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 December
31, 2009





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





Commission
file number 000-51599





OmniReliant
Holdings, Inc.


(Exact
name of small business issuer as specified in its charter)





Nevada
                (State
      or other jurisdiction of
                incorporation
      or organization)
              
              54-2153837
                (I.R.S.
      Employer
                Identification
      No.)





14375
Myerlake Circle


Clearwater,
Florida 33760


(Address
of principal executive offices)





(727)
230-1031


(Issuer's
telephone number)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for the past 90 days.   Yes þ No o





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). o Yes o 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 o
            Accelerated
      filer oNon-accelerated
      filer o
            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 o No þ





The
number of shares of the registrant’s Common Stock, $0.00001 par value per share,
outstanding as of February 12, 2010 is 159,369,307.





OMNIRELIANT HOLDINGS, INC. AND
SUBSIDIARIES


QUARTERLY
PERIOD ENDED


DECEMBER
31, 2009





Table
of Contents





Part
                  
                  Item and Description
                  
                  PagePart
      I
                  
                  Financial
      InformationForward-Looking
      Statements
                  
                  3Item
      1. Financial Statements
                  
                  4Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                  
                  37Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
                  
                  56Item
      4T. Controls and Procedures
                  
                  57Part
      II
                  
                  Other
      InformationItem
      1. Legal Proceedings
                  
                  59Item
      1A. Risk Factors
                  
                  59Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                  
                  59Item
      3. Defaults Upon Senior Securities
                  
                  59Item
      4. Submission of Matters to a Vote of Security Holders
                  
                  60Item
      5. Other Information
                  
                  60Item
      6. Exhibit Index
                  
                  60Signatures
                  
                  
                  
                  61


2


PART
I - FINANCIAL INFORMATION





FORWARD-LOOKING
STATEMENTS





This Form 10-Q contains “forward-looking statements” relating to
OmniReliant Holdings, Inc. (referred to as the “Company” or “we”, “us” or “our”
in this Form 10-Q), which represent the Company’s current expectations or
beliefs including, but not limited to, statements concerning the Company’s
operations, performance, financial condition and growth. For this purpose, any
statements contained in this Form 10-Q that are not statements of historical
fact are forward-looking statements. Without limiting the generality of the
foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”,
or “continue” or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel, variability of quarterly results, and the ability
of the Company to continue its growth strategy and competition, certain of which
are beyond the Company’s control. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in the
forward-looking statements.





Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.


3


ITEM
1 – FINANCIAL STATEMENTS





OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Balance Sheets





December 31, 2009
                
                
                June 30, 2009(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                3,991,837
                
                
                $
                2,005,702Accounts
      receivable, net of $487,763 and $187,763
                
                
                3,042,393
                
                
                
                1,864,465Inventories
                
                
                2,906,932
                
                
                
                1,294,250Investments,
      available for sale
                
                
                677,336
                
                
                
                1,729,448Prepaid
      expenses and other current assets
                
                
                248,339
                
                
                
                632,200Total
      current assets
                
                
                10,866,837
                
                
                
                7,526,065Intangible
      assets, net
                
                
                24,091,520
                
                
                
                1,123,335Investments
                
                
                3,685,468
                
                
                
                2,215,309Property
      and equipment, net
                
                
                2,543,855
                
                
                
                2,579,548Investments,
      available-for-sale
                
                
                —
                
                
                
                732,227Other
      assets
                
                
                22,677
                
                
                
                909,714Total
      assets
                
                $
                41,210,357
                
                
                $
                15,086,198Liabilities
      and Equity (Deficit)Current
      liabilities:Accounts
      payable and accrued expenses
                
                $
                1,761,048
                
                
                $
                556,747Deferred
      revenue
                
                
                2,403,030
                
                
                
                —Notes
      payable and maturities of long-term debt
                
                
                284,335
                
                
                
                33,230Derivative
      liabilities
                
                
                22,390,514
                
                
                
                6,481,839Total
      current liabilities
                
                
                26,838,927
                
                
                
                7,071,816Long-term
      debt
                
                
                1,928,199
                
                
                
                1,945,647Security
      deposits on leases
                
                
                9,193
                
                
                
                11,734Total
      liabilities
                
                
                28,776,319
                
                
                
                9,029,197Commitments
      and contingencies (Note 12)
                
                
                —
                
                
                
                —Redeemable
      preferred stock
                
                
                4,946,910
                
                
                
                45,969,634Equity
      (deficit):OmniReliant
      shareholders’ equity:Series
      E Preferred Stock, $0.00001 par, 3,120,626 shares authorized, issued and
      outstanding
                
                
                3,177,317
                
                
                
                —Common
      Stock, $0.00001 par, 400,000,000 shares authorized; 159,122,243 and
      14,509,225 outstanding
                
                
                1,591
                
                
                
                145Paid-in
      capital
                
                
                46,370,212
                
                
                
                6,532,238Accumulated
      deficit
                
                
                (42,642,651
                )
                
                
                (46,570,028
                )Other
      comprehensive items
                
                
                425,000
                
                
                
                (72,102
                )Total
      OmniReliant shareholders’ equity (deficit)
                
                
                7,331,469
                
                
                
                (40,109,747
                )Non-controlling
      interests
                
                
                155,659
                
                
                
                197,114Total
      equity (deficit)
                
                
                7,487,128
                
                
                
                (39,912,633
                )Total
      liabilities and equity (deficit)
                
                $
                41,210,357
                
                
                $
                15,086,198





See
accompanying notes.


4


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations





Three Months Ended December 31,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Product
      sales
                
                $
                9,793,676
                
                
                $
                1,067,624Cost
      of product sales (excluding depreciation expense reflected in other
      operating expenses)
                
                
                6,293,117
                
                
                
                570,983Gross
      profit
                
                
                3,500,559
                
                
                
                496,641Real
      estate income
                
                
                60,969
                
                
                
                70,670Other
      operating expenses:Advertising
      and promotional
                
                
                2,461,997
                
                
                
                1,198,630Other
      general and administrative
                
                
                829,090
                
                
                
                133,753Depreciation
      and amortization
                
                
                628,104
                
                
                
                143,795Accounting
      and professional
                
                
                590,150
                
                
                
                288,093Employment
      costs
                
                
                359,049
                
                
                
                32,4294,868,390
                
                
                
                1,796,700Loss
      from operations
                
                
                (1,306,862
                )
                
                
                (1,229,389
                )Other
      income (expense):Impairment
      of investments
                
                
                (1,591,704
                )
                
                
                —Equity
      in losses of investees
                
                
                (1,529,570
                )
                
                
                —Derivative
      (expense) income
                
                
                (675,671
                )
                
                
                2,303,036Interest
      expense
                
                
                (103,960
                )
                
                
                (104,421
                )Interest
      income
                
                
                48,995
                
                
                
                36,863Total
      other income (expense)
                
                
                (3,851,910
                )
                
                
                2,235,478Net
      (loss) income
                
                
                (5,158,772
                )
                
                
                1,006,089Net
      income (loss) attributable to non-controlling interests
                
                
                179,969
                
                
                
                46,082Net
      (loss) income attributable to OmniReliant
                
                $
                (4,978,803
                )
                
                $
                1,052,171





Continued
on next page.


5


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations (continued)





Three Months Ended December 31,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Reconciliation
      of net (loss) income attributable to OmniReliant to loss applicable to
      OmniReliant common shareholders:Net
      (loss) income attributable to OmniReliant
                
                $
                (4,978,803
                )
                
                $
                1,052,171Deemed
      dividend to preferred stockholders
                
                
                —
                
                
                
                —Loss
      applicable to OmniReliant common shareholders
                
                $
                (4,978,803
                )
                
                $
                1,052,171Loss
      per common share:Basic
                
                $
                (0.03
                )
                
                $
                0.07Diluted
                
                $
                (0.03
                )
                
                $
                0.01Weighted
      average common shares—basic
                
                
                153,173,300
                
                
                
                14,509,225Weighted
      average common shares—diluted
                
                
                153,173,300
                
                
                
                70,657,402





See
accompanying notes.


6





OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations





Six Months Ended December 31,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Product
      sales
                
                $
                17,421,537
                
                
                $
                1,171,258Cost
      of product sales (excluding depreciation expense reflected in other
      operating expenses)
                
                
                10,770,485
                
                
                
                615,019Gross
      profit
                
                
                6,651,052
                
                
                
                556,239Real
      estate income
                
                
                163,889
                
                
                
                132,106Other
      operating expenses:Advertising
      and promotional
                
                
                5,459,920
                
                
                
                1,227,293Other
      general and administrative
                
                
                1,640,784
                
                
                
                272,274Employment
      costs
                
                
                1,159,465
                
                
                
                64,724Accounting
      and professional
                
                
                1,150,296
                
                
                
                689,423Depreciation
      and amortization
                
                
                743,809
                
                
                
                260,83410,154,274
                
                
                
                2,514,548Loss
      from operations
                
                
                (3,339,333
                )
                
                
                (1,826,203
                )Other
      income (expense):Extinguishment
                
                
                (22,328,516
                )
                
                
                —Derivative
      income
                
                
                9,272,414
                
                
                
                4,775,537Equity
      in (losses) of investees
                
                
                (1,634,242
                )
                
                
                —Impairment
      of investments
                
                
                (1,591,704
                )
                
                
                —Inducement
      expense
                
                
                (1,473,855
                )
                
                
                —Interest
      income
                
                
                297,043
                
                
                
                117,272Interest
      expense
                
                
                (153,304
                )
                
                
                (185,100
                )Total
      other income (expense)
                
                
                (17,612,164
                )
                
                
                4,707,709Net
      (loss) income
                
                
                (20,951,497
                )
                
                
                2,881,506Net
      income (loss) attributable to non-controlling interests
                
                
                204,905
                
                
                
                66,071Net
      (loss) income attributable to OmniReliant
                
                $
                (20,746,592
                )
                
                $
                2,947,577





Continued
on next page.


7





OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations (continued)





Six Months Ended December 31,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Reconciliation
      of net (loss) income attributable to OmniReliant to loss applicable to
      OmniReliant common shareholders:Net
      (loss) income attributable to OmniReliant
                
                $
                (20,746,592
                )
                
                $
                2,947,577Deemed
      dividend to preferred stockholders
                
                
                (66,948,653
                )
                
                
                —Loss
      applicable to OmniReliant common shareholders
                
                $
                (87,695,245
                )
                
                $
                2,947,577Loss
      per common share:Basic
                
                $
                (0.75
                )
                
                $
                0.20Diluted
                
                $
                (0.75
                )
                
                $
                0.04Weighted
      average common shares—basic
                
                
                116,970,641
                
                
                
                14,497,568Weighted
      average common shares—diluted
                
                
                116,970,641
                
                
                
                74,066,738





See
accompanying notes.


8


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows





Six Months Ended December 31,2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)Cash
      flows from operating activities:Net
      (loss) income
                  
                  $
                  (20,746,592
                  )
                  
                  $
                  2,947,577Adjustments
      to reconcile net (loss) to net cash from operating
    activities:Extinguishment
                  
                  
                  22,328,516
                  
                  
                  
                  —Derivative
      income
                  
                  
                  (9,272,414
                  )
                  
                  
                  (4,775,537
                  )Equity
      in losses of investees
                  
                  
                  1,634,242
                  
                  
                  
                  —Impairment
      of investments
                  
                  
                  1,591,704
                  
                  
                  
                  —Inducement
      expense
                  
                  
                  1,473,855
                  
                  
                  
                  —Amortization
      of intangible assets
                  
                  
                  685,113
                  
                  
                  
                  138,361Bad
      debts expense
                  
                  
                  675,000
                  
                  
                  
                  —Amortization
      of deferred revenue
                  
                  
                  (392,970
                  )
                  
                  
                  —Non-controlling
      interests
                  
                  
                  (204,905
                  )
                  
                  
                  (66,071
                  )Depreciation
      expense
                  
                  
                  58,695
                  
                  
                  
                  103,529Amortization
      of deferred finance costs
                  
                  
                  15,167
                  
                  
                  
                  125,638Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (1,641,881
                  )
                  
                  
                  (1,973
                  )Inventories
                  
                  
                  (365,995
                  )
                  
                  
                  (439,227
                  )Prepaid
      expenses and other assets
                  
                  
                  529,323
                  
                  
                  
                  (208,488
                  )Accounts
      payable and accrued expenses
                  
                  
                  728,072
                  
                  
                  
                  19,261Net
      cash from operating activities
                  
                  
                  (2,905,070
                  )
                  
                  
                  (2,156,930
                  )Cash
      flows from investing activities:Purchases
      of investments
                  
                  
                  (6,411,709
                  )
                  
                  
                  (600,000
                  )Acquisition
      of Designer Liquidators
                  
                  
                  612,702
                  
                  
                  
                  —Acquisition
      of Abazias
                  
                  
                  127,530
                  
                  
                  
                  —Purchases
      of property and equipment
                  
                  
                  (20,975
                  )
                  
                  
                  (2,805,187
                  )Investment
      by non-controlling interest holders
                  
                  
                  —
                  
                  
                  
                  320,000Payments
      for licenses and patents
                  
                  
                  —
                  
                  
                  
                  (100,000
                  )Net
      cash flow from investing activities
                  
                  
                  (5,692,452
                  )
                  
                  
                  (3,185,187
                  )Cash
      flows from financing activities:Proceeds
      from exercise of warrants
                  
                  
                  5,600,000
                  
                  
                  
                  —Proceeds
      from exchange of warrants
                  
                  
                  5,000,000
                  
                  
                  
                  —Principal
      payments on long-term debt
                  
                  
                  (16,343
                  )
                  
                  
                  (5,306
                  )Proceeds
      from long-term debt, net
                  
                  
                  —
                  
                  
                  
                  1,964,066Net
      cash flow from financing activities
                  
                  
                  10,583,657
                  
                  
                  
                  1,958,760Net
      change in cash and cash equivalents
                  
                  
                  1,986,135
                  
                  
                  
                  (3,383,357
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  2,005,702
                  
                  
                  
                  4,435,814Cash
      and cash equivalents at end of period
                  
                  $
                  3,991,837
                  
                  
                  $
                  1,052,457





Continued
on the next page.


9


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows





Supplemental
Cash Flow Information





Six Months Ended December 31,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Cash
      paid for interest
                
                $
                70,567
                
                
                $
                21,709Cash
      paid for income taxes
                
                $
                —
                
                
                $
                —Non-cash
      investing and financing activities:Issuance
      of 100,000 shares of common stock for partial consideration transferred in
      acquiring Designer Liquidators
                
                $
                101,000
                
                
                $
                —Issuance
      of 13,000,000 shares of Series E Preferred Stock for consideration
      transferred in acquiring Abazias:Classified
      as preferred stock
                
                $
                13,236,165
                
                
                $
                —Classified
      in paid-in capital, representing beneficial conversion
                
                
                2,605,159
                
                
                
                —Total
      fair value of Series E Preferred Stock
                
                $
                15,841,323
                
                
                $
                —Exchange
      of available for sale investments for intangible asset
                
                $
                3,782,717
                
                
                $
                —Consideration
      for marketing agreements in the form of common stock and notes receivable,
      carried as investments:Zurvita,
      15,200,000 common shares (fair value of $646,000), plus face value
      $2,000,000, 6% per annum note receivable due October 2012, at fair
      value
                
                $
                2,646,000
                
                
                $
                —Net
      Talk.com, 1,000,000 common shares at fair value
                
                
                150,000
                
                
                
                —$
                2,796,000
                
                
                $
                —Common
      stock issued for loan
                
                $
                —
                
                
                $
                43,333





See
accompanying notes


10


OmniReliant
Holdings, Inc. and Subsidiaries


Condensed
Consolidated Statements of Stockholders’ Equity (Deficiency)


Six
Months Ended December 31, 2009





Series E
                  
                  
                  Common Stock
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  OmniReliant
                  
                  
                  Non-Controlling
                  
                  
                  TotalPreferred Stock
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Income Items
                  
                  
                  Deficit
                  
                  
                  Equity (deficit)
                  
                  
                  Interests
                  
                  
                  Equity (deficit)Balances,
      July 1, 2009
                  
                  $
                  —
                  
                  
                  
                  14,509,225
                  
                  
                  $
                  145
                  
                  
                  $
                  6,532,238
                  
                  
                  $
                  (72,102
                  )
                  
                  $
                  (46,570,028
                  )
                  
                  $
                  (40,109,747
                  )
                  
                  $
                  197,114
                  
                  
                  $
                  (39,912,633
                  )Change
      in accounting for derivatives
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (28,719,115
                  )
                  
                  
                  —
                  
                  
                  
                  24,673,969
                  
                  
                  
                  (4,045,146
                  )
                  
                  
                  —
                  
                  
                  
                  (4,045,146
                  )Warrant
      exchange
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )
                  
                  
                  —
                  
                  
                  
                  (66,948,653
                  )Conversions
      of preferred
                  
                  
                  —
                  
                  
                  
                  105,141,416
                  
                  
                  
                  1,051
                  
                  
                  
                  107,587,408
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  107,588,459
                  
                  
                  
                  —
                  
                  
                  
                  107,588,459Acquisition:
      Designer Liquidator
                  
                  
                  —
                  
                  
                  
                  100,000
                  
                  
                  
                  1
                  
                  
                  
                  161,966
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  161,967
                  
                  
                  
                  163,450
                  
                  
                  
                  325,417Acquisition:
      Abazias
                  
                  
                  13,236,165
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,886,188
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  18,122,353
                  
                  
                  
                  —
                  
                  
                  
                  18,122,353Warrant
      exercises
                  
                  
                  —
                  
                  
                  
                  27,606,276
                  
                  
                  
                  276
                  
                  
                  
                  12,811,450
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  12,811,726
                  
                  
                  
                  —
                  
                  
                  
                  12,811,726Cashless
      option exercises
                  
                  
                  —
                  
                  
                  
                  4,167
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Conversions
      of Series E
                  
                  
                  (10,058,848
                  )
                  
                  
                  11,761,159
                  
                  
                  
                  118
                  
                  
                  
                  10,058,730
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Unrealized
      gains (losses)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  497,102
                  
                  
                  
                  —
                  
                  
                  
                  497,102
                  
                  
                  
                  —
                  
                  
                  
                  497,102Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (20,746,592
                  )
                  
                  
                  (20,746,592
                  )
                  
                  
                  (204,905
                  )
                  
                  
                  (20,951,497
                  )Balances,
      December 31, 2009
                  
                  $
                  3,177,317
                  
                  
                  
                  159,122,243
                  
                  
                  $
                  1,591
                  
                  
                  $
                  46,370,212
                  
                  
                  $
                  425,000
                  
                  
                  $
                  (42,642,651
                  )
                  
                  $
                  7,331,469
                  
                  
                  $
                  155,659
                  
                  
                  $
                  7,487,128





See
accompanying notes.


11


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 1 –
Basis of presentation:





The
accompanying unaudited condensed consolidated financial statements as of and for
the three and six months ended December 31, 2009 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission for Form 10-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 and six months ended December 31, 2009 are not
necessarily indicative of the results for the fiscal year ending June 30, 2010.
The unaudited condensed consolidated financial statements included in this
report should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the
year ended June 30, 2009, filed with the Securities and Exchange
Commission.





Commencing
with our quarterly report on Form 10-Q for the period ended September 30, 2009,
our references to accounting principles generally accepted in the Unites States
of America are to those standards promulgated and described in the Accounting
Standards Codification (“ASC”) of the Financial Accounting Standards
Board.





Certain
reclassifications have been made to categories of operating expenses for the
three and six months ended December 31, 2008, from those previously reported, to
conform to the classifications in the current periods. These reclassifications
did not result in changes to subtotals provided in our unaudited statements of
operations.





Note 2 –
Going concern:





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States contemplates that operations will be
sustained for a reasonable period. However, we have incurred operating losses of
$(1,306,862) and $(3,339,333) during the three and six months ended December 31,
2009, respectively and net losses of $(4,978,803) and $(20,746,592) during the
three and six months ended December 31, 2009 and 2008, respectively. During the
six months ended December 31, 2009, we used cash of $(2,905,070) in our
operating activities, which amount was net of impairments of our investments of
$1,591,704 and our proportionate losses of our equity investees of $1,634,242,
among other items. Further, we have a net working capital deficiency of
$15,972,090 on December 31, 2009. Since our inception, we have been dependent
upon funds raised through the sale of preferred and common stock and warrants to
sustain our operations. These conditions raise substantial doubt about our
ability to continue as a going concern for a reasonable period.





Our
ability to continue as a going concern for a reasonable period is dependent upon
our ability to raise sufficient capital to implement our business plan and to
generate profits sufficient to become financially viable. During the six months
ended December 31, 2009, we raised $10,600,000 from the sale and exercise of
warrants. These funds were derived from Vicis Capital LLC (“Vicis”), which owns
a majority of our outstanding common stock and has been our principal source of
funding. During the same period, we also made cash investments of $6,411,709 in
ventures for the development of our business plan. Finally, in July and August
of 2009, we acquired two operating and revenue-producing businesses more fully
discussed in Note 3. These acquisitions resulted in the acquisition of cash
aggregating $740,232. However, aggregate net losses of these two operations,
included in our consolidated results, amounted to approximately $896,101 and
$1,677,977 during the three and six months ended December 31, 2009,
respectively. We cannot give any assurances regarding the success of our current
operations or those of our investees. Further, we cannot give assurances that
Vicis will continue to fund our operating deficiencies or that other financing
can be obtained at terms acceptable to our management, if at all. 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.


12


OmniReliant Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 3 –
Business acquisitions:





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





We have
accounted for our acquisitions applying the Acquisition Method in Accounting
Standards Codification (“ASC”) 805, Business Combinations
(“ASC 805”). Accordingly, we recognized, separately from goodwill, the
identifiable tangible and intangible assets acquired and liabilities assumed at
their fair values on the acquisition dates. The excess of the fair value of the
consideration transferred, plus the fair value of non-controlling interests in
the acquired assets, over the fair values of assets acquired and liabilities
assumed is recorded as goodwill.





The
following table summarizes the results of the allocation:





Abazias
                
                
                Designer
                
                
                TotalCurrent
      assets, including cash of $127,530 and $612,702 from Abazias and Designer,
      respectively
                
                $
                523,307
                
                
                $
                1,824,660
                
                
                $
                2,347,966Property
      and equipment
                
                
                2,027
                
                
                
                —
                
                
                
                2,027Intangible
      assets:Customer
      lists and customer related
                
                
                2,545,930
                
                
                
                484,353
                
                
                
                3,030,283Dealer
      network intangibles
                
                
                2,133,679
                
                
                
                —
                
                
                
                2,133,679Registered
      trademarks, trade names and dress
                
                
                1,642,420
                
                
                
                —
                
                
                
                1,642,420Executive
      employment contracts
                
                
                210,928
                
                
                
                —
                
                
                
                210,928Software
      and operational processes
                
                
                35,000
                
                
                
                —
                
                
                
                35,000Trade
      liabilities assumed
                
                
                (347,905
                )
                
                
                (124,728
                )
                
                
                (472,633
                )Notes
      payable
                
                
                —
                
                
                
                (250,000
                )
                
                
                (250,000
                )Deferred
      income taxes
                
                
                (2,281,029
                )
                
                
                (60,967
                )
                
                
                (2,341,966
                )4,464,357
                
                
                
                1,873,318
                
                
                
                6,337,674Consideration
      transferred (excluding direct expenses):Cash
      consideration
                
                
                —
                
                
                
                150,000
                
                
                
                150,000Fair
      value of OmniReliant Securities
                
                
                15,841,323
                
                
                
                101,000
                
                
                
                15,942,323Investments
      (see Note 4)
                
                
                1,042,789
                
                
                
                1,857,383
                
                
                
                2,900,172Non-controlling
      interest in RPS Traders LLC
                
                
                —
                
                
                
                163,450
                
                
                
                163,450Consideration
      transferred, plus non-controlling interests
                
                
                16,884,112
                
                
                
                2,271,833
                
                
                
                19,155,945Goodwill
      arising from the acquisitions under ASC 805
                
                $
                12,419,756
                
                
                $
                398,515
                
                
                $
                12,818,271





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


13




OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 3 –
Business acquisitions (continued):





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





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





Our
acquisition of Designer included a 50% equity interest in RPS Traders LLC
(“RPS”), which is engaged in the manufacture of apparel and the sale of
accessories. RPS is a variable interest entity which is an entity that has (i)
an insufficient amount of equity to absorb the entity’s expected losses, (2)
equity owners as a group that are not able to make decisions about the entity’s
activities, or (3) equity that does not absorb the entity’s losses or receive
the entity’s residual returns. Prior to our acquisition of Designer, we invested
$1,857,383 in RPS secured notes, which was the principal funding of RPS’s early
operations. Our interests in these notes, and rights there under, coupled with
our purchase of the 50% equity interest held by Designer place us as the primary
beneficiary to RPS expected losses. As a result, the values of RPS assets are
included in the assets acquired from RPS and the non-controlling interest is
reflected as a component of the consideration transferred for purposes of
computing goodwill. Also see Note 10.





Abazias’
operations are consolidated with our operations commencing with the closest
monthly closing date near the date of acquisition, or September 1, 2009. During
the three and six months ended December 31, 2009, Abazias reported post
acquisition sales of $1,371,139 and $1,890,601, respectively, and post
acquisition net losses of $382,185 and $1,148,465, respectively. Designer
operations are consolidated with our operations commencing August 1, 2009.
During the three and six months ended December 31, 2009, Designer reported post
acquisition sales of $1,740,657 and $1,902,735, respectively, and post
acquisition net losses of $513,916 and $529,512, respectively.





The
following table summarizes the pro forma affects on our unaudited condensed
consolidated statements of operations, as if the acquisition had occurred on
July 1, 2009 and 2008, respectively:





Six months ended December 31,2009
                        
                        
                        2008Sales
                        
                        $
                        18,523,763
                        
                        
                        $
                        4,034,568Net
      (loss) income attributable to OmniReliant
                        
                        
                        (21,193,457
                        )
                        
                        
                        2,250,014(Loss)
      income per common share—basic
                        
                        
                        (0.75
                        )
                        
                        
                        0.15(Loss)
      income per common share—diluted
                        
                        
                        (0.75
                        )
                        
                        
                        0.03





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


14


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 4 –
Investments:





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




December 31,
                
                
                June 30,2009
                
                
                2009Available-for-sale
      investments:Beyond
      Commerce, 10%, face value $1,270,000 notes receivable, due July through
      September 2011; cost basis $1,249,021 (1)
                
                $
                —
                
                
                $
                976,083NetTalk.com,
      Inc., 1,000,000 shares of common stock; cost basis
$150,000
                
                
                575,000
                
                
                
                —Valcom,
      10% face value $100,000 convertible note receivable, plus accrued interest
      of 2,336, due January 6, 2010; cost basis $100,000
                
                
                102,336
                
                
                
                103,365Abazias,
      Inc., face value $700,000, 10.0% convertible note receivable, due December
      31, 2009 (2)
                
                
                —
                
                
                
                732,227Held-to-maturity
      investments:RPS
      Trading, LLC, variable rate (currently 4.75%), face value $650,000 notes
      receivable, due in November and December 2009 (2)
                
                
                —
                
                
                
                650,000677,336
                
                
                
                2,461,675Current
      portion of investments
                
                
                —
                
                
                
                (1,729,448
                )Total
      non-current investments
                
                $
                677,336
                
                
                $
                732,227





(1)
            During
      the quarterly period ended December 31, 2009, our management evaluated the
      continuing carrying value of the Beyond Commerce investment. As a result
      of the review, and after extensive negotiations, we exchanged notes with a
      principal amount of $3,428,574 and accrued interest of $135,355, and
      a fair value of $3,782,717, for certain of Beyond Commerce’s software and
      provided a reserve on the balance. However, we will continue to pursue
      collection of this amount from the debtor. We recorded the software at the
      fair value of the available for sale securities exchanged, which was
      viewed as a reasonable basis for the
software.


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





Unrealized
(gains) losses are recorded as a component of other comprehensive income in
stockholders’ equity. The composition of the balances in other comprehensive
income as of December 31, 2009 and June 30, 2009 are as follows:





December 31,
                  
                  
                  June 30,2009
                  
                  
                  2009Beyond
      Commerce Notes Receivable
                  
                  $
                  —
                  
                  
                  $
                  (23,917
                  )NetTalk.com
      Common Stock
                  
                  
                  425,000
                  
                  
                  
                  —Valcom
      Notes Receivable
                  
                  
                  —
                  
                  
                  
                  (1,430
                  )Abazias
                  
                  
                  —
                  
                  
                  
                  (17,960
                  )Other
      investments
                  
                  
                  —
                  
                  
                  
                  (28,795
                  )$
                  425,000
                  
                  
                  $
                  (72,102
                  )




15





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 4 –
Investments (continued):





Non-marketable
equity method and other investments accounted for at cost or method of
accounting consisted of the following as of December 31, 2009 and June 30,
2009:





Voting
                  Ownership
                
                
                Investment
                  Cost
                
                
                Equity in
                  Earnings (1)
                
                
                December
                  31, 2009
                
                
                June 30,
                  2009Equity method investees:Cellular
      Blowout
                
                
                50.0
                %
                
                $
                1,460,000
                
                
                $
                (87,269
                )
                
                $
                1,372,731
                
                
                $
                1,030,000Zurvita
      Holdings
                
                
                23.0
                %
                
                
                2,646,000
                
                
                
                (1,314,016
                )
                
                
                1,331,984
                
                
                
                —A
      Perfect Pear
                
                
                49.5
                %
                
                
                484,084
                
                
                
                (85,489
                )
                
                
                —
                
                
                
                244,088Webcarnation
                
                
                40.0
                %
                
                
                315,000
                
                
                
                (65,568
                )
                
                
                230,410
                
                
                
                230,978Wineharvest
                
                
                30.0
                %
                
                
                300,050
                
                
                
                (42,190
                )
                
                
                240,053
                
                
                
                260,243For
      Your Imagination
                
                
                20.0
                %
                
                
                300,000
                
                
                
                (39,710
                )
                
                
                260,290
                
                
                
                200,0005,505,134
                
                
                
                (1,634,242
                )
                
                
                3,435,648
                
                
                
                1,965,309Cost
      method investees:Nested
      Media
                
                
                —
                
                
                
                250,000
                
                
                
                —
                
                
                
                250,000
                
                
                
                250,000Total
      non-marketable and other equity investments
                
                
                
                
                
                $
                5,755,134
                
                
                $
                (1,634,242
                )
                
                $
                3,685,648
                
                
                $
                2,215,309





(1)  Equity
in income (loss) of investments carried under the equity method amounted to
$(1,529,570) and $(1,634,242) during the three and six months ended December 31,
2009, respectively.


(2)  During
the most recent quarter, management reviewed the carrying value of investments
and determined that the Company’s investment in A Perfect Pear was permanently
impaired and, accordingly, charged the investment to impairments expense.
Although management concluded that no further impairments were required, the
investments will continue to be monitored and evaluated for recoverability and
further impairments may become necessary should conditions so
warrant.





Note 5 –
Intangible assets:





Intangible
assets consisted of the following on December 31, 2009 and June 30,
2009:





December 31,
                
                
                June 30,EUL (Years)
                
                
                2009
                
                
                2009Customer
      lists and related
                
                
                3-7
                
                
                $
                3,030,283
                
                
                $
                —Dealer
      network
                
                
                7
                
                
                
                2,133,679
                
                
                
                —Patent
      costs
                
                
                5
                
                
                
                1,169,412
                
                
                
                1,169,412Employment
      contracts
                
                
                2
                
                
                
                210,928
                
                
                
                —Software
      and processes
                
                
                2
                
                
                
                3,817,717
                
                
                
                —Other
                
                
                3
                
                
                
                79,899
                
                
                
                79,40210,441,918
                
                
                
                1,248,814Less
      accumulated amortization
                
                
                
                
                
                
                (811,091
                )
                
                
                (125,479
                )Total
                
                
                
                
                
                
                9,630,827
                
                
                $
                1,123,335Trademarks
      and trade dress
                
                
                —
                
                
                
                1,642,420
                
                
                
                —Goodwill
                
                
                —
                
                
                
                12,818,273
                
                
                
                —$
                24,091,520
                
                
                $
                1,123,335




16


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 5 –
Intangible assets (continued):





Amortization expense recorded at December 31
                
                2009
                
                
                2008Three
      months
                
                $
                575,479
                
                
                $
                69,429Six
      months
                
                $
                685,113
                
                
                $
                138,361





Estimated
      Amortization Expense:Six
      months ended June 30, 2010
                
                $
                1,150,959Year
      ending June 30:2011
                
                
                2,301,9132012
                
                
                2,212,8992013
                
                
                1,071,8212014
                
                
                756,5952015
                
                
                756,595Thereafter
                
                
                1,380,045$
                9,630,827





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





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


17


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments:





The
following table summarizes the components of derivative liabilities as of
December 31, 2009 and June 30, 2009:





Financing—Financial
    Instrument
              
              December 31,
                2009
              
              
              June 30,
                2009New Vicis
      Warrant
              
              $
              19,901,000
              
              
              $
              —Series
      A Preferred Financing—Investor warrants
              
              
              —
              
              
              
              716,700Series
      B Preferred Financing—Investor warrants
              
              
              211,488
              
              
              
              75,312Series
      C Preferred Financing—Investor warrants
              
              
              723,639
              
              
              
              —Series
      C Preferred Financing—Put derivative
              
              
              15,305
              
              
              
              199,993Series
      D Preferred Financing—Investor warrants
              
              
              —
              
              
              
              1,752,800Series
      D Preferred Financing—Placement agent warrants
              
              
              —
              
              
              
              166,950Series
      D Preferred Financing—Put derivative
              
              
              —
              
              
              
              253,417Series
      F Preferred Financing—Investor warrants
              
              
              —
              
              
              
              2,946,667Series
      F Preferred Financing—Placement agent warrants
              
              
              1,145,416
              
              
              
              370,000Warrant
      Financing Transaction—Placement agent warrants
              
              
              393,666Derivative
      liabilities
              
              $
              22,390,514
              
              
              $
              6,481,839





The
following table summarizes the number of common shares index to derivative
financial instruments as of December 31, 2009 and June 30, 2009:





Financing—Financial Instrument
              
              December 31,
                2009
              
              
              June 30,
                2009New Vicis
      Warrant
              
              
              70,000,000
              
              
              
              —Series
      A Preferred Financing—Investor warrants
              
              
              —
              
              
              
              6,000,000Series
      B Preferred Financing—Investor warrants
              
              
              960,000
              
              
              
              960,000Series
      C Preferred Financing—Investor warrants
              
              
              2,731,228
              
              
              
              —Series
      D Preferred Financing—Investor warrants
              
              
              —
              
              
              
              28,000,000Series
      D Preferred Financing—Placement agent warrants
              
              
              —
              
              
              
              2,100,000Series
      F Preferred Financing—Investor warrants
              
              
              —
              
              
              
              33,333,333Series
      F Preferred Financing—Placement agent warrants
              
              
              4,166,666
              
              
              
              4,166,666Warrant
      Financing Transaction—Placement agent warrants
              
              
              1,380,314
              
              
              
              —79,238,208
              
              
              
              74,559,999





As
discussed in Note 8, effective July 1, 2009, we adopted the requirements of ASC
815 Derivatives and
Hedging Activities that revised the definition of “indexed to a company’s
own stock” for purposes of continuing classification of derivative contracts in
equity. Derivative contracts may be classified in equity only when the both are
indexed to a company’s own stock and meet certain conditions for equity
classification. Under the revised definition, an instrument (or embedded
feature) would be considered indexed to an entity's own stock if its settlement
amount will equal the difference between the fair value of a fixed number of the
entity's equity shares and a fixed monetary amount. We were unable to continue
to carry 30,904,171 warrants in equity because they embodied anti-dilution
protections that did not achieve the fixed-for-fixed definition.





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


18


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





Also, as
discussed in Note 8, on September 30, 2009, pursuant to an inducement offer
wherein we reduced the strike price on the Vicis warrants from $0.25 to $0.2029
on 97,606,276 warrants, Vicis exercised 27,606,276 warrants for an adjusted
aggregate exercise price of $5,600,000. We accounted for the warrant exercise
analogously to an inducement offer to convert debt instruments; that is the
inducement value is recorded as a charge to income.





The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the three months ended December 31,
2009:





Financing—Financial Instrument
              
              Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              TotalNew
      Vicis Warrant
              
              $
              —
              
              
              $
              654,905
              
              
              $
              654,905Series
      A Preferred Financing
              
              
              —
              
              
              
              —
              
              
              
              —Series
      B Preferred Financing
              
              
              —
              
              
              
              13,200
              
              
              
              13,200Series
      C Preferred Financing
              
              
              642
              
              
              
              25,674
              
              
              
              26,316Series
      D Preferred Financing
              
              
              —
              
              
              
              —
              
              
              
              —Series
      F Preferred Financing—Warrants
              
              
              —
              
              
              
              (18,750
              )
              
              
              (18,750
              )Derivative
      income (expense)
              
              $
              642
              
              
              $
              675,029
              
              
              $
              675,671





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





Financing—Financial Instrument
              
              Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              TotalNew Vicis
      Warrant
              
              $
              —
              
              
              $
              —
              
              
              $
              —Series
      A Preferred Financing
              
              
              —
              
              
              
              251,116
              
              
              
              251,116Series
      B Preferred Financing
              
              
              —
              
              
              
              3,745
              
              
              
              3,745Series
      C Preferred Financing
              
              
              525,465
              
              
              
              771,929
              
              
              
              1,297,394Series
      D Preferred Financing
              
              
              750,781
              
              
              
              —
              
              
              
              750,781Series
      F Preferred Financing—Warrants
              
              
              —
              
              
              
              —
              
              
              
              —Derivative
      income (expense)
              
              $
              1,276,246
              
              
              $
              1,026,790
              
              
              $
              2,303,036





The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the six months ended December 31,
2009:





Financing—Financial Instrument
              
              Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              TotalNew Vicis
      Warrant
              
              $
              —
              
              
              $
              (11,057,848
              )
              
              $
              (11,057,848
              )Series
      A Preferred Financing
              
              
              —
              
              
              
              833
              
              
              
              833Series
      B Preferred Financing
              
              
              —
              
              
              
              783,160
              
              
              
              783,160Series
      C Preferred Financing
              
              
              5,565
              
              
              
              25,674
              
              
              
              31,239Series
      D Preferred Financing
              
              
              11,032
              
              
              
              56,666
              
              
              
              67,698Series
      F Preferred Financing—Warrants
              
              
              —
              
              
              
              775,416
              
              
              
              775,416Derivative
      income (expense)
              
              $
              16,597
              
              
              $
              (9,289,011
              )
              
              $
              (9,272,414
              )


19





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





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





Financing—Financial Instrument
              
              Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              TotalNew Vicis Warrant
              
              $
              —
              
              
              $
              —
              
              
              $
              —Series
      A Preferred Financing
              
              
              —
              
              
              
              776,416
              
              
              
              251,116Series
      B Preferred Financing
              
              
              —
              
              
              
              29,185
              
              
              
              3,745Series
      C Preferred Financing
              
              
              536,133
              
              
              
              771,929
              
              
              
              1,297,394Series
      D Preferred Financing
              
              
              762,144
              
              
              
              1,899,730
              
              
              
              750,781Series
      F Preferred Financing—Warrants
              
              
              —
              
              
              
              —
              
              
              
              —Derivative
      income (expense)
              
              $
              1,298,277
              
              
              $
              3,477,260
              
              
              $
              4,775,537





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





We
estimate fair values of derivative financial instruments using various
techniques (and combinations thereof) that are considered to be consistent with
the objective measuring fair values. In selecting the appropriate technique, we
consider, among other factors, the nature of the instrument, the market risks
that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, we generally use the
Black-Scholes-Merton option valuation technique because it embodies all of the
requisite assumptions (including trading volatility, estimated terms and risk
free rates) necessary to fair value these instruments.


20





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





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





The
following represents a reconciliation of the changes in our derivatives and the
related changes in fair value on a recurring basis using significant
unobservable inputs (Level 3) during the three months ended December 31, 2009
and 2008:





2009
                
                
                2008Balances
      at June 30
                
                $
                6,481,839
                
                
                $
                6,361,100Change
      in accounting, described above
                
                
                4,045,146
                
                
                
                —Balances
      at July 1
                
                
                10,526,985
                
                
                
                6,361,100Issuances
      (Note 8):Exchange
      transaction
                
                
                37,090,385
                
                
                
                —Warrant
      financing transaction
                
                
                382,761
                
                
                
                —Total
                
                
                37,473,146
                
                
                
                —Conversions
      and cancellations (Note 8):Exchange
      transaction
                
                
                (9,761,869
                )
                
                
                —Conversion
      transaction
                
                
                (454,702
                )
                
                
                —Exercises
                
                
                (7,594,487
                )
                
                
                —Total
                
                
                (17,811,058
                )
                
                
                —Fair
      value adjustments:Anti-dilution
      re-pricing events (1)
                
                
                1,436,735
                
                
                
                —Inducement
      adjustment (Note 8)
                
                
                1,473,855
                
                
                
                —Other
      assumption changes (1)
                
                
                (10,709,149
                )
                
                
                (4,775,536
                )Total
                
                
                (7,798,559
                )
                
                
                (4,775,536
                )Balances
      at December 31,
                
                $
                22,390,514
                
                
                $
                1,585,564





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





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




21


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 6 –
Derivative financial instruments (continued):





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





Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateNew
      Vicis Warrant
                
                
                70,000,000
                
                
                $
                0.2029
                
                
                
                9.55
                
                
                
                82.86
                %
                
                
                3.85
                %Series
      B Preferred Financing:B-1
      Investor Warrants
                
                
                480,000
                
                
                $
                0.25
                
                
                
                0.40
                
                
                
                272.84
                %
                
                
                0.20
                %B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.25
                
                
                
                2.40
                
                
                
                159.73
                %
                
                
                1.14
                %Series
      C Preferred Financing:C-1
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.25
                
                
                
                2.80
                
                
                
                152.70
                %
                
                
                1.70
                %C-2
      Investor Warrants
                
                
                1,365,614
                
                
                $
                0.25
                
                
                
                7.80
                
                
                
                89.12
                %
                
                
                3.39
                %Series
      F Preferred Financing:BD-12
      Placement agent warrants
                
                
                833,333
                
                
                $
                0.25
                
                
                
                9.12
                
                
                
                84.41
                %
                
                
                3.85
                %BD-13
      Placement agent warrants
                
                
                3,333,333
                
                
                $
                0.25
                
                
                
                9.12
                
                
                
                84.41
                %
                
                
                3.85
                %Warrant
      Financing Transaction—Placement agent warrants
                
                
                1,380,314
                
                
                $
                0.2029
                
                
                
                9.75
                
                
                
                82.38
                %
                
                
                3.85
                %





Significant
assumptions underlying the BSM calculations are as follows as of December 31,
2008:





Indexed
                  Shares
                
                
                Exercise
                  Price
                
                
                Remaining
                  Term
                
                
                Expected
                  Volatility
                
                
                Risk-Free
                  RateSeries
      A Preferred Financing:A-1
      Investor Warrants
                
                
                3,000,000
                
                
                $
                0.50
                
                
                
                2.89
                
                
                
                47.55
                %
                
                
                1.00
                %A-2
      Investor Warrants
                
                
                3,000,000
                
                
                $
                0.50
                
                
                
                7.89
                
                
                
                44.77
                %
                
                
                1.87
                %Series
      B Preferred Financing:B-1
      Investor Warrants
                
                
                480,000
                
                
                $
                0.50
                
                
                
                1.39
                
                
                
                56.93
                %
                
                
                0.37
                %B-2
      Investor Warrants
                
                
                480,000
                
                
                $
                0.50
                
                
                
                3.39
                
                
                
                45.54
                %
                
                
                1.00
                %Series
      D Preferred Financing:D-1
      Investor Warrants
                
                
                28,000,000
                
                
                $
                0.75
                
                
                
                6.33
                
                
                
                43.13
                %
                
                
                1.87
                %BD-10
      Placement agent warrants
                
                
                700,000
                
                
                $
                0.50
                
                
                
                4.33
                
                
                
                43.28
                %
                
                
                1.55
                %BD-11
      Placement agent warrants
                
                
                1,400,000
                
                
                $
                0.75
                
                
                
                4.33
                
                
                
                43.28
                %
                
                
                1.55
                %





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





Our put
derivatives, which were bifurcated from our Series C and Series D Preferred
Stock, are estimated based upon a multiple, probability-weighted outcomes, cash
flow model that is present valued using risk-adjusted interest rates. We use
publicly available bond-rate curves for companies that we estimate have credit
ratings similar to what ours may be based upon Standard & Poors and Moody’s
rating scales. Those ratings generally fall in the highly speculative to
in-poor-standing categories of these ratings, and ranged from 10.40% to 13.56%
for periods from one to five years, respectively.




22


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note
7—Long-term debt:





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




December 31,
                      2009
                    
                    
                    June 30,
                      2009Initial
      $2,000,000 six-year, variable rate mortgage note, with interest at the
      Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75%
      during the first three years and a floor of 6.75% and a cap of 8.75%
      during the second three years; principal and interest payments of $13,507
      are payable over the six year term based upon a twenty-five year
      amortization schedule, with $1,766,016 payable at maturity; secured by
      real estate; guaranteed by related parties.
                    
                    $
                    1,962,534
                    
                    
                    $
                    1,978,877Bank
      lending rate (9.0% at December 31, 2009) demand bank note
                    
                    
                    250,000
                    
                    
                    
                    —2,212,534
                    
                    
                    
                    1,978,877Less
      current maturities
                    
                    
                    (284,335
                    )
                    
                    
                    (33,230
                    )Long-term
      debt
                    
                    $
                    1,928,199
                    
                    
                    $
                    1,945,647Maturities
      of long-term debt at December 31, 2009 are as follows:Six
      months ending June 30, 2010
                    
                    
                    
                    
                    
                    $
                    266,887Years
      ending June 30:2011
                    
                    
                    
                    
                    
                    
                    35,4772012
                    
                    
                    
                    
                    
                    
                    37,8762013
                    
                    
                    
                    
                    
                    
                    40,4372014
                    
                    
                    
                    
                    
                    
                    43,1722015
                    
                    
                    
                    
                    
                    
                    1,788,685$
                    2,212,534





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





Note 8 –
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.


23





OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 8 –
Equity (deficit) (continued):





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





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





Series
E Convertible Preferred Stock:





On
December 3, 2008, we designated 13,001,000 shares of our newly designated
$0.00001 par value, $1.00 stated value, Series E Convertible Preferred Stock
(the “Series E Preferred Stock”) of which 13,000,000 were issued on August 27,
2009 in connection with our acquisition of Abazias. The Series E Preferred Stock
votes with the common shareholders on an if-converted basis. The Series E
Preferred Stock does not provide for either a liquidation preference or a
dividend right. The Series E Preferred Stock was initially convertible into
common stock on a one-for-one basis. However, this conversion rate was subject
to a one-time adjustment, on the closing date of the Abazias purchase, where the
conversion price was adjusted downward on a pro rata basis for common market
values below $1.20, subject to a floor of $0.50. Since the market value on the
closing date, August 27, 2009, was $1.01, the effective conversion price is
$0.84; resulting in the 13,000,000 Series E Convertible Preferred Shares issued
being indexed to 15,476,190 common shares.





In
addition to the aforementioned conversion adjustment, the Series E Preferred
Stock provides for down-round price protection in the event that we sell shares
or indexed securities below $1.20 during the two year period following issuance.
In the event of a down-round financing, the conversion price is adjusted
similarly to the one-time adjustment described above. That is, on a pro rata
basis for down round financings at less than $1.20. This protection has a floor
of $0.50. The Series E Preferred Stock conversion price is otherwise subject to
adjustment for traditional reorganizations, such as stock splits, stock
dividends and similar restructuring of equity. Finally, OmniReliant is precluded
from changing the designations of the Series E Preferred Stock without the
approval of at least 80% of the holders.


24


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 8 –
Equity (deficit) (continued):





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





Exchange
and conversion transactions:





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





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





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





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





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


25


OmniReliant
Holdings, Inc. and Subsidiaries


Notes to
Unaudited Condensed Consolidated Financial Statements





Note 8 –
Equity (deficit) (continued):





Changes
in fair value are summarized as follows:





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





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





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





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





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


26




OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 8 –
Equity (deficit) (continued):





Warrant
exercise:





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





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





Stock
Options and Warrants:





The
following table summarizes the activity related to warrants and stock options
for the three months ended September 30, 2009 and December 31,
2009:


Weighted AverageExercise Price
                
                
                Exercise PricePer Share
                
                
                Per ShareWarrants
                
                
                Options
                
                
                Warrants
                
                
                Options
                
                
                Warrants
                
                
                OptionsJuly
      1, 2009
                
                
                106,464,170
                
                
                
                2,145,000
                
                
                
                0.50-3.75
                
                
                
                0.50-1.00
                
                
                
                0.92
                
                
                
                0.57Granted
                
                
                98,986,590
                
                
                
                —
                
                
                
                0.25
                
                
                
                —
                
                
                
                0.25
                
                
                
                —Exercised
                
                
                (27,606,276
                )
                
                
                —
                
                
                
                0.20
                
                
                
                —
                
                
                
                0.20
                
                
                
                —Expired
                
                
                (97,606,276
                )
                
                
                —
                
                
                
                0.50-3.75
                
                
                
                —
                
                
                
                0.92
                
                
                
                —September
      30, 2009
                
                
                80,238,208
                
                
                
                2,145,000
                
                
                
                0.20-1.00
                
                
                
                0.50-1.00
                
                
                
                0.20
                
                
                
                0.57Granted
                
                
                —
                
                
                
                2,400,000
                
                
                
                —
                
                
                
                0.35-1.00
                
                
                
                —
                
                
                
                0.49Exercised
                
                
                —
                
                
                
                (8,334
                )
                
                
                —
                
                
                
                0.50
                
                
                
                —
                
                
                
                0.50Expired
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —December
      31, 2009
                
                
                80,238,208
                
                
                
                24,536,666
                
                
                
                0.20-1.00
                
                
                
                0.35-1.00
                
                
                
                0.20
                
                
                
                0.53Exercisable
      at December 31, 2009
                
                
                80,238,208
                
                
                
                2,145,000





The
warrants expire at various dates ranging from April 2010 through October 2017.
On December 31, 2009, the Company granted 2,400,000 stock options; 1,615,000 of
which were to employees and 785,000 were to non-employees. The stock options
have exercise prices ranging from $0.35 to $1.00 (weighted average of $0.49) and
terms ranging from three years to four years. The stock options vest ratably on
each anniversary date of the term. Compensation expense related to grants to
employees amounted to $531,450 and will be recorded in expense as options vest.
Grant-date fair values of stock options issued to non-employees amounted to
$252,050; however, a measurement date has not been established for these options
under current accounting standards. Accordingly, the Company will record
compensation expense when the stock options are earned or vest, whichever comes
first, at the fair value to be determined on the measurement date.





On
January 21, 2010, 1,800,000 exercisable options were redeemed and cancelled in
connection with the separation of an officer of the Company. See Note 14. 
On February 12, 2010, stock
options to purchase 1,000,000 shares of common stock were awarded to the
Company’s newly appointed President and Chief Executive Officer. The stock
options have an exercise price of $0.21 and vest over a four year
period.


27


OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 8 –
Equity (deficit) (continued):





(Loss) income per common
share:





The following table reflects the
components of our calculation of (loss) income per common share for the three
months ended December 31, 2009 and 2008:





2009
                
                
                2008Net (loss)
      income
                
                $
                (4,978,803
                )
                
                $
                1,052,171Deemed dividend on preferred
      stock
                
                
                —
                
                
                
                —Numerator for
      basic
                
                $
                (4,978,803
                )
                
                $
                1,052,171Denominator:Weighted averages
      shares
                
                
                153,173,300
                
                
                
                14,509,225Potentially dilutive equity-linked
      contracts:Warrants and
      options
                
                
                —
                
                
                
                21,529,049Convertible preferred
      stock
                
                
                —
                
                
                
                34,619,128153,173,300
                
                
                
                70,657,402(Loss) income per common
      share:Basic
                
                $
                (0.03
                )
                
                $
                0.07Diluted
                
                $
                (0.03
                )
                
                $
                0.01





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





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





2009
                
                
                2008Net (loss)
      income
                
                $
                (20,746,592
                )
                
                $
                2,947,577Deemed dividend on preferred
      stock
                
                
                (66,948,653
                )
                
                
                —Numerator for
      basic
                
                $
                (87,695,245
                )
                
                $
                2,947,577Denominator:Weighted averages
      shares
                
                
                116,970,641
                
                
                
                14,497,568Potentially dilutive equity-linked
      contracts:Warrants and
      options
                
                
                —
                
                
                
                24,950,042Convertible preferred
      stock
                
                
                —
                
                
                
                34,619,128116,970,641
                
                
                
                74,066,738(Loss) income per common
      share:Basic
                
                $
                (0.75
                )
                
                $
                0.20Diluted
                
                $
                (0.75
                )
                
                $
                0.04





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


28





OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 9 –
Redeemable preferred stock:





Redeemable
preferred stock consists of the following as of December 31, 2009 and June 30,
2009:





December 31,
                    2009
                  
                  
                  June 30,
                    2009Series
      C Convertible Preferred Stock, 1,024,210 and 10,620,000 shares issued and
      outstanding at December 31, 2009 (liquidation value $1,024,210) and June
      30, 2009 (liquidation value $10,620,000), respectively
                  
                  $
                  4,946,910
                  
                  
                  $
                  28,969,634Series
      D Convertible Preferred Stock, -0- and 7,000,000 shares issued and
      outstanding at December 31, 2009 and June 30, 2009 (liquidation value
      $7,000,000), respectively
                  
                  
                  —
                  
                  
                  
                  7,000,000Series
      F Convertible Preferred Stock, -0- and 10,000,000 shares issued and
      outstanding at December 31, 2009 and June 30, 2009 (liquidation value
      $10,000,000), respectively
                  
                  
                  —
                  
                  
                  
                  10,000,000$
                  4,946,910
                  
                  
                  $
                  45,969,634





See Note
8 for information on the conversion of redeemable preferred stock. See Note 8
for information on our Series E Convertible Preferred Stock.





Terms,
Features and Conditions of our Redeemable Preferred Stock:





Series
              
              Date of
                Designation
              
              Number of
                Shares
              
              
              Par
                Value
              
              
              Stated
                Value
              
              
              Liquidation
                Value
              
              
              Dividend
                Rate
              
              
              Initial
                Conversion
              
              
              Current
                ConversionC
              
              10/18/2007
              
              
              10,620,000
              
              
              $
              0.00001
              
              
              $
              1.00
              
              
              $
              1.00
              
              
              
              —
              
              
              $
              0.75
              
              
              $
              0.25





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





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





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


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


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


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




29




OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 9 –
Redeemable preferred stock (continued) :





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





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





Note 10 –
Non-controlling interests:





A
non-controlling interest, formerly called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Non-controlling interests arise from the consolidation of subsidiaries as a
result of voting control or based upon benefits of an entity’s variable
interests. We consolidate two entities that have non-controlling interests. Our
subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated because we own the
majority of the voting control. Our subsidiary, RPS Trading LLC (“RPS”) is
consolidated because we own a 50% voting interest and it meets the definition of
a variable interest entity of which we are the primary beneficiary.





Effective
July 1, 2009, we adopted the amended requirements of ASC 810 Consolidations that
require (i) presentation of non-controlling interests as a component of equity
and (ii) presentation of income (loss) associated with OmniReliant separately
from income (loss) associated with non-controlling interests. These standards
required retrospective adoption and, accordingly, the comparable amounts in
prior periods have been reclassified to conform to the new standard. The
following table summarizes the contribution to our consolidated results of
operations and financial condition of consolidated subsidiaries with
non-controlling interests:





OmniReliant and
                  wholly-owned
                  subsidiaries
                
                
                OmniComm
                
                
                RPS
                
                
                ConsolidatedThree
      months ended December 31, 2009:Sales
      or other revenues
                
                $
                8,071,118
                
                
                $
                60,969
                
                
                $
                1,722,558
                
                
                $
                9,854,645Loss
      from operations
                
                
                (734,491
                )
                
                
                (53,345
                )
                
                
                (519,026
                )
                
                
                (1,306,862
                )Net
      (loss) income
                
                
                (4,580,630
                )
                
                
                (53,251
                )
                
                
                (524,891
                )
                
                
                (5,158,772
                )Non-controlling
      interests
                
                
                —
                
                
                
                21,300
                
                
                
                158,669
                
                
                
                179,969Net
      (loss) income applicable to OmniReliant
                
                
                (4,580,630
                ))
                
                
                (31,951
                )
                
                
                (366,222
                )
                
                
                (4,978,803
                )


30





OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 10 –
Non-controlling interests (continued):





OmniReliant and
                  wholly-owned
                  subsidiaries
                
                
                OmniComm
                
                
                RPS
                
                
                ConsolidatedSix
      months ended December 31, 2009:Sales
      or other revenues
                
                $
                15,536,902
                
                
                $
                163,889
                
                
                $
                1,884,635
                
                
                $
                17,585,426Loss
      from operations
                
                
                (2,735,808
                )
                
                
                (68,902
                )
                
                
                (534,623
                )
                
                
                (3,339,333
                )Net
      (loss) income
                
                
                (20,342,320
                )
                
                
                (68,690
                )
                
                
                (540,487
                )
                
                
                (20,951,497
                )Non-controlling
      interests
                
                
                —
                
                
                
                41,455
                
                
                
                163,450
                
                
                
                204,905Net
      (loss) income applicable to OmniReliant
                
                
                (20,342,320
                )
                
                
                (27,235
                )
                
                
                (377,037
                )
                
                
                (20,746,592
                )





Balance
      Sheet InformationTotal
      assets
                
                $
                34,491,494
                
                
                $
                2,522,300
                
                
                $
                4,196,563
                
                
                $
                41,210,357Total
      liabilities
                
                
                (22,360,793
                )
                
                
                (2,029,051
                )
                
                
                (4,386,475
                )
                
                
                (28,776,319
                )Redeemable
      preferred stock
                
                
                (4,946,910
                )
                
                
                —
                
                
                
                —
                
                
                
                (4,946,910
                )Total
      equity
                
                
                7,183,791
                
                
                
                493,249
                
                
                
                (189,912
                )
                
                
                7,487,128Non-controlling
      interests
                
                
                —
                
                
                
                (155,659
                )
                
                
                —
                
                
                
                (155,659
                )Equity
      of OmniReliant shareholders
                
                $
                7,183,791
                
                
                $
                337,590
                
                
                $
                (189,912
                )
                
                $
                7,331,469





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


31


OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 11 –
Income taxes:





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





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





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





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





Note 12 – Commitments and
contingencies:





Geographic
and product concentrations:





As
discussed in Note 3, during the current fiscal quarter we purchased Designer.
The acquisition of Designer resulted in our consolidation of RPS, in which we
have separately invested $1,857,383, based upon our 50% voting interest and the
fact that we are the primary beneficiary of this variable interest entity. RPS
is largely engaged in the manufacture of apparel and relies on outsourced
manufacturing facilities in foreign countries that provide low-cost labor. As of
December 31, 2009, RPS carries approximately $1,952,000 of inventories that are
located in a foreign country. While we and RPS take precautions against loss,
there is a higher risk associated with these assets due to their physical
location. Risks include theft and nationalization events that could result in a
total loss of the assets.


32


OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 12 – Commitments and contingencies
(continued):





Due to
the nature of the retail business sector, our revenues may be concentrated from
time-to-time in the sale of certain specific products or a single product. These
concentrations generally arise from the timing and intensity of our marketing
and infomercial campaigns related to those specific products. During the three
and six months ended December 31, 2009, two products comprised 56% and 12% and
64% and 14%, respectively, of our consolidated product sales. During the same
periods, our Abazias product line, consisting of precious gems and jewelry
comprised 14% and 11% of our consolidated product sales; our RPS product line,
consisting of manufactured apparel comprised 18% and 11%, respectively.
Significant declines in the sales volumes associated with these products or
product lines, should that occur, could have a material adverse effect on our
operations and financial position, should are management be unable to timely
replace the lines with alternative retail products.





Employment
Agreements:





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





License
Agreement





On
October 9, 2009, we entered into a license agreement (the “License Agreement”)
with Zurvita Holdings, Inc. (“Zurvita”) whereby we granted a perpetual right and
license, under all intellectual property rights applicable to the Software, to
access, use, execute, display, market, and sell the Software to Zurvita in
consideration for a royalty fee of $2.00 per user for a period of twenty four
(24) months, commencing ninety (90) days from the date Zurvita runs its first
advertisement. Compensation for the license represented 15,200,000 shares of
Zurvita common stock, which had a fair value of $646,000. Additionally, pursuant
to the terms of the License Agreement, we granted Zurvita the right to market
and sell the Software through its independent sales representatives in
consideration for a 6% promissory note in the principal amount of Two Million
Dollars ($2,000,000), payable three (3) years from the date of issuance and
convertible at any time at our option at a conversion price of $0.25 per share.
The aggregate consideration has been recorded as deferred revenue and is subject
to amortization into income over the term using the straight-line
method.


33





OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 12 – Commitments and contingencies
(continued):





Other
contingencies:





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 Limited filed a complaint against the named
defendants alleging certain causes of actions, including breach of fiduciary
duty.  In January, all defendants moved to dismiss.  The
Company’s motion is returnable on March 8, 2010.





OmniReliant
Holdings, Inc v. ResponzeTV, et al.





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





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





Defendants
have moved to dismiss the Complaint, and the Company has opposed this motion.
This motion was fully submitted to the Court on September 22, 2009.





Davlyn Industries, Inc. v.
ResponzeTV America, LLC f/k/a Reliant International Media, LLC and OmniReliant
Corporation (Circuit Court, Pinellas County, Florida, Case No: 09-11763
CI). Davlyn Industries, Inc. filed this lawsuit asserting a claim for breach of
contract in connection with the purchase of cosmetic skin care products. Davlyn Industries, Inc.
demands judgment against OmniReliant Corporation of $293,600 plus interest and
court costs. Management believes the lawsuit is without merit.




In
connection with our Retail Products Segment, we enter into other arrangements
from time to time that are routine and customary for the operation of our
business that include commitments, typically of a short duration. These
arrangements include, among other things, infomercial development and production
arrangements and royalty or contingent consideration to product manufacturers or
infomercial hosts. As of December 31, 2009, we do not believe that our routine
and customary business arrangements are material.


34


OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 13 –
Related party transactions:





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





Placement Agent and Related Services
- Midtown Partner & Co. LLC and Apogee Financial Investments, serve
as our placement agents and merchant banker, respectively, in connection with
our financing and other strategic transactions. These companies are owned by
certain shareholders and Board Members. We compensated these companies in
warrants with fair values of $382,761 during the six months ended December 31,
2009, related to financing arrangements. 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.





Financial Consulting Agreement
– We have engaged TotalCFO to provide financial services. TotalCFO is
owned by certain shareholders and Board members’ relatives. We recognized
$230,610 and $120,175 of expense related to this arrangement for the six months
ended December 31, 2009 and 2008.





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





Investees – Our Chief
Operating Officer owns a controlling 56% interest in Webcarnation. As more fully
discussed in Note 4, we have a 44% interest in Webcarnation that we account for
using the equity method of accounting. Apogee and TotalCFO, related parties
referred to above, own an aggregate of 60% of Wineharvest as of Decemer 31,
2009. As more fully discussed in Note 4, we have a 30% interest in Wineharvest
that we account for using the equity method of accounting. The remaining 10%
interest was held by the Company’s previous CEO as
of December 31, 2009 (see Note 14).





Advertising and Marketing
Agreement – On July 30, 2009, we entered into an Advertising and
Marketing Agreement with Zurvita, Inc., more fully described in Note 12, above.
Certain of our Board Members also serve as Directors of Zurvita, Inc. As more
fully discussed in Note 14, below, on January 21, 2010, we separated with our
President and Chief Executive Officer. The separated officer also served as a
Zurvita, Inc. Director.





Leasing Arrangement – Our
subsidiary, Abazias, leases its business premises from the subsidiary President.
The lease provides for monthly lease payments of $2,650 and cost reimbursements
of $1,170, and expires on July 31, 2010.


35





OmniReliant Holdings, Inc. and
Subsidiaries


Notes to Unaudited Condensed
Consolidated Financial Statements





Note 14 – Subsequent
events:





We have evaluated subsequent events
arising following the balance sheet date of December 31, 2009 through the date
of filing, which is February 15, 2010.





Settlement Agreement—On
January 19, 2010, we settled a dispute with Revenue Frontier LLC alleging breach
of contract for $16,785 in cash. We will record the settlement in the period
that it was reached, which is January 2010.





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.


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


4.
            A
      company-owned automobile with an estimated value of
    $18,000.


5.
            An
      exchange of investments, wherein we will deliver 50 common shares in
      Strathmore Investments (collectively, our Cellular Blowout investment) and
      625,000 preferred shares in Nested Media for 1,000,000 shares in
      Wineharvest owned by the separated officer
..





Termination
benefits and other payments are recorded in the period that the benefits are
formally established and communicated with the separated employee. Accordingly,
we will record the termination benefits as an employment cost during January
2010.





Conversion of Series E
Preferred: On January 28, 2010, 210,000 shares of Series E Preferred
Stock were converted into 247,064 shares of common stock under the contractual
terms of the Series E Preferred Stock.





Grant of Stock
Options: On February 12,
2010, stock options to purchase 1,000,000 shares of common stock were awarded to
the Company’s newly appointed President and Chief Executive Officer pursuant to
his employment arrangement. The stock options have an exercise price of $0.21
and vest over a four year period.


36


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





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





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


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


3.
            The
      intensity of competition; and


4.
            General
      economic conditions.





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





Overview





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





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





Business
acquisitions:





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





We have
accounted for our acquisitions applying the Acquisition Method in Accounting
Standards Codification (“ASC”) 805, Business Combinations
(“ASC 805”). Accordingly, we recognized, separately from goodwill, the
identifiable tangible and intangible assets acquired and liabilities assumed at
their fair values on the acquisition dates. The excess of the fair value of the
consideration transferred, plus the fair value of non-controlling interests in
the acquired assets, over the fair values of assets acquired and liabilities
assumed is recorded as goodwill.


37


The
following table summarizes the results of the allocation:





Abazias
                
                
                Designer
                
                
                TotalCurrent
      assets, including cash of $127,530 and $762,702 from Abazias and Designer,
      respectively
                
                $
                523,307
                
                
                $
                1,824,660
                
                
                $
                2,347,966Property
      and equipment
                
                
                2,027
                
                
                
                —
                
                
                
                2,027Intangible
      assets:Customer
      lists and customer related
                
                
                2,545,930
                
                
                
                484,353
                
                
                
                3,030,283Dealer
      network intangibles
                
                
                2,133,679
                
                
                
                —
                
                
                
                2,133,679Registered
      trademarks, trade names and dress
                
                
                1,642,420
                
                
                
                —
                
                
                
                1,642,420Executive
      employment contracts
                
                
                210,928
                
                
                
                —
                
                
                
                210,928Software
      and operational processes
                
                
                35,000
                
                
                
                —
                
                
                
                35,000Trade
      liabilities assumed
                
                
                (347,905
                )
                
                
                (124,728
                )
                
                
                (472,633
                )Notes
      payable
                
                
                —
                
                
                
                (250,000
                )
                
                
                (250,000
                )Deferred
      income taxes
                
                
                (2,281,029
                )
                
                
                (60,967
                )
                
                
                (2,341,966
                )4,464,357
                
                
                
                1,873,318
                
                
                
                6,337,674Consideration
      transferred (excluding direct expenses):Cash
      consideration
                
                
                —
                
                
                
                150,000
                
                
                
                150,000Fair
      value of OmniReliant Securities
                
                
                15,841,323
                
                
                
                101,000
                
                
                
                15,942,323Investments
                
                
                1,042,789
                
                
                
                1,857,383
                
                
                
                2,900,172Non-controlling
      interest in RPS Traders LLC
                
                
                —
                
                
                
                163,450
                
                
                
                163,450Consideration
      transferred, plus non-controlling interests
                
                
                16,884,112
                
                
                
                2,271,833
                
                
                
                19,155,945Goodwill
      arising from the acquisitions under ASC 805
                
                $
                12,419,756
                
                
                $
                398,515
                
                
                $
                12,818,271





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





Abazias’
operations are consolidated with our operations commencing with the closest
monthly closing date near the date of acquisition, or September 1, 2009. During
the three and six months ended December 31, 2009, Abazias reported post
acquisition sales of $1,371,139 and $1,890,601, respectively, and post
acquisition net losses of $382,185 and $1,148,465, respectively. Designer
operations are consolidated with our operations commencing August 1, 2009.
During the three and six months ended December 31, 2009, Designer reported post
acquisition sales of $1,740,677 and $1,902,735, respectively, and post
acquisition net losses of $513,916 and $529,512, respectively.





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.


38





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.





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





Three
months ended December 31, 2009 compared to three months ended December 31,
2008:





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





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





·
            Product
      sales: Our product sales increased $8,726,052 to $9,793,676 for the three
      months ended December 31, 2009 compared to $1,067,624 for the three months
      ended December 31, 2008. Abazias and Designer contributed $1,371,139 and
      $1,740,677, respectively, of this increase. Otherwise, this increase
      reflects our maturation in identifying new retail products to sell through
      our media distribution networks. Our product sales for the three months
      ended December 31, 2009 are net of estimated returns and allowances of
      $59,482, which amounts are normal in retail sales and within the
      expectations of our management. Due to the nature of the retail business
      sector, our revenues may be concentrated from time-to-time in the sale of
      certain specific products or a single product. These concentrations
      generally arise from the timing and intensity of our marketing and
      infomercial campaigns related to those specific products. Due to the
      nature of the retail business sector, our revenues may be concentrated
      from time-to-time in the sale of certain specific products or a single
      product. These concentrations generally arise from the timing and
      intensity of our marketing and infomercial campaigns related to those
      specific products. During the three months ended December 31, 2009, two
      products comprised 56% and 12%, respectively, of our consolidated product
      sales. During the same periods, our Abazias product line, consisting of
      precious gems and jewelry comprised 14% of our consolidated product sales;
      our RPS product line, consisting of manufactured apparel comprised 18%,
      respectively. Significant declines in the sales volumes associated with
      these products or product lines, should that occur, could have a material
      adverse effect on our operations and financial position, should are
      management be unable to timely replace the lines with alternative retail
      products.





Included
in product sales for the three months ended December 31, 2009 is $392,970 of
amortization of deferred revenue. The revenue is associated with marketing
services and royalties. See liquidity section below. Deferred revenue subject to
future amortization amounts to $2,403,030 at December 31, 2009. We will reflect
these amounts separately from product sales when and if they become material to
our total revenues.


39





·
            Cost
      of product sales:
      Our cost of product sales increased $5,722,134 to $6,293,117 for the three
      months ended December 31, 2009 compared to $570,983 for the three months
      ended December 31, 2008. This increase reflects our increasing retail
      product sales, including cost of products, freight and shipping and
      merchant account fees. Our margin during the current quarter amounted to
      36% compared to 47% during the quarter ended December 31, 2008. Margins on
      retail products are largely dependent upon the types and demands for
      retail products. Accordingly, our ongoing margins will likely be volatile
      until we establish the types of products that will serve as our long-term
      base of offerings.





·
            Rental
      revenue: Rental revenue of commercial real estate amounted to $60,969, a
      decrease of $9,701when compare to $70,670 of commercial real estate
      revenue that we reported for the three months ended December 31, 2008. We
      anticipate rental revenues to be consistent with levels experienced in the
      current quarterly period.





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





·
            Advertising
      expense: Advertising and marketing expense increased $1,263,367 (or 105%)
      for the three months ended December 31, 2009 to $2,461,997 as compared to
      $1,198,630 for the three months ended December 31, 2008. We began
      incurring substantial advertising media expense during the prior fiscal
      year which is necessary to promote our Retail Products. We generally
      expense advertising when it is incurred in accordance with Financial the
      Accounting Standards Boards’ Accounting Standards Codification (“ASC”)
      720-35, Accounting for
      Advertising Costs. Commencing in the prior fiscal year the Company
      began engaging for the production of infomercials related to its Retail
      Products Business, which is expected to be an increasing activity and
      cost. The Company’s accounting policy provides that the costs of
      infomercials are deferred in prepaid assets until the first airing, at
      which time the cost is expensed.





·
            Employment
      Costs: Employment related costs consist of employee insurance, salaries
      and payroll. These costs increased by $326,620 (or 1,007%) to $359,049 for
      the three months ended December 31, 2009. During the three months ended
      December 31, 2008, employment expenses amounted to $32,429. The increase
      is due to higher employment levels. Further, we hired a Chief Operating
      Officer in July of 2009 and a Chief Financial Officer in September of
      2009. Employment costs of these newly hired officers will increase our
      total employment costs in future
periods.





On
December 31, 2009, we issued 2,400,000 stock options to employees and
non-employees having a grant-date fair value of $689,450 for employees and
$94,050 for non-employees, based upon the Black-Scholes-Merton valuation
technique. No compensation expense is reflected in employment costs in the
accompanying financial statements. Rather, the fair value of the stock options
issued to employees will be recorded in expense as the options vest ratably over
periods of three years. The fair value of the stock options issued to
non-employees will be recorded when the related services are performed at fair
values determined on the dates of service. Accordingly, the expense that we
record for non-employee stock option awards could be greater or lesser than the
aforementioned grant-date fair value amount, depending upon the trading value of
our common stock and other assumptions that are used in the valuation
technique.





On
January 21, 2010, we entered into a Severance Agreement with our former
President. This agreement provides for the payment to the separated officer of
$349,000 in cash for severance and expenses, plus the exchange of certain equity
securities. We will record the termination benefits in the month of January
2010.





On
February 12, 2010, stock options to purchase 1,000,000 shares of common stock
were awarded to the Company’s newly appointed President and Chief Executive
Officer pursuant to his employment arrangement. The stock options have an
exercise price of $0.21 and vest over a four year period. We have not yet
computed the grant-date fair value of these stock options. However, the related
expense will be reflected in our employment costs as they vest.


40





·
            Other
      general and administrative: These costs and expenses include compensation,
      occupancy costs and general office expenses. Our general and
      administrative costs increased $695,337 (or 520%) to $829,090 for the
      three months ended December 31, 2009 compared to $133,753 for the three
      months ended December 31, 2008. Our general and administrative expenses
      for the current fiscal quarter include bad debt charges of $375,000, which
      is a result of our higher sales volume. Overall, we believe that our
      reserves are reasonable and appropriate for our current levels of
      operations. Also included in other general and administrative expenses for
      the current fiscal quarter is $156,250 in royalty expenses that we
      incurred to sell licensed products. Engaging in licensing agreements to
      sell products is an industry practice and, accordingly, we will likely
      incur higher levels of royalty charges as our operations mature and we add
      additional products to our retail offerings. Finally, included within
      general and administrative expenses are real estate operation expenses of
      approximately $50,104 and $89,047 during the three months ended December
      31, 2009 and 2008, respectively. Our real estate operation expenses
      include property taxes, utilities, repairs and maintenance and insurance
      costs. These expenses are expected to remain consistent with levels
      experienced in the current period.





·
            Accounting
      and professional expense: Accounting and consulting professional expenses
      increased $302,057 (or 105%) to $590,150 for the three months ended
      December 31, 2009. During the three months ended December 31, 2008 these
      expenses amounted to $288,093. These costs include fees relating to audit
      and other consulting related expenses. Our audit fees have increased due
      to our increased operating activities. We continue to utilize third-party
      consultants to assist in the application of complex accounting principles
      and valuation of our derivative financial instruments. We believe that our
      professional fees will continue at current levels until we can further
      develop our operating and financial
  infrastructure.





·
            Depreciation
      and amortization: Our amortization of intangible assets and depreciation
      of property and equipment amounted to $575,479 and $52,625 respectively
      for the three months ended December 31, 2009. Our amortization of
      intangible assets and depreciation of property and equipment amounted to
      $69,429 and $63,109, respectively for the three months ended December 31,
      2008. Increases in depreciation and amortization are largely due to the
      higher levels of intangible assets arising from our acquisitions of
      Abazias and Designer, which contributed $4,925,537 and $484,353 in
      intangible assets that are subject to amortization. In addition, during
      the current fiscal quarter, we exchanged certain investments for software
      having an estimated value of $3,782,717. The addition of the Abazias and
      Designer intangible assets, coupled with the new software acquired in the
      current quarter will result in higher amortization expense in future
      periods. The following table reflects our estimated future amortization of
      intangible assets:





Estimated
      Amortization Expense:Three
      months ended June 30, 2010
                  
                  $
                  1,150,959Year
      ending June 30:2011
                  
                  
                  2,301,9132012
                  
                  
                  2,212,8992013
                  
                  
                  1,071,8212014
                  
                  
                  756,5952015
                  
                  
                  756,595Thereafter
                  
                  
                  1,380,045$
                  9,630,827


41


In
addition, our intangible assets include $12,818,273 in goodwill that is not
subject to amortization and $1,642,420 of trademarks that currently is deemed by
management to have an indefinite life. For purposes of goodwill, we are required
to perform impairment analyses annually and when considered necessary to
determine whether goodwill may be impaired. Our analysis as of December 31, 2009
involved the comparison of our enterprise value, determined using our trading
market price and common shares outstanding, to the carrying value of our net
assets, including goodwill. Since the enterprise value exceeded the carrying
value, there was no impairment. However, the results of this test are
significantly influenced by our trading market value. Significant declines in
such values could cause us to perform additional analysis to determine if
goodwill is impaired in future periods. In addition, all of our identifiable
intangible assets are subject to impairment review, generally based upon the
cash flow that we anticipate will be generated from the assets over their
estimated useful lives. Any reductions in projected cash flows may result in
impairments to those assets. Finally, the trademarks are continuously reviewed
by management to determine if the indefinite life conclusion continues to be
appropriate. Should that conclusion change, the trademarks would be subject to
amortization over the remaining useful life so determined.





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





·
            Impairment
      of investments: During the three months ended December 31, 2009, we
      recorded impairment charges aggregating $1,591,704 associated with one
      investment carried as an available for sale investment and one investment
      carried as an equity investment. As to the former, during the quarterly
      period ended December 31, 2009, our management evaluated the continuing
      carrying value of the Beyond Commerce investment. As a result of the
      review, and after extensive negotiations, we exchanged notes with a
      principal amount of $3,428,574 and accrued interest of $135,355, and a
      fair value of $3,782,717, for certain of Beyond Commerce’s software and
      provided a reserve on the balance. However, we will continue to pursue
      collection of this amount from the debtor. We recorded the software at the
      fair value of the available for sale securities exchanged, which was
      viewed as a reasonable basis for the software. As to the later, management
      reviewed the carrying value of equity investments and determined that the
      Company’s investment in A Perfect Pear was permanently impaired and,
      accordingly, charged the investment to impairments expense. Although
      management concluded that no further impairments were required, the
      investments will continue to be monitored and evaluated for recoverability
      and further impairments may become necessary should conditions so
      warrant.





·
            Derivative
      income (expense): Derivative income (expense) increased $(2,978,707) (or
      129%) to $(675,671) during the three months ended December 31, 2009
      compared to $2,303,036 for the three months ended December 31, 2008.
      Derivative income (expense) results from certain financial instruments
      (principally warrants, but also including embedded derivative financial
      instruments) that are required to be measured at fair value. The changes
      in the fair value of these derivatives are significantly influenced by
      changes in our trading stock price and changes in interest rates in the
      public markets. Further, certain elements of the fair value techniques
      require us to make estimates about the outcome of certain events, such as
      defaults. We will continue to record income or expense related to
      derivatives until they are settled or reclassified to
    equity.





·
            Interest income: Income
      generated from interest on notes receivable from investees increased
      $12,132 to $48,995 during the three months ended December 31, 2009
      compared to $36,863 for the three months ended December 31, 2008. The
      increase is attributable to higher balances of notes receivable. However,
      during the quarter ended December 31, 2009, we exchanged $3,429,000
      principal amount of notes receivable for an intangible asset. As a result,
      interest income is expected to decline in the ensuing quarterly
      periods.





·
            Equity in losses of
      investees: We hold investments accounted for under the equity
      method. Our pro rata share of net loss and related book adjustments in
      these investments equaled $1,529,570 for the three months ended December
      31, 2009. We reported no similar balances during the quarter ended
      December 31, 2008. We will continue to report our interests in the
      earnings or losses of these equity investees so long as our investments
      remain at levels required for accounting treatment under this method. Our
      equity investment balance as of December 31, 2009 amounts to $3,435,468;
      we are not obligated to recognize losses above our investment balances
      computed discretely as to each individual
  investment.


42





·
            Interest expense:
      Interest expense includes amortization of deferred finance costs and
      interest on our mortgage loan. Interest expense decreased $461 (or 0.0%)
      to $103,960 during the three months ended December 31, 2009 compared to
      $104,421 for the three months ended December 31, 2008. Our interest
      expense will continue to decrease as more of our monthly mortgage payments
      are allocated to principal rather than
interest.





Non-controlling interests – A
non-controlling interest, formerly called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Non-controlling interests arise from the consolidation of subsidiaries as a
result of voting control or based upon benefits of an entity’s variable
interests. We consolidate two entities that have non-controlling interests. Our
subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated because we own the
majority of the voting control. Our subsidiary, RPS Trading LLC (“RPS”) is
consolidated because we own a 50% voting interest and it meets the definition of
a variable interest entity of which we are the primary beneficiary.
Non-controlling interests in the (income) loss of these consolidated entities
amounted to $179,969 and $46,082 during the three months ended December 31, 2009
and 2008, respectively. During the quarterly period ended December 31, 2009, we
liquidated the total balance in non-controlling interest associated with RPS;
therefore, there will be no further credits in our income.





Net (loss) income – We have
reported net loss of ($4,978,803) during the three months ended December 31,
2009 compared to income of $1,052,171 during the three months ended December 31,
2008, a decrease of ($6,030,974). These changes result from 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 dividends and
accretions on our Preferred Stock. There were no differences in our net income
(loss) and income (loss) applicable to common shareholders during the three
months ended December 31, 2009 and 2008. Accordingly, our loss per common share
(basic and diluted) amounted to ($0.03) for the three months ended December 31,
2009. Our income per common share, basic and diluted, amounted to $0.07 and
$0.01, respectively, for the three months ended December 31, 2008.





Our
weighted average outstanding common shares amounted to 153,173,300 and
14,509,225 during the three months ended December 31, 2009 and 2008,
respectively. Our weighted average outstanding common shares, plus potentially
dilutive securities amounted to 153,173,300 and 70,657,402, respectively for the
same periods. The weighted average outstanding shares increased due to the
issuance of 144,613,018 common shares in connection with conversions of
preferred stock, exercise of warrants and issuances in connection with the
Designer acquisition. No potentially dilutive securities were included in the
2009 denominator because the effects would have been anti-dilutive. During the
2008 period, 56,148,177 potentially dilutive shares were included in the
denominator of our income per common share computation.





Six
months ended December 31, 2009 compared to six months ended December 31,
2008:





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


43


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





·
            Product
      sales: Our product sales increased $16,250,279 to $17,421,537 for the six
      months ended December 31, 2009 compared to $1,171,258 for the six months
      ended December 31, 2008. Abazias and Designer contributed $1,890,601 and
      $1,902,735, respectively, of this increase. Otherwise, this increase
      reflects our maturation in identifying new retail products to sell through
      our media distribution networks. Our product sales for the six months
      ended December 31, 2009 are net of estimated returns and allowances of
      $236,516, which amounts are normal in retail sales and within the
      expectations of our management. Due to the nature of the retail business
      sector, our revenues may be concentrated from time-to-time in the sale of
      certain specific products or a single product. These concentrations
      generally arise from the timing and intensity of our marketing and
      infomercial campaigns related to those specific products. During the three
      months ended December 31, 2009, two products comprised 64% and 14%,
      respectively, of our consolidated product sales. During the same periods,
      our Abazias product line, consisting of precious gems and jewelry
      comprised 11% of our consolidated product sales; our RPS product line,
      consisting of manufactured apparel comprised 11%, respectively.
      Significant declines in the sales volumes associated with these products
      or product lines, should that occur, could have a material adverse effect
      on our operations and financial position, should are management be unable
      to timely replace the lines with alternative retail
    products.





Included
in product sales for the six months ended December 31, 2009 is $392,970 of
amortization of deferred revenue. The revenue is associated with marketing
services and royalties. See liquidity section below. Deferred revenue subject to
future amortization amounts to $2,403,030 at December 31, 2009. We will reflect
these amounts separately from product sales when and if they become material to
our total revenues.





·
            Cost
      of product sales:
      Our cost of product sales increased $10,155,466 to $10,770,485 for the six
      months ended December 31, 2009 compared to $615,019 for the six months
      ended December 31, 2008. This increase reflects our increasing retail
      product sales, including cost of products, freight and shipping and
      merchant account fees. Our margin during the current quarter amounted to
      38% compared to 47% during the quarter ended December 31, 2008. Margins on
      retail products are largely dependent upon the types and demands for
      retail products. Accordingly, our ongoing margins will likely be volatile
      until we establish the types of products that will serve as our long-term
      base of offerings.





·
            Rental
      revenue: Rental revenue of commercial real estate amounted to $163,889, an
      increase of $31,783 when compare to $132,106 of commercial real estate
      revenue that we reported for the six months ended December 31, 2008. We
      anticipate rental revenues to be consistent with levels experienced in the
      current quarterly period.





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





·
            Advertising
      expense: Advertising and marketing expense increased $4,232,627 (or 345%)
      for the six months ended December 31, 2009 to $5,459,920 as compared to
      $1,227,293 for the six months ended December 31, 2008. We began incurring
      substantial advertising media expense during the prior fiscal year which
      is necessary to promote our Retail Products. We generally expense
      advertising when it is incurred in accordance with Financial the
      Accounting Standards Boards’ Accounting Standards Codification (“ASC”)
      720-35, Accounting for
      Advertising Costs. Commencing in the prior fiscal year the Company
      began engaging for the production of infomercials related to its Retail
      Products Business, which is expected to be an increasing activity and
      cost. The Company’s accounting policy provides that the costs of
      infomercials are deferred in prepaid assets until the first airing, at
      which time the cost is
expensed.


44





·
            Employment
      Costs: Employment related costs consist of employee insurance, salaries
      and payroll. These costs increased by $1,094,741 (or 1,691%) to $1,159,465
      for the six months ended December 31, 2009. During the six months ended
      December 31, 2008, employment expenses amounted to $64,724. The increase
      is due to higher employment levels and executive signing bonuses of
      approximately $579,000 related to our acquisition of Abazias. Further, we
      hired a Chief Operating Officer in July of 2009 and a Chief Financial
      Officer in September of 2009. Employment costs of these newly hired
      officers will increase our total employment costs in future
      periods.





On
December 31, 2009, we issued 2,400,000 stock options to employees and
non-employees having a grant-date fair value of $689,450 for employees and
$94,050 for non-employees, based upon the Lattice valuation technique. No
compensation expense is reflected in employment costs in the accompanying
financial statements. Rather, the fair value of the stock options issued to
employees will be recorded in expense as the options vest ratably over periods
of six years. The fair value of the stock options issued to non-employees will
be recorded when the related services are performed at fair values determined on
the dates of service. Accordingly, the expense that we record for non-employee
stock option awards could be greater or lesser than the aforementioned
grant-date fair value amount, depending upon the trading value of our common
stock and other assumptions that are used in the valuation
technique.





On
January 21, 2010, we entered into a Severance Agreement with our former
President. This agreement provides for the payment to the separated officer of
$349,000 in cash for severance and expenses, plus the exchange of certain equity
securities. We will record the termination benefits in the month of January
2010.





On
February 12, 2010, stock options to purchase 1,000,000 shares of common stock
were awarded to the Company’s newly appointed President and Chief Executive
Officer pursuant to his employment arrangement. The stock options have an
exercise price of $0.21 and vest over a four year period. We have not yet
computed the grant-date fair value of these stock options. However, the related
expense will be reflected in our employment costs as they vest.





·
            Other
      general and administrative: These costs and expenses include compensation,
      occupancy costs and general office expenses. Our general and
      administrative costs increased $1,368,510 (or 503%) to $1,640,784 for the
      six months ended December 31, 2009 compared to $272,274 for the six months
      ended December 31, 2008. Our general and administrative expenses for the
      current fiscal quarter include bad debt charges of $675,000, which is a
      result of our higher sales volume. Overall, we believe that our reserves
      are reasonable and appropriate for our current levels of operations. Also
      included in other general and administrative expenses for the current
      fiscal quarter is $389,014 in royalty expenses that we incurred to sell
      licensed products. Engaging in licensing agreements to sell products is an
      industry practice and, accordingly, we will likely incur higher levels of
      royalty charges as our operations mature and we add additional products to
      our retail offerings. Finally, included within general and administrative
      expenses are real estate operation expenses of approximately $152,700 and
      $160,200 during the six months ended December 31, 2009 and 2008,
      respectively. Our real estate operation expenses include property taxes,
      utilities, repairs and maintenance and insurance costs. These expenses are
      expected to remain consistent with levels experienced in the current
      period.





·
            Accounting
      and professional expense: Accounting and consulting professional expenses
      increased $460,873 (or 67%) to $1,150,296 for the six months ended
      December 31, 2009. During the six months ended December 31, 2008 these
      expenses amounted to $689,423. These costs include fees relating to audit
      and other consulting related expenses. Our audit fees have increased due
      to our increased operating activities. Our legal and consulting expenses
      have increased due to the increase in our investment and other activities,
      including our acquisitions of Abazias and Designer. Unlike previous
      accounting standards, our direct costs related to our investing activities
      are expensed as they are incurred. We continue to utilize third-party
      consultants to assist in the application of complex accounting principles
      and valuation of our derivative financial instruments. We believe that our
      professional fees will continue at current levels until we can further
      develop our operating and financial
  infrastructure.


45





·
            Depreciation
      and amortization: Our amortization of intangible assets and depreciation
      of property and equipment amounted to $685,113 and $58,695, respectively
      for the six months ended December 31, 2009. Our amortization of intangible
      assets and depreciation of property and equipment amounted to $138,361 and
      $103,529, respectively for the six months ended December 31, 2008.
      Increases in depreciation and amortization are largely due to the higher
      levels of intangible assets arising from our acquisitions of Abazias and
      Designer, which contributed $4,925,537 and $484,353 in intangible assets
      that are subject to amortization. In addition, during the current fiscal
      quarter, we exchanged certain investments for software having an estimated
      value of $3,782,717. The addition of the Abazias and Designer intangible
      assets, coupled with the new software acquired in the current quarter will
      result in higher amortization expense in future periods. The following
      table reflects our estimated future amortization of intangible
      assets:





Estimated
      Amortization Expense:Six
      months ended June 30, 2010
                  
                  $
                  1,150,959Year
      ending June 30:2011
                  
                  
                  2,301,9132012
                  
                  
                  2,212,8992013
                  
                  
                  1,071,8212014
                  
                  
                  756,5952015
                  
                  
                  756,595Thereafter
                  
                  
                  1,380,045$
                  9,630,827





In
addition, our intangible assets include $12,818,273 in goodwill that is not
subject to amortization and $1,642,420 of trademarks that currently is deemed by
management to have an indefinite life. For purposes of goodwill, we are required
to perform impairment analyses annually and when considered necessary to
determine whether goodwill may be impaired. Our analysis as of December 31, 2009
involved the comparison of our enterprise value, determined using our trading
market price and common shares outstanding, to the carrying value of our net
assets, including goodwill. Since the enterprise value exceeded the carrying
value, there was no impairment. However, the results of this test are
significantly influenced by our trading market value. Significant declines in
such values could cause us to perform additional analysis to determine if
goodwill is impaired in future periods. In addition, all of our identifiable
intangible assets are subject to impairment review, generally based upon the
cash flow that we anticipate will be generated from the assets over their
estimated useful lives. Any reductions in projected cash flows may result in
impairments to those assets. Finally, the trademarks are continuously reviewed
by management to determine if the indefinite life conclusion continues to be
appropriate. Should that conclusion change, the trademarks would be subject to
amortization over the remaining useful life so determined.





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





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


46





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





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





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





·
              Derivative
      income (expense): Derivative income (expense) increased $4,496,877 (or
      94%) to $9,272,414 during the six months ended December 31, 2009 compared
      to $4,775,537 for the six months ended December 31, 2008. Derivative
      income (expense) results from certain financial instruments (principally
      warrants, but also including embedded derivative financial instruments)
      that are required to be measured at fair value. The changes in the fair
      value of these derivatives are significantly influenced by changes in our
      trading stock price and changes in interest rates in the public markets.
      Further, certain elements of the fair value techniques require us to make
      estimates about the outcome of certain events, such as defaults. We will
      continue to record income or expense related to derivatives until they are
      settled or reclassified to
equity.





·
            Inducement expense: On
      December 31, 2009, pursuant to an inducement offer wherein we reduced the
      strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276
      warrants, Vicis exercised 27,606,276 warrants for an adjusted aggregate
      exercise price of $5,600,000. We accounted for the warrant exercise
      analogously to an inducement offer to convert debt instruments; that is
      the inducement value is recorded as a charge to income. The following
      table summarizes the components of the inducement
    calculation:





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





·
            Interest income: Income
      generated from interest on notes receivable from investees increased
      $179,771 to $297,043 during the six months ended December 31, 2009
      compared to $117,272 for the six months ended December 31, 2008. The
      increase is attributable to higher balances of notes receivable. However,
      during the quarter ended December 31, 2009, we exchanged $3,429,000 face
      value of notes receivable for an intangible asset. As a result, interest
      income is expected to decline in the ensuing quarterly
      periods.





·
            Equity in losses of
      investees: We hold investments accounted for under the equity
      method. Our pro rata share of net loss and related book adjustments in
      these investments equaled $1,634,242 for the six months ended December 31,
      2009. We reported no similar balances during the quarter ended December
      31, 2008. We will continue to report our interests in the earnings or
      losses of these equity investees so long as our investments remain at
      levels required for accounting treatment under this method. Our equity
      investment balance as of December 31, 2009 amounts to $3,435,468; we are
      not obligate to recognize losses above our investment balances computed
      discretely as to each individual
investment.


47





·
            Impairment
      of investments: During the six months ended December 31, 2009, we recorded
      impairment charges aggregating $1,591,704 associated with one investment
      carried as an available for sale investment and one investment carried as
      an equity investment. As to the former, during the quarterly period ended
      December 31, 2009, our management evaluated the continuing carrying value
      of the Beyond Commerce investment. As a result of the review, and after
      extensive negotiations, we exchanged notes with a principal amount of
      $3,428,574, plus accrued interest of $135,355, and a fair value of
      $3,782,717, for certain of Beyond Commerce’s software and provided a
      reserve on the balance. However, we will continue to pursue collection of
      this amount from the debtor. We recorded the software at the fair value of
      the available for sale securities exchanged, which was viewed as a
      reasonable basis for the software. As to the later, management reviewed
      the carrying value of equity investments and determined that the Company’s
      investment in A Perfect Pear was permanently impaired and, accordingly,
      charged the investment to impairments expense. Although management
      concluded that no further impairments were required, the investments will
      continue to be monitored and evaluated for recoverability and further
      impairments may become necessary should conditions so
    warrant.





·
            Interest expense:
      Interest expense includes amortization of deferred finance costs and
      interest on our mortgage loan. Interest expense decreased $31,796 (or 17%)
      to $153,304 during the six months ended December 31, 2009 compared to
      $185,100 for the six months ended December 31, 2008. Our interest expense
      will continue to decrease as more of our monthly mortgage payments are
      allocated to principal rather than
interest.





Non-controlling interests – A
non-controlling interest, formerly called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Non-controlling interests arise from the consolidation of subsidiaries as a
result of voting control or based upon benefits of an entity’s variable
interests. We consolidate two entities that have non-controlling interests. Our
subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated because we own the
majority of the voting control. Our subsidiary, RPS Trading LLC (“RPS”) is
consolidated because we own a 50% voting interest and it meets the definition of
a variable interest entity of which we are the primary beneficiary.
Non-controlling interests in the (income) loss of these consolidated entities
amounted to $204,905 and $66,071 during the six months ended December 31, 2009
and 2008, respectively. During the quarterly period ended December 31, 2009, we
liquidated the total balance in non-controlling interest associated with RPS;
therefore, there will be no further credits in our income.





Net (loss) income – We have
reported net loss of ($20,951,497) during the six months ended December 31, 2009
compared to income of $2,947,577 during the six months ended December 31, 2008,
a decrease of ($23,833,003). These changes result from 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 dividends and
accretions on our Preferred Stock. Our increase in loss applicable to common
shareholders is attributable to the $66,948,653 increase in deemed dividends on
our preferred stock arising from the exchange transaction. That is, the exchange
transaction triggered anti-dilution protection adjustments to the conversion
price of the preferred stock. The amount recorded as the deemed dividend is the
fair value of the incremental value associated with the post-exchange
transaction preferred balances. Accordingly, our loss applicable to common
shareholders and our loss per common share (basic and diluted) amounted to
($87,695,245) and ($0.75), respectively, for the six months ended December 31,
2009. Our income applicable to common shareholders and our income per common
share, basic and diluted, amounted to $2,947,577, $0.20 and $0.04, respectively,
for the six months ended December 31, 2008.





Our
weighted average outstanding common shares amounted to 116,970,641 and
14,497,568 during the six months ended December 31, 2009 and 2008, respectively.
Our weighted average outstanding common shares, plus potentially dilutive
securities amounted to 116,970,641 and 74,066,738, respectively for the same
periods. The weighted average outstanding shares increased due to the issuance
of 144,613,018 common shares in connection with conversions of preferred stock,
exercise of warrants and issuances in connection with the Designer acquisition.
No potentially dilutive securities were included in the 2009 denominator because
the effects would have been anti-dilutive. During the 2008 period, 59,569,170
potentially dilutive shares were included in the denominator of our income per
common share computation.


48





Liquidity
and Capital Resources





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States contemplates that operations will be
sustained for a reasonable period. However, we have incurred operating losses of
$(1,306,862) and $(3,339,333) during the three and six months ended December 31,
2009, respectively and net losses of $(4,978,803) and $(20,746,592) during the
three and six months ended December 31, 2009 and 2008, respectively. During the
six months ended December 31, 2009, we used cash of $(2,905,070) in our
operating activities, which amount was net of impairments of our investments of
$1,591,704 and our proportionate losses of our equity investees of $1,634,242,
among other items. Further, we have a net working capital deficiency of
$15,972,090 on December 31, 2009. Since our inception, we have been dependent
upon funds raised through the sale of preferred and common stock and warrants to
sustain our operations. These conditions raise substantial doubt about our
ability to continue as a going concern for a reasonable period.





Our
ability to continue as a going concern for a reasonable period is dependent upon
our ability to raise sufficient capital to implement our business plan and to
generate profits sufficient to become financially viable. During the six months
ended December 31, 2009, we raised $10,600,000 from the sale and exercise of
warrants. These funds were derived from Vicis Capital LLC (“Vicis”), which owns
a majority of our outstanding common stock and has been our principal source of
funding. During the same period, we also made cash investments of $6,411,709 in
ventures that we believe will provide a foundation for the development of our
business plan. Finally, in July and August of 2009, we acquired two operating
and revenue-producing businesses more fully discussed in Note 3. These
acquisitions resulted in the acquisition of cash aggregating $740,232. However,
aggregate net losses of these two operations, included in our consolidated
results, amounted to approximately $896,101 and $1,677,977 during the three and
six months ended December 31, 2009, respectively. We cannot give any assurances
regarding the success of our current operations or those of our investees.
Further, we cannot give assurances that Vicis will continue to fund our
operating deficiencies or that other financing can be obtained at terms
acceptable to our management, if at all. 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 $3,991,837 as of December 31, 2009 compared to
$2,005,702 at June 30, 2009. We have working capital deficiency of $15,972,000
as of December 31, 2009 and a working capital of $454,249 at June 30, 2009. Our
working capital declined as a result of our Series F Preferred Stock and Warrant
Financing Arrangement, proceeds from which were used to purchase current assets.
Our working capital fluctuates significantly, reflecting the changes in fair
value of our financial instruments. Our decline in working capital gives effect
to increase in the fair value of these financial instruments by $15,908,675 for
the six months ended December 31, 2009. Future changes in the fair value of
these financial instruments could increase or decrease our working capital based
upon changes in the assumptions underlying our fair value
calculations.





Cash Flow from
Operating Activities– We used cash of
$2,905,070 and $2,156,930 in our operating activities during the six months
ended December 31, 2009 and 2008, respectively.





We
recorded net income (loss) of ($20,746,952) and $2,947,577 during the six months
ended December 31, 2009 and 2008, respectively that was offset by non-cash
charges (credits) of $(18,622,003) and $4,475,537, respectively. Our analysis of
the material components of changes in non-cash charges are as
follows:





·
            Extinguishment:
      Non-cash charges included an extinguishment of $22,328,516 triggered by a
      July 20, 2009 exchange transaction, whereby Vicis purchased from the
      Company a warrant to purchase 97,606,276 shares of the Company’s Common
      Stock for a purchase price of five million dollars ($5,000,000). For
      further information over the extinguishment expense, refer to Note 8 of
      the accompanying consolidated financial statements in this Form
      10-Q.


49





·
            Derivative
      income: Non-cash charges and (credits) include changes in the fair value
      of derivative financial instruments and other activity associated with our
      financial instruments, amounting to ($9,272,414) and ($4,775,537) during
      the three months ended December 31, 2009 and 2008, respectively. We
      estimate fair values of derivative financial instruments using various
      techniques (and combinations thereof) that are considered to be consistent
      with the objective measuring fair values. In selecting the appropriate
      technique, we consider, among other factors, the nature of the instrument,
      the market risks that it embodies and the expected means of settlement.
      For less complex derivative instruments, such as free-standing warrants,
      we generally use the Black-Scholes Merton (“BSM”) option valuation
      technique, adjusted for the effect of dilution, because it embodies all of
      the requisite assumptions (including trading volatility, estimated terms,
      dilution and risk free rates) necessary to fair value these instruments.
      For compound derivative instruments, comprising certain redemption and put
      features embodied in our convertible preferred stock, we use discounted
      cash flow models involving multiple, probability-weighted outcomes and
      risk-adjusted rates. Estimating fair values of derivative financial
      instruments requires the development of significant and subjective
      estimates that may, and are likely to, change over the duration of the
      instrument with related changes in internal and external market factors.
      In addition, option-based techniques (such as BSM) are highly volatile and
      sensitive to changes in the trading market price of our common stock,
      which has a high-historical volatility. Since derivative financial
      instruments are initially and subsequently carried at fair values, our
      income (loss) will reflect the volatility in these estimate and assumption
      changes.





·
            Inducement
      expense: Non-cash charges also included an extinguishment loss of
      $1,473,855, pursuant to an inducement offer wherein we reduced the strike
      price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants
      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.





·
            Impairment
      of investments: Non-cash charges recorded included impairment charges
      aggregating $1,591,704 associated with one investment carried as an
      available for sale investment and one investment carried as an equity
      investment. As to the former, during the quarterly period ended December
      31, 2009, our management evaluated the continuing carrying value of the
      Beyond Commerce investment. As a result of the review, and after extensive
      negotiations, we exchanged notes with a principal amount of $3,428,574,
      plus accrued interest of $135,355, and a fair value of $3,782,717, for
      certain of Beyond Commerce’s software and provided a reserve on the
      balance. However, we will continue to pursue collection of this amount
      from the debtor. We recorded the software at the fair value of the
      available for sale securities exchanged, which was viewed as a reasonable
      basis for the software. As to the later, management reviewed the carrying
      value of equity investments and determined that the Company’s investment
      in A Perfect Pear was permanently impaired and, accordingly, charged the
      investment to impairments expense. Although management concluded that no
      further impairments were required, the investments will continue to be
      monitored and evaluated for recoverability and further impairments may
      become necessary should conditions so
warrant.





·
            Equity in losses of
      investees: We hold investments accounted for under the equity
      method. Our pro rata share of net loss and related book adjustments in
      these investments equaled $1,634,242 for the six months ended December 31,
      2009. We reported no similar balances during the quarter ended December
      31, 2008. We will continue to report our interests in the earnings or
      losses of these equity investees so long as our investments remain at
      levels required for accounting treatment under this method. Our equity
      investment balance as of December 31, 2009 amounts to $3,435,468; we are
      not obligate to recognize losses above our investment balances computed
      discretely as to each individual
investment.





·
            Bad
      debts expense: Bad debt expense was comprised of $675,000 and $-0- during
      the quarters ended December 31, 2009 and 2008,
    respectively.


50





·
            Amortization
      of intangible assets: Amortization costs consisted of $685,113 and
      $138,361 during the three months ended December 31, 2009 and 2008,
      respectively.





·
            Other
      material components of change in our non-cash charges and (credits) were
      related to non-controlling interests of ($204,905) and ($66,071);
      depreciation expense of $58,695 and $103,529; amortization of deferred
      revenue of $392,970 and $-0-; and, amortization of finance costs of
      $15,167 and $125,638 during the six months ended December 31, 2009 and
      2008, respectively.





Our cash
from operating activities also includes cash flow from changes in our operating
assets and liabilities of ($861,690) for the six months ended December 31, 2009
compared to a source of cash of $630,427 for the six months ended December 31,
2008.





·
            Accounts
      receivable: Accounts receivable represents normal trade obligations from
      customers that are subject to normal trade collection terms, without
      discounts or rebates. Notwithstanding these collections, we periodically
      evaluate the collectability of our accounts receivable and consider the
      need to establish an allowance for doubtful accounts based upon our
      historical collection experience and specifically identifiable information
      about our customers. We experienced an increase of $1,177,928, (net of
      $675,000 in doubtful accounts) in our accounts receivable (a use of cash)
      for the six months ended December 31, 2009 as compared to an increase of
      $1,973 in our accounts receivable (a source of cash) for the six months
      ended December 31, 2008.





·
            Inventories:
      Inventories consist of retail merchandise that is in its finished form and
      ready for sale to end-user customers. Inventories are recorded at the
      lower of average cost or market. In-bound freight-related costs from our
      vendors are included as part of the net cost of merchandise inventories.
      Other costs associated with acquiring, storing and transporting
      merchandise inventories are expensed as incurred and included in cost of
      goods sold. Our inventories are acquired and carried for retail sale and,
      accordingly, the carrying value is susceptible to, among other things,
      market trends and conditions and overall customer demand. We use our best
      estimates of all available information to establish reasonable inventory
      quantities. However, these conditions may cause our inventories to become
      obsolete and/or excessive. We review our inventories periodically for
      indications that reserves are necessary to reduce the carrying values to
      the lower of cost or market values. Inventories increased (a use of cash)
      $365,995 during the six months ended December 31, 2009 as compared to an
      increase (a use of cash) of $439,227 during the six months ended December
      31, 2008.





As
discussed in above, during the current fiscal quarter we purchased Designer. The
acquisition of Designer resulted in our consolidation of RPS, in which we have
separately invested $1,857,383, based upon our 50% voting interest and the fact
that we are the primary beneficiary of this variable interest entity. RPS is
largely engaged in the manufacture of apparel and relies on outsourced
manufacturing facilities in foreign countries that provide low-cost labor. As of
December 31, 2009, RPS carries approximately $1,952,000 of inventories that are
located in a foreign country. While we and RPS take precautions against loss,
there is a higher risk associated with these assets due to their physical
location. Risks include theft and nationalization events that could result in a
total loss of the assets.





·
            Prepaid
      expenses and other assets: We experienced a decrease in our prepaid
      expenses and other assets (a source of cash) of $418,113 and an increase
      in our prepaid expenses and other assets (a use of cash) of $208,488
      during the six months ended December 31, 2009 and 2008,
      respectively.





·
            Accounts
      payable and accrued expenses: Our accounts payable and accrued liabilities
      increased (a source of cash) 216%, an aggregate of $728,072 and $19,261
      during the six months ended December 31, 2009 and 2008, respectively.
      T


51




·
            Deferred
      revenue: On October 9, 2009, we entered into a license agreement (the
      “License Agreement”) with Zurvita Holdings, Inc. (“Zurvita”) whereby we
      granted a perpetual right and license, under all intellectual property
      rights applicable to the Software, to access, use, execute, display,
      market, and sell the Software to Zurvita in consideration for a royalty
      fee of $2.00 per user for a period of twenty four (24) months, commencing
      ninety (90) days from the date Zurvita runs its first advertisement.
      Compensation for the license represented 15,200,000 shares of Zurvita
      common stock, which had a fair value of $646,000. Additionally, pursuant
      to the terms of the License Agreement, we granted Zurvita the right to
      market and sell the Software through its independent sales representatives
      in consideration for a 6% promissory note in the principal amount of Two
      Million Dollars ($2,000,000), payable three (3) years from the date of
      issuance and convertible at any time at our option at a conversion price
      of $0.25 per share. The aggregate consideration has been recorded as
      deferred revenue and is subject to amortization into income over the term
      using the straight-line method. Similarly, we entered into a similar
      arrangement with Net Talk.com, receiving 1,000,000 shares of common stock,
      which had a value of $150,000. The fair value of the consideration
      received has been recorded as deferred compensation and is subject to
      amortization over the contractual terms. During the six months ended
      December 31, 2009, $392,970 of deferred revenue was amortized into income.
      The remaining balance that will be amortized into income in future periods
      amounts to $2,403,030.





Cash Flow from
Investing Activities– We used cash of $5,692,452 and $3,185,187 in our
investing activities during the six months ended December 31, 2009 and 2008,
respectively. Our analysis of the material components of the changes in our
investing activities is as follows:





·
            We
      invested $6,411,709 and $600,000 during the six months ended December 31,
      2009 and 2008, respectively. This increase in investments from December
      31, 2008 to the six months ended December 31, 2009 was as a result of our
      increased commitment to further invest in meaningful ventures in support
      of our Retail Products business.





·
            We
      were also a party to two acquisitions for the six months ended December
      31, 2009. On July 31, 2009 we acquired Designer Liquidators in which we
      received cash proceeds of $612,702 (net of $150,000 in cash payments). On
      August 27, 2009 we completed our acquisition of the outstanding common
      stock of Abazias in which we received cash proceeds of $127,530. We
      acquired Abazias for the purpose of building brand recognition and
      increasing retail market penetration. Refer to Note 3 of the accompanying
      condensed consolidated financial statements for further analysis on the
      acquisitions.





·
            Other
      material components of change in our investing activities were related to
      purchase of property and equipment of $20,975 and $2,805,187, during the
      six months ended December 31, 2009 and 2008, respectively. During 2008, we
      acquired our real estate.





Cash Flow from
Financing Activities– We generated
$10,583,657 and $1,958,760 in cash from our financing activities during the six
months ended December 31, 2009 and 2008. Our analysis of the material components
of the changes in our financing activities is as follows:





·
            $5,600,000
      in cash was received during the six months ended December 31, 2009 from
      the proceeds on the exercise of warrants, pursuant to an inducement offer
      wherein we reduced the strike price on the Vicis warrants on 97,606,276
      warrants, Vicis exercised 27,606,276
warrants.





·
            In
      addition, cash was received from the proceeds from exchange of warrants
      related to the July 20, 2009 Purchase Agreement, in the amount of
      $5,000,000. Refer to Note 8 of the accompanying condensed consolidated
      financial statements for further analysis on the July 20, 2009 Purchase
      Agreement.





·
            Other
      material components of change in our financing activities were related to
      principal payments on long-term debt of $16,343 during the six months
      ended December 31, 2009 and $5,306 during the same period in the prior
      year. .


52





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





Critical
Accounting Policies





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





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





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





Due to
the nature of retail business sector, our revenues may be concentrated from
time-to-time in the sale of certain specific products or a single product. These
concentrations generally arise from the timing and intensity of our marketing
and infomercial campaigns related to those specific products. During the six
months ended December 31, 2009, two products comprised 64% and 14%,
respectively, of our consolidated Product Sales.





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





Inventories –Inventories
consist of retail merchandise that is in its finished form and ready for sale to
end-user customers. Inventories are recorded at the lower of average cost or
market. In-bound freight-related costs from our vendors are included as part of
the net cost of merchandise inventories. Other costs associated with acquiring,
storing and transporting merchandise inventories are expensed as incurred and
included in cost of goods sold. Our inventories are acquired and carried for
retail sale and, accordingly, the carrying value is susceptible to, among other
things, market trends and conditions and overall customer demand. 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.


53





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





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


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





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





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





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





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


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





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





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


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


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


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


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


54





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





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





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





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





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


55


ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





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


56





ITEM
4T – CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act, as of December 31, 2009, to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commission's rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that as of December
31, 2009, 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
December 31, 2009, 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.





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.


57





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





(c)
Changes in Internal Control over Financial Reporting





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





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


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





Inherent
Limitations of the Effectiveness of Internal Control





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


58





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 Limited filed a complaint against the named
defendants alleging certain causes of actions, including breach of fiduciary
duty.  In January, all defendants moved to dismiss.  The
Company’s motion is returnable on March 8, 2010.





OmniReliant
Holdings, Inc v. ResponzeTV, et al.





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





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





Defendants
have moved to dismiss the Complaint, and the Company has opposed this motion.
This motion was fully submitted to the Court on September 22, 2009.





Davlyn Industries, Inc. v.
ResponzeTV America, LLC f/k/a Reliant International Media, LLC and OmniReliant
Corporation (Circuit Court, Pinellas County, Florida, Case No: 09-11763
CI). Davlyn Industries, Inc. filed this lawsuit asserting a claim for breach of
contract in connection with the purchase of cosmetic skin care products. Davlyn Industries, Inc.
demands judgment against OmniReliant Corporation of $293,600 plus interest and
court costs. Management believes the lawsuit is without merit.




ITEM
1A – RISK FACTORS





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





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




None.


ITEM
3 – DEFAULTS UPON SENIOR SECURITES





None.


59





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





None.





ITEM
5 – OTHER MATTERS





None.





ITEM
6 – EXHIBIT INDEX




4.1
            Form
      of Vicis Capital Master Fund Warrant (Incorporated by reference to the
      Current Report on Form 8-K filed with the SEC on October 13,
      2009)


4.2
                  Form
      of Midtown Partners & Co, LLC Warrant (Incorporated by reference to
      the Current Report on Form 8-K filed with the SEC on October
      13, 2009)


10.1
            Asset
      Purchase Agreement, dated October 9, 200 (Incorporated by reference to the
      Current Report on Form 8-K filed with the SEC on October 16,
      2009)


10.2
            License
      Agreement Dated October 9, 2010 (Incorporated by reference to the Current
      Report on Form 8-K filed with the SEC on October 16,
  2009)


10.3
            Promissory
      Note dated October 9, 2010(Incorporated by reference to the Current Report
      on Form 8-K filed with the SEC on July 21,
2009)


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


60




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:
      February 16, 2010
                  By:
                  /s/
      Robert John DeCecco IIIRobert
      John DeCecco IIIPresident
      and Chief Executive Officer (Principal Executive Officer and Principal
      Accounting
Officer)


61