Infusion Brands International 10Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

Commission file number 000-51599

OmniReliant Holdings, Inc.

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

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

14375 Myerlake Circle

Clearwater, Florida 33760

(Address of principal executive offices)

(727) 230-1031

(Issuer's telephone number)

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

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

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

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

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

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

OMNIRELIANT HOLDINGS, INC. AND SUBSIDIARIES

QUARTERLY PERIOD ENDED

SEPTEMBER 30, 2010

Table of Contents

Part	Item and Description	Page

Part I	Financial Information
	Forward-Looking Statements	3
	Item 1. Financial Statements	3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3. Quantitative and Qualitative Disclosures about Market Risks	53
	Item 4T. Controls and Procedures	54

Part II	Other Information
	Item 1. Legal Proceedings	56
	Item 1A. Risk Factors	58
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
	Item 3. Defaults Upon Senior Securities	58
	Item 4. Removed and Reserved	58
	Item 5. Other Information	58
	Item 6. Exhibit Index	58

Signatures		59

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.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

	September 30, 2010			June 30, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,818,515		$	5,691,422
Accounts receivable, net of allowances for doubtful accounts of $273,043 and $168,355		842,726			1,464,254
Inventories, net		3,013,509			3,326,346
Investments		250,000			180,000
Prepaid expenses and other current assets		122,760			140,575
Total current assets		8,047,510			10,802,597

Property and equipment, net		2,519,962			2,527,816
Investments, equity method		281,848			1,340,583
Other assets		77,391			29,519
Total assets	$	10,926,711		$	14,700,515

Liabilities, Redeemable Preferred Stock and Deficit

Current liabilities:
Accounts payable and accrued expenses	$	982,450		$	996,138
Deferred revenue		—			53,833
Notes payable and maturities of long-term debt		282,835			284,985
Derivative liabilities		9,767,226			4,185,956
Total current liabilities		11,032,511			5,520,912

Deferred revenue		2,000,000			2,000,000
Long-term debt		1,940,361			1,946,900
Security deposits on leases		9,193			9,193
Total liabilities		14,982,065			9,477,005
Commitments and contingencies (Note 13)		—			—
Redeemable preferred stock		8,560,777			7,816,910

Deficit:
OmniReliant shareholders’ deficit:
Series E Preferred Stock, $0.00001 par, 13,000,000 shares authorized and, 2,331,031 and 2,884,601 shares issued outstanding		2,373,378			2,937,004
Common Stock, $0.00001 par, 400,000,000 sharesauthorized; 158,732,336 and 158,073,323 outstanding		1,588			1,581
Paid-in capital		46,882,174			47,029,421
Accumulated deficit		(62,022,910	)		(52,707,780	)
Other comprehensive items		100,000			30,000
Total OmniReliant shareholders’ deficit		(12,665,770	)		(2,709,774	)
Non-controlling interests		49,639			116,374
Total deficit		(12,616,131	)		(2,593,400	)
Total liabilities, redeemable preferred stock and deficit	$	10,926,711		$	14,700,515

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three months ended September 30,
	2010			2009
	(Unaudited)			(Unaudited)

Product sales	$	3,189,951		$	7,627,821
Cost of product sales (excluding depreciation expense reflected in other operating expenses)		2,792,091			4,477,325
Gross profit		397,860			3,150,496

Services and other revenues		53,833			—
Rental income		38,403			86,979
		92,236			86,979

Other operating expenses:
Other general and administrative		950,552			800,409
Advertising and promotional		846,039			2,997,923
Accounting and professional		840,111			555,036
Employment costs		594,363			800,416
Depreciation and amortization		57,722			111,288
		3,288,787			5,265,072
Loss from operations		(2,798,691	)		(2,027,597	)

Other income (expense):
Derivative (expense) income		(5,581,270	)		9,948,085
Equity in losses of investees		(1,064,485	)		(104,672	)
Interest and other income		97,567			248,047
Interest expense		(34,986	)		(54,216	)
Extinguishment expense		—			(22,328,516	)
Inducement expense		—			(1,473,855	)
Total other income (expense)		(6,583,174	)		(13,765,127	)

Net loss		(9,381,865	)		(15,792,724	)
Net loss attributable to non-controlling interests		66,735			24,935

Net loss attributable to OmniReliant	$	(9,315,130	)	$	(15,767,789	)

Continued on next page.

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three months ended September 30,
	2010			2009
	(Unaudited)			(Unaudited)
Reconciliation of net loss attributable to OmniReliant to loss applicable to OmniReliant common shareholders:
Net loss attributable to OmniReliant	$	(9,315,130	)	$	(15,767,789	)
Preferred stock dividends and accretion		(846,819	)		(66,948,653	)
Loss applicable to OmniReliant common shareholders	$	(10,161,949	)	$	(82,716,442	)

Loss per common share:
Basic	$	(0.06	)	$	(1.03	)
Diluted	$	(0.06	)	$	(1.03	)
Weighted average common shares—basic		158,732,336			80,434,068
Weighted average common shares—diluted		158,732,336			80,434,068

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Three months ended September 30,
	2010			2009
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(9,315,130	)	$	(15,767,789	)
Adjustments to reconcile net loss to net cash from operating activities:
Derivative expense (income)		5,581,270			(9,948,085	)
Equity in losses of investees		1,064,485			104,672
Share-based payment		135,953			—
Bad debts expense		111,768			300,762
Non-controlling interests		(66,735	)		(24,935	)
Depreciation expense		57,266			6,070
Amortization of deferred revenue		(53,833	)		—
Amortization of deferred finance costs		8,905			4,871
Extinguishment		—			22,328,516
Inducement expense		—			1,473,855
Amortization of intangible assets		—			105,218
Total adjustments		6,839,079			14,350,944
Changes in operating assets and liabilities:
Accounts receivable		509,760			(1,227,549	)
Inventories		312,837			(345,740	)
Prepaid expenses and other assets		17,815			413,638
Accounts payable and accrued expenses		(116,640	)		353,158
Total changes		723,772			(806,493	)
Net cash used in operating activities		(1,752,279	)		(2,223,338	)

Cash flows from investing activities:
Purchases of property and equipment		(49,412	)		(16,559	)
Payments for licenses and intangible assets		(46,060	)		—
Security deposits		(10,717	)		—
Purchases of investments		(5,750	)		(5,651,887	)
Acquisition of Designer Liquidators		—			612,702
Acquisition of Abazias		—			127,530
Net cash flow from investing activities		(111,939	)		(4,928,214	)

Cash flows from financing activities:
Principal payments on long-term debt		(8,689	)		(5,590	)
Proceeds from sale of preferred stock and warrants		—			10,600,000
Net cash flow from financing activities		(8,689	)		10,594,410

Net change in cash and cash equivalents		(1,872,907	)		3,442,858
Cash and cash equivalents at beginning of period		5,691,422			2,005,702
Cash and cash equivalents at end of period	$	3,818,515		$	5,448,560

Continued on the next page.

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Supplemental Cash Flow Information

	Three months ended September 30,
	2010		2009
	(Unaudited)		(Unaudited)

Cash paid for interest	$	70,567	$	32,418
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		—		2,605,158
Total fair value of Series E Preferred Stock	$	—	$	15,841,323

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

Three months ended September 30, 2010 (unaudited)

	Series E			Common Stock				Paid-in			Comprehensive		Accumulated			OmniReliant			Non-Controlling			Total
	Preferred Stock			Shares		Amount		Capital			Income Items		Deficit			Equity (deficit)			Interests			Equity (deficit)

Balances, July 1, 2010	$	2,937,004			158,073,323	$	1,581	$	47,029,421		$	30,000	$	(52,708,780	)	$	(2,709,774	)	$	116,374		$	(2,593,400	)

Conversions of Series E Preferred		(563,626	)		659,013		7		563,619			—		—			—			—			—
Share-based payment		—			—		—		135,953			—		—			135,953			—			135,953
Unrealized gains (losses)		—			—		—		—			70,000		—			70,000			—			70,000
Accretion of Series G Preferred		—			—		—		(743,867	)		—		—			(743,867	)		—			(743,867	)
Preferred Stock Dividends		—			—		—		(102,952	)		—		—			(102,952	)		—			(102,952	)
Net loss		—			—		—		—			—		(9,315,130	)		(9,315,130	)		(66,735	)		(9,381,865	)

Balances, September 30, 2010	$	2,373,378			158,732,336	$	1,588	$	46,882,174		$	100,000	$	(62,022,910	)	$	(12,665,770	)	$	49,639		$	(12,616,131	)

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

Three months ended September 30, 2009 (unaudited)

	Series E		Common Stock				Paid-in			Comprehensive			Accumulated			OmniReliant			Non-Controlling			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			324,417
Acquisition: Abazias		13,236,165		—		—		4,886,188			—			—			18,122,353			—			18,122,353
Warrant exercises		—		27,606,276		276		12,811,450			—			—			12,811,4726			—			12,811,726
Unrealized gains (losses)											83,228						83,228						83,228
Net loss														(15,767,789	)		(15,767,789	)		(24,935	)		(15,792,724	)

Balances, September 30, 2009	$	13,236,165		147,356,917	$	1,473	$	36,311,482		$	11,126		$	(37,663,848	)	$	11,896,398		$	335,629		$	12,232,027

See accompanying notes.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 – Basis of presentation:

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

Note 2 – Going concern and management’s plans:

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Note 3 – Business acquisitions:

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 – Business acquisitions (continued):

The following table summarizes the results of the allocation:

	Abazias			Designer			Total
Current assets, including cash of $127,530 and $612,702 from Abazias and Designer, respectively	$	523,307		$	1,964,119		$	2,487,425
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			2,012,777			6,477,133
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 Trading 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		$	259,056		$	12,678,812

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 – Business acquisitions (continued):

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

	Three Months ended September 30, 2009

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

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

Note 4 – Inventories:

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

	September 30, 2010			June 30, 2010
	(Unaudited)
Finished goods	$	3,133,509		$	2,708,974
Work-in-process		—			897,681
		3,133,509			3,606,655
Reserves for obsolescence and excess quantities		(120,000	)		(280,309	)
	$	3,013,509		$	3,326,346

Note 5 – Investments:

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 5 – Investments (continued):

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

	Common Ownership			Investment Cost		Equity in Earnings			September 30, 2010		June 30, 2010
						(Unaudited)			(Unaudited)
Investees:
Zurvita Holdings		25.0	%	$	2,646,000	$	(1,045,786	)	$	—	$	1,045,786
Webcarnation		40.0	%		420,750		(18,699	)		281,848		294,797
Total				$	3,066,750	$	(1,064,485	)	$	281,848	$	1,340,583

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

Note 6 – Accounts payable and accrued expenses:

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Derivative financial instruments:

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Derivative financial instruments (continued):

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Derivative financial instruments (continued):

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

	2010		2009
	(Unaudited)		(Unaudited)
Balances at the beginning of the period	$	4,185,956	$	6,481,839
Change in accounting, described above		—		4,045,146
Balances at July 1		4,185,956		10,526,985

Issuances (Note 10):
Exchange transaction		—		37,090,385
Warrant financing transaction		—		382,761
Total		—		37,473,146

Conversions and cancellations (Note 10):
Exchange transaction		—		(9,761,869	)
Conversion transaction		—		(454,702	)
Exercises		—		(7,594,487	)
Total		—		(17,811,058	)

Fair value adjustments:
Anti-dilution re-pricing events (1)		—		1,436,735
Inducement adjustment (Note 10)		—		1,473,855
Other assumption changes (1)		5,581,270		(11,384,820	)
Total		5,581,270		(8,474,230	)

Balances at the end of the period	$	9,767,226	$	21,714,843

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Derivative financial instruments (continued):

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Derivative financial instruments (continued):

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Derivative financial instruments (continued):

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

Note 8 — Long-term debt:

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

	September 30, 2010			June 30, 2010
	(Unaudited)
Initial $2,000,000 six-year, variable rate mortgage note, with interest at the Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75% during the first three years and a floor of 6.75% and a cap of 8.75% during the second three years; principal and interest payments of $13,507 are payable over the six year term based upon a twenty-five year amortization schedule, with $1,775,557 payable at maturity; secured by real estate; guaranteed by related parties.	$	1,938,391		$	1,947,080

Bank lending rate (3.8% at June 30, 2010) demand bank note		249,605			249,605

Other long-term debt		35,200			35,200
		2,223,196			2,231,885
Less current maturities		(282,835	)		(284,985	)
Long-term debt	$	1,940,361		$	1,946,900

Maturities of long-term debt for the nine months ended June 30, 2011				$	276,356
Maturities of long-term for each year ended June 30 are as follows:
2012					37,773
2013					40,327
2014					43,054
2015					14,989
					1,810,697
				$	2,223,196

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9 – Redeemable preferred stock:

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

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

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

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

Terms, Features and Conditions of our Redeemable Preferred Stock:

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9 – Redeemable preferred stock (continued):

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

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

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

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

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

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

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

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9 – Redeemable preferred stock (continued):

Fiscal 2010 Series G Preferred Stock and Warrant Financing Arrangement:

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

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

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit):

Changes in accounting:

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

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

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

Series E Convertible Preferred Stock:

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit) (continued):

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

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

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

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

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

Exchange and conversion transactions:

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit) (continued):

Fair value of 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.

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.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit) (continued):

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

	Pre-Exchange and Conversion		Exchange (1)			Conversion			Post-Exchange and 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 F		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.

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
Inducement expense	$	1,473,855

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit) (continued):

Stock Options and Warrants:

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

	Linked Common Shares						Exercise Prices Per Share				Weighted Average Exercise Prices Per Share
	Warrants			Stock Options			Warrants		Stock Options		Warrants		Stock Options
Outstanding at July 1, 2009		106,464,170			2,145,000			0.50-3.75		0.50-1.00		0.92		0.57
Granted		148,986,590			37,448,671			0.10-0.25		0.01-0.35		0.20		0.06
Exercised		(27,606,275	)		(8,334	)		0.20		0.50		0.25		0.50
Exchanged		(97,606,276	)		(4,800,000	)		0.25		0.19-0.35		0.25		0.22
Cancelled or expired		(1,480,000	)		(1,825,000	)		0.10-1.00		0.05-1.00		0.76		0.58
Outstanding at June 30, 2010		128,758,209			32,960,337		$	0.10	$	0.01-0.50	$	0.10	$	0.05
Granted		—			—			—		—		—		—
Exercised		—			—			—		—		—		—
Cancelled or expired		—			—			—		—		—
Outstanding at September 30, 2010		128,758,209			32,960,337		$	0.10	$	0.01-0.50	$	0.10	$	0.05

Exerciseable at June 30, 2010		126,758,209			311,666		$	0.10	$	0.50	$	0.10	$	0.50
Exerciseable at September 30, 2010		126,758,209			311,666		$	0.10	$	0.50	$	0.10	$	0.50

Compensation expense:
Grant date fair values:
Year ended June 30, 2010				$	2,942,415
Year ended June 30, 2009				$	344,339
Compensation expense recorded:
Three months ended September 30, 2010				$	135,953
Three months ended September 30, 2009				$	—
Compensation subject to amortization in future periods as options vest				$	2,287,577

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit) (continued):

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

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

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

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Equity (deficit) (continued):

(Loss) income per common share:

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

Three months ended September 30,	2010			2009
Net loss	$	(9,315,130	)	$	(15,767,789	)
Adjustments:
Accretion of Series G Preferred Stock		(743,867	)		—
Cumulative dividends on Series G Preferred Stock		(102,952	)		—
Deemed dividend on Preferred Stock Exchange		—			(66,948,653	)
Numerator for basic	$	(10,161,949	)	$	(82,716,442	)

Denominator:
Weighted averages shares		158,732,336			80,434,068
Potentially dilutive equity-linked contracts:		—			—
Warrants and options		—			—
Convertible preferred stock		—			-
		158,732,336			80,434,068
Loss per common share:
Basic	$	(0.06	)	$	(1.03	)
Diluted	$	(0.06	)	$	(1.03	)

Note 11 – Non-controlling interests:

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

Three months ended September 30, 2010:	Parent and Wholly- Owned Subsidiaries			OmniComm Studios			RPS			Wine Harvest			Consolidated
Operations
Revenues	$	2,384,137		$	38,403		$	833,922		$	25,725		$	3,282,187
Loss from operations		(2,419,613	)		(98,848	)		(234,903	)		(45,327	)		(2,798,691	)
Net loss		(9,002,787	)		(98,848	)		(234,903	)		(45,327	)		(9,391,865	)
Non-controlling interests		—			39,539			—			27,196			66,735
Net loss applicable to Omni		(9,002,787	)		(59,309	)		(234,903	)		(18,131	)		(9,315,130	)

Balance Sheet
Total assets	$	8,072,299		$	2,377,863		$	341,519		$	135,030		$	10,926,711
Total liabilities		(12,946,970	)		(1,988,476	)		(6,730	)		(39,889	)		(14,982,065
Redeemable preferred		(8,560,777	)		—			—			—			(8,560,777	)
Total deficit		(13,435,448	)		389,387			334,789			95,151			(12,616,131	)
Non-controlling interests		—			36,171			—			13,468			49,639
Deficit of Omni	$	(13,435,448	)	$	353,216		$	334,789		$	81,673		$	(12,665,770	)

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Non-controlling interests (continued):

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

Three months ended September 30, 2009	OmniReliant and wholly-owned subsidiaries			OmniComm			RPS			Consolidated
Operating Information
Sales or other revenues	$	7,465,743		$	86,979		$	162,078		$	7,714,800
Loss from operations		(1,996,444	)		(15,557	)		(15,596	)		(2,027,597	)
Net (loss) income		(15,761,689	)		(15,439	)		(15,596	)		(15,792,724	)
Non-controlling interests		—			(20,154	)		(4,781	)		(24,935	)
Net (loss) income applicable to OmniReliant		(15,761,689	)		4,715			(10,815	)		(15,767,789	)

Balance Sheet Information
Total assets	$	36,089,031		$	2,589,461		$	3,833,901		$	42,512,393
Total liabilities		(20,166,417	)		(2,042,960	)		(3,124,079	)		(25,333,456	)
Redeemable preferred stock		(4,946,910	)		—			—			(4,946,910	)
Total equity		10,975,704			546,501			709,822			12,232,027
Non-controlling interests		—			(181,226	)		(158,669	)		(335,629	)
Equity of OmniReliant shareholders	$	10,975,704		$	358,275		$	551,153		$	11,896,398

Note 12 – Segment information:

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 12 – Segment information (continued):

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

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

Three months ended September 30, 2010:	Consumer Products			eCommerce			Fashion Goods			Consolidated
Operations
Revenues	$	1,566,020		$	720,261		$	995,906		$	3,282,187
Depreciation and amortization		(54,334	)		(2,845	)		(573	)		(57,722	)
Operating loss		(2,019,259	)		(219,649	)		(559,783	)		(2,798,691	)
Equity in investee losses		—			(1,064,485			—			(1,064,485	)
Interest expense		(32,866	)		—			(2,120	)		(34,986	)
Net loss		(7,496,291	)		(1,256,938	)		(561,901	)		(9,315,130	)

Balance Sheet
Total assets		9,253,786			830,867			842,058			10,926,711
Equity investments		—			281,848			—			281,848
Capital expenditures		—			—			49,412			49,412

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 12 – Segment information (continued):

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

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

Note 13 – Commitments and contingencies:

Leases:

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

Nine months ending June 30, 2011	$	71,309
Years ending June 30:
2012		75,972
2013		60,734
2014		51,870
2015		—
Thereafter		—
	$	259,885

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13 – Commitments and contingencies (continued):

Consulting Agreements:

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

Litigation, claims and assessments:

We are involved in the following matters:

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

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

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

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13 – Commitments and contingencies (continued):

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

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

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

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

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

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13 – Commitments and contingencies (continued):

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

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

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

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

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13 – Commitments and contingencies (continued):

License Agreement

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

Other contingencies:

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

Note 14 – Related party transactions:

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

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

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

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 14 – Related party transactions (continued):

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

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

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

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

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

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

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.

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

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. See Note 6.

OmniReliant Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 14 – Related party transactions (continued):

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

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

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

Note 15 – Subsequent events:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Derivative income (expense): Derivative income (expense) represents the changes in the fair values of our derivative financial instruments. Fair value increases during the three months ended September 30, 2010 resulted in expense of $5,581,270. During the same period of the prior fiscal year, fair value decreases resulted in income of $9,948,085. The changes in the fair value of these derivatives are significantly influenced by changes in our trading stock price and changes in interest rates in the public markets. Further, certain elements of the fair value techniques require us to make estimates about the outcome of certain events, such as defaults. We will continue to record income or expense related to derivatives until they are settled or reclassified to equity.

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Changes in accounting:

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

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

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

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

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

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

The material weaknesses we have identified include:

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

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

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

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

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

Inherent Limitations of the Effectiveness of Internal Control

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

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.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS