Infusion Brands International 10Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

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 x 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 o
Non-accelerated filer o	Smaller reporting company x

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

The number of shares of the registrant’s Common Stock, $0.00001 par value per share, outstanding as of May 14, 2010 is 159,073,323.

OMNIRELIANT HOLDINGS, INC. AND SUBSIDIARIES

QUARTERLY PERIOD ENDED

MARCH 31, 2010

Table of Contents

Part	Item and Description	Page
Part I	Financial Information
	Forward-Looking Statements	3
	Item 1. Financial Statements	4
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3. Quantitative and Qualitative Disclosures about Market Risks	58
	Item 4T. Controls and Procedures	58

Part II	Other Information
	Item 1. Legal Proceedings	60
	Item 1A. Risk Factors	61
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	61
	Item 3. Defaults Upon Senior Securities	61
	Item 4. Removed and Reserved	61
	Item 5. Other Information	61
	Item 6. Exhibit Index	61

Signatures		62

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.

ITEM 1 – FINANCIAL STATEMENTS

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

Assets		March 31, 2010			June 30, 2009
		(Unaudited)
Current assets:
Cash and cash equivalents		$	3,222,248		$	2,005,702
Accounts receivable, net of $1,162,763 and $187,763			1,986,212			1,864,465
Inventories			3,053,970			1,294,250
Investments, available for sale			340,000			1,729,448
Prepaid expenses and other current assets			203,353			632,200
Total current assets			8,805,783			7,526,065

Intangible assets, net			23,516,043			1,123,335
Investments			2,987,811			2,215,309
Property and equipment, net			2,497,617			2,579,548
Investments, available-for-sale			—			732,227
Other assets			21,991			909,714
Total assets		$	37,829,245		$	15,086,198

Liabilities and Equity (Deficit)
	��
Current liabilities:
Accounts payable and accrued expenses		$	1,268,069		$	556,747
Deferred revenue			2,214,153			—
Notes payable and maturities of long-term debt			284,506			33,230
Derivative liabilities			5,905,629			6,481,839
Total current liabilities			9,672,357			7,071,816

Long-term debt			1,919,259			1,945,647
Security deposits on leases			9,193			11,734
Total liabilities			11,600,809			9,029,197
Commitments and contingencies (Note 12)			—			—
Redeemable preferred stock			4,946,910			45,969,634

Equity (deficit):
OmniReliant shareholders’ equity:
Series E Preferred Stock, $0.00001 par, 13,000,000 shares authorized and issued, and 2,884,601 outstanding			2,937,004			—
Common Stock, $0.00001 par, 400,000,000 shares authorized; 159,073,323 and 14,509,225 outstanding			1,591			145
Paid-in capital			47,020,810			6,532,238
Accumulated deficit			(29,010,338	)		(46,570,028	)
Other comprehensive items			190,000			(72,102	)
Total OmniReliant shareholders’ equity (deficit)			21,139,067			(40,109,747	)
Non-controlling interests			142,459			197,114
Total equity (deficit)			21,281,526			(39,912,633	)
Total liabilities and equity (deficit)		$	37,829,245		$	15,086,198

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

	Three Months Ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)

Product sales	$	4,854,911		$	2,585,582
Cost of product sales (excluding depreciation expense reflected in other operating expenses)		3,405,975			1,473,776
Gross profit		1,448,936			1,111,806

Real estate income		95,738			58,314

Other operating expenses:
Advertising and promotional		373,507			1,212,525
Other general and administrative		826,873			247,691
Depreciation and amortization		628,180			181,833
Accounting and professional		684,745			374,178
Employment costs		1,047,603			408,433
		3,560,908			2,424,660
Loss from operations		(2,016,234	)		(1,254,540	)

Other income (expense):
Impairment of investments		(371,362	)		—
Equity in losses of investees		(445,047	)		—
Derivative (expense) income		16,484,885			(2,071,646	)
Interest expense		(35,871	)		(55,280	)
Interest and other income		2,742			7,729
Total other income (expense)		15,635,347			(2,119,197	)

Net income (loss)		13,619,113			(3,373,737	)
Net income (loss) attributable to non-controlling interests		13,200			20,623

Net income (loss) attributable to OmniReliant	$	13,632,313		$	(3,353,114	)

Continued on next page.

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (continued)

	Three Months Ended March 31,
	2010		2009
Reconciliation of net income (loss) attributable to OmniReliant to loss applicable to OmniReliant common shareholders:	(Unaudited)		(Unaudited)
Net income (loss) attributable to OmniReliant	$	13,632,313	$	(3,353,114	)
Preferred dividends and accretion		—		(2,958,350	)
Income (loss) applicable to OmniReliant common shareholders	$	13,632,313	$	(6,311,464	)

Income (loss) per common share:
Basic	$	0.09	$	(0.43	)
Diluted	$	0.08	$	(0.43	)
Weighted average common shares—basic		159,023,171		14,509,225
Weighted average common shares—diluted		167,978,159		14,509,225

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

	Nine Months Ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)

Product sales	$	22,276,408		$	3,756,840
Cost of product sales (excluding depreciation expense reflected in other operating expenses)		14,176,417			2,086,495
Gross profit		8,099,991			1,670,345

Real estate income		243,686			190,420

Other operating expenses:
Advertising and promotional		5,833,427			2,442,119
Other general and administrative		2,456,372			502,282
Employment costs		2,207,068			473,157
Accounting and professional		1,829,931			1,088,601
Depreciation and amortization		1,367,572			430,218
		13,694,370			4,936,377
Loss from operations		(5,350,693	)		(3,075,612	)

Other income (expense):
Extinguishment		(22,328,516	)		--
Derivative income		25,757,299			2,703,891
Equity in (losses) of investees		(2,079,289	)
Impairment of investments		(1,963,066	)
Inducement expense		(1,473,855	)
Interest and other income		299,784			65,568
Interest expense		(194,047	)		(180,918	)
Total other income (expense)		(1,981,690	)		2,588,541

Net (loss) income		(7,332,383	)		(487,071	)
Net income (loss) attributable to non-controlling interests		218,104			81,533

Net (loss) income attributable to OmniReliant	$	(7,114,279	)	$	(405,538	)

Continued on next page.

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (continued)

	Nine Months Ended March 31,
	2010			2009
Reconciliation of net (loss) income attributable to OmniReliant to loss applicable to OmniReliant common shareholders:	(Unaudited)			(Unaudited)
Net (loss) income attributable to OmniReliant	$	(7,114,279	)	$	(405,538	)
Deemed dividend to preferred stockholders		(66,948,653	)		(2,958,350	)
Loss applicable to OmniReliant common shareholders	$	(74,062,932	)	$	(3,363,888	)

Loss per common share:
Basic	$	(0.57	)	$	(0.23	)
Diluted	$	(0.57	)	$	(0.23	)
Weighted average common shares—basic		130,834,476			14,497,568
Weighted average common shares—diluted		130,834,476			14,497,568

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(7,114,279	)	$	(405,538	)
Adjustments to reconcile net loss to net cash from operating activities:
Derivative income		(25,757,299	)		(2,703,891	)
Extinguishment		22,328,516			—
Equity in losses of investees		2,079,289			—
Impairment of investments		1,963,066			—
Inducement expense		1,473,855			—
Amortization of intangible assets		1,260,592			300,534
Bad debts expense		975,000			—
Amortization of deferred revenue		(581,847	)		—
Share-based payment		410,285			344,339
Non-controlling interests		(218,105	)		(81,533	)
Depreciation expense		111,398			142,402
Non-cash severance costs		76,009			—
Amortization of deferred finance costs		15,623			168,200
Changes in operating assets and liabilities:
Accounts receivable		(885,700	)		(190,563	)
Inventories		(513,033	)		(445,972	)
Prepaid expenses and other assets		575,620			(49,805	)
Accounts payable and accrued expenses		235,094			198,151
Net cash used in operating activities		(3,565,916	)		(2,723,676	)

Cash flows from investing activities:
Purchases of investments		(6,491,709	)		(1,139,944	)
Acquisition of Designer Liquidators		612,702			—
Acquisition of Abazias		127,530			—
Purchases of property and equipment		(40,949	)		(2,811,901	)
Investment by non-controlling interest holders		—			320,000
Payments for licenses and patents		—			(300,000	)
Net cash flow from investing activities		(5,792,426	)		(3,931,845	)

Cash flows from financing activities:
Proceeds from sale of preferred stock and warrants		5,600,000			9,136,994
Proceeds from exchange of warrants		5,000,000			—
Principal payments on long-term debt		(25,112	)		(7,844	)
Proceeds from long-term debt, net		—			1,994,694
Net cash flow from financing activities		10,574,888			11,123,844

Net change in cash and cash equivalents		1,216,546			4,468,323
Cash and cash equivalents at beginning of period		2,005,702			4,435,814
Cash and cash equivalents at end of period	$	3,222,248		$	8,904,137

Continued on the next page.

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Supplemental Cash Flow Information

	Nine Months Ended March 31,
	2010		2009
	(Unaudited)		(Unaudited)

Cash paid for interest	$	102,715	$	54,387
Cash 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

OmniReliant Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficiency)

Nine Months Ended March 31, 2010

	Series E			Common Stock						Paid-in			Comprehensive			Accumulated			OmniReliant			Non-Controlling			Total
	Preferred 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			—			107,588,459
Acquisition: Designer Liquidator		—			100,000			1			161,966			—			—			161,967			163,450			325,417
Acquisition: Abazias		13,236,165			—			—			4,886,188			—			—			18,122,353			—			18,122,353
Warrant exercises		—			27,606,276			276			12,811,450			—			—			12,811,726			—			12,811,726
Cashless option exercises		—			4,167			—			—			—			—			—			—			—
Conversions of Series E		(10,299,161	)		12,012,239			121			10,299,040			—			—			—			—			—
Redemption					(300,000	)		(3	)		3			—			—			—			—			—
Share-based payment		—			—			—			410,285			—			—			410,285			—			410,285
Unrealized gains (losses)		—			—			—			—			262,102			—			262,102			—			262,102
Net loss		—			—			—			—			—			(7,114,279	)		(7,114,279	)		(218,105	)		(7,332,384	)

Balances, March 31, 2010	$	2,937,004			159,073,323		$	1,591		$	47,020,810		$	190,000		$	(29,010,338	)	$	21,139,067		$	142,459		$	21,281,526

See accompanying notes.

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 nine months ended March 31, 2010 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 nine months ended March 31, 2010 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 nine months ended March 31, 2009, 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 $(2,016,234) and $(5,350,693) during the three and nine months ended March 31, 2010, respectively and a net loss of $(7,114,279) during the nine months ended March 31, 2010. During the nine months ended March 31, 2010, we used cash of $(3,565,916) in our operating activities, which amount was net of impairments of our investments of $1,963,066 and our proportionate losses of our equity investees of $2,079,289, among other items. Further, we have a net working capital deficiency of $866,574 on March 31, 2010. 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 nine months ended March 31, 2010, 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 $6,491,709 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 $520,407 and $2,031,691 during the three and nine months ended March 31, 2010, 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.

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			Total
Current assets, including cash of $127,530 and $612,702 from Abazias and Designer, respectively	$	523,307		$	1,824,660		$	2,347,966
Property and equipment		2,027			—			2,027
Intangible assets:
Customer lists and customer related		2,545,930			484,353			3,030,283
Dealer network intangibles		2,133,679			—			2,133,679
Registered trademarks, trade names and dress		1,642,420			—			1,642,420
Executive employment contracts		210,928			—			210,928
Software and operational processes		35,000			—			35,000
Trade 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			6,337,674
Consideration transferred (excluding direct expenses):
Cash consideration		—			150,000			150,000
Fair value of OmniReliant Securities		15,841,323			101,000			15,942,323
Investments (see Note 4)		1,042,789			1,857,383			2,900,172
Non-controlling interest in RPS Traders LLC		—			163,450			163,450
Consideration transferred, plus non-controlling interests		16,884,112			2,271,833			19,155,945
Goodwill 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.

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 borrowing rate, plus 1.0%, 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 nine months ended March 31, 2010, Abazias reported post acquisition sales of $1,014,696 and $2,905,297, respectively, and post acquisition net losses of $366,175 and $1,511,396, respectively. Designer operations are consolidated with our operations commencing August 1, 2009. During the three and nine months ended March 31, 2010, Designer reported post acquisition sales of $1,308,855 and $3,211,591, respectively, and post acquisition net losses of $154,232 and $520,295, 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:

	Nine months ended March 31,
	2010			2009

Sales	$	23,622,320		$	8,072,370
Net (loss) income attributable to OmniReliant		(7,561,144	)		(1,488,310	)
(Loss) income per common share—basic		(0.57	)		(0.30	)
(Loss) income per common share—diluted		(0.57	)		(0.30	)

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.

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 March 31, 2010 and June 30, 2009:

	2010			2009
Available-for-sale investments:
Beyond Commerce, 10%, face value $1,270,000 notes receivable, due July through September 2011; cost basis $1,249,021 (1)	$	--		$	976,083
NetTalk.com, Inc., 1,000,000 shares of common stock; cost basis $150,000		340,000			--
Valcom, 10% face value $100,000 convertible note receivable, plus accrued interest of 2,336, due January 6, 2010; cost basis $100,000 (2)		--			103,365
Abazias, Inc., face value $700,000, 10.0% convertible note receivable, originally due December 31, 2009 (3)		--			732,227
Held-to-maturity investments:
RPS Trading, LLC, variable rate (currently 4.75%), face value $650,000 notes receivable, due in November and December 2009 (2)		--			650,000
		340,000			2,461,675
Current portion of investments		(340,000	)		(1,729,448	)
Total non-current investments	$	--		$	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)	During the quarterly period ended March 31, 2010, our management evaluated the continuing carrying value of Valcom and concluded that recoverability was improbable and wrote off the balance of $102,336.

(3)

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 are as follows:

	March 31,		June 30,
	2010		2009
Beyond Commerce Notes Receivable	$	--	$	(23,917	)
NetTalk.com Common Stock		190,000		--
Valcom Notes Receivable		--		(1,430	)
Abazias		--		(17,960	)
Other investments		--		(28,795	)
	$	190,000	$	(72,102	)

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 March 31, 2010 and June 30, 2009:

	Voting Ownership			Investment Cost		Equity in Earnings (1)			March 31, 2010		June 30, 2009
Equity method investees:
Cellular Blowout		50.0	%	$	1,530,000	$	(87,269	)	$	1,442,731	$	1,030,000
Zurvita Holdings		23.0	%		2,646,000		(1,725,034	)		920,966		--
A Perfect Pear (2)		49.5	%		494,084		(84,405	)		--		244,088
Webcarnation		40.0	%		315,000		(79,804	)		216,174		230,978
Wineharvest		30.0	%		300,050		(61,803	)		220,440		260,243
For Your Imagination (2)		20.0	%		300,000		(40,974	)		--		200,000
					5,585,134		(2,079,289	)		2,800,311		1,965,309
Cost method investees:
Nested Media (3)		--			187,500		--			187,500		250,000
Total non-marketable and other equity investments				$	5,772,634	$	(2,079,289	)	$	2,987,811	$	2,215,309

(1) Equity in income (loss) of investments carried under the equity method amounted to $(259,026) and $(2,079,289) during the three and nine months ended March 31, 2010, respectively.

(2) During the quarters ended December 31, 2009 and March 31, 2010, management reviewed the carrying value of investments and determined that the Company’s investment in A Perfect Pear and For Your Imagination were 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.

(3) During the quarter ended March 31, 2010, a portion of the Nested Media investment was transferred pursuant to an executive separation agreement. The carrying value of $62,500 was charged to employment costs.

Note 5 – Intangible assets:

Intangible assets consisted of the following on March 31, 2010 and June 30, 2009:

			March 31,			June 30,
	EUL (Years)		2010			2009
Customer lists and related		3-7	$	3,030,283		$	--
Dealer network		7		2,133,679			--
Patent costs		5		1,169,412			1,169,412
Employment contracts		2		210,928			--
Software and processes		2		3,817,717			--
Other		3		79,899			79,402
				10,441,918			1,248,814
Less accumulated amortization				(1,386,568	)		(125,479	)
Total				9,055,350		$	1,123,335
Trademarks and trade dress		--		1,642,420			--
Goodwill		--		12,818,273			--
			$	23,516,043		$	1,123,335

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 5 – Intangible assets (continued):

Amortization expense recorded at March 31	2010		2009
Three months	$	575,479	$	118,932
Nine months	$	1,260,592	$	257,293

Estimated Amortization Expense:
Three months ended June 30, 2010	$	575,480
Year ending June 30:
2011		2,301,914
2012		2,212,899
2013		1,071,821
2014		756,595
2015		756,595
Thereafter		1,380,046
	$	9,055,350

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.

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 March 31 2010 and June 30, 2009:

Financing—Financial Instrument	March 31, 2010		June 30, 2009
New Vicis Warrant	$	5,236,000	$	--
Series A Preferred Financing—Investor warrants		--		716,700
Series B Preferred Financing—Investor warrants		34,896		75,312
Series C Preferred Financing—Investor warrants		201,155		--
Series C Preferred Financing—Put derivative		16,307		199,993
Series D Preferred Financing—Investor warrants		--		1,752,800
Series D Preferred Financing—Placement agent warrants		--		166,950
Series D Preferred Financing—Put derivative		--		253,417
Series F Preferred Financing—Investor warrants		--		2,946,667
Series F Preferred Financing—Placement agent warrants		313,334		370,000
Warrant Financing Transaction—Placement agent warrants		103,938
Derivative liabilities	$	5,905,630	$	6,481,839

The following table summarizes the number of common shares index to derivative financial instruments as of March 31, 2010 and June 30, 2009:

Financing—Financial Instrument	March 31, 2010		June 30, 2009
New Vicis Warrant		70,000,000		--
Series A Preferred Financing—Investor warrants		--		6,000,000
Series B Preferred Financing—Investor warrants		960,000		960,000
Series C Preferred Financing—Investor warrants		2,731,228		--
Series D Preferred Financing—Investor warrants		--		28,000,000
Series D Preferred Financing—Placement agent warrants		--		2,100,000
Series F Preferred Financing—Investor warrants		--		33,333,333
Series F Preferred Financing—Placement agent warrants		4,166,666		4,166,666
Warrant 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.

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 March 31, 2010:

Financing—Financial Instrument	Embedded Derivatives			Warrant Derivatives		Total
New Vicis Warrant	$	--		$	14,665,000	$	14,665,000
Series A Preferred Financing		--			--		--
Series B Preferred Financing		--			176,592		176,592
Series C Preferred Financing		(1,001	)		522,484		521,483
Series D Preferred Financing		--			--		--
Series F Preferred Financing—Warrants		--			--		--
Warrant Financing		--			1,121,810		1,121,810
Derivative income (expense)	$	(1,001	)	$	16,485,886	$	16,484,885

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

Financing—Financial Instrument	Embedded Derivatives			Warrant Derivatives			Total
New Vicis Warrant	$	--		$	--		$	--
Series A Preferred Financing		--			(438,016	)		(438,016	)
Series B Preferred Financing		--			(74,305	)		(74,305	)
Series C Preferred Financing		(1,604,159	)		8,167			(1,595,992	)
Series D Preferred Financing		(188,406	)		8,907			(179,499	)
Series F Preferred Financing—Warrants		--			216,166			216,166
Warrant Financing
Derivative income (expense)	$	(1,792,565	)	$	(279,081	)	$	(2,071,646	)

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 nine months ended March 31, 2010:

Financing—Financial Instrument	Embedded Derivatives			Warrant Derivatives			Total
New Vicis Warrant	$	--		$	25,733,753		$	25,733,753
Series A Preferred Financing		--			(833	)		(833	)
Series B Preferred Financing		--			23,830			23,830
Series C Preferred Financing		(6,566	)		(260,676	)		(267,242	)
Series D Preferred Financing		(11,032	)		(56,666	)		(67,698	)
Series F Preferred Financing—Warrants		--			(775,416	)		(775,416	)
Warrant Financing					1,110,905			1,110,905
Derivative income (expense)	$	(17,598	)	$	25,774,897		$	25,757,299

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

Financing—Financial Instrument	Embedded Derivatives			Warrant Derivatives			Total
New Vicis Warrant	$	--		$	--		$	--
Series A Preferred Financing		--			338,400			338,400
Series B Preferred Financing		--			(45,120	)		(45,120	)
Series C Preferred Financing		(1,068,026	)		780,096			(287,930	)
Series D Preferred Financing		573,738			1,908,637			2,482,375
Series F Preferred Financing—Warrants		--			216,166			216,166
Derivative income (expense)	$	(494,288	)	$	3,198,179		$	2,703,891

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 basis 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.

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 nine months ended March 31, 2010 and 2009:

	2010			2009

Balances at June 30	$	6,481,839		$	6,361,100
Change in accounting, described above		4,045,146			--
Balances at July 1		10,526,985			6,361,100

Issuances (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)		(27,194,033	)		(608,547	)
Total		(24,283,443	)		(608,547	)

Balances at March 31	$	5,905,630		$	5,752,553

(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.

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 March 31, 2010:

	Indexed Shares		Exercise Price		Remaining Term		Expected Volatility			Risk-Free Rate
New Vicis Warrant		70,000,000	$	0.2029		9.30		81.53	%		3.84	%
Series B Preferred Financing:
B-1 Investor Warrants		480,000	$	0.25		0.15		147.61	%		0.16	%
B-2 Investor Warrants		480,000	$	0.25		2.15		168.58	%		1.02	%
Series C Preferred Financing:
C-1 Investor Warrants		1,365,614	$	0.25		2.55		162.95	%		1.60	%
C-2 Investor Warrants		1,365,614	$	0.25		7.56		88.89	%		3.28	%
Series F Preferred Financing:
BD-12 Placement agent warrants		833,333	$	0.25		8.88		83.20	%		3.56	%
BD-13 Placement agent warrants		3,333,333	$	0.25		8.88		83.20	%		3.56	%
Warrant Financing Transaction—Placement agent warrants		1,380,314	$	0.2029		9.51		81.05	%		3.84	%

Significant assumptions underlying the BSM calculations are as follows as of March 31, 2009:

	Indexed Shares		Exercise Price		Remaining Term		Expected Volatility			Risk-Free Rate
Series A Preferred Financing:
A-1 Investor Warrants		3,000,000	$	0.50		2.64		112.53	%		1.15	%
A-2 Investor Warrants		3,000,000	$	0.50		7.64		69.21	%		2.28	%
Series B Preferred Financing:
B-1 Investor Warrants		480,000	$	0.50		1.15		72.23	%		0.57	%
B-2 Investor Warrants		480,000	$	0.50		3.15		52.87	%		1.15	%
Series D Preferred Financing:
D-1 Investor Warrants		28,000,000	$	0.75		6.08		74.06	%		2.28	%
BD-10 Placement agent warrants		700,000	$	0.50		4.08		89.39	%		1.67	%
BD-11 Placement agent warrants		1,400,000	$	0.75		4.08		89.39	%		1.67	%
Series E Preferred Financing:
E Investor Warrants		33,333,333	$	1.50		9.87		65.19	%		2.71	%
BD-12 Placement agent warrants		833,333	$	1.20		9.87		65.19	%		2.71	%
BD-13 Placement agent warrants		3,333,333	$	1.50		9.87		65.19	%		2.71	%

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.

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 March 31, 2010 and June 30, 2009:

	2010			2009
Initial $2,000,000 six-year, variable rate mortgage note, with interest at the Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75% during the first three years and a floor of 6.75% and a cap of 8.75% during the second three years; principal and interest payments of $13,507 are payable over the six year term based upon a twenty-five year amortization schedule, with $1,766,016 payable at maturity; secured by real estate; guaranteed by related parties.	$	1,954,160		$	1,978,877
Bank lending rate (3.8% at March 31, 2010) demand bank note		249,605			--
		2,203,765			1,978,877
Less current maturities		(284,506	)		(33,230	)
Long-term debt	$	1,919,259		$	1,945,647

Maturities of long-term debt at March 31, 2010 are as follows:
Three months ending June 30, 2010				$	258,117
Years ending June 30:
2011					35,477
2012					37,876
2013					40,437
2014					43,172
2015					1,788,686
				$	2,203,765

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.

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.

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.

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	$	37,090,385
Fair 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.

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		$	1,436,735
Incremental 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 Conversion

Common shares outstanding		14,509,225					105,141,416			119,650,641

Preferred Stock:
Series C Convertible Preferred		20,619,128		20,619,128			(37,141,416	)		4,096,840
Series 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	)		4,096,840
Warrants and Stock Options:
Exchange Warrant		--		97,606,276						97,606,276
Class A Warrants		6,900,000		(6,900,000	)					--
Class B-1 and B-2		1,008,000		(48,000	)					960,000
Class C-1 and C-2		29,956,171		(27,224,943	)					2,731,428
Class D-1		30,100,000		(30,100,000	)					--
Class E		37,499,999		(33,333,333	)					4,166,666
Other Warrants		1,000,000		--						1,000,000
Employee stock options		2,145,000		--						2,145,000
		108,609,170		--						108,609,170

Common 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.

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

Stock Options and Warrants:

The following table summarizes the activity related to warrants and stock options for the nine months ended March 31, 2010:

											Weighted Average
							Exercise Price				Exercise Price
							Per Share				Per Share
	Warrants			Options			Warrants		Options		Warrants		Options
July 1, 2009		106,464,170			2,145,000			0.50-3.75		.50-1.00		0.92		0.57
Granted		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		.50-1.00		0.20		0.57
Granted		--			7,225,000			--		.19-1.00		--		0.29
Exercised		--			(8,334	)		--		0.50		--		0.50
Expired		--			(1,825,000	)		--		-.50-1.00		--		0.58
March 31, 2010		80,238,208			7,536,666			0.20-1.00		0.19-1.00		0.20		0.38
Exercisable at March 31, 2010		80,238,208			4,311,666							0.20		0.22

Compensation expense related to share-based payment is recorded as a component of employment cost. The following table reflects the details of our calculations and expense recorded:

			Grant Date		Unamortized		Share-Based Payment Expense Nine Months Ended March 31,
Grant Dates	Number		Fair Value		Compensation		2010		2009
March 31, 2010		4,825,000	$	435,025	$	80,025	$	355,000	$	--
December 31, 2009		2,400,000		783,500		728,215		55,285		--
January 15, 2009		2,145,000		344,339		--		--		344,339
		9,370,000	$	1,562,864	$	808,240	$	410,285	$	344,339

Grant date fair values of stock options are calculated using a Lattice Valuation Technique. Significant assumptions for stock options issued on March 31, 2010 are as follows: Volatility 138.40%--248.07%; Risk Free Rate 0.16%--1.60%. Significant assumptions for stock options issued on December 31, 2009 are as follows: Volatility 139.35%--282.51%; Risk Free Rate 0.06%--1.70%. In all instances we use the trading market price of our stock on the award date and the contractual term of the stock options in our calculations of grant-date fair value. Due to the timing of amortization, expense in the three month periods is the same as the nine month periods, above.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8 – Equity (deficit) (continued):

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

(Loss) income per common share:

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

Three months ended March 31	2010		2009
Net (loss) income	$	13,632,313	$	(3,353,114	)
Deemed dividend on preferred stock		--		(2,958,350	)
Numerator for basic	$	13,632,313	$	(6,311,494	)

Denominator:
Weighted averages shares		159,023,171		14,509,225
Potentially dilutive equity-linked contracts:
Warrants and options		1,424,101		--
Convertible preferred stock		7,530,887		-
		167,978,159		14,509,225
(Loss) income per common share:
Basic	$	0.09	$	(0.43	)
Diluted	$	0.08	$	(0.43	)

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

Nine months ended March 31	2010			2009
Net (loss) income	$	(7,114,279	)		(405,538	)
Deemed dividend on preferred stock		(66,948,653	)		(2,958,350	)
Numerator for basic	$	(74,062,932	)		(3,363,888	)

Denominator:
Weighted averages shares		130,834,476			14,497,568
Potentially dilutive equity-linked contracts:
Warrants and options		--			--
Convertible preferred stock		--			--
		130,834,476			14,497,568
(Loss) income per common share:
Basic	$	(0.57	)	$	(0.23	)
Diluted	$	(0.57	)	$	(0.23	)

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

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 March 31, 2010 and June 30, 2009:

	2010		2009
Series 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	$	28,969,634
Series 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		--		7,000,000
Series 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 Conversion
	C		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;

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			Consolidated
Three months ended March 31, 2010:
Sales or other revenues	$	3,556,595		$	95,738	$	1,298,316		$	4,950,649
Loss from operations		(1,864,176	)		1,059		(153,117	)		(2,016,234	)
Net (loss) income		13,771,171			1,059		(153,117	)		13,619,113
Non-controlling interests		--			13,200		--			13,200
Net (loss) income applicable to OmniReliant		13,771,171			14,259		(153,117	)		13,632,313

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			Consolidated
Nine months ended March 31, 2010:
Sales or other revenues	$	18,846,442		$	247,015		$	3,182,951		$	22,276,408
Loss from operations		(4,581,845	)		(81,109	)		(687,739	)		(5,350,693	)
Net (loss) income		(6,562,817	)		(75,962	)		(693,604	)		(7,332,383	)
Non-controlling interests		--			54,655			163,450			218,105
Net (loss) income applicable to OmniReliant		(6,562,817	)		(21,307	)		(530,154	)		(7,114,279	)

Balance Sheet Information
Total assets	$	32,250,531		$	2,493,285		$	3,085,429		$	37,829,245
Total liabilities		(6,174,174	)		(1,998,177	)		(3,428,458	)		(11,600,809	)
Redeemable preferred stock		(4,946,910	)		--			--			(4,946,910	)
Total equity		21,129,447			495,108			(343,029	)		21,281,526
Non-controlling interests		--			(142,459	)		--			(142,459	)
Equity of OmniReliant shareholders	$	21,129,447		$	352,649		$	(343,029	)	$	21,139,067

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.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 11 – Income taxes:

We estimate our interim effective income tax provisions (benefits) based upon our best estimate of expected future income (loss) and permanent differences for the year ending June 30, 2010. As of March 31, 2010, our projected effective tax rate is zero.

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		$	3,087,929
Net operating losses		3,066,879			2,898,060
Share-based payment		1,490,114			1,490,114
Impairment charges		74,024			74,024
Bad debts		51,790			51,790
Inventory reserves		35,972			35,972
Unconsolidated investee		34,592			34,592
Intangible assets		(2,879,101	)		(368,286	)
Net deferred tax assets, before allowances		4,962,199			7,304,195
Less: 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	$	2,281,029
Acquisition: 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 March 31, 2010, RPS carries approximately $1,946,000 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.

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 nine months ended March 31, 2010, two products comprised 22% and 16% and 29% and 56%, respectively, of our consolidated product sales. In the aggregate, these two products comprised 51% and 72% of our consolidated revenue for the three and nine months ended March 31, 2010, respectively. During the same periods, our Abazias product line, consisting of precious gems and jewelry comprised 20% and 13% of our consolidated product sales; our RPS product line, consisting of manufactured apparel comprised 26% and 14%, 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.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12 – Commitments and contingencies (continued):

Litigation, claims and assessments:

We are involved in the following matters:

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

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

On October 30, 2009, Mediaxposure Limited filed a complaint against the named defendants alleging certain causes of actions, including aiding and abetting a breach of fiduciary duty. In January, all defendants moved to dismiss. The Company’s motion has been fully briefed and is scheduled for oral argument on May 21, 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. Defendants withdrew a portion of the motion to dismiss that sought dismissal as against ResponzeTV, and the portion of the motion to dismiss which sought dismissal of the complaint as against Grahame Farquhar is sub judice. ResponzeTV has since re-filed a motion to dismiss the complaint as against it, which is returnable on June 11, 2010.

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

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

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

On April 13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted against it. Defendant has not yet submitted opposition to this motion.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12 – Commitments and contingencies (continued):

Litigation, claims and assessments:

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.

On January 19, 2010, we settled a dispute with Revenue Frontier LLC alleging breach of contract for $16,785 in cash. We recorded the settlement in the current period.

Except as to the Revenue Frontier matter, above, at this time, management of the Company has determined that the prospect for unfavorable outcome is reasonably possible, but not estimable. Loss contingencies, if any, would be recorded when the loss is incurred or is probable and estimable in amount or range.

Other contingencies:

In connection with our retail products business, we enter into other arrangements from time to time that are routine and customary for the operation of our business that include commitments, typically of a short duration. These arrangements include, among other things, infomercial development and production arrangements and royalty or contingent consideration to product manufacturers or infomercial hosts. As of March 31, 2010, we do not believe that our routine and customary business arrangements are material for reporting purposes.

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 nine months ended March 31, 2010, 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 $318,628 and $233,994 of expense related to this arrangement for the nine months ended March 31, 2010 and 2009.

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.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 13 – Related party transactions (continued):

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 70% of Wineharvest. As more fully discussed in Note 4, we have a 30% interest in Wineharvest that we account for using the equity method of accounting.

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. 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.

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

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

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

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

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

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

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

Note 14 – Subsequent events:

We have evaluated subsequent events arising following the balance sheet date of March 31, 2010 through the date of March 14, 2010. There have been no material subsequent events not provided elsewhere herein or in filings on Form 8-K.

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

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:

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 nine months ended March 31, 2010, 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.

The following table summarizes the results of the allocation:

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

Changes in accounting:

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.

We reported our Retail Products and the Real Estate Operations separately as identifiable segments in prior periods. Effective with our quarterly period ended September 30, 2009, 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.

Three months ended March 31, 2010 compared to three months ended March 31, 2009:

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 $2,269,329 to $4,854,911 for the three months ended March 31, 2010 compared to $2,585,582 for the three months ended March 31, 2009. Abazias and Designer contributed $1,014,696 and $1,308,855, respectively, of this increase. Our product sales for the three months ended March 31, 2010 are net of estimated returns and allowances of $8,744, 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 March 31, 2010, two products comprised 22% and 29%, respectively, of our consolidated product sales. In the aggregate, these two products comprised 51% of our consolidated revenue for the three months ended March 31, 2010. During the same periods, our Abazias product line, consisting of precious gems and jewelry comprised 20% of our consolidated product sales and our RPS product line, consisting of manufactured apparel comprised 26%. 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 March 31, 2010 is $189,000 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 $2,214,153 at March 31, 2010. 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 $1,932,199 to $3,405,975 for the three months ended March 31, 2010 compared to $1,473,776 for the three months ended March 31, 2009. This increase reflects cost of sales associated with the Abazias and RPS product lines added during the current year. Our margin during the current quarter amounted to 30% compared to 43% during the quarter ended March 31, 2009. 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 $95,738, an increase of $37,424 when compare to $58,314 of commercial real estate revenue that we reported for the three months ended March 31, 2009. Increases are associated with increased occupancy of our building. 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 decreased $839,018 (or 69%) for the three months ended March 31, 2010 to $373,507 as compared to $1,212,525 for the three months ended March 31, 2009. 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. The decrease in expense over the prior fiscal year relates to the curtailment of advertising activities associated with certain products that management believe are close to market saturation.

Employment Costs: Employment related costs consist of employee insurance, salaries and payroll. These costs increased by $639,170 (or 159%) to $1,047,603 for the three months ended March 31, 2010. During the three months ended March 31, 2009, employment expenses amounted to $408,433. Our employment costs in the current period include $132,272 related Abazias and Designer. Also, our employment costs included non-cash share-based payment expense of $410,285 and $344,339 during the three months ended March 31, 2010 and 2009, respectively. Unamortized share-based payment expense amounts to $808,240 as of March 31, 2010. This amount will be amortized into expense as the stock options vest, generally over the next five years. Employment costs for the three months ended March 31, 2010 also include severance expense in the amount of $400,009 related to the separation of our Chief Executive Officer. Otherwise, the increase in our employment cost 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 and other will increase our total employment costs in future periods.

Other general and administrative: These costs and expenses include bad debts, occupancy costs and general office expenses. Our general and administrative costs increased $579,182 (or 234%) to $826,873 for the three months ended March 31, 2010 compared to $247,691 for the three months ended March 31, 2009. Abazias and Designer contributed $122,427 to this increase. Overall, we believe that our reserves are reasonable and appropriate for our current levels of operations. In the quarter ended March 31, 2010 we increased our provision for bad debts by $300,000. Also included in other general and administrative expenses for the current fiscal quarter is $217,100 in royalty expenses that we incurred to sell licensed products. The expense for royalties was $65,000 in the prior year. 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 $50,326 and $86,747 during the three months ended March 31, 2010 and 2009, 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 $310,567 (or 83%) to $684,745 for the three months ended March 31, 2010. During the three months ended March 31, 2009 these expenses amounted to $374,178. 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 $628,180 and $181,833 respectively for the three months ended March 31, 2010. Our amortization of intangible assets and depreciation of property and equipment amounted to $575,480 and $52,703, respectively for the three months ended March 31, 2009. 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	$	575,480
Year ending June 30:
2011		2,301,914
2012		2,212,899
2013		1,071,821
2014		756,595
2015		756,595
Thereafter		1,380,046
	$	9,055,350

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 impairment analysis will be performed in the fourth fiscal quarter. If impairment is required as a result of this analysis, the impairment will be recorded in our operations.

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 March 31, 2010, we recorded impairment charges aggregating $371,362 associated with one investment carried as an available for sale investment and one investment carried as an equity investment. The continuing recoverability of our investments is under the continuous review by our management. Additional impairment charges may arise in future periods if, as a result of these reviews, management concludes that the impairments are permanently impaired.

Derivative income (expense): Derivative income (expense) decreased $18,556,531(or 896%) to $16,484,885 during the three months ended March 31, 2010 compared to $(2,071,646) for the three months ended March 31, 2009. 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. The reduction in the fair value of our derivatives, and the resulting income, is largely a result of a decline in our trading market price. We will continue to record income or expense related to derivatives until they are settled or reclassified to equity.

Interest and other income: Income generated from interest on notes receivable from investees and other sources of income decreased $4,987 to $2,742 during the three months ended March 31, 2010 compared to $7,729 for the three months ended March 31, 2009. The decrease is attributable to recent write-offs of certain interest bearing available for sale investments.

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 $445,047 for the three months ended March 31, 2010. We reported no similar balances during the quarter ended March 31, 2009. 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 March 31, 2010 amounts to $2,800,311; we are not obligated to recognize losses above our investment balances computed discretely as to each individual investment.

Interest expense: Interest expense includes amortization of deferred finance costs and interest on our mortgage loan. Interest expense decreased $19,409 (or 35%) to $35,871 during the three months ended March 31, 2010 compared to $55,280 for the three months ended March 31, 2009. The decrease is attributable to fully amortizing deferred finance costs prior to the quarter. Further, 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 $13,200 and $20,623 during the three months ended March 31, 2010 and 2009, respectively. During the quarterly period ended March 31, 2010, we liquidated the total balance in non-controlling interest associated with RPS; therefore, there will be no further credits in our income.

Net (loss) income – We have reported net income of $13,632,313 during the three months ended March 31, 2010 compared to a loss of $(3,353,114) during the three months ended March 31, 2009, an increase of $16,985,427. 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 March 31, 2010. During the three months ended March 31, 2009, loss applicable to common stockholders gave effect to $2,958,350 of preferred stock dividends and accretion. Accordingly, our basic income (loss) per common share amounted to $0.09 for the three months ended March 31, 2010 and $(0.43) for the three months ended March 31, 2009. Our diluted income basic (loss) per common share, basic and diluted, amounted to $0.08 for the three months ended March 31, 2010 and $(0.43) for the three months ended March 31, 2009.

Our weighted average outstanding common shares amounted to 159,023,171 and 14,509,225 during the three months ended March 31, 2010 and 2009, respectively. Our weighted average outstanding common shares, plus potentially dilutive securities amounted to 167,978,159 for the three months ended March 31, 2010. 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.

Nine months ended March 31, 2010 compared to nine months ended March 31, 2009:

·	Product sales: Our product sales increased $18,519,568 to $22,276,408 for the nine months ended March 31, 2010 compared to $3,756,840 for the nine months ended March 31, 2009. Abazias and Designer contributed $2,905,297 and $3,211,591 (aggregate $6,116,888), respectively, of this increase. Our product sales for the nine months ended March 31, 2010 are net of estimated returns and allowances of $245,261, 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 nine months ended March 31, 2010, two products comprised 16% and 56%, respectively, of our consolidated product sales. In the aggregate, these two products comprised 72% of our consolidated revenue for the nine months ended March 31, 2010. During the same periods, our Abazias product line, consisting of precious gems and jewelry comprised 13% of our consolidated product sales and our RPS product line, consisting of manufactured apparel comprised 14%. 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 nine months ended March 31, 2010 is $581,847 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 $2,214,153 at March 31, 2010. 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 $12,089,922 to $14,176,417 for the nine months ended March 31, 2010 compared to $2,086,495 for the nine months ended March 31, 2009. This increase reflects cost of sales associated with the Abazias and RPS product lines added during the current year. Our margin during the current quarter amounted to 36% compared to 44% during the nine months ended March 31, 2009. 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 $243,686, an increase of $53,266 when compare to $190,420 of commercial real estate revenue that we reported for the nine months ended March 31, 2009. Increases are associated with increased occupancy of our building. We anticipate rental revenues to be consistent with levels experienced in the current quarterly period.

Advertising expense: Advertising and marketing expense increased $3,391,308 (or 139%) for the nine months ended March 31, 2010 to $5,833,427 as compared to $2,442,119 for the nine months ended March 31, 2009. 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. The decrease in expense over the prior fiscal year relates to the curtailment of advertising activities associated with certain products that management believe are close to market saturation.

Employment Costs: Employment related costs consist of employee insurance, salaries and payroll. These costs increased by $1,733,911 (or 266%) to $2,207,068 for the nine months ended March 31, 2010. During the nine months ended March 31, 2009, employment expenses amounted to $473,157. Our employment costs in the current period include $922,875 related Abazias and Designer. Also, our employment costs included non-cash share-based payment expense of $410,285 and $344,339 during the nine months ended March 31, 2010 and 2009, respectively. Unamortized share-based payment expense amounts to $808,240 as of March 31, 2010. This amount will be amortized into expense as the stock options vest, generally over the next five years. Employment costs for the nine months ended March 31, 2010 also include severance expense in the amount of $400,009 related to the separation of our Chief Executive Officer. Otherwise, the increase in our employment cost 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 and other will increase our total employment costs in future periods.

Other general and administrative: These costs and expenses include bad debts, occupancy costs and general office expenses. Our general and administrative costs increased $1,954,150 (or 389%) to $2,456,372 for the nine months ended March 31, 2010 compared to $502,222 for the nine months ended March 31, 2009. Abazias and Designer contributed $326,338 to this increase. 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 $606,114 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 $85,977 and $260,621 during the nine months ended March 31, 2010 and 2009, 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 $741,330 (or 68%) to $1,829,931 for the nine months ended March 31, 2010. During the nine months ended March 31, 2009 these expenses amounted to $1,088,601. These costs include fees relating to legal, audit and other consulting related expenses. During the current year to date our acquisitions of Abazias and Designer gave rise to significant increases because direct acquisition expenses are required to be expensed. 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 $1,367,572 and $430,218 respectively for the nine months ended March 31, 2010. Our amortization of intangible assets and depreciation of property and equipment amounted to $1,262,260 and $105,503 respectively for the nine months ended March 31, 2009. 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	$	575,480
Year ending June 30:
2011		2,301,914
2012		2,212,899
2013		1,071,821
2014		756,595
2015		756,595
Thereafter		1,380,046
	$	9,055,350

·	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 nine months from the date of issuance if there is no effective registration statement registering the resale of the shares underlying the Warrant.

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

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

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

Derivative income (expense): Derivative income (expense) increased $23,053,408 (or 853%) to $25,757,299 during the nine months ended March 31, 2010 compared to $2,703,891 for the nine months ended March 31, 2009. 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 March 31, 2010, pursuant to an inducement offer wherein we reduced the strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants, Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise price of $5,600,000. We accounted for the warrant exercise analogously to an inducement offer to convert debt instruments; that is the inducement value is recorded as a charge to income. The following table summarizes the components of the inducement calculation:

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

Interest and other income: Income generated from interest on notes receivable from investees increased $234,227 to $299,795 during the nine months ended March 31, 2010 compared to $65,568 for the nine months ended March 31, 2009. The increase is attributable to higher balances of notes receivable. However, during the quarter ended March 31, 2010, we exchanged $3,429,000 face value of notes receivable for an intangible asset and wrote off certain receivable investments. 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 $2,079,289 for the nine months ended March 31, 2010. We reported no similar balances during the quarter ended March 31, 2009. 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 March 31, 2010 amounts to $2,800,311; we are not obligate to recognize losses above our investment balances computed discretely as to each individual investment.

Impairment of investments: During the nine months ended March 31, 2010, we recorded impairment charges aggregating $1,963,066 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 March 31, 2010, 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 increased $13,129 (or 7%) to $194,047 during the nine months ended March 31, 2010 compared to $180,918 for the nine months ended March 31, 2009. 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 $218,104 and $81,533 during the nine months ended March 31, 2010 and 2009, respectively. During the nine month period ended March 31, 2010, we liquidated the total balance in non-controlling interest associated with RPS; therefore, there will be no further credits in our income.

Net (loss) income – We have reported net loss of ($7,114,279) during the nine months ended March 31, 2010 compared to a loss of $(405,478) during the nine months ended March 31, 2009, a decrease of ($6,708,801). 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 ($74,062,932) and ($0.57), respectively, for the nine months ended March 31, 2010. Our loss applicable to common shareholders and our loss per common share, basic and diluted, amounted to $(3,363,888), $(0.23), respectively, for the nine months ended March 31, 2009. Our weighted average outstanding common shares amounted to 130,834,476 and 14,497,568 during the nine months ended March 31, 2010 and 2009, respectively.

Liquidity and Capital Resources

Cash and cash equivalents amounted to $3,222,248 as of March 31, 2010 compared to $2,005,702 at June 30, 2009. We have working capital deficiency of $866,574 as of March 31, 2010 and a working capital of $454,249 at June 30, 2009. Our working capital declined as a result of our increases in accounts payable and accrued liabilities as we manage our cash positions.

Cash Flow from Operating Activities – We used cash of $3,565,916 and $2,723,676in our operating activities during the nine months ended March 31, 2010 and 2009, respectively.

We recorded net income (loss) of ($7,114,279) and $(405,538) during the nine months ended March 31, 2010 and 2009, respectively that was offset by non-cash charges (credits) of $4,136,382 and $(1,829,949), 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.

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 ($25,757,299) and ($2,703,891) during the nine months ended March 31, 2010 and 2009, respectively. We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes Merton (“BSM”) option valuation technique, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. For compound derivative instruments, comprising certain redemption and put features embodied in our convertible preferred stock, we use discounted cash flow models involving multiple, probability-weighted outcomes and risk-adjusted rates. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as BSM) are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.

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 $1,963,066 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 March 31, 2010, 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 $2,079,289 for the nine months ended March 31, 2010. We reported no similar balances during the quarter ended March 31, 2009. 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 March 31, 2010 amounts to $2,800,311 we are not obligated to recognize losses above our investment balances computed discretely as to each individual investment.

·	Bad debts expense: Bad debt expense was comprised of $975,000 and $-0- during the nine months ended March 31, 2010 and 2009, respectively.

·	Amortization of intangible assets: Amortization costs consisted of $1,260,592 and $300,534 during the nine months ended March 31, 2010 and 2008, respectively.

Other material components of change in our non-cash charges and (credits) were related to non-controlling interests of ($218,105) and ($81,533); depreciation expense of $111,398 and $142,402; amortization of deferred revenue of $581,847 and $-0-; share based payment of $410,285 and $344,339; and, amortization of finance costs of $15,623 and $168,200 during the nine months ended March 31, 2010 and 2008, respectively.

Our cash from operating activities also includes cash flow from changes in our operating assets and liabilities of ($588,019) for the nine months ended March 31, 2010 compared to a source of cash of $(488,189) for the nine months ended March 31, 2009.

Accounts receivable: Accounts receivable represents normal trade obligations from customers that are subject to normal trade collection terms, without discounts or rebates. Notwithstanding these collections, we periodically evaluate the collectability of our accounts receivable and consider the need to establish an allowance for doubtful accounts based upon our historical collection experience and specifically identifiable information about our customers. We experienced an increase of $885,700, (net of $975,000 in doubtful accounts) in our accounts receivable (a use of cash) for the nine months ended March 31, 2010 as compared to an increase of $190,563 in our accounts receivable (a use of cash) for the nine months ended March 31, 2009.

·	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) $513,033 during the nine months ended March 31, 2010 as compared to an increase (a use of cash) of $445,972 during the nine months ended March 31, 2009.

	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 March 31, 2010, RPS carries approximately $1,946,000 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 $575,620 and an increase in our prepaid expenses and other assets (a use of cash) of $49,805 during the nine months ended March 31, 2010 and 2009, respectively.

·	Accounts payable and accrued expenses: Our accounts payable and accrued liabilities increased (a source of cash) 19%, an aggregate of $235,094 and $198,151 during the nine months ended March 31, 2010 and 2009, respectively. T

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 nine months ended March 31, 2010, $581,847 of deferred revenue was amortized into income. The remaining balance that will be amortized into income in future periods amounts to $2,414,153.

Cash Flow from Investing Activities – We used cash of $5,792,426 and $3,931,845 in our investing activities during the nine months ended March 31, 2010 and 2009, respectively. Our analysis of the material components of the changes in our investing activities is as follows:

We invested $6,491,709 and $1,139,944 during the nine months ended March 31, 2010 and 2009, respectively. This increase in investments from June 30, 2009 to the nine months ended March 31, 2010 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 nine months ended March 31, 2010. 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 $40.949 and $2,811.901, during the nine months ended March 31, 2010 and 2009, respectively. During 2009, we acquired our real estate.

Cash Flow from Financing Activities – We generated $10,574,888 and $11,123,844 in cash from our financing activities during the nine months ended March 31, 2010 and 2009. 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 nine months ended March 31, 2010 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 $25,112 during the nine months ended March 31, 2010 and $7,844 during the same period in the prior year.

Cash was received during the nine months ended March 31, 2009 from proceeds on the sale of our preferred stock totaling $9,136,994 and a mortgage loan totaling $1,994,694. The mortgage proceeds were used to fund the purchase of the property and equipment of OmniComm Studios LLC.

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 nine months ended March 31, 2010, 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.

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.

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.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

ITEM 4T – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2010, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer/Chief Financial Officer have concluded that as of March 31, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

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

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following four material weaknesses which have caused management to conclude that, as of March 31, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level:

The material weaknesses we have identified include:

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

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

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

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

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

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.

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 aiding an abetting a breach of fiduciary duty. In January, all defendants moved to dismiss. The Company’s motion has been fully briefed and is scheduled for oral argument on May 21, 2010.

OmniReliant Holdings, Inc v. ResponzeTV, et al.

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

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

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

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

On April 13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted against it. Defendant has not yet submitted opposition to this motion.

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.

ITEM 4 �� REMOVED AND RESERVED

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBIT INDEX

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

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

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: May 17, 2010	By:	/s/ Robert John DeCecco III
		Robert John DeCecco III
		President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Infusion Brands International (INBI) Inactive 10-Q2010 Q1 Quarterly report

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