





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 12 –
Segment information (continued):





June 30, 2010
                    
                    Consumer
                      Products
                    
                    
                    eCommerce
                    
                    
                    Fashion
                      Goods
                    
                    
                    ConsolidatedBalance
      SheetTotal
      assets
                    
                    $
                    10,713,902
                    
                    
                    $
                    1,957,952
                    
                    
                    $
                    2,028,661
                    
                    
                    $
                    14,700,515Equity
      investments
                    
                    
                    —
                    
                    
                    
                    1,340,583
                    
                    
                    
                    —
                    
                    
                    
                    1,340,583Capital
      expenditures
                    
                    
                    56,086
                    
                    
                    
                    63,399
                    
                    
                    
                    61,372
                    
                    
                    
                    180,857





Three months ended
                          September 30, 2009:
                        
                        Consumer
                          Products
                        
                        
                        eCommerce
                        
                        
                        Fashion
                          Goods
                        
                        
                        ConsolidatedOperationsRevenues
                        
                        $
                        7,033,301
                        
                        
                        $
                        519,421
                        
                        
                        $
                        162,078
                        
                        
                        $
                        7,714,800Depreciation
      and amortization
                        
                        
                        (18,077
                        )
                        
                        
                        (93,211
                        )
                        
                        
                        —
                        
                        
                        
                        (111,288
                        )Operating
      (loss) income
                        
                        
                        (1,287,167
                        )
                        
                        
                        (751,742
                        )
                        
                        
                        11,312
                        
                        
                        
                        (2,027,597
                        )Equity
      in investee losses
                        
                        
                        —
                        
                        
                        
                        (104,672
                        )
                        
                        
                        —
                        
                        
                        
                        (104,672
                        )Interest
      expense
                        
                        
                        (54,216
                        )
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        (54,216
                        )Net
      loss
                        
                        
                        (14,907,818
                        )
                        
                        
                        (871,283
                        )
                        
                        
                        (11,312
                        )
                        
                        
                        (15,767,789
                        )





Note 13 –
Commitments and contingencies:





Leases:





We lease
certain office and warehouse space under non-cancellable operating leases.
Future non-cancellable minimum lease payments are as follows:





Nine
      months ending June 30, 2011
                  
                  $
                  71,309Years
      ending June 30:2012
                  
                  
                  75,9722013
                  
                  
                  60,7342014
                  
                  
                  51,8702015
                  
                  
                  —Thereafter
                  
                  
                  —$
                  259,885





Rent
expense for the three months ended September 30, 2010 and 2009 amounted to
$41,549 and $10,000, respectively. These amounts included $7,950 and $2,650 that
is paid to the former principal officer of Abazias and who is now that
subsidiary’s president.


34





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 13 –
Commitments and contingencies (continued):





Consulting
Agreements:





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





Litigation,
claims and assessments:





We are
involved in the following matters:





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





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





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





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





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





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





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





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


35





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 13 –
Commitments and contingencies (continued):





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





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





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





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





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





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





Davlyn
Industries, Inc. filed this lawsuit asserting a claim for breach of contract in
connection with the purchase of cosmetic skin care products. Davlyn Industries,
Inc. demands judgment against OmniReliant Corporation of $293,600 plus interest
and court costs. Management believes the lawsuit is without merit. Davlyn
Industries, Inc. and OmniReliant entered into a Settlement Agreement dated
November 8, 2010, as settlement of all claims against OmniReliant and its
affiliates made in connection with the above referenced lawsuit. 
Pursuant to the Settlement Agreement, Omnireliant is obligated to pay Davlyn
Industries, Inc. $62,500.00 on or before November 30, 2010,
as full and final settlement of all claims. If OmniRelaint
fails to make such settlement payment, Davlyn Industries,
Inc. may declare the settlement null and void and demand payment of
$335,986.91.





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





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




On June
17, 2010, OmniResponse, Inc. filed a complaint against Global Concepts Limited,
Inc., d/b/a Global TV Concepts, LTD, Laurie Braden and Lee Smith alleging
trademark infringement, unfair competition, violations of Florida’s Deceptive
and Unfair Trade Practices Act and breach of contract. OmniResponse, Inc. is
seeking monetary damages and injunctive relief. Also on July 17, 2010, the
United States District Court for the Southern District of Florida entered an
order preliminarily enjoining Defendants from the use of infringing trademarks.
The matter was scheduled for trial at the end of June, 2011. However, the
Company has accepted a confidential settlement  from the
defendants.
 36





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 13 –
Commitments and contingencies (continued):





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





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


OmniReliant Holdings, Inc.
v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder
Products and Professor Amos Wonder Products, Inc.) et al. Index No.
651635/2010





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





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





Omnicomm
Studios, LLC filed this lawsuit asserting a claim for breach of a real
estate lease agreement by the Defendants. Omnicomm Studios, LLC demands
judgment against the Defendants for payment of past due rent in excess of
$85,000, plus subsequent accruing rent, reasonable attorney’s fees and costs.
Omnicomm Studios, LLC, Vince Vellardita, D/B/A Valcom Studios, Inc., Valcom
Studios, Inc., and Valcom, Inc. entered into a Settlement Agreement dated
November 12, 2010, as settlement of all claims made in connection with
the above referenced lawsuit.  Pursuant to the settlement agreement,
Valcom Studios, Inc. paid Omnireliant $23,749.41.





Although
there is a reasonable possibility that certain of the above legal matters could
have an unfavorable outcome, no cases rise to the level of probable of an
unfavorable outcome. Accordingly, we have no accrued expenses associated with
these cases other than the defense costs, which are recorded as they are
incurred.


37





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 13 –
Commitments and contingencies (continued):





License
Agreement





On
October 9, 2009, we entered into a License and Marketing Agreement (the “License
Agreement”) with Zurvita Holdings, Inc. (“Zurvita”) whereby we granted a
perpetual right and license, under all intellectual property rights applicable
to the Software, to access, use, execute, display, market, and sell the Software
to Zurvita in consideration for a royalty fee of $2.00 per user for a period of
twenty four (24) months, commencing ninety (90) days from the date Zurvita runs
its first advertisement. Compensation for the license represented a 6%
promissory note in the principal amount of $2,000,000, payable three (3) years
from the date of issuance and convertible at any time at our option at a
conversion price of $0.25 per share.  We deferred the revenue for
which we received the convertible debenture. However, current accounting
standards provide that any extended payment terms in revenue arrangements, and
in particular terms that extend beyond twelve months, indicate that the
compensation is not fixed and determinable, a requisite criteria for revenue
recognition as noted above. Accordingly, this revenue will not be recognized
until all requisite criteria for revenue recognition are met. See Note 15,
Subsequent Events.





Other
contingencies:





In
connection with our business, we enter into other arrangements from time to time
that are routine and customary for the operation of our business that include
commitments, typically of a short duration. These arrangements include, among
other things, infomercial development and production arrangements and royalty or
contingent consideration to product manufacturers or infomercial hosts. As of
September 30, 2010, we do not believe that our routine and customary business
arrangements are material for reporting purposes.





Note 14 –
Related party transactions:





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





Placement Agent and Related Services
- Midtown Partner & Co. LLC and Apogee Financial Investments, serve
as our placement agents and merchant banker, respectively, in connection with
certain of our financing and other strategic transactions. These companies are
owned by certain shareholders and Board Members. We compensated these companies
in warrants with fair values of $382,761 during the year ended June 30, 2010,
related to financing arrangements. See Notes 9 and 10 for information about the
financing transactions and the broker-dealer warrants issued. Further, these
companies are entitled to receive commissions from us upon the exercise by
investors of warrants that were issued in connection with financings that they
arranged for us. These companies also received a commission of $240,000 in cash
related to our investment in Beyond Commerce, Inc.





Financial Consulting Agreement
– We have engaged TotalCFO to provide financial services. TotalCFO is
owned by certain shareholders and former Board members’ relatives. We recognized
$143,000 and $122,000 of expense related to this arrangement for three months
ended September 30, 2010 and 2009.


38





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 14 –
Related party transactions (continued):





Investments– As more fully
discussed in Note 3, we acquired Designer which had a 50% interest in RPS on
July 31, 2009.  Designer was owned by a relative of a former member of
our Board of Directors. Prior to our purchase of Designer, we invested
approximately $1,857,000 in notes receivable. We invested cash and our common
stock with an aggregate value of $251,000 to purchase this company. Our purchase
of Designer included a provision that requires us to pay 10% of the net profits
before income taxes derived from a specific customer of RPS for a period of two
years following the purchase. No net profits were earned from this customer
during the year ended June 30, 2010 and management does not currently project
net profits during the remaining term of this provision. Also, as more fully
discussed in Note 4, we acquired Abazias on August 27, 2009 and, as discussed in
Note 6 made pre-acquisition investments in Abazias amounting to $1,042,789. At
the time of the acquisition and investments, a former Board Member had a minor,
non-controlling investment in the outstanding common stock of Abazias. We also
made investments in Wineharvest in the aggregate amount of $315,050, which
company was owned by the same relatives of the former Board Member and Apogee.
We continue to fund Wineharvest operations and guarantee its lease, which has
non-cancellable future payments due of approximately $228,000. As a result, we
have consolidated Wineharvest because it meets the definition of a Variable
Interest Entity and we are the primary beneficiary because our equity in
Wineharvest is the only equity at risk.





Advertising and Marketing
Agreement – On July 30, 2009, we entered into an Advertising and
Marketing Agreement with Zurvita Holdings, Inc. (“Zurvita”), more fully
described in Note 13, above. Certain of our Board Members also serve as
Directors of Zurvita. On January 21, 2010, we separated with our President and
Chief Executive Officer. The separated officer also served as a Zurvita
Director. Two of our current Board Members also serve on the Board of Directors
of Zurvita. See Note 15, Subsequent Events.





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





Leasing Arrangement – Our
subsidiary, OmniReliant Acquisition Sub, Inc., leases its business premises from
the subsidiary President. The arrangement is cancellable but provides for
monthly lease payments of $2,650 and cost reimbursements of up to $1,170. We
recorded $7,950 and $2,650 in rent expense during the three months ended
September 30, 2010 and 2009, respectively.





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





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


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


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


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


5.
            An
      exchange of investments, wherein we will deliver 50 common shares in
      Strathmore Investments and 625,000 preferred shares in Nested Media
      (collectively, our Cellular Blowout investment) for 1,000,000 shares in
      Wineharvest owned by the separated officer. The aggregate carrying value
      and fair value of investments transferred to the former officer amounted
      to $62,500. See Note 6.


39





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Consolidated Financial Statements





Note 14 –
Related party transactions (continued):





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





Significant Ownership –
Vicis, which has provided significant funding, is the beneficial owner of 93.7%
of our fully-diluted equity. Vicis also has financial interests in our investee
companies Net Talk.com, Inc. and Zurvita (see Note 5).





Consulting Agreements— As
more fully disclosed in Note 14, on June 30, 2010 we entered into consulting
agreements with two former members of our Board of Directors.





Note 15 –
Subsequent events:





We have
evaluated subsequent events arising following the balance sheet date of
September 30, 2010 through the date of November 19, 2010, 2010. There have been
no material subsequent events not provided elsewhere herein or in filings on
Form 8-K.


40





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





The
following discussion and analysis is intended to help the reader understand the
results of operations, financial condition, and cash flows of OmniReliant
Holdings, Inc. MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes to the consolidated financial statements included herein and in our Annual
Report on Form 10-K for the year ended June 30, 2010 filed with the Securities
and Exchange Commission.





Three
months ended September 30, 2010 compared to three months ended September 30,
2009:





Revenues and costs of revenues –We derive the majority of our revenues from the sale of tangible products
in our Consumer Products, Fashion Goods and eCommerce segments. We also derive
services revenue from providing marketing and distribution services in our
Consumer Products segment. Finally, we collect rents from leasing a portion of
the real estate we own in Clearwater, Florida. Our comparison of material
components of revenues are as follows:





Product sales: Our
consolidated product sales decreased by $4,437,870 or 58.2% to $3,189,951 for
the three months ended September 30, 2010 from $7,627,821 for the three months
ended September 30, 2009.





The
overall decrease in consolidated product sales is largely attributable to the
redirection, focus and application of company assets towards the Consumer
Products Segment of our company, and away from the other
segments.  Wherein our new management team has initiated the
recruitment of leading brand development and international direct to consumer
marketing experts with many years of experience in the direct to consumer
marketing industry.  This new management team is executing on our
vision of becoming a world class consumer products company which builds
demonstrable brands globally through an ecosystem of direct to consumer
marketing channels. This new management team has also initiated a strategic
redirection of the Consumer Products Segment away from its roots of simply being
a reseller of “products” to becoming more focused on growing long term sales
through brand development, combined with product line extension of its new and
existing brands. Moreover, we are implementing international distribution
strategies as well as extending our reach to standard brick and mortar retailers
on a global basis leading to new and more profitable revenue channels. As a
result of the implementation of this new direction and the underlying
strategies, Consumer Products sales decreased $5,472,538 to $1,473,784 for the
three months ended September 30, 2010 compared to $6,946,322 during the three
months ended September 30, 2009.





Product
sales for our eCommerce Segment increased by $200,840 or 38.7% to $720,261 for
the three months ended September 30, 2010 from $519,421 for the three months
ended September 30, 2009. The increase in 2010 over 2009 is a result of two
factors. First, we acquired Abazias, Inc. (“Abazias”) our online diamond and
jewelry retailer, on August 27, 2009 and began consolidating its operations with
ours in September of 2009. Accordingly, our quarterly sales in the first quarter
ending September 30, 2010 include three full months of sales, compared to one
month of sales in the prior fiscal year. Second, we began consolidating
Wineharvest, our online wine seller, in the fourth quarter of our prior fiscal
year. Wineharvest contributed $25,725 to our quarterly product sales for the
three months ended September 30, 2010, compared to none in the prior
year.


41





Product
sales for our Fashion Goods Segment increased by $833,828 or 514.5% to $995,906
for the three months ended September 30, 2010 from $162,078 for the three months
ended September 30, 2009. We acquired Designer Liquidators, Inc. (“Designer
Liquidator”) and its subsidiary RPS Trading, LLC (“RPS”) effective July 31,
2009. Accordingly, our consolidated product sales reflect a full three months of
operations in the three months ended September 30, 2010 compared to two months
in the prior year. As we previously disclosed in our Annual Report for the year
ended June 30, 2010, commencing in the first quarter of our year ending June 30,
2011, we have substantially curtailed, although we did not exit, the
manufacturing operations at RPS. Curtailment of these operations was believed
necessary by our new management team when it became apparent that RPS was not
operating efficiently and our new management’s efforts are required in other
developing initiatives related to our operations. Accordingly, our consolidated
revenue and our Fashion Goods Segment revenue will be substantially lower as a
result of this curtailment of activities.





Cost of product sales: Our
cost of product sales decreased by $1,685,234 or 37.6% to $2,792,091 for the
three months ended September 30, 2010 from $4,477,325 for the year three months
ended September 30, 2009. The decrease was attributable to the significant
decline in our Consumer Products Segment sales, while increases were experienced
in the eCommerce and Fashion Goods Segment as a result of their higher revenues.
Our gross margin as a percent of product sales during the three months ended
September 30, 2010 amounted to 12% compared to 41% during the three months ended
September 30, 2009. Gross margin as a percent of product sales in our Consumer
Products segment amounted to 46% and 43% for the three months ended September
30, 2010 and 2009, respectively. Margins on retail products sold in our Consumer
Products Segment are dependent upon the types and demands for specific types of
products. Accordingly, our ongoing margins will likely be volatile until we
establish the types of products that will serve as our long-term base of
offerings. Gross margins as a percent of sales in our e Commerce Segment
amounted to (2)% and 15% for the three months ended September 30, 2010 and 2009,
respectively. Gross margins for our Fashion Goods Segment amounted to (27)% and
70% for the three months ended September 30, 2010 and 2009, respectively. Our
margin deficits were due primarily to certain inventory charges in our Abazias
subsidiary and cost overruns and inventory charges in our RPS subsidiary. As it
relates to RPS, due to manufacturing and personnel challenges in Bangladesh, we
experienced a number of delays in receiving finished goods. These delays led to
increased production and freight costs which negated any planned gross margin
and continued into the current fiscal quarter. As a result of these matters, and
as discussed in Product Sales above, our management has substantially curtailed
the RPS operations until efficient processes can be developed and put in place
to avoid these losses.





Services revenue: Services
revenue of $58,833 for the three months ended September 30, 2010 was derived
from one customer contract that were prepaid with common stock of the customers.
We had no services revenue during the three months ended September 30, 2010. As
it relates to the services revenue during the three months ended September 30,
2010, we recorded the common stock at the fair value on the date we received
them and deferred the revenue until such time as it was earned. The inital
investments were recorded in available for sale investments and equity method
investments in the amounts of $150,000 and $646,000, respectively. As of
September 30, 2010, there remains $2,000,000 in non-current deferred revenue
associated with a licensing agreement with the customer from whom we acquired
the aforementioned equity method investment and for which we were compensated in
the form of a face value $2,000,000 convertible debenture, due October 9, 2012.
Current accounting standards provide that any extended payment terms in revenue
arrangements, and in particular terms that extend beyond twelve months, indicate
that the compensation is not fixed and determinable, a requisite criteria for
recognition of revenue in our income. Accordingly, this revenue will not be
recognized until all requisite criteria for revenue recognition are met, which
will be in periods after the current fiscal year ending June 30, 2011. The
convertible debenture that we received is recorded on our balance sheet as a
component of our equity method investment in this company.





Rental
income: Rental income of commercial real estate amounted to $38,403 for the
three months ended September 30, 2010, a decrease of $48,576 or 55.8% when
compared to $86,979 of rental income that we reported for the three months ended
September 30, 2009. The decrease is attributable to our corporate offices
displacing tenants and assuming a higher level of occupancy in our
building.


42





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





Other general and
administrative: These costs and expenses include bad debts, occupancy
costs and general office expenses. Our general and administrative costs
increased by $150,143 or 18.8% to $950,552 for the three months ended September
30, 2010 from $800,409 for the three months ended September 30, 2009. The
overall increase reflects higher travel costs and the higher administrative
expense associated with Abazias and Designer Liquidator, which were acquired
during the three months ended September 30, 2009.





Advertising and promotion:
Advertising and promotion expense decreased by $2,151,884 or 71.8% for the three
months ended September 30, 2010 to $846,039 from $2,997,923 for the three months
ended September 30, 2009. Of the current year advertising and promotion
spending, $815,604 related to our Consumer Products Segment. We began incurring
substantial advertising media expense during the prior fiscal year which is
necessary to promote products under the previous business model. Lower
advertising and promotion during the three months ended September 30, 2010 was
the intentional result of focusing and redirecting the business in preparation
for its new business model.. Management purposefully slowed the rate of
advertising expenditure in all of our operating segments in order to make the
necessary operational changes to our business and growth plans for the future
under our new business plan for OmniReliant and its wholly owned
subsidiaries.





Accounting and professional
expense: Accounting and consulting professional expenses increased by
$285,075 or 51.4% to $840,111 for the three months ended September 30, 2010 from
$555,036 for the three months ended September 30, 2009. These costs include fees
relating to other professional consulting and audit related expenses. Our fees
have increased due to our increased consulting fees for outsourced accountants
and financial services, audit fees and operating activities.





Employment Costs: Employment
related costs consist of salaries and payroll, employee insurance, and
share-based payment. These costs decreased by $206,053 or 25.7% to $594,363 for
the three months ended September 30, 2010 from $800,416 for the three months
ended September 30, 2010. Our employment costs in the current quarterly period
include non-cash share-based payment expense of $135,953 and there was no
comparable cost in the same quarter in the prior fiscal year. Unamortized
share-based payment expense amounts to $2,287,577 as of September 30, 2010. This
amount will be amortized into expense as the stock options vest, generally over
the next two to five years.





Depreciation and
amortization: Our amortization of intangible assets and depreciation of
property and equipment decreased $53,566 to $57,722 for the three months ended
September 30, 2010 compared to $111,288 during the three months ended September
30, 2009. The decline is due to our conclusion during the fourth quarter of our
prior fiscal year ended June 30, 2010 that the carrying values of our intangible
assets were not recoverable through future cash flows or by other means.
Accordingly, the intangible assets were written off at that time.





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


43





Derivative income (expense):
Derivative income (expense) represents the changes in the fair values of our
derivative financial instruments. Fair value increases during the three months
ended September 30, 2010 resulted in expense of $5,581,270. During the same
period of the prior fiscal year, fair value decreases resulted in income of
$9,948,085. 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. We will continue to record income or expense related to derivatives
until they are settled or reclassified to equity.





Equity in losses of
investees: We hold two investments accounted for under the equity method.
Our pro rata share of net loss in these investments equaled $1,064,485for the
three months ended September 30, 2010 compared to $104,672 for the three months
ended September 30, 2009. As a result of our recognition of our pro rata losses,
one of our equity investments was reduced to zero. Otherwise, we will continue
to report our interests in the earnings or losses of these equity investees so
long as our investments remain at levels required for accounting treatment under
this method.





Interest and other income:
Income generated from depository accounts and interest on notes receivable from
investees decreased by $150,480 or 60.7% to $97,567 during the three months
ended September 30, 2010 from $248,047 for the three months ended September 30,
2009. The decrease is attributable to the impairment of notes receivable during
the fourth fiscal quarter of our year ended June 30, 2010.





Interest expense: Interest
expense includes amortization of deferred finance costs and interest on our
mortgage loan and other notes payable. Interest expense decreased by $19,230 or
35.5% to $34,986 during the three months ended September 30, 2010 compared to
$54,216 for the three months ended September 30, 2009. Our interest expense
declined in the current quarter after we wrote off certain deferred finance
costs that were subject to amortization in connection with the extinguishment
transaction referred to below.





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





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





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





Fair
      value of New Warrant
                  
                  $
                  37,090,385Fair
      value of surrendered warrants
                  
                  
                  (9,761,869
                  )Consideration
                  
                  
                  (5,000,000
                  )Extinguishment
      loss
                  
                  $
                  22,328,516




44




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





Fair
      value of warrants following inducement
                      
                      $
                      26,851,487Fair
      value of warrants preceding inducement
                      
                      
                      25,377,632Inducement
      expense
                      
                      $
                      1,473,855





Non-controlling interests – A
non-controlling interest, formerly called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Non-controlling interests arise from the consolidation of subsidiaries as a
result of voting control or based upon benefits of an entity’s variable
interests. We consolidate three entities that have non-controlling interests.
Our subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated in 2010 and
2009 because we own the majority of the voting control. Our subsidiary, RPS is
consolidated in 2010 because we own a 50% voting interest, it meets the
definition of a variable interest entity, and we are the primary beneficiary.
Our subsidiary Wineharvest is consolidated in 2010 because we own 40% voting
interest, it meets the definition of a variable interest entity and we are the
primary beneficiary, principally due to our guarantee of their lease.
Non-controlling interests in the (income) loss of consolidated entities amounted
to $66,735 and $24,935 during the three months ended September 30, 2010 and
2009, respectively. During the year ended June 30, 2010, we liquidated the total
balance in non-controlling interest associated with RPS; therefore, there will
be no further credits in our income.





Net loss – We have reported
net loss of $9,315,130 during the three months ended September 30, 2010 compared
to a net loss of $15,767,789 during the three months ended 30, 2009. The
decrease is a result of the items discussed in the preceding
discussion.





Loss applicable to common
stockholders– Loss applicable to common
stockholders represents our net loss or income as adjusted for deemed and
accrued dividends and accretions on our Preferred Stock. Loss applicable to
common shareholders for the three months ended September 30, 2010 gives effect
to accretion of the discount on our Series G Preferred Stock in the amount of
$743,867 and cumulative dividends of $102,952. Dividends accrue because they are
contractually payable whether or not declared by our Board of Directors. During
the three months ended September 30, 2009 our loss applicable to common
stockholders reflected a $66,948,653 deemed dividend on our preferred stock
arising from the exchange transaction referred to above. That was because the
exchange transaction triggered anti-dilution protection adjustments to the
conversion price of the preferred stock. The amount recorded as the deemed
dividend during the three months ended September 30, 2009 is the incremental
value associated with the post-exchange transaction preferred balances.
Accordingly, our loss applicable to common shareholders and our loss per common
share (basic and diluted) amounted to $10,161,949 and $0.06, respectively, for
the three months ended September 30, 2010. Our loss applicable to common
shareholders and our loss per common share, basic and diluted, amounted to
$82,716,442 and $1.03, respectively, for the three months ended September 30,
2009. Our weighted average outstanding common shares amounted to 158,732,336 and
80,434,068during the three months ended September 30, 2010 and 2009,
respectively.


45





Liquidity
and Capital Resources





The
preparation of financial statements in accordance with generally accepted
accounting principles contemplates that operations will be sustained for a
reasonable period. However, we have incurred operating losses of $2,798,691 and
$2,027,597 during the three months ended September 30, 2010 and 2009,
respectively. In addition, during these periods, we used cash of $1,752,279 and
$2,223,338, respectively, in support of our operating activities. As of
September 30, 2010, we have cash on hand of $3,818,515 and a working capital
deficiency of $2,985,001. Since our inception, we have been substantially
dependent upon funds raised through the sale of preferred and common stock and
warrants to sustain our operating and investing activities. However, recent
reviews of the current market, which included discussions with prior and
potential funding sources by our executive management, indicate that additional
funding at levels to maintain operations at their historical levels and under
the existing structure are doubtful. As more fully discussed in the next
paragraphs, our management team has commenced certain significant initiatives
focused on restructuring and redirection. These initiatives will require
substantially all available liquid resources and, if positive outcomes from
these initiatives are not realized by approximately April 2011, much of our
liquid resources may be depleted. These conditions would raise substantial doubt
about our ability to continue as a going concern for a reasonable
period.





Our
management has developed strategic plans during the fourth quarter of the prior
fiscal year with the intention of alleviating ongoing operating losses. The
principal focus of these plans is an intensified emphasis on the redesign of the
Consumer Products Segment, shifting its focus from the highly expensive product
based distribution model to a global brand development and brand ownership
model. Compared to the historical model for the Consumer Products Segment, the
exorbitant advertising, distribution and administrative costs are able to be
shifted to third party organizations that are more entrenched in those types of
activities and networks, while allowing the Company to develop and brand
specific products that management believes have substantive market potential.
Management believes that the planned model, which is currently under
development, will provide better current and long-term profitability by
curtailing the cost structure, allowing for longer product life, and providing
for next-version, next-generation and follow-on opportunities to those products
ultimately developed. However, substantial investment is required to support
this change and, as a result, the Company will be unable to continue to provide
significant operating capital to the operating entities within eCommerce
Segment. As a result, while developing the new Consumer Products Model,
management has also been engaged in overseeing subsidiary managements’ efforts
to both curtail costs and, to the extent possible, develop alternative operating
models that have the result of minimally achieving a state of neutral cash flow.
There can be no assurances that either the aforementioned Response Model can be
accomplished nor, if accomplished, can there be any assurances of its
operational success.





The
Company received $10,600,000 in funding from the sale of preferred stock and
warrants and similar transactions during the three months ended September 30,
2009. However, since further funding of our operating structure in its current
form has been determined to be doubtful, our ability to continue as a going
concern for a reasonable period is initially dependent upon achieving our
management’s plans for the Company’s reorganization and, ultimately, generating
profitable operations from those restructured operations. We cannot give any
assurances regarding the success of management’s plans. Our consolidated
financial statements do not include adjustments relating to the recoverability
of recorded assets or liabilities that might be necessary should we be unable to
continue as a going concern.





Cash and
cash equivalents amounted to $3,818,515 as of September 30, 2010 compared to
$5,691,422 at June 30, 2010. We have working capital deficiency of $2,682,980 as
of September 30, 2010 and we had working capital of $5,281,685 at June 30, 2010.
Our working capital decreased as a result of a depletion of our cash reserves by
$1,872,907 and increase in the fair values of our derivative liabilities by
$5,581,270 during the three months ended September 30, 2010.





Cash Flow from Operating Activities– We used cash of $1,752,279 and $2,223,338 in our operating activities
during the three months ended September 30, 2010 and 2009,
respectively.





We
recorded net income (loss) of ($9,315,130) and $(15,767,789) during the three
months ended September 30, 2010 and 2009, respectively that was partially offset
by net non-cash charges (credits) of $6,839,079 and $14,350,944, respectively.
Our analysis of the material components of changes in non-cash charges are as
follows:


46





·
            Derivative
      fair value changes: Non-cash charges and (credits) include changes in the
      fair value of derivative financial instruments and other activity
      associated with our financial instruments, amounting to charges of
      $5,581,270 and credits of 9,948,085 during the three months ended
      September 30, 2010 and 2009, respectively. We estimate fair values of
      derivative financial instruments using various techniques (and
      combinations thereof) that are considered to be consistent with the
      objective measuring fair values. In selecting the appropriate technique,
      we consider, among other factors, the nature of the instrument, the market
      risks that it embodies and the expected means of settlement. For less
      complex derivative instruments, such as free-standing warrants, we
      generally use the Black-Scholes Merton (“BSM”) option valuation technique,
      adjusted for the effect of dilution, because it embodies all of the
      requisite assumptions (including trading volatility, estimated terms,
      dilution and risk free rates) necessary to fair value these instruments.
      For compound derivative instruments, comprising certain redemption and put
      features embodied in our convertible preferred stock, we use discounted
      cash flow models involving multiple, probability-weighted outcomes and
      risk-adjusted rates. Estimating fair values of derivative financial
      instruments requires the development of significant and subjective
      estimates that may, and are likely to, change over the duration of the
      instrument with related changes in internal and external market factors.
      In addition, option-based techniques (such as BSM) are highly volatile and
      sensitive to changes in the trading market price of our common stock,
      which has a high-historical volatility. Since derivative financial
      instruments are initially and subsequently carried at fair values, our
      income (loss) will reflect the volatility in these estimate and assumption
      changes.




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




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




Our cash
from operating activities also includes cash flow from changes in our operating
assets and liabilities of $723,772 for the three months ended September 30, 2010
compared to a use of cash of $806,493 for the three months ended September 30,
2009.




·
            Accounts
      receivable: Accounts receivable represents normal trade obligations from
      customers that are subject to normal trade collection terms, without
      discounts or rebates. Notwithstanding these collections, we periodically
      evaluate the collectability of our accounts receivable and consider the
      need to establish an allowance for doubtful accounts based upon our
      historical collection experience and specifically identifiable information
      about our customers. We experienced a decrease of $509,760 in our accounts
      receivable (a source of cash) for the three months ended September 30,
      2010 as compared to an increase of $1,227,549 in our accounts receivable
      (a use of cash) for the three months ended September 30,
    2009.


47





·
            Inventories:
      Inventories consist of retail merchandise that is in its finished form and
      ready for sale to end-user customers. Inventories are recorded at the
      lower of average cost or market. In-bound freight-related costs from our
      vendors are included as part of the net cost of merchandise inventories.
      Other costs associated with acquiring, storing and transporting
      merchandise inventories are expensed as incurred and included in cost of
      goods sold. Our inventories are acquired and carried for retail sale and,
      accordingly, the carrying value is susceptible to, among other things,
      market trends and conditions and overall customer demand. We use our best
      estimates of all available information to establish reasonable inventory
      quantities. However, these conditions may cause our inventories to become
      obsolete and/or excessive. We review our inventories periodically for
      indications that reserves are necessary to reduce the carrying values to
      the lower of cost or market values. Inventories decreased by $312,837 (a
      source of cash) during the three months ended September 30, 2010 as
      compared to an increase (a use of cash) of $345,740 during the three
      months ended September 30, 2009.




·
            Accounts
      payable and accrued expenses: Our accounts payable and accrued liabilities
      decreased (a use of cash) an aggregate of $116,640 and increased (a source
      of cash) $353,158 during the three months ended September 30, 2010 and
      2009, respectively.





Cash Flow from Investing Activities– We used cash of $111,939 and $4,928,214 in our investing activities
during the three months ended September 30, 2010 and 2009, respectively. During
the three months ended September 30, 2010, these activities consisted of normal
purchases of assets and website development costs.  During the three
months ended September 30, 2009, we made investments in investee companies of
$5,651,887. This increase in investments was as a result of our prior business
plan to further invest in meaningful ventures in support of our Consumer
Products business. However, many of the investments proved to be either
non-performing or required ongoing funding that our Company could not commit to.
All investments included in the cash paid amounts have been written
off.





We were
also a party to two acquisitions during the three months ended September 30,
2009. On July 31, 2009 we acquired Designer Liquidator in which we received cash
proceeds of $612,702 (net of $150,000 in cash payments). On August 27, 2009 we
completed our acquisition of the outstanding common stock of Abazias in which we
received cash proceeds of $127,530. We acquired Abazias for the purpose of
building brand recognition and increasing retail market penetration. As
discussed in the operations discussion for impairments, while we continue to
operate these companies, we have impaired substantially all of their long-lived
assets.





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





Cash Flow from Financing Activities– We used $8,689 cash in our financing activities during the three months
ended September 30, 2010. This amount related to the principal payments we made
on our mortgage loan. We generated $10,594,410 in cash from our financing
activities during the three months ended September 30, 2009. During the three
months ended September 30, 2009, we received $10,600,000 from the sale of
preferred stock and warrants. We have been substantially dependent on these
types of financings during our history. Current indications are that there are
no funding sources available for our prior business plan and structure. Funding
sources may become available based upon interest in our reorganized business
model. However, there can be no assurances that funding sources will become
available or at terms that are suitable to our new management.





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


48





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


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


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





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





Critical
Accounting Policies





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





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





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





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


49





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





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





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


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





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





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





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





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




50





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





the
      investee's revenue and earnings trends relative to predefined milestones
      and overall business prospects;the
      technological feasibility of the investee's products and
      technologies;





the
      general market conditions in the investee's industry or geographic area,
      including regulatory or economic changes;factors
      related to the investee's ability to remain in business, such as the
      investee's liquidity, debt ratios, and the rate at which the investee is
      using its cash; and





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





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





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





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





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


51





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.





Changes in
accounting:





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





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





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


52


ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





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


53





ITEM
4T – CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation, with the participation of our Chief Executive
Officer/Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of September 30, 2010, to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities Exchange Commission's rules and forms,
including to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation,
our Chief Executive Officer/Chief Financial Officer have concluded that as of
September 30, 2010, our disclosure controls and procedures were not effective at
the reasonable assurance level due to the material weaknesses described
below.





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





A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified the following four
material weaknesses which have caused management to conclude that, as of
September 30, 2010, our disclosure controls and procedures were not effective at
the reasonable assurance level:





The
material weaknesses we have identified include:





Deficiencies pertaining to a lack of
human resources within our finance and accounting functions: We currently
only have 9 employees. The lack of appropriately skilled personnel and less
effective monitoring activities could result in material misstatements to
financial statements not being detected in a timely manner.





Deficiencies pertaining to the lack
of controls or ineffectively designed controls:Our control design
analysis and process walk-throughs disclosed a number of instances where review
approvals were undocumented, where established policies and procedures were not
defined, and controls were not in place.





Deficiencies related to information
technology control design and operating effectiveness weaknesses:This
material weakness resulted from the absence of key formalized information
technology policies and procedures and could result in (1) unauthorized system
access, (2) application changes being implemented without adequate reliability
testing, (3) inconsistent investigation of system errors and the absence of
timely or properly considered remedial actions, and (4) over reliance on
spreadsheet applications without quality control assurances. These factors could
lead to material errors and misstatements to financial statements occurring
without timely detection.


54





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





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





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.





(c)
Changes in Internal Control over Financial Reporting





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





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


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




55





PART
II – OTHER INFORMATION





ITEM
1 – LEGAL PROCEEDINGS





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





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





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





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





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





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





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





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





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





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





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





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


56





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





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





Davlyn
Industries, Inc. filed this lawsuit asserting a claim for breach of contract in
connection with the purchase of cosmetic skin care products. Davlyn Industries,
Inc. demands judgment against OmniReliant Corporation of $293,600 plus interest
and court costs. Management believes the lawsuit is without merit. Davlyn
Industries, Inc. and OmniReliant entered into a Settlement Agreement dated
November 8, 2010, as settlement of all claims against OmniReliant and its
affiliates made in connection with the above referenced lawsuit. 
Pursuant to the Settlement Agreement, Omnireliant is obligated to pay Davlyn
Industries, Inc. $62,500.00 on or before November 30, 2010,
as full and final settlement of all claims. If OmniRelaint
fails to make such settlement payment, Davlyn Industries,
Inc. may declare the settlement null and void and demand payment of
$335,986.91.





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





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




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





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




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


OmniReliant Holdings, Inc.
v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder
Products and Professor Amos Wonder Products, Inc.) et al. Index No.
651635/2010





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


57





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





Omnicomm
Studios, LLC filed this lawsuit asserting a claim for breach of a real
estate lease agreement by the Defendants. Omnicomm Studios, LLC demands
judgment against the Defendants for payment of past due rent in excess of
$85,000, plus subsequent accruing rent, reasonable attorney’s fees and costs.
Omnicomm Studios, LLC, Vince Vellardita, D/B/A Valcom Studios, Inc., Valcom
Studios, Inc., and Valcom, Inc. entered into a Settlement Agreement dated
November 12, 2010, as settlement of all claims made in connection with
the above referenced lawsuit.  Pursuant to the settlement agreement,
Valcom Studios, Inc. paid Omnireliant $23,749.41.





ITEM
1A – RISK FACTORS





There has
been no material change in our risk factors from those disclosed in our Annual
Report on Form10-K filed with the SEC for the year ended June 30,
2010.





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





None.





ITEM
3 – DEFAULTS UPON SENIOR SECURITES





None.





ITEM
4 – REMOVED AND RESERVED





Not
applicable





ITEM
5 – OTHER INFORMATION





None.





ITEM
6 – EXHIBIT INDEX





31.1  Certification
of Periodic Financial Reports by Robert John DeCecco III in satisfaction of
Section 302 of the Sarbanes-Oxley Act of 2002


32.1  Certification
of Periodic Financial Reports by Robert John DeCecco III in satisfaction of
Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
1350


58


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





OmniReliant
      Holdings, Inc.Date:
      November 22, 2010
              By:
              /s/ Robert John DeCecco
  IIIRobert
      John DeCecco IIIPresident,
      Chief Executive Officer, and Chief Financial Officer (Principal Executive
      Officer and Principal Financial and Accounting Officer)




59