Attached files
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EX-32.1 - Infusion Brands International, Inc. | v161227_ex32-1.htm |
EX-31.1 - Infusion Brands International, Inc. | v161227_ex31-1.htm |
EX-31.2 - Infusion Brands International, Inc. | v161227_ex31-2.htm |
EX-32.2 - Infusion Brands International, Inc. | v161227_ex32-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For year
ended June 30, 2009
¨
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
OmniReliant
Holdings, Inc.
(Exact
name of registrant as specified in its charter)
Nevada
|
000-51599
|
54-2153837
|
||
(State
or other jurisdiction
of incorporation)
|
(Commission
File Number)
|
(I.R.S
Employer Identification No.)
|
14375 Myerlake
Circle
Clearwater, FL 33760
(Address
of principal executive offices)
(813)
885-5998
(Issuer's
telephone number, including area code)
4902
Eisenhower Blvd., Suite 185
Tampa, FL
33634
(Former
name or former address, if changed since last report)
Securities
registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No x
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 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 such filing requirements for
the past 90 days. Yes x 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 o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
Aggregate
market value of the voting stock held by non-affiliates: $7,181,931.24 as based
on last reported sales price of such stock. The voting stock held by
non-affiliates on that date consisted of 7,254,476 shares of common
stock.
Applicable
Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five
Years:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes o No o
Applicable
Only to Corporate Registrants
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. As of October 8, 2009, there were
119,650,641 shares of common stock, par value $0.00001, issued and
outstanding.
Documents
Incorporated by Reference
List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to rule 424(b) or
(c) of the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None.
OmniReliant Holdings,
Inc.
FORM
10-K
For
the Fiscal Year Ended June 30, 2009
TABLE OF
CONTENTS
PART
I
|
|
ITEM
1 - BUSINESS
|
4
|
ITEM
1A - RISK FACTORS
|
6
|
ITEM
1B - UNRESOLVED STAFF COMMENTS
|
9
|
ITEM
2 - PROPERTIES
|
9
|
ITEM
3 - LEGAL PROCEEDINGS
|
10
|
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
10
|
PART
II
|
|
ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
10
|
ITEM
6 - SELECTED FINANCIAL DATA
|
11
|
ITEM
7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATION
|
11
|
ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
27
|
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
28
|
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
|
86
|
ITEM
9A - CONTROLS AND PROCEDURES
|
86
|
ITEM
9A(T) - CONTROLS AND PROCEDURES
|
|
ITEM
9B - OTHER INFORMATION
|
88
|
PART
III
|
|
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
|
88
|
ITEM
11 - EXECUTIVE COMPENSATION
|
90
|
ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
|
91
|
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
92
|
ITEM
14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
|
92
|
PART
IV
|
|
ITEM
15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
92
|
2
PART
I
FORWARD-LOOKING
STATEMENTS:
This
Annual Report on Form 10-K (including the section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-K.
Additionally, statements concerning future matters are forward-looking
statements.
Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our Management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading "Risks Related to Our Business" below,
as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the Securities and Exchange Commission ("SEC"). You can obtain any
materials we file with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including us.
We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.
3
Item
1. BUSINESS
OmniReliant
Holdings, Inc. (the “Company”, “OmniReliant”, “we”, or “our”) engages in the
creation, design, distribution, and sale of various product lines, both
proprietary and licensed. We plan to make these products available to U.S. and
international consumers through direct response infomercials, live shopping
networks, ecommerce, direct mail and traditional retail channels. We’ve acquired
a portfolio of interests in various companies, patents and products to bring to
the market. This strategy was incorporated to reduce the risk of relying on a
single celebrity, brand or business entity for our success. We look to leverage
our various assets to work together to ensure success of each entity and the
holding company.
Our
Business
We build
global brands through domestic and international direct marketing channels, web
and licensing agreements. Our products are also sold through web sites operated
by the live shopping networks that agree to carry our products. The information
contained on our website is not a part of this Report, nor is it incorporated by
reference into this Report.
Business
Overview
We are a
holding company that has a portfolio of companies that utilize direct response
to build brands. We engage in the creation, design, distribution, and sale of
affordable retail and web products. We plan to make these products available to
U.S. and international consumers through direct response infomercials, live
shopping networks, ecommerce, direct mail and traditional retail
channels.
Omni Response
(www.omniresponse.com)
Omni
Response creates Direct Response Marketing campaigns that increase sales,
produce leads and increase ROI. Omni Response provides comprehensive solutions
such as creative conceptualization, strategic planning, pre and post production,
and complete campaign management. Through infomercials, Omni Response
reaches millions of consumers in their own homes, where they’re relaxed,
receptive to a message and ready to buy. We educate them about the
product’s features and benefits so they can fully understand what makes the
product special.
Omnicomm
Studios
Omnicomm
Studios supplies and rents production equipment and full time staff to manage
any size production. Amenities include: studio control room, grip equipment,
full lighting grid and light board, makeup and wardrobe rooms, and a green room.
For post-production, Omnicomm offers full edit facilities, equipment and video
editing software Avid, FinalCut Pro and Adobe Premiere. Also available is an
in-house, full service recording studio and music house.
Cellular
Blowout (www.cellular-blowout.com)
Cellular-Blowout.com provides
the highest quality wireless products with exceptional customer service.
Cellular-Blowout has a catalogue of over 15,000 wireless devices including
unlocked iPhones and other leading Smartphones and has shipped hundreds of
thousands of orders to customers all over the world. Cellular-Blowout provides
products to individual consumers, Fortune 500 companies and countless government
agencies such as the Army, Air Force, Navy and more.
4
OmniReliant
Acquisition Sub, Inc. (Abazias, www.abazias.com)
Abazias
is an online retailer of high quality loose diamonds and fine jewelry settings
for the diamonds. The Abazias website, www.abazias.com, showcases over 100,000
diamonds, most of which are independently certified and more than 100 styles of
fine jewelry, including rings, wedding bands, earrings, necklaces and bracelets.
Customers may purchase customized diamond jewelry by selecting a diamond and
then choosing from a variety of ring, earring and pendant settings that are
designed to match the shape of each individual diamond. The customized product
is then assembled and delivered to the customer, typically within four
business days.
NetTalk.com,
Inc. (www.nettalk.com)
NetTalk.com,
Inc. engages in the development of products and services for the use of Voice
over Internet Protocol (“VoIP”). Its applications of VoIP technology are
intended to allow consumers to make phone calls over a broadband Internet
connection instead of using a regular (or analog) phone line. At this time,
NetTalk’s main product under development is the TK 6000, which is designed to
allow its future customer’s full mobile flexibility by being able to transport
the VoIP interface anywhere the customer has an internet
connection.
Wineharvest,
Inc. (www.wineharvest.com)
Wineharvest,
Inc. is an online wine retailer which sells wine bottles and offers “Wine
Clubs” whereby Wineharvest will distribute to its online subscribers, on a
monthly basis, selected bottles of wine selected by a certified sommelier.
Wineharvest currently works with major distibutors to obtain wine. Winharvest
will seek out wine vineyards to supply exclusive and non-exclusive wines to club
members. Winharvest provides educational and informative video content and
material for its online members and general viewers of the site. Wineharvest has
one retail store in the State of Florida with plans for
expansion.
Webcarnation,
LLC (“Jibidee”, www.jibidee.com)
Jibidee.com
is a free website designed for personal/home users to save, organize and
share information. Jibidee.com includes a Calendar, Lists, Notes, Address
Book, Document Storage, Pictures, Personal Fax, and Mobile
Access. Jibidee launched publically in September 2008 as a
semi-finalist at the international TechCrunch50 Conference in San
Francisco. Jibidee is a free website with several premium
feature, annual upgrade subscription options (“freemium” pricing
model). .
Zurvita
Holdings, Inc.(ZRVT, www.zurvita.com)
Zurvita
Holdings, Inc. is a provider of products and benefits in healthcare, technology,
energy, legal and other niche benefit markets. Zurvita has aligned itself with
consultants that have worked with some of the top companies in the industry and
who bring decades of practical experience to its executive team. Zurvita has
partnered with one of the top IT providers in the country presently serving
billion dollar companies in the Network Marketing industry. Zurvita's management
team is comprised of individuals and companies that will focus Zurvita on
becoming a leader in the network marketing industry. Mark Jarvis, Founder and
CEO of Zurvita, has 26 years of experience in the direct marketing
industry.
For
Your Imagination (www.foryourimagination.com)
For Your
Imagination is a leading branded entertainment web video studio focused on the
development, packaging and multi-platform distribution and syndication of
high-quality branded web video. The studio works with advertisers to develop
their online video content, produce high quality video programs, and ensure the
delivery of the content to the desired target audiences with scale and reach.
New York City based For Your Imagination is built upon the experience of
interactive and TV industry veterans whose combined expertise include web
development, major television and movie production, national marketing campaigns
and technology.
Nested Media, Inc.
(www.nestedmedia.com)
Nested
Media is a technology company focused on building tools and services that enable
advertisers, publishers and third parties gain a better understanding on how
audiences interact with their brands, content and other services across the web.
Nested Media uses advanced semantic analysis, data- mining, and machine learning
technologies to find patterns and insights in unstructured data about online
content, context and traffic. Nested Media helps customers use those patterns
and insights to understand and improve audience engagement.
A
Perfect Pear, Inc. (www.aperfectpear.com)
A Perfect
Pear, which was featured on ABC’s hit show “Shark Tank”, is the only
pear-focused gourmet condiment company in the country that includes such
products as jellies, jams, preserves, mustards and tapenades. A Perfect Pear has
also established a gourmet club where subscribers will receive a selection of
products shipped to them every other month.
5
Designer
Liquidator, Inc./RPS
Designer
Liquidator is a wholesaler of off price, high end, designer products,
specializing in closeouts from Italy. They distribute clothing,
sunglasses, handbags and shoes from world famous designers such as Prada, Gucci,
and Dolce and Gabbana. Customers include Marmax, Syms, Costco, and
Sams Club. Designer Liquidator is in the process of creating their
own website which will offer these bargains directly to the
consumer. RPS Trading also falls under this umbrella. This
division manages and produces private label products from Bangledesh for Haggar
Corporation.
Omni
Dual Saw (www.dualsaw.com)
Omni Dual
Saw’s counter rotating blade technology makes it a unique saw with two
blades that simultaneously rotate in opposite directions. The professional-grade
saw’s technology and dual blade design allow users to cut through virtually any
material without changing blades. The Dual Saw is powered by a patented
high-speed system with a 900-watt motor that rotates the dual blades in opposite
directions at 6,000 RPMs. Omni Dual Saw's double traction and inverted rotation
moves its two blades equally both forward and backwardeliminating the usual
kickback, vibrations and sparks that other saws cause. Omni Dual Saw's
professional lubricating system allows the user to cut through metals like
aluminum, copper and stainless steel without overheating or warping
them.
Beyond
Commerce, Inc. (“BYOC”)
On July
10, 2009, we entered into an advertising and endorsement agreement with BYOC
whereby BYOC will provide placement of advertising, banners and video on its
website of various Omnireliant related products. BYOC is a low cost provider of
fully customizable e-commerce services, along with its proprietary advertising
partner network platform, LocalAdLink, a local business search directory and
advertising network that brings local advertising to geo- targeted
consumers.
Firefreeze
(ColdFire)
We have
entered into a Marketing and Distribution Agreement with FireFreeze Worldwide
Inc. (“Firefreeze”) whereby OmniReliant obtained the exclusive right to market
and distribute the ColdFire Products globally through direct response
television, live shopping channels, the worldwide web and retail. Firefreeze
provides a line of fire suppressing products, designed to be safe and
effective. One of Firefreeze’s main products ColdFire, is an environmentally
friendly rapid cooling fire suppressing agent, which gets its name from its
ability to remove heat from any object in which it comes into contact. The
suppressants in ColdFire act as encapsulators that use water as a catalyst
to remove heat and work to encapsulate the fuel source from a fire.
Kathy
Hilton
Omni
brings to market the Kathy Hilton product line that includes skincare, perfumes,
spa wellness, cosmetics, fragrances and related products. Ms. Hilton, who is the
wife of Rick Hilton, the grandson of the Hilton Hotel founder, has agreed to
appear in television segments and infomercials.
Professor
Amos Wonder Products
On June
4, 2009, we entered into an International Marketing and Distribution Agreement
with Professor Amos Wonder Products, Inc. (“PAW”) whereby PAW granted the
Company the exclusive right to advertise, promote, market sell or otherwise
distribute all products developed by PAW by means of infomercials, live
shopping, internet, direct response televisions, programming, retail, radio,
MLM, catalog, and credit card stuffers, along with any other channels of
distribution that may be developed. Some examples of the Professor Amos Wonder
Products are:
·
|
The
BOM
|
·
|
Fast! Drain
Cleaner
|
·
|
Shock It
Clean!
|
Competition
Other
companies have had success selling beauty care products via direct response
marketing as well as through established home shopping television
channels.
Competition
in the retailing industry is intense and may be expected to intensify. There are
other, larger and well-established retailers with whom we must
compete. We compete directly with several companies which generate sales
from infomercials. We also compete with a large number of consumer product
companies and retailers which have substantially greater financial, marketing
and other resources than OmniReliant, some of which have recently commenced, or
indicated their intent to conduct, direct response marketing. We also
compete with companies that make imitations of OmniReliant's products at
substantially lower prices. Products similar to our products may be sold in
department stores, pharmacies, general merchandise stores and through magazines,
newspapers, direct mail advertising and catalogs. It is management's opinion
that all of its major competitors are better and longer established, better
financed and with enhanced borrowing credit based on historical operations, and
enjoy substantially higher revenues than OmniReliant does currently. As a new
entrant into this marketing industry, we rely on the skill, experience
and innovative discernment of management in the hope that superior judgment will
provide a competitive advantage. Our major competitors include Thane
International, Inc.; Fitness Quest, Inc.; Telebrands Advertising Corporation;
Tristar; Idea Village; Media Enterprises, Inc. and Guthy-Renker Corp. Other
competitors in the direct response market include Avon Products, Inc., Nu Skin,
BeautiControl, Inc., Parlux, Bare Essentials, and Mary Kay
Cosmetics.
Government
Regulation
Various
aspects of our business are subject to regulation and ongoing review by a
variety of federal, state, and local agencies, including the Federal Trade
Commission, the United States Post Office, the Consumer Product Safety
Commission, the Federal Communications Commission, Food and Drug Administration,
various States' Attorneys General and other state and local consumer protection
and health agencies. The statutes, rules and regulations applicable to the
Company's operations, and to various products marketed by it, are numerous,
complex and subject to change.
We will
collect and remit sales tax in the states in which it has a physical
presence. We are prepared to collect sales taxes for other states, if
laws are passed requiring such collection. We do not believe that a
change in the tax laws requiring the collecting of sales tax will have a
material adverse effect on our financial condition or results of
operations.
Employees
As of
October 2, 2009, we have 9 employees, who work full-time. We consider our
relations with our employees to be good.
RISK
FACTORS
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of our
stock could go down. This means you could lose all or a part of your
investment.
6
RISKS
RELATED TO OUR BUSINESS:
TO
DATE WE HAVE HAD SIGNIFICANT OPERATING LOSSES, AND AN ACCUMULATED DEFICIT AND
HAVE HAD LIMITED REVENUES AND DO NOT EXPECT TO BE PROFITABLE FOR AT LEAST THE
FORESEEABLE FUTURE, AND CANNOT PREDICT WHEN WE MIGHT BECOME PROFITABLE, IF
EVER.
We have
been operating at a loss since our inception, and we expect to continue to incur
substantial losses for the foreseeable future. Net loss for the year ended June
30, 2009 was $2,625,964 resulting in an accumulated deficit of $46,570,028.
Further, we may not be able to generate significant revenues in the future. In
addition, we expect to incur substantial operating expenses in order to fund the
expansion of our business. As a result, we expect to continue to experience
substantial negative cash flow for at least the foreseeable future and cannot
predict when, or even if, we might become profitable.
OUR
AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
In their
report dated September 28, 2009, KBL LLP stated that our financial statements
for the fiscal year ended June 30, 2009, were prepared assuming that we would
continue as a going concern the factors that follow raise substantial doubt
about the Company's ability to continue as a going concern. Our ability to
continue as a going concern is an issue raised as a result of our recurring
losses from operations and our net capital deficiency. We continue to experience
net operating losses. Our ability to continue as a going concern is subject to
our ability to generate a profit and raise capital to finance our
operation.
ADDITIONAL
FINANCING IS NECESSARY FOR THE IMPLEMENTATION OF OUR GROWTH
STRATEGY.
We may
require additional debt and/or equity financing to pursue our growth strategy.
Given our limited operating history and existing losses, there can be no
assurance that we will be successful in obtaining additional financing. Lack of
additional funding could force us to curtail substantially our growth plans or
cease our operations. Furthermore, the issuance by us of any additional
securities pursuant to any future fundraising activities undertaken by us would
dilute the ownership of existing shareholders and may reduce the price of our
common stock.
Furthermore,
debt financing, if available, will require payment of interest and may involve
restrictive covenants that could impose limitations on our operating
flexibility. Our failure to successfully obtain additional future funding may
jeopardize our ability to continue our business and operations.
WE
MAY BE UNABLE TO MANAGE OUR GROWTH OR IMPLEMENT OUR EXPANSION
STRATEGY.
We may
not be able to expand our product and service offerings, our client base and
markets, or implement the other features of our business strategy at the rate or
to the extent presently planned. Our projected growth will place a significant
strain on our administrative, operational and financial resources. If we are
unable to successfully manage our future growth, establish and continue to
upgrade our operating and financial control systems, recruit and hire necessary
personnel or effectively manage unexpected expansion difficulties, our financial
condition and results of operations could be materially and adversely
affected.
FLUCTUATIONS
IN OUR OPERATING RESULTS AND ANNOUNCEMENTS AND DEVELOPMENTS CONCERNING OUR
BUSINESS AFFECT OUR STOCK PRICE.
Our
quarterly operating results, the number of stockholders desiring to sell their
shares, changes in general economic conditions and the financial markets, the
execution of new contracts and the completion of existing agreements and other
developments affecting us, could cause the market price of our common stock to
fluctuate substantially.
OUR
OFFICERS AND DIRECTORS ARE INVOLVED IN OTHER BUSINESSES WHICH MAY CAUSE THEM TO
DEVOTE LESS TIME TO OUR BUSINESS.
Our
officers' and directors' involvement with other businesses may cause them to
allocate their time and services between us and other entities. Consequently,
they may give priority to other matters over our needs which may materially
cause us to lose their services temporarily which could affect our operations
and profitability.
OUR
BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL.
Our
ability to increase sales, and to profitably distribute and sell our products
and services, is subject to a number of risks, including changes in our business
relationships with our principal distributors, competitive risks such as the
entrance of additional competitors into our markets, pricing and technological
competition, risks associated with the development and marketing of new products
and services in order to remain competitive and risks associated with changing
economic conditions and government regulation.
7
OUR
SUCCESS DEPENDS, IN PART, ON THE QUALITY AND SAFETY OF OUR
PRODUCTS.
Our
success depends, in part, on the quality and safety of our products. If our
products are found to be defective or unsafe, or if they otherwise fail to meet
our customers’ standards, our relationship with our customers could suffer, our
brand appeal could be diminished, and we could lose market share and/or become
subject to liability claims, any of which could result in a material adverse
effect on our business, results of operations and financial
condition.
OUR BUSINESS IS CONDUCTED WORLDWIDE
PRIMARILY IN ONE CHANNEL, DIRECT SELLING.
We plan
to market our products primarily through home shopping television channels and
infomercials. If consumers change their purchasing habits, such as by reducing
purchases of beauty and related products through home shopping television
channels and infomercials, this could reduce our sales and have a material
adverse effect on our business, financial condition and results of
operations.
RISKS
RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE
ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SERIES C PREFERRED STOCK AND
WARRANTS THAT MAY AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Below is
a chart which illustrates all of our outstanding our Series C Preferred
Stock and Warrants that may be available for future sale.
|
Common
|
|||
Equivalents
|
||||
Securities:
|
||||
Series
C Preferred Stock
|
1,365,579
|
|||
Warrants:
|
||||
Class
B-1 Warrants
|
480,000
|
|||
Class
B-2 Warrants
|
480,000
|
|||
Class
BD-12 Warrants
|
833,333
|
|||
Class
BD-13 Warrants
|
3,333,333
|
|||
Warrant
issued to consultants
|
1,000,000
|
|||
Class
C-1 Warrants
|
1,365,614
|
|||
Class
C-2 Warrants
|
1,365,614
|
|||
Vicis Warrant
|
97,606,276
|
|||
Employee
Stock Options
|
2,145,000
|
|||
Total
common stock equivalent shares
|
109,974,749
|
On July
31, 2009, Vicis Capital Master Fund converted its OmniReliant Series C, D
and F Preferred Stock and is now the beneficial owner of 95.98% of OmniReliant ’
s issued and outstanding common stock.
RISKS
RELATING TO OUR COMMON STOCK:
IF
WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDER TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.
A
SOLE SHAREHOLDER BENEFICIALLY OWN APPROXIMATELY 95.98% OF OUR COMMON STOCK; ITS
INTERESTS COULD CONFLICT WITH YOURS; SIGNIFICANT SALES OF STOCK HELD BY THEM
COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE; STOCKHOLDERS MAY BE UNABLE TO
EXERCISE CONTROL.
As of
October 2, 2009, Vicis Capital Master Fund beneficially owned approximately
95.98% of our common stock. As a result, Vicis Capital Master Fund will have
significant influence to:
¨
|
elect
or defeat the election of our
directors;
|
8
¨
|
amend
or prevent amendment of our articles of incorporation or
bylaws;
|
¨
|
effect
or prevent a merger, sale of assets or other corporate transaction;
and
|
¨
|
control
the outcome of any other matter submitted to the stockholders for
vote.
|
As a
result of their ownership and positions, Vicis Capital Master Fund is able to
significantly influence all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions. In
addition, sales of significant amounts of shares held by Vicis Capital Master
Fund, or the prospect of these sales, could adversely affect the market price of
our common stock.
BECAUSE
WE MAY BE SUBJECT TO THE “PENNY STOCK” RULES, YOU MAY HAVE DIFFICULTY IN SELLING
OUR COMMON STOCK.
If our
stock price is less than $5.00 per share, our stock may be subject to the SEC’s
penny stock rules, which impose additional sales practice requirements and
restrictions on broker-dealers that sell our stock to persons other than
established customers and institutional accredited investors. The application of
these rules may affect the ability of broker-dealers to sell our common stock
and may affect your ability to sell any common stock you may own.
o
|
According
to the SEC, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns
include:
|
o
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
o
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
o
|
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
o
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
The
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the inevitable
collapse of those prices with consequent investor losses.
As an
issuer of “penny stock” the protection provided by the federal securities laws
relating to forward looking statements does not apply to us.
Although
the federal securities law provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities laws,
this safe harbor is not available to issuers of penny stocks. As a result, if we
are a penny stock we will not have the benefit of this safe harbor protection in
the event of any claim that the material provided by us contained a material
misstatement of fact or was misleading in any material respect because of our
failure to include any statements necessary to make the statements not
misleading.
FAILURE
TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND OPERATING RESULTS AND STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR
FINANCIAL REPORTING.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed. We may be required in the
future to document and test our internal control procedures in order to satisfy
the requirements of Section 404 of the Sarbanes-Oxley Act, which requires
increased control over financial reporting requirements, including annual
management assessments of the effectiveness of such internal controls and a
report by our independent certified public accounting firm addressing these
assessments. Failure to achieve and maintain an effective internal control
environment, regardless of whether we are required to maintain such controls
could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on our stock
price.
Item
1B. UNRESOLVED STAFF COMMENTS
None
Item 2.
PROPERTIES:
Our
principal offices are located at 14375 Myerlake Circle, Clearwater, FL 33760 and
are provided at no cost to the Company by one of our officers. It is anticipated
that the Company will lease office space in the near future however no current
lease has been negotiated.
* Omnicomm Studios, our 60% owned subsidiary, is also located at
14375 Myerlake Circle, Clearwater, FL 33760.
9
Item
3. LEGAL PROCEEDINGS
OmniReliant
Holdings, Inc v. ResponzeTV, et al.
Supreme Court of the State
of New York, County of New York, Index No. 600646/2009
The
Company commenced this action on March 2, 2009 in the Supreme Court of the State
of New York, County of New York against ResponzeTV, PLC, and two of its
directors, Grahame Farquhar and Steven Goodman to recover $2,000,000 due and
owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in
favor of the Company, and also asserts causes of action for fraud and unjust
enrichment.
Defendants
have moved to dismiss the Complaint, and the Company has opposed this
motion. This motion was fully submitted to the Court on September 22,
2009.
Davlyn
Industries, Inc. v. ResponzeTV America, LLC f/k/a Reliant International Media,
LLC and OmniReliant Corporation (Circuit Court, Pinellas County, Florida,
Case No: 09-11763 CI). Davlyn Industries, Inc. filed this lawsuit asserting
a claim for breach of contract in connection with the purchase of cosmetic skin
care products. Davlyn
Industries, Inc. demands judgment against OmniReliant Corporation of
$293,600 plus interest and court costs. Management believes the lawsuit is
without merit.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Shares of
the Company’s common stock are quoted on the Over the Counter Bulletin Board
("OTCBB") under the symbol ORHI. Our shares were listed for trading in July,
2006. The following table sets forth, since July, 2006, the range of high and
low intraday closing bid information per share of our common stock as quoted on
the Over the Counter Bulletin Board.
Quarter Ended
|
|
High ($)
|
|
|
Low ($)
|
|
||
June
30, 2009
|
1.01
|
1.01
|
||||||
March
31, 2009
|
1.01
|
0.35
|
||||||
December
31, 2008
|
1.18
|
0.60
|
||||||
September
30,2008
|
1.60
|
1.01
|
||||||
June
30, 2008
|
3.05
|
1.50
|
||||||
March
31, 2008
|
3.95
|
2.00
|
||||||
December
31, 2007
|
4.75
|
2.20
|
||||||
September
30, 2007
|
3.40
|
2.10
|
||||||
June
30, 2007
|
3.60
|
2.50
|
||||||
March
31, 2007
|
3.875
|
2.50
|
||||||
December
31, 2006
|
3.00
|
0.10
|
||||||
September
30, 2006
|
0.10
|
0.10
|
Holders:
As of
June 30, 2009, we had approximately 18 record holders of our common stock. The
number of record holders was determined from the records of our transfer agent
and does not include beneficial owners of common stock whose shares are held in
the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is Register and Transfer
Company.
Dividend
Policy
The
Company has not paid or declared any dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future.
The
series A preferred stock pays an annual dividend of 10% which is payable
quarterly, at the option of OmniReliant, either in cash or in shares of
registered common stock at a 10% discount to the Company’s stock price. On
October 18, 2007, we exchanged all of the outstanding shares of series A
preferred stock outstanding for 3,285,354 shares of series C preferred
stock.
The
series B preferred stock pays an annual dividend of 10% which is payable
quarterly, at the option of OmniReliant, either in cash or in shares of
registered common stock at a 10% discount to the Company’s stock price. On
October 18, 2007, we exchanged all of the outstanding shares of series B
preferred stock outstanding for 624,210 shares of series C preferred
stock.
The
series C, D, E and F preferred stock do not pay an annual
dividend.
10
The
following table summarizes the equity compensation plans under which our
securities may be issued as of June 30, 2009.
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding options
and warrants
|
Weighted-average
exercise price of
outstanding
options and
warrants
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
|
|||||||||
Equity compensation
plans approved by security holders
|
-0- | -0- | -0- | |||||||||
Equity
compensation plan not approved by security holders
|
1,845,000 | $ | 0.50 | 1,655,000 |
ITEM
6 - SELECTED FINANCIAL DATA
As a
smaller reporting company we are not required to provide the information
required by this Item.
Item
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s
discussion and analysis of financial condition and results of operations should
be read in conjunction with our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for our year ended June 30,
2009.
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. For a description of those estimates, see Note 3, Summary of
Significant Accounting Policies, contained in the explanatory notes to our
audited financial statements for the years ended June 30, 2009 and 2008 attached
to this Form 10-K. On an on-going basis, we evaluate our estimates, including
those related to reserves, deferred tax assets and valuation allowance,
impairment of long-lived assets, fair value of our financial instruments and
equity instruments. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
While all
of our accounting policies impact the consolidated financial statements, certain
policies are viewed to be critical. Critical accounting policies are those that
are both most important to the portrayal of our financial condition and results
of operations and that require management’s most subjective or complex judgments
and estimates. Management believes the policies that fall within this category
are the policies on revenue recognition and accounts receivable and other
intangible assets, investments, financial and derivative
instruments.
Revenue recognition – Revenue
is recognized when evidence of the arrangement exists, the product is shipped to
a customer, or in the limited circumstances, at destination, when terms provide
that title passes at destination, and when we have concluded that amounts are
collectible from the customers. Estimated amounts for sales returns and
allowances are recorded at the time of sale. Shipping costs billed to customers
are included as a component of product sales. The associated cost of shipping is
included as a component of cost of product sales.
Due to
the nature of retail business sector, our revenues may be concentrated from
time-to-time in the sale of certain specific products or a single product. These
concentrations generally arise from the timing and intensity of our marketing
and infomercial campaigns related to those specific products. During the year
ended June 30, 2009, two products comprised 67% and 29%, respectively, of our
consolidated Product Sales.
11
Rental
revenues are recorded based upon executed leases with our tenants over the term
of the respective leases. Concessions such as rent holidays are amortized over
the lease term. License revenue is recorded over the term of the license
arrangement, as it is earned.
Accounts receivable –
Accounts receivable represents normal trade obligations from customers
that are subject to normal trade collection terms, without discounts or rebates.
Notwithstanding these collections, we periodically evaluate the collectability
of our accounts receivable and consider the need to establish an allowance for
doubtful accounts based upon our historical collection experience and
specifically identifiable information about our customers.
Inventories – Inventories
consist of retail merchandise that is in its finished form and ready for sale to
end-user customers. Inventories are recorded at the lower of average cost or
market. In-bound freight-related costs from our vendors are included as part of
the net cost of merchandise inventories. Other costs associated with acquiring,
storing and transporting merchandise inventories are expensed as incurred and
included in cost of goods sold. Our inventories are acquired and carried for
retail sale and, accordingly, the carrying value is susceptible to, among other
things, market trends and conditions and overall customer demand. 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. During the years ended June 30, 2009 and 2008,
we recorded reserves of $215,944 and $-0-, respectively. During the year ended
June 30, 2009, we recorded our reserves to cost of goods sold and impairment
charges in the amounts of $96,440 and $119,504, respectively.
Impairments – The Company’s
management evaluates its tangible and definite-lived intangible assets for
impairment under Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144) annually at the
beginning of our fourth fiscal quarter or more frequently in the presence of
circumstances or trends that may be indicators of impairment. Our evaluation is
a two step process. The first step is to compare our undiscounted cash flows, as
projected over the remaining useful lives of the assets, to their respective
carrying values. In the event that the carrying values are not recovered by
future undiscounted cash flows, as a second step, we compare the carrying values
to the related fair values and, if lower, record an impairment adjustment. For
purposes of fair value, we generally use replacement costs for tangible fixed
assets and discounted cash flows, using risk-adjusted discount rates, for
intangible assets. During the years ended June 30, 2009 and 2008, we recorded
impairment charges of $78,952 and $-0-, respectively, related to intangible
assets.
Investments – Our investments
consist of available for sale securities, non-marketable securities and other
equity investments.
Available-for-Sale
Investments: Investments that we designate as available-for-sale are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in accumulated other comprehensive income (loss). We base the cost of the
investment sold on the specific identification method using market rates for
similar financial instruments. Our available-for-sale investments
include:
12
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, as defined in Financial Accounting Standard No.
107 Disclosures about
Fair Value of Financial Instruments (Statement 107), consist of cash,
evidence of ownership in an entity, and contracts that both (i) impose on one
entity a contractual obligation to deliver cash or another financial instrument
to a second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (ii) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity, or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Accordingly, our financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, derivative financial instruments, long-term debt, and
redeemable preferred stock.
13
We carry
cash and cash equivalents, accounts payable and accrued liabilities and
long-term debt at historical costs; their respective estimated fair values
approximate carrying values. We carry derivative financial instruments at fair
value in accordance with Financial Accounting Standard No. 133 Accounting for Derivative
Financial Instruments and Hedging Activities (Statement 133). We carry
redeemable preferred stock at either its basis derived from the cash received or
fair value depending upon the classification afforded the preferred stock, or
embedded components thereof, in accordance with Statement 133 and Financial
Accounting Standard No. 150 Financial Instruments with
Characteristics of both Equity and Liabilities (Statement
150).
Derivative financial
instruments – Derivative financial instruments, as defined in Statement
133 consist of financial instruments or other contracts that contain a notional
amount and one or more underlying (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets. See Note 11 Derivative financing instruments included in the
consolidated financial statements for the years ended June 30, 2009 and 2008 in
this Form 10-K for additional information.
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.
Year
ended June 30, 2009 compared to year ended June 30, 2008:
Revenues – We derive revenues
substantially from the sale of products in our Retail Products business.
Commencing in the current year, we purchased certain real estate in Pinellas
County, Florida and leased a substantial portion of this building to third-party
tenants. We are accounting for each of these businesses as identifiable
segments. Our analysis of the material components of changes in revenues are as
follows:
·
|
Product
sales: Our product sales increased $9,132,079 (or 2,170%) to $9,552,892
for the year ended June 30, 2009 compared to $420,813 for the year ended
June 30, 2008. This increase reflects our maturation in identifying new
retail products to sell through our media distribution
networks.
|
·
|
Rental
revenue: Our rental of commercial real estate commenced during the current
fiscal year and amounted to $236,021. Accordingly, we reported no similar
balances in prior periods. We anticipate rental revenues to be higher in
future periods that will reflect rentals for the entire period and as we
increase the percentage of our building that is available to be
rented.
|
·
|
Licensing
revenue: Our licensing revues decreased $546,917 (or 100%) to $-0- for the
year ended June 30, 2009 compared to $546,917 for the year ended June 30,
2008. Licensing revenue was derived from sub-licensing our rights to
certain licensed products. We discontinued recording licensing revenue
when the licensee began experiencing significant financial difficulties
and the collection of our licensing revenue could not be assured beyond a
reasonable doubt.
|
14
Cost of product sales – Our cost of product
sales increased $4,855,172 (or 1691%) to $5,142,210 for the year ended June 30,
2009 compared to $287,038 for the year ended June 30, 2008. This increase
reflects our increasing retail product sales, including cost of products,
freight and shipping and merchant account fees. Our margin during the current
year amounted to 46% compared to 32% in the prior period. Margins on retail
products are largely dependent upon the types and demands for retail products.
Accordingly, our ongoing margins will likely be volatile until we establish the
types of products that will serve as our long-term base of offerings. In
addition, cost of product sales reflects reserves for obsolete and excessive
quantities of $96,440 during the year ended June 30, 2009, with no comparable
charges during the prior fiscal year.
Other operating expenses –
Other operating expenses consists of advertising expense, accounting and
professional expenses, employment costs and general, depreciation and
amortization and administrative expenses. Our analysis of the material
components of changes in other operating expenses are as follows:
·
|
Advertising
expense: Advertising and marketing expense increased $4,767,032 (or
1,681%) for the year ended June 30, 2009 to $5,050,558 as compared to
$283,526 for the year ended June 30, 2008. We began incurring substantial
advertising media expense during the current fiscal year which is
necessary to promote our Retail Products. We generally expense advertising
when it is incurred in accordance with Statement of Position 93-7
Accounting for Advertising. Commencing in the current fiscal year the
Company began engaging for the production of infomercials related to its
Retail Products Business, which is expected to be an increasing activity
and cost. The Company’s accounting policy provides that the costs of
infomercials are deferred in prepaid assets until the first airing, at
which time the cost is expensed. As of June 30, 2009, prepaid advertising
expense was $-0-. However, we may defer advertising when that is
appropriate in future periods.
|
·
|
Accounting
and professional expense: Accounting and consulting professional expenses
increased $1,030,124 (or 190%) to $1,570,903 for the year ended June 30,
2009. In the prior year these expenses amounted to $540,779. These costs
include fees relating to audit and other consulting related expenses.
Consulting agreements totaled approximately $900,000 in the year ended
June 30, 2009. Our audit fees have increased due to our increased
operating activities. Our legal expenses have increased due to the
increase in our investment and other activities, including our acquisition
of Abazias, Inc. (“Abazias”). Unlike previous accounting standards, our
direct costs related to our investing activities are expensed as they are
incurred. See Recent Accounting Principles, below. We continue to utilize
third-party consultants to assist in the application of complex accounting
principles and valuation of our derivative financial instruments. We
believe that our professional fees will continue at current levels until
we can further develop our operating and financial
infrastructure.
|
·
|
Employment
Costs: Employment related costs consist of employee insurance, salaries
and payroll. These costs decreased by $584,886 (or 48%) to 626,683 for the
year ended June 30, 2009. During the year ended June 30, 2008, employment
expenses amounted to $1,211,569. The decrease is attributable to lower
share based compensation during the year ended June 30, 2009 compared to
the prior year. We hired a Chief Operating Officer in July 2009 and a
Chief Financial Officer in September 2009. The compensation related to
these employees will result in additional compensation expense commencing
with their employment.
|
15
·
|
Depreciation
and amortization: Our amortization of intangible assets and depreciation
of property and equipment amounted to $423,757 and $232,353, respectively
for the year ended June 30, 2009. Our amortization of intangible assets
amounted to $681,616 during the year ended June 30, 2008. This amounted to
a decrease of $25,506 (or 4%) in amortization and depreciation for the
year ended June 30, 2009. The addition of depreciation expense of $232,353
relates to our recently acquired real estate, along with improvements and
fixtures. Our depreciation expense will continue and increase in the near
term as our operations reflect the depreciation for the full periods
reported. The reduction in amortization is due to a decrease in license
fees.
|
·
|
Other
general and administrative: These costs and expenses include compensation,
professional fees, occupancy costs and general office expenses. Our
general and administrative costs increased $325,686 (or 131%) to $573,673
for the year ended June 30, 2009 compared to $247,987 for the year ended
June 30, 2008. Included within general and administrative expenses are
real estate operation expenses. Our real estate operation expenses include
property taxes, utilities, repairs and maintenance and insurance costs.
These items amounted to $364,841 for the year ended June 30, 2009; no such
expenses existed in the prior year because we did not run this operation
during that period. We expect our real estate related costs to increase in
the near term to give effect to its operation during full fiscal
periods.
|
·
|
Impairment
charges: In our year end analysis of our operations, we concluded that the
certain product lines would not provide sufficient cash flows to cover our
carrying costs. We recorded impairment charges associated with these lines
in the amount of $198,456, which consisted of $119,504 in inventories and
$78,952 in intangible assets. There were no similar charges in the prior
fiscal year.
|
In August
2009, we completed our purchase of Abazias, Inc. a transaction that will result
in significant goodwill. However, we have not yet completed our calculations of
the amount of goodwill that will be recorded. Goodwill is subject to annual
review for impairment. Impairments, if ever any, would be recorded as a
component of operating expense.
Other income (expense) –
Other income and expense include fair value adjustments related to our
derivative financial instruments, interest expense and income, extinguishments
and impairments, etc. Our analysis of the material components of changes in the
other income (expense) section of the statement of operations are as
follows:
·
|
Derivative
income (expense): Derivative income (expense) decreased $19,719,821 (or
91%) to $1,974,605 during the year ended June 30, 2009 compared to
$21,694,426 for the year ended June 30, 2008. The following table reflects
comparative information related to our derivative income (expense).
Derivative income (expense) results from certain financial instruments
(including embedded derivative financial instruments) that are required to
be measured at fair value. The changes in the fair value of these
derivatives are significantly influenced by changes in our trading stock
price and changes in interest rates in the public markets. Further,
certain elements of the fair value techniques require us to make estimates
about the outcome of certain events, such as
defaults.
|
16
The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the year ended June 30, 2009:
Financing—Financial Instrument
|
Embedded
Derivatives
|
Warrant
Derivatives
|
Total
|
|||||||||
Series
A Preferred Financing
|
$ | — | $ | 376,800 | $ | 376,800 | ||||||
Series
B Preferred Financing
|
— | (32,928 | ) | (32,928 | ) | |||||||
Series
C Preferred Financing
|
533,151 | — | 533,151 | |||||||||
Series
D Preferred Financing
|
760,946 | 1,557,959 | 2,318,905 | |||||||||
Series
F Preferred Financing—Warrants
|
— | (1,221,323 | ) | (1,221,323 | ) | |||||||
Derivative
income (expense)
|
$ | 1,294,097 | $ | 680,508 | $ | 1,974,605 |
The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the year ended June 30, 2008:
Financing—Financial Instrument
|
Embedded
Derivatives
|
Warrant
Derivatives
|
Total
|
|||||||||
Series
A Preferred Financing
|
$ | — | $ | 18,208,598 | $ | 18,208,598 | ||||||
Series
B Preferred Financing
|
— | 1,733,309 | 1,733,309 | |||||||||
Series
C Preferred Financing
|
(333,994 | ) | — | (333,994 | ) | |||||||
Series
D Preferred Financing
|
10,242 | 15,826,580 | 15,836,822 | |||||||||
Other
warrants, reclassified
|
— | 1,614,360 | 1,614,360 | |||||||||
Day-one
derivative losses
|
(15,364,669 | ) | — | (15,364,669 | ) | |||||||
Derivative
income (expense)
|
$ | (15,688,421 | ) | $ | 37,382,847 | $ | 21,694,426 |
·
|
Interest
expense: Interest expense includes amortization of deferred finance costs
and interest on our new mortgage loan. Interest expense increased $159,761
(or 84%) to $350,491 during the year ended June 30, 2009 compared to
$190,730 for the year ended June 30, 2008 compared to $33,183 during the
year ended June 30, 2008. An increase in interest expense is present due
to interest on our new mortgage loan. We anticipate that our interest
expense will increase in future periods as our operations reflect mortgage
interest for the full periods
presented.
|
·
|
Interest
income: Income generated from interest increased $166,274 to $199,457
during the year ended June 30, 2009. Our interest income is accumulated
through investments in loans and notes receivables in investee companies,
in addition to interest generated from bank
deposits.
|
·
|
Equity
in losses of investees: We acquired investments accounted for under the
equity method during the year ended June 30, 2009. Our pro rata share of
net loss and related book adjustments in these investments equaled $92,741
for the year ended June 30, 2009. We reported no similar balances in prior
periods. 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.
|
·
|
Impairment
on investment: Our recorded impairments on investments decreased
$7,378,631 (or 94%) to $450,000 for year ended June 30, 2009 compared to
$7,828,631 for the year ended June 30, 2008. As of June 30, 2009 we have
determined that a decline in fair value in our investment in Carolyn &
Company was other than temporary. Thus, we impaired our entire investment
in Carolyn & Company for $438,587 and removed the unrealized loss from
other comprehensive income for a total of $450,000. For the year ended
June 30, 2008 our impairments on investments related our investment in
ResponzeTv, PLC (“ResponzeTv”). ResponzeTV began experiencing financial
difficulties and delisted its shares for trading. Based upon the
preponderance of all available information, we concluded that our
investment was not recoverable and impaired the investment in the amount
of $7,828,631.
|
17
·
|
Other
material components of change in our other income (expense) section of the
statement of operations included extinguished preferred fees, which
decreased $26,247,007 (or 100%) to $-0- for the year ended June 30, 2009
as compared to $26,247,007 for the year ended June 30, 2008; registration
payments, which decreased $309,137 (or 100%) to $-0- for the year ended
June 30, 2009 as compared to $309,137 for the year ended June 30, 2008;
and extinguished other liabilities, which decreased $271,109 (or 100%) to
$-0- for the year ended June 30, 2009 as compared to $271,109 for the year
ended June 30, 2008. For further analysis over extinguished preferred
expense and extinguished other liabilities expense, refer to Note 10 of
the accompanying consolidated financial statements in this Form
10-K.
|
Minority interest – Minority
interests arises from the consolidation of or 60% owned subsidiary OmniCom
Studios LLC. This company constitutes our real estate business and was
capitalized by cash by us and other unrelated investors. Minority interest
arises from recognition of the minority shareholders proportionate share of
OmniComm’s losses. Minority interest for
the year ended June 30, 2009 amounted to $122,886. No such expense was incurred
in the prior year.
Net loss – We have reported
net loss of ($2,625,964) during the year ended June 30, 2009 compared to a loss
of ($15,403,790) during the year ended June 30, 2008, a decrease of $12,777,826
(or 83%). Our loss from operations increased by $1,744,895 (or 76%) to
($4,029,680) for the year ended June 30, 2009 compared to ($2,284,785) for the
year ended June 30, 2008. Net income (loss) was mostly affected by our increased
advertising activities with the startup of our aggressive advertising campaign
during the current fiscal period. Further, our net income (loss) also has been
largely influenced by our other income (expense), as discussed above, gives
effect to fair value adjustments and the effects of financing transactions
necessary to support our capital requirements.
Loss applicable to common
stockholders – Loss applicable to common
stockholders represents our net loss as adjusted for cumulative dividends and
accretions on our Series F Preferred Stock. Our decrease in loss applicable to
common shareholders is attributable to the $19,954,922 (or 87%) decrease in
accretion of preferred stock. Accretion of preferred stock amounted to
$2,958,350 and $22,913,272 for the years ended June 30, 2009 and 2008,
respectively. These amounts are necessary to compute income (loss) per common
share. Our loss applicable to common shareholders and our loss per common share
(basic and diluted) amounted to ($5,584,314) and ($0.39), respectively, for the
year ended June 30, 2009. Our loss applicable to common shareholders and our
loss per common share (basic and diluted) amounted to ($38,317,062) and ($2.71),
respectively, for the year ended June 30, 2008. This represents a decrease of
$32,732,748 (or 85%) in loss applicable to common shareholders and a decrease of
$2.32 in loss per common share (basic and diluted).
18
Liquidity
and Capital Resources
We have
reported recurring losses during our development stage. During the fourth
quarter of the year ended June 30, 2009 we emerged from the development stage of
operation. However, we have used cash from operations of $5,859,217 and
$1,032,937 during the years ended June 30, 2009 and 2008, respectively. These
conditions raise substantial doubt about our ability to continue as a going
concern for a reasonable period. The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates
continuing operations, realization of assets and liquidation of liabilities in
the ordinary course of business. Our ability to continue as a going concern is
dependent upon its ability to raise sufficient capital to implement a successful
business plan and to generate profits sufficient to become financially viable.
To the extent that it becomes necessary to raise additional cash in the future
as our current cash and working capital resources are depleted, we will seek to
raise it through the public or private sale of debt or equity securities, the
procurement of advances on contracts or licenses, funding from joint-venture or
strategic partners, debt financing or short-term loans, or a combination of the
foregoing. We also may seek to satisfy indebtedness without any cash outlay
through the private issuance of debt or equity securities.
There can
be no assurance that future financings will be available to us on acceptable
terms. If financing is not available to us on acceptable terms, we may be unable
to continue our operations.
Cash and
cash equivalents amounted to $2,005,702 as of June 30, 2009 compared to
$4,435,814 at June 30, 2008. We have working capital of $454,249 as of June 30,
2009 and a working capital deficiency of $1,685,811 at June 30, 2008. Our
working capital improved as a result of our Series F Preferred Stock and Warrant
Financing Arrangement, proceeds from which were used to purchase current assets.
Our working capital fluctuates significantly, reflecting the changes in fair
value of our financial instruments. Our improved working capital gives effect to
increase in the fair value of these financial instruments by $120,739 from June
30, 2008 to June 30, 2009. Future changes in the fair value of these financial
instruments could increase or decrease our working capital based upon changes in
the assumptions underlying our fair value calculations.
Cash Flow from
Operating Activities – We used cash of
$5,859,217 and $1,032,937 in our operating activities during the years ended
June 30, 2009 and 2008, respectively.
We
recorded net income (loss) of ($2,625,964) and ($15,403,790) during the years
ended June 30, 2009 and 2008, respectively that was offset by non-cash charges
(credits) of ($19,792) and $14,907,627, respectively. Our analysis of the
material components of changes in non-cash charges are as follows:
·
|
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 ($1,974,605) and ($21,694,426) during the years
ended June 30, 2009 and 2008, respectively. We estimate fair values of
derivative financial instruments using various techniques (and
combinations thereof) that are considered to be consistent with the
objective measuring fair values. In selecting the appropriate technique,
we consider, among other factors, the nature of the instrument, the market
risks that it embodies and the expected means of settlement. For less
complex derivative instruments, such as free-standing warrants, we
generally use the Black-Scholes Merton (“BSM”) option valuation technique,
adjusted for the effect of dilution, because it embodies all of the
requisite assumptions (including trading volatility, estimated terms,
dilution and risk free rates) necessary to fair value these instruments.
For compound derivative instruments, comprising certain redemption and put
features embodied in our convertible preferred stock, we use discounted
cash flow models involving multiple, probability-weighted outcomes and
risk-adjusted rates. Estimating fair values of derivative financial
instruments requires the development of significant and subjective
estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors.
In addition, option-based techniques (such as BSM) are highly volatile and
sensitive to changes in the trading market price of our common stock,
which has a high-historical volatility. Since derivative financial
instruments are initially and subsequently carried at fair values, our
income (loss) will reflect the volatility in these estimate and assumption
changes.
|
19
·
|
Non-cash
charges included an impairment charge to the investment in Carolyn &
Company of $450,000 during the year ended June 30, 2009. During the year
ended June 30, 2008, impairments in investments equaled $7,828,631. June
30, 2008 impairments all related to the investment in ResponzeTv.
ResponzeTV began experiencing financial difficulties and delisted its
shares for trading. Based upon the preponderance of all available
information, we concluded that our investment was not recoverable and
impaired the investment in the amount of $5,776,917. $2,051,714 is related
to the write-off of the ResponzeTV note receivable. There have been no
further developments related to the investment’s
recovery.
|
·
|
Non-cash
charges also included share-based payments of $387,672 and $1,164,205
during the years ended June 30, 2009 and 2008, respectively. Share-based
costs consisted of $344,339 associated to stock based compensation and
$43,333 of which related to legal costs incurred in relationship to an
Abazias, Inc. loan that was entered into during the year ending June 30,
2009. During the year ending June 30, 2008, share-based costs consisted of
$1,136,705 in stock and option based compensation and $29,500 incurred in
legal fees in relationship to Famous
Discoveries.
|
·
|
Amortization
costs consisted of $376,226 and $900,371 during the years ended June 30,
2009 and 2008, respectively. A decrease in amortization occurred due to a
reduction in license fees paid under the Kathy Hilton
agreement.
|
·
|
Amortization
of finance costs of $240,987 and $190,730 were incurred during the years
ended June 30, 2009 and 2008,
respectively.
|
·
|
Other
material components of change in our non-cash charges and (credits) were
related to depreciation expense of $232,353 and $-0-; impairment change of
$198,456 and $-0- bad debt expense of $138,848 and $-0-; minority interest
in loss of subsidiary $122,886 and $-0-; loss on exchange of preferred
stock of $-0- and 26,247,007; and extinguishment of liabilities of $-0-
and 271,109 during the years ended June 30, 2009 and 2008,
respectively.
|
Our cash
from operating activities also includes cash flow from changes in our operating
assets and liabilities of ($3,253,045) for the year ended June 30, 2009 compared
to a usage of cash of ($536,774) for the year ended June 30, 2008. Our analysis
of the material components of these changes is as follows:
·
|
We
experienced an increase of $1,816,234, (net of $138,848 in doubtful
accounts) amounting to a change of 3,766% in our accounts receivable (a
use of cash) for the year ended June 30, 2009. During the year ended June
30, 2008 we experienced an increase (a use of cash) of and $48,231 in
accounts receivable.
|
·
|
Inventories
increased (a use of cash) 457%, equaling $1,181,329 during the year ended
June 30, 2009 compared to an increase (a use of cash) of $241,801 during
the year ended June 30, 2008.
|
20
·
|
We
experienced increases in our prepaid expenses (a use of cash) of $563,000
and $35,201 during the years ended June 30, 2009 and 2008,
respectively.
|
·
|
Our
accounts payable and accrued liabilities increased (a source of cash)
404%, an aggregate of $446,366 and $85,647 during the years ended June 30,
2009 and 2008, respectively.
|
·
|
Other
material components of change in our operating assets and liabilities were
related to changes in accrued interest and registration payments of $-0-
and an increase (a source of cash) of $249,729; and changes in deferred
revenue of $-0- and a decrease (a use of cash) of 546,917 for the years
ended June 30, 2009 and 2008,
respectively.
|
Our total
assets amounted to $15,086,198 as of June 30, 2009 as compared to $7,568,977 as
of June 30, 2008. The material increase of $7,517,221 (or 99%) in our total
assets is largely from the results of changes in our operating assets in
addition to purchases of property and equipment and investments, as described in
the “Cash Flow from Investing Activities” section below.
Our total
liabilities amounted to $9,029,197 as of June 30, 2009 as compared to $6,471,481
as of June 30, 2008. The material increase of $2,557,716 (or 40%) in our total
liabilities is largely the result of a $2,000,000 (face value) notes payable
made during the current year ending June 30, 2009. As of June 30, 2009, notes
payable principal balance comprised $1,945,647 (or 21%) of our total
liabilities. Since derivative financial instruments are carried at fair value,
our liabilities have and will continue to fluctuate as the fair value of these
instruments fluctuates.
On July
1, 2009, we are required to adopt Emerging Issues Task Force issued EITF
Consensus No. 07-05 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock.
Upon its adoption, we will be required to reclassify certain of our equity
classified warrants to liabilities, and these warrants will be carried at fair
value with changes recorded in income. We currently estimate that the value of
warrants requiring reclassification to current liabilities on July 1, 2009
amounts to $4,000,000.
Cash Flow from
Investing Activities – We used cash of ($7,945,802) and ($7,581,811) in
our investing activities during the years ended June 30, 2009 and 2008,
respectively. Our analysis of the material components of the changes in our
investing activities is as follows:
·
|
We
invested $4,758,050 and $450,000 during the years ended June 30, 2009 and
2008, respectively. This increase in investments from June 30, 2008 to the
year ended June 30, 2009 was as a result of our increased commitment to
further invest in meaningful ventures in support of our Retail Products
business.
|
·
|
We
purchased property and equipment amounting to $2,811,901 and $-0- during
the years ended June 30, 2009 and 2008, respectively. This property is
used in our real estate business related to our 60% interest in OmniComm
Studios LLC.
|
·
|
We
paid 300,001 and $31,811 for licenses and patents during the years ended
June 30, 2009 and 2008,
respectively.
|
·
|
Other
material components of change in our investing activities were related to
security deposits and other activities of $75,850 and $-0-; investment in
ResponzeTV of $-0- and $5,100,000; and loan receivable from RespnzeTV of
$-0- and $2,000,000 during the years ended June 30, 2009 and 2008,
respectively. We impaired our total investment in ResponzeTV and wrote off
the note receivable during the year ended June 30,
2008.
|
21
On April
29, 2009, we entered into an Agreement and Plan of Merger (the “Agreement”) with
Abazias, a Delaware Corporation and Abazias.com, Inc., a Nevada corporation and
wholly owned subsidiary of Abazias, to acquire all of the outstanding common
stock of Abazias for 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”). On August 27, 2009, we completed the acquisition. While we
have not completed our accounting for the Abazias acquisition, we currently
believe that its purchase will result in our recognition of significant
intangible assets, including goodwill.
Further,
in connection with our acquisition of Abazias, we have entered into employment
arrangements with its two principal officers. The arrangements provide for base
annual salaries ranging from $85,000 to $100,000, discretionary bonuses,
participation in existing employee benefit program, and non-competition and
non-solicitation. The arrangements also provide for contingent incentive
compensation that is payable in the event that we sell Abazias at certain
levels. Finally, the employment arrangements provide for the payment of signing
bonuses to the Abazias officers, aggregating $417,650 upon the completion of our
acquisition.
On June
29, 2009, we entered into a Securities Purchase Agreement with Beyond Commerce,
Inc. (BYOC), which was amended on July 10, 2009 (see Note 4) pursuant to which
we agreed to purchase additional original issue discount secured convertible
debentures up to $3,000,000, plus warrants to purchase up to 15,000,000 shares
of BYOC common stock. The Debentures are due one year from when they are issued
and are convertible into shares of BYOC’s common stock at any time at our option
at a conversion price of $0.70 per share, subject to adjustment (the “Conversion
Price”). If BYOC does not repay the respective Debentures within six months of
their issuance, or upon a default of the Debenture, the Conversion Price shall
be reset to equal 80% of the lowest closing bid prices for the three days prior
to the date such Debenture is being converted. Further, BYOC has pledged
7,467,000 shares of its common stock as collateral for its performance under
this arrangement. Interest on the Debenture is 10% per annum, payable in cash or
common stock, at the option of BYOC, provided that, interest may only be paid in
common stock if certain Equity Conditions (as defined in the Debenture) are met
or waived by Omni. Interest is payable on each monthly redemption date, upon
conversion, and upon maturity. The Warrants may be exercised until the fifth
anniversary of their issuance at an exercise price of $.70 per share subject to
adjustment. In connection with the sale of the Debentures, BYOC issued Midtown
Partners & Co., LLC, the placement agent for the sale of the Debentures,
warrants to purchase a total of 1,600,008 shares of the Company’s common stock
and fees totaling an aggregate of $104,000.
BYOC
repaid $500,000 of the secured convertible debentures subsequent to year
end.
Beyond Commerce, Inc.: On
July 30, 2009, we entered into a Securities Purchase Agreement with Beyond
Commerce, Inc. (“BYOC”) (see Note 4) pursuant to which we agreed to purchase
additional original issue discount secured convertible debentures up to
$1,820,000, plus warrants to purchase up to 9,100,000 shares of BYOC common
stock. The Debentures are due one year from when they are issued and are
convertible into shares of BYOC’s common stock at any time at our option at a
conversion price of $0.70 per share, subject to adjustment (the “Conversion
Price”). If BYOC does not repay the respective Debentures within six months of
their issuance, or upon a default of the Debenture, the Conversion Price shall
be reset to equal 80% of the lowest closing bid prices for the three days prior
to the date such Debenture is being converted. Interest on the Debenture is 10%
per annum, payable in cash or common stock, at the option of BYOC, provided
that, interest may only be paid in common stock if certain Equity Conditions (as
defined in the Debenture) are met or waived by Omni. Interest is payable on each
monthly redemption date, upon conversion, and upon maturity. The Warrants may be
exercised until the fifth anniversary of their issuance at an exercise price of
$.70 per share subject to adjustment. In connection with the sale of the
Debentures, BYOC issued Midtown Partners & Co., LLC, the placement agent for
the sale of the Debentures, warrants to purchase a total of 917,335 shares of
the Company’s common stock and fees totaling an aggregate of $104,000. A portion
of the Securities Purchase Agreement with BYOC was in part, financed by an
advance of $600,000 from our majority shareholder who funded the purchase in
that amount.
BYOC has
pledged 10,812,416 shares of its common stock as collateral for its performance
under this arrangement.
22
On July
31, 2009, we entered into an Asset Purchase Agreement with Designer Liquidator,
Inc., (“DLI”) which is a company owned by a shareholder and director, that
provides for the purchase its assets and liabilities, subject to customary due
diligence. The purchase price is $150,000 in cash, 100,000 shares of our common
stock, the assumption of liabilities, as defined, and an earnout that provides
for 10% of the net profits generated from a specific product line. One of DLI’s
assets is a 50% interest in RPS Traders, LLC, (“RPS”) in which, as described in
Note 4, we have an investment. The acquisition of DLI has not been completed as
of the filing of this report and we have not established the application of
accounting principles to the acquisition or the effects on our investment in
RPS.
In
several transactions subsequent to June 30, 2009, we invested an additional
$2,549,072 in RPS. As disclosed in Note 4 Investments to the accompanying
financial statements, our investment in RPS at June 30, 2009 amounted to
$650,000. The subsequent investments were made in the form of variable interest
promissory notes with maturities of six months. We will reflect these additional
investments in RPS as held-to-maturity investments.
Cash Flow from
Financing Activities – We generated
$11,374,907 and $12,339,078 in cash from our financing activities during the
years ended June 30, 2009 and 2008. Our analysis of the material components of
the changes in our financing activities is as follows:
·
|
Cash
was received during the year ended June 30, 2009 from proceeds on the sale
of our Series F preferred stock totaling $9,136,994 and a mortgage loan
totaling $1,939,036 (net of $60,964 of direct loan costs). The mortgage
proceeds were used to fund the purchase of the property and equipment of
OmniComm Studios LLC. In the prior year, we received net proceeds from the
sale of preferred stock amounting to
$12,339,078.
|
·
|
Other
material components of change in our financing activities were related to
minority interest of $320,000 and principal payments on long-term debt of
$21,123 during the year ended June 30, 2009. We incurred no such charge
during the prior year as these charges relate to investments that have
commenced during the current fiscal
period.
|
We have
no commitments for the purchase of property and equipment.
On July
20, 2009, we entered into a securities purchase agreement (the “Purchase
Agreement”) with Vicis Capital Master Fund (“Vicis”), a sub-trust of the Vicis
Capital Series Master Trust, a unit trust organized under the laws of the Cayman
Islands, whereby Vicis purchased from the Company a warrant to purchase
97,606,276 shares of the Company’s Common Stock (the “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. Furthermore, Vicis is the primary holder of the
Company’s Series C, Series D and Series F Convertible Preferred Stock (the
“Preferred Stock”). Pursuant to the terms of the Purchase Agreement, the Company
amended and restated the certificates of designation of the Preferred Stock to
remove the beneficial ownership limitations contained therein, thus allowing the
holder to convert that amount of Preferred Stock that would cause the holder to
beneficially own greater than 4.99% or 9.99% of the issued and outstanding
Common Stock of the Company.
23
On
September 15, 2009, we borrowed $116,000 from Debt Opportunity Fund LLP, an
affiliate of a major shareholder, pursuant to a 12% promissory note with a two
month maturity.
On
September 30, 2009, the Vicis warrant for 97,606,276, to purchase shares of the
Company common stock, is modified to reduce the warrant conversion exercise
price from $.25 to $.2029 for each warrant. Vicis exercised 27,606,276 of
its warrants resulting in cash proceeds to the Company of
$5,600,000. In addition, the Company’s placement agent,
Midtown Partner & Co. LLC, has the right to receive a 5% fee upon
warrant exercises. Accordingly, the placement agent is to receive a warrant
to purchase 1,380,314 of the Company’s common stock at an exercise price of
$.2029 per share.
Segment
Reporting:
Our
business segments consist of (i) Retail Products and Licensing and (ii) Real
Estate. Our real estate business commenced during the current fiscal year upon
the purchase of an office building in Pinellas County, Florida. Our chief
decision making officer considers income (loss) from operations as the basis to
measure segment profitability. The following table summarizes important
financial information about our business segments as of June 30,
2009:
Retail Products
|
Real
Estate
|
Consolidated
|
||||||||||
Year Ended June 30, 2009
|
||||||||||||
Revenues
from external customers
|
$ | 9,552,892 | $ | 236,021 | $ | 9,788,913 | ||||||
Depreciation
expense
|
$ | 11,647 | $ | 220,706 | $ | 232,353 | ||||||
Loss
from operations
|
$ | (3,722,464 | ) | $ | (307,216 | ) | $ | (4,029,680 | ) | |||
Capital
expenditures
|
$ | 87,310 | $ | 2,724,591 | $ | 2,811,901 |
June 30, 2009
|
||||||||||||
Total
assets
|
$ | 12,561,429 | $ | 2,524,769 | $ | 15,086,198 |
During
the year ended June 30, 2009 the Real Estate operation received $65,943 in
rental revenue from the Retail Products and Licensing business, which amount is
eliminated in the table above.
Effect
of Recently Issued Accounting Pronouncements:
We have
reviewed accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. We
believe that the following impending standards may have an impact on our future
filings. Also see Fair Value Measurements, above. The applicability of any
standard is subject to the formal review of our financial management and certain
standards are under consideration.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS 141(R)"), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS 141R is effective as of the beginning of the first
fiscal year beginning on or after December 15, 2008. The effective date
therefore is July 1, 2009. Earlier adoption is prohibited. As more fully
discussed in the Subsequent Events footnote, we completed the acquisition of
Abazias on August 26, 2009. Our accounting for the Abazias acquisition will be
reflected in our first quarterly report on Form 10-Q for the quarterly period
ended September 30, 2009 and will be recorded and presented in accordance with
SFAS 141(R).
24
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51
(“SFAS 160”). This statement amends ARB No. 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary (including
minority interests) and for the deconsolidation of a subsidiary. SFAS 160 will
change the classification and reporting for minority interest and
non-controlling interests of variable interest entities. Following the
effectiveness of SFAS 160, the minority interest and non-controlling interest of
variable interest entities will be carried as a component of stockholders’
equity. This statement is effective for fiscal years and interim periods within
those fiscal years, beginning on or after December 15, 2008 and earlier adoption
is prohibited. We do not currently have Variable Interest Entities consolidated
in our financial statements. However, the adoption of SFAS 160 may result in
certain classification changes.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133 (“SFAS 161”). SFAS 161 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years beginning after November 15, 2008, with early
adoption encouraged. We are currently evaluating the impact of SFAS 161, if any,
will have on our financial position, results of operations or cash flows. This
standard will affect the disclosures in our financial statements to provide the
required information.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." The Company does not expect the adoption of
SFAS 162 will have a material effect on its financial position, results of
operations or cash flows.
In April
2008, the FASB issued FSP No. FAS 142-3 Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. The Company is required to adopt FSP 142-3 on October
1, 2008. The guidance in FSP 142-3 for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. The Company is currently evaluating the impact of FSP 142-3 on its
financial position, results of operations or cash flows, and believes that the
established lives will continue to be appropriate under the FSP.
25
In May
2008, the FASB issued FSP Accounting Principles Board 14-1 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
Company is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its financial position, results of operations or cash
flows.
In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock,
which supersedes the definition in EITF 06-01 for periods beginning after
December 15, 2008 (our fiscal year ending June 30, 2010). The objective of this
Issue is to provide guidance for determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entity's own stock and it
applies to any freestanding financial instrument or embedded feature that has
all the characteristics of a derivative in of Statement 133, for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception in paragraph 11(a) of Statement 133 (the “Paragraph
11(a) Exemption). This Issue also applies to any freestanding financial
instrument that is potentially settled in an entity's own stock, regardless of
whether the instrument has all the characteristics of a derivative in Statement
133, for purposes of determining whether the instrument is within the scope of
Issue 00-19. We currently have warrants linked to 27,224,943 shares of our
common stock that embody terms and conditions that require the reset of their
strike prices upon our sale of shares or equity-indexed financial instruments
and amounts less than the conversion prices. These features will no longer be
treated as “equity” under the EITF once it becomes effective on July 1, 2009.
Rather, such instruments will require classification on July 1, 2009 as
liabilities and measured at fair value, which we have currently estimated
amounts to $4,000,000. Early adoption is precluded.
In June
2008, the Emerging Issues Task Force issue EITF Consensus No. 08-04 Transition
Guidance for Conforming Changes to Issue 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, which is effective for years ending after December 15,
2008 (our fiscal year ending June 30, 2009). Early adoption is not permitted.
The overall objective of the Issue is to conform the requirements of EITF 00-27
and Financial Accounting Standard No. 150 with EITF 98-5 to provide for
consistency in application of the standard. We computed and recorded a
beneficial conversion feature in connection with certain of our prior financing
arrangements and do not believe that this standard has any material effect on
that accounting.
26
In June
2009, the Financial Accounting Standards Board Issued Statements of Financial
Accounting Standards No. 168 The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). The FASB Accounting Standards
Codification has become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB effective September
15, 2009. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws continue to be
sources of authoritative GAAP for SEC registrants. On the effective date of this
Statement, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. As the principal source of authoritative accounting
literature following its release, we will be required to revise our filings
commencing with our quarterly period ended September 30, 2009 to reflect
references to the Codification.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future financial
statements.
Off
Balance Sheet Arrangements
None.
ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
smaller reporting company we are not required to provide the information
required by this Item.
27
ITEM 8 - FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
28
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
OmniReliant
Holdings, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of OmniReliant Holdings,
Inc and subsidiaries at June 30, 2009 and 2008 and the related consolidated
statement of operations, stockholders’ deficit, and cash flows for the years
ended June 30, 2009 and 2008. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of OmniReliant Holdings, Inc.
and subsidiaries at June 30, 2009 and 2008, and the results of their
operations, changes in their stockholders’ deficit and their cash flows for the
years ended June 30, 2009 and 2008, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going
concern. As discussed in Note 2 of the accompanying financial statements, the
Company has incurred significant recurring losses from operations since
inception and is dependent on outside sources of financing for continuation of
its operations. These factors raise substantial doubt about the Company's
ability to continue as a going
concern.
/s/KBL,LLP
Tampa,
Florida
October
5, 2009
29
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Balance Sheets
June
30,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,005,702 | $ | 4,435,814 | ||||
Accounts
receivable, net of $187,763 and $48,914 in allowances
|
1,864,465 | 48,231 | ||||||
Investments
|
1,729,448 | — | ||||||
Inventories,
net of $215,944 and $0, in reserves
|
1,294,250 | 232,425 | ||||||
Prepaid
expenses and other current assets
|
632,200 | 69,200 | ||||||
Total
current assets
|
7,526,065 | 4,785,670 | ||||||
Property
and equipment, net
|
2,579,548 | — | ||||||
Investments,
other
|
2,215,309 | — | ||||||
Intangible
assets, net
|
1,123,335 | 1,278,512 | ||||||
Investments,
available-for-sale
|
732,227 | 426,558 | ||||||
Other
assets
|
909,714 | 1,078,237 | ||||||
Total
assets
|
$ | 15,086,198 | $ | 7,568,977 | ||||
Liabilities,
Redeemable Preferred Stock and Stockholders’ Equity
(Deficiency)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 485,791 | $ | 96,381 | ||||
Accrued
expenses
|
70,956 | 14,000 | ||||||
Current
maturities of long-term debt
|
33,230 | — | ||||||
Derivative
liabilities
|
6,481,839 | 6,361,100 | ||||||
Total
current liabilities
|
7,071,816 | 6,471,481 | ||||||
Long-term
debt
|
1,945,647 | — | ||||||
Security
deposits on leases
|
11,734 | — | ||||||
Total
liabilities
|
9,029,197 | 6,471,481 | ||||||
Minority
interest
|
197,114 | — | ||||||
Redeemable
preferred stock
|
45,969,634 | 35,969,634 | ||||||
Commitments
and contingencies (Note 8)
|
— | — | ||||||
Stockholders'
equity (deficiency):
|
||||||||
Common
stock, $0.00001 par value 400,000,000 shares authorized, 14,509,225 and
14,475,892 shares issued and outstanding
|
145 | 145 | ||||||
Paid-in
capital
|
6,532,238 | 9,102,916 | ||||||
Other
comprehensive items
|
(72,102 | ) | (31,135 | ) | ||||
Accumulated
deficit
|
(46,570,028 | ) | (43,944,064 | ) | ||||
Total
stockholders' deficiency
|
(40,109,747 | ) | (34,872,138 | ) | ||||
Total
liabilities and stockholders' deficiency
|
$ | 15,086,198 | $ | 7,568,977 |
See
accompanying notes.
30
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Operations
Years
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Product
sales
|
$ | 9,552,892 | $ | 420,813 | ||||
Cost
of product sales
|
5,142,210 | 287,038 | ||||||
Gross
profit
|
4,410,682 | 133,775 | ||||||
Other
revenues:
|
||||||||
Rental
revenues
|
236,021 | — | ||||||
Licensing
revenues
|
— | 546,917 | ||||||
236,021 | 546,917 | |||||||
Other
operating expenses:
|
||||||||
Advertising
and promotional
|
5,050,558 | 283,526 | ||||||
Accounting
and professional
|
1,570,903 | 540,779 | ||||||
Employment
costs
|
626,683 | 1,211,569 | ||||||
Depreciation
and amortization
|
656,110 | 681,616 | ||||||
Other
general and administrative
|
573,673 | 247,987 | ||||||
Impairment
charges
|
198,456 | — | ||||||
8,676,383 | 2,965,477 | |||||||
Loss
from operations
|
(4,029,680 | ) | (2,284,785 | ) | ||||
Other
income (expense):
|
||||||||
Derivative
income
|
1,974,605 | 21,694,426 | ||||||
Impairment
of investments
|
(450,000 | ) | (7,828,631 | ) | ||||
Interest
expense
|
(350,491 | ) | (190,730 | ) | ||||
Interest
income
|
199,457 | 33,183 | ||||||
Equity
in (losses) of investee
|
(92,741 | ) | — | |||||
Loss
on exchange of redeemable preferred
|
— | (26,247,007 | ) | |||||
Registration
payments
|
— | (309,137 | ) | |||||
Loss
on settlement of liabilities
|
— | (271,109 | ) | |||||
Total
other income (expense)
|
1,280,830 | (13,119,005 | ) | |||||
Loss
before minority interest in loss of subsidiary
|
(2,748,850 | ) | (15,403,790 | ) | ||||
Minority
interest in loss of subsidiary
|
122,886 | — | ||||||
Net
loss
|
$ | (2,625,964 | ) | $ | (15,403,790 | ) |
Continued
on next page.
31
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Operations (continued)
Years
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Reconciliation
of net loss to loss applicable to common shareholders:
|
||||||||
Net
loss
|
$ | (2,625,964 | ) | $ | (15,403,790 | ) | ||
Preferred
stock accretion
|
(2,958,350 | ) | (22,913,272 | ) | ||||
Loss
applicable to common shareholders
|
$ | (5,584,314 | ) | $ | (38,317,062 | ) | ||
Loss
per common share:
|
||||||||
Basic
|
$ | (039 | ) | $ | (2.71 | ) | ||
Diluted
|
$ | (0.39 | ) | $ | (2.71 | ) | ||
Weighted
average common shares—basic
|
14,503,289 | 14,165,245 | ||||||
Weighted
average common shares—diluted
|
14,503,289 | 14,165,245 |
See
accompanying notes.
32
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (2,625,964 | ) | $ | (15,403,790 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Derivative
income
|
(1,974,605 | ) | (21,694,426 | ) | ||||
Impairment
of investments
|
450,000 | 7,828,631 | ||||||
Share-based
payment
|
387,672 | 1,164,205 | ||||||
Amortization
of intangible assets
|
376,226 | 900,371 | ||||||
Amortization
of deferred finance costs
|
240,987 | 190,730 | ||||||
Depreciation
expense
|
232,353 | — | ||||||
Impairment
charges
|
198,456 | — | ||||||
Bad
debts expense
|
138,848 | — | ||||||
Minority
interest in loss of subsidiary
|
(122,886 | ) | — | |||||
Equity
in losses of investees
|
92,741 | — | ||||||
Loss
on exchange of preferred stock
|
— | 26,247,007 | ||||||
Extinguishment
of liabilities
|
— | 271,109 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,955,082 | ) | (48,231 | ) | ||||
Inventories
|
(1,181,329 | ) | (241,801 | ) | ||||
Prepaid
expenses
|
(563,000 | ) | (35,201 | ) | ||||
Accounts
payable
|
389,410 | 71,647 | ||||||
Accrued
expenses
|
56,956 | 14,000 | ||||||
Accrued
interest on loans
|
— | (59,408 | ) | |||||
Accrued
registration payments
|
— | 309,137 | ||||||
Deferred
revenue
|
— | (546,917 | ) | |||||
Net
cash used for operating activities
|
(5,859,217 | ) | (1,032,937 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of investments
|
(4,758,050 | ) | (450,000 | ) | ||||
Purchases
of property and equipment
|
(2,811,901 | ) | — | |||||
Payments
for licenses and patents
|
(300,001 | ) | (31,811 | ) | ||||
Security
deposits and other activities
|
(75,850 | ) | — | |||||
Investment
in ResponzeTV
|
— | (5,100,000 | ) | |||||
Loan
Receivable from ResponzeTV
|
— | (2,000,000 | ) | |||||
Net
cash flow from investing activities
|
(7,945,802 | ) | (7,581,811 | ) |
Continued
on the next page.
33
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of preferred stock and warrants, net
|
9,136,994 | 12,339,078 | ||||||
Proceeds
from long-term debt, net of $60,964 of direct loan costs
|
1,939,036 | — | ||||||
Minority
interest
|
320,000 | — | ||||||
Principal
payments on long-term debt
|
(21,123 | ) | — | |||||
Net
cash flow from financing activities
|
11,374,907 | 12,339,078 | ||||||
Net
change in cash and cash equivalents
|
(2,430,112 | ) | 3,724,330 | |||||
Cash
and cash equivalents at beginning of year
|
4,435,814 | 711,484 | ||||||
Cash
and cash equivalents at end of year
|
$ | 2,005,702 | $ | 4,435,814 |
Supplemental
Cash Flow Information
Year
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
paid for interest
|
$ | 86,937 | $ | — | ||||
Cash
paid for income taxes
|
$ | — | $ | — | ||||
Non-cash
investing and financing activities:
|
||||||||
Series
C Preferred and warrants issued in exchange
|
$ | — | $ | 33,404,543 | ||||
Series
D Preferred and warrants issued in exchange
|
— | 14,047,580 | ||||||
Investment
in ResponzeTV
|
— | (330,744 | ) | |||||
Transfer
of inventory as part of investment in securities
|
— | 130,000 | ||||||
Transfer
of sublicense as part of investment in securities
|
— | 198,914 | ||||||
Dividends
paid in the form of Series C Preferred
|
— | 309,564 | ||||||
Common
stock issued for patent, at fair value
|
— | 420,000 | ||||||
Series
D Preferred and warrants issued in exchange
|
— | 14,047,580 |
See
accompanying notes
34
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity (Deficiency)
Years
Ended June 30, 2009 and 2008
Common Stock
|
Paid-in
|
Other
Comprehensive
|
Accumulated
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Deficit
|
Total
|
|||||||||||||||||||
Balances
at July 1, 2007
|
14,000,000 | $ | 140 | $ | — | $ | — | $ | (28,425,178 | ) | $ | (28,425,038 | ) | |||||||||||
Beneficial
conversion on Series C Preferred-Stock Financing
|
— | — | 2,766,833 | — | — | 2,766,833 | ||||||||||||||||||
Deferred
finance costs associated with Series C Preferred
|
— | — | (5,231,442 | ) | — | — | (5,231,442 | ) | ||||||||||||||||
Placement
agent warrants on Series C Preferred-Stock Financing
|
— | — | 5,198,797 | — | — | 5,198,797 | ||||||||||||||||||
Investor
warrants on Series C Preferred-Stock Financing
|
— | — | 3,633,167 | — | — | 3,633,167 | ||||||||||||||||||
Accretion
to redemption value on Series C Preferred-Stock Exchange
|
— | — | (6,400,000 | ) | — | — | (6,400,000 | ) | ||||||||||||||||
Investor
warrants-Stock Exchange
|
— | — | 17,796,834 | — | — | 17,796,834 | ||||||||||||||||||
Reclassification
of warrants to equity
|
— | — | 4,008,912 | — | — | 4,008,912 | ||||||||||||||||||
Employee
stock compensation
|
— | — | 450,000 | — | — | 450,000 | ||||||||||||||||||
Employee
stock option compensation
|
42,500 | 1 | 659,329 | — | — | 659,330 | ||||||||||||||||||
Employee
exercise of stock options
|
27,778 | — | — | — | — | — | ||||||||||||||||||
Stock
issued for legal work associated with Preferred C and SB2
|
35,334 | — | 77,000 | — | — | 77,000 | ||||||||||||||||||
Cashless
exercise of warrants
|
170,280 | 2 | (2 | ) | — | — | — | |||||||||||||||||
Common
stock issued for patent
|
200,000 | 2 | 419,998 | — | — | 420,000 | ||||||||||||||||||
Preferred
Series D issuance
|
— | — | 2,236,763 | — | — | 2,236,763 | ||||||||||||||||||
Accretion
of Series C Preferred
|
— | — | (9,513,273 | ) | — | — | (9,513,273 | ) | ||||||||||||||||
Accretion
of Series D Preferred
|
— | — | (7,000,000 | ) | — | — | (7,000,000 | ) | ||||||||||||||||
Fair
value adjustment on available for sale securities
|
— | — | — | (31,135 | ) | — | (31,135 | ) | ||||||||||||||||
Net
income (loss) for the year ended June 30, 2008
|
— | — | — | — | (15,518,886 | ) | (15,518,886 | ) | ||||||||||||||||
Balances
at June 30, 2008
|
14,475,892 | 145 | 9,102,916 | (31,135 | ) | (43,944,064 | ) | (34,872,138 | ) | |||||||||||||||
Fair
value adjustments on available for sale securities
|
— | — | — | (40,967 | ) | — | (40,967 | ) | ||||||||||||||||
Share-based
payments (employees)
|
33,333 | — | 327,016 | — | — | 327,016 | ||||||||||||||||||
Share-based
payments (others)
|
— | — | 60,656 | — | — | 60,656 | ||||||||||||||||||
Accretion
of Series F Preferred Stock
|
— | — | (2,958,350 | ) | — | — | (2,958,350 | ) | ||||||||||||||||
Net
loss for the year ended June 30, 2009
|
— | — | — | — | (2,625,964 | ) | (2,625,964 | ) | ||||||||||||||||
Balances
at June 30, 2009
|
14,509,225 | $ | 145 | $ | 6,532,238 | $ | (72,102 | ) | $ | (46,570,028 | ) | $ | (40,109,747 | ) |
See
accompanying notes.
35
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 1 –
Organization and nature of business:
OmniReliant
Holdings, Inc. is a Nevada corporation. We are engaged in the creation, design,
distribution, and sale of affordable retail products. We plan to make these
products available to U.S. and international consumers through direct response
infomercials, live shopping networks, ecommerce, direct mail and traditional
retail channels.
During
the current fiscal year, we purchased an office building in Pinellas County,
Florida, which is largely being leased to unrelated tenants. While real estate
operations are not our principal business, we have reported it herein as an
identifiable business segment. See Note 14.
Prior to
our quarterly period ended June 30, 2009, we were in our development stage.
Commencing with the fourth fiscal quarter of our year ended June 30, 2009, we
concluded that we have substantially established our operating architecture and
have commenced revenue producing activities sufficient to emerge from the
development stage of operations.
Note 2 –
Going concern:
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States contemplates that operations will be
sustained for a reasonable period. However, we have incurred operating losses of
$2,625,964and $15,403,790 during the years ended June 30, 2009 and 2008,
respectively. In addition, during these periods, we used cash of $5,859,217 and
$1,032,937, respectively, in our operating activities. Since our inception, we
have been substantially dependent upon funds raised through the sale of
preferred and common stock and warrants. These conditions raise substantial
doubt about our ability to continue as a going concern for a reasonable
period.
Our
ability to continue as a going concern for a reasonable period is dependent upon
our ability to raise sufficient capital to implement our business plan and to
generate profits sufficient to become financially viable. During the years ended
June 30, 2009 and 2008, we raised $9,136,994 and $12,339,078, respectively, from
the sale of preferred stock and warrants. During the same periods, we made
investments of $4,758,050 in ventures that we believe will provide a foundation
for the development of our Retail Products Segment. Subsequent to June 30, 2009,
we acquired Abazias, Inc. (“Abazias”) for Series E Convertible Preferred Stock.
Abazias will become a consolidated subsidiary on the purchase date. We cannot
give any assurances regarding the success of our current operations or those of
our investees. 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.
36
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies:
Use of estimates - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make estimates and assumptions that affect the reported amounts in
our consolidated financial statements. Significant estimates embodied in the
Company’s financial statements include (i) developing fair value measurements to
record financial instruments, including investments (ii) developing cash flow
projections for purposes of evaluating the recoverability of long-lived assets.
Actual results could differ from those estimates.
Principles of consolidation –
Our consolidated financial statements include the accounts of OmniReliant
Holdings, Inc. and its wholly owned subsidiaries, OmniReliant Corporation and
OmniResponse Corporation, and its 60.0% owned subsidiary OmniComm Studios LLC.
All significant intercompany accounts, profits and transactions have been
eliminated in consolidation. Entities where the Company does not have voting
control but has significant influence over its operations are accounted for
under the equity method.
Business segments — We
apply the management approach to the identification of our reportable operating
segments as provided in accordance with Statements on Financial Accounting
Standards (“SFAS”) No. 131, Disclosures about Segments
of an Enterprise and Related Information (“SFAS No. 131”). This approach
requires us to report our segment information based on how our chief decision
making officer internally evaluates our operating performance. Our business
segments consist of (i) Retail Product Sales and (ii) Commercial Real Estate
Services. See Note 14.
Revenue recognition – Revenue
is recognized when evidence of the arrangement exists, the product is shipped to
a customer, or in the limited circumstances, at destination, when terms provide
that title passes at destination, and when we have concluded that amounts are
collectible from the customers. Estimated amounts for sales returns and
allowances are recorded at the time of sale. Shipping costs billed to customers
are included as a component of product sales. The associated cost of shipping is
included as a component of cost of product sales.
Due to
the nature of retail business sector, our revenues may be concentrated from
time-to-time in the sale of certain specific products or a single product. These
concentrations generally arise from the timing and intensity of our marketing
and infomercial campaigns related to those specific products. During the year
ended June 30, 2009, two products comprised 67% and 29%, respectively, of our
consolidated Product Sales.
Rental
revenues are recorded based upon executed leases with our tenants over the term
of the respective leases. Concessions such as rent holidays are amortized over
the lease term. License revenue is recorded over the term of the license
arrangement, as it is earned.
37
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Accounts receivable –
Accounts receivable represents normal trade obligations from customers
that are subject to normal trade collection terms, without discounts or rebates.
We may require deposits or retainers when we consider a customer’s credit risk
to warrant the collection of such. Notwithstanding these collections, we
periodically evaluate the collectability of our accounts receivable and consider
the need to establish an allowance for doubtful accounts based upon our
historical collection experience and specifically identifiable information about
our customers.
Inventories – Inventories
consist of retail merchandise that is in its finished form and ready for sale to
end-user customers. Inventories are recorded at the lower of average cost or
market. In-bound freight-related costs from our vendors are included as part of
the net cost of merchandise inventories. Other costs associated with acquiring,
storing and transporting merchandise inventories are expensed as incurred and
included in cost of goods sold. Our inventories are acquired and carried for
retail sale and, accordingly, the carrying value is susceptible to, among other
things, market trends and conditions and overall customer demand. 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. During the years ended June 30, 2009 and 2008,
we recorded reserves of $215,944 and $-0-, respectively. During the year ended
June 30, 2009, we recorded our reserves to cost of goods sold and impairment
charges in the amounts of $96,440 and $119,504, respectively.
Property and equipment –
Property and equipment are recorded at our
cost. We depreciate property and equipment, other than land, using the
straight-line method over lives that we believe the assets will have utility.
Buildings and building improvements are depreciated over 15 years. Furnishings
and office equipment are depreciated over 5 years. Our expenditures for
additions, improvements and renewals are capitalized, while normal expenditures
for maintenance and repairs are charged to expense.
Intangible assets - Patents
and licenses are recorded at cost and those with finite lives are amortized over
the estimated periods of benefit. Patents are amortized over 10 years. Licenses
are amortized over the term of the license agreement, which range from 2 to 5
years.
Impairments – The Company’s
management evaluates its tangible and definite-lived intangible assets for
impairment under Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144) annually at the
beginning of our fourth fiscal quarter or more frequently in the presence of
circumstances or trends that may be indicators of impairment. Our evaluation is
a two step process. The first step is to compare our undiscounted cash flows, as
projected over the remaining useful lives of the assets, to their respective
carrying values. In the event that the carrying values are not recovered by
future undiscounted cash flows, as a second step, we compare the carrying values
to the related fair values and, if lower, record an impairment adjustment. For
purposes of fair value, we generally use replacement costs for tangible fixed
assets and discounted cash flows, using risk-adjusted discount rates, for
intangible assets. During the years ended June 30, 2009 and 2008, we recorded
impairment charges of $78,952 and $-0-, respectively, related to intangible
assets.
38
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Investments – Our investments
consist of available for sale securities, non-marketable securities and other
equity investments.
Available-for-Sale
Investments: Investments that we designate as available-for-sale are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in accumulated other comprehensive income (loss). We base the cost of the
investment sold on the specific identification method using market rates for
similar financial instruments. Our available-for-sale investments
include:
Non-Marketable and Other
Equity Investments: We account for non-marketable and other equity
investments under either the cost or equity method and include them in other
long-term assets. Our non-marketable and other equity investments
include:
|
·
|
Equity method
investments when we have the ability to exercise significant
influence, but not control, over the investee. We record equity method
adjustments in gains (losses) on equity investments, net. Equity method
adjustments include: our proportionate share of investee income or loss,
gains or losses resulting from investee capital transactions, amortization
of certain differences between our carrying value and our equity in the
net assets of the investee at the date of investment, and other
adjustments required by the equity method. In certain instances, due to
the time that it takes our equity investees to close their accounting
records, we record our equity interest in income or loss in arrears up to
but not exceeding three-months.
|
|
·
|
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.
|
39
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
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.
During
the years ended June 30, 2009 and 2008, we recorded investment impairments of
$450,000 and $7,828,631, respectively, based upon this policy. We record
impairment charges associated with our investments as a component of other
expense.
Deferred finance costs –
Direct, incremental finance costs related to debt instruments and other
financial instruments that are recorded in liabilities are included in other
assets and amortized over the term of the respective instrument through charges
to interest expense using the effective method or the straight-line method,
when the difference would not be material. Total deferred financing cost
included in other assets amount to $898,214 and $1,078,237, as of June 30, 2009
and June 30, 2008, respectively. These amounts are net of accumulated
amortization of $283,097 and $42,119 as of June 30, 2009 and June 30, 2008,
respectively.
Share-based payment – We
apply the grant-date fair value method to our share-based payment arrangements
with employees under the rules provided in Statement of Financial Accounting
Standards No. 123R Accounting for Share-Based
Payment (SFAS 123R). For share-based payment transactions with parties
other than employees we apply EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Under SFAS 123R, share-based
compensation cost to employees is measured at the grant date fair value based on
the value of the award and is recognized over the service period, which is
usually the vesting period for employees. Share-based payments to non-employees
are recorded at fair value on the measurement date and reflected in expense over
the service period.
The
Company uses the Black-Scholes option valuation model to determine the
grant-date fair value of stock options and employee stock purchase plan shares.
The determination of the fair value of share-based payment awards on the date of
grant using an option-valuation model is affected by the Company’s stock price
as well as assumptions regarding a number of complex variables. These variables
include the Company’s expected stock price volatility over the term of the
awards, projected employee stock option exercise behavior, expected risk-free
interest rate and expected dividends. The Company estimates the expected term
and volatility of options granted based on values derived from its industry peer
group. Our decision to use these measures of expected term and volatility was
based upon the lack of availability of actively traded options in the Company’s
own common stock and the Company’s assessment that the peer group measure of
volatility is more representative of future stock price trends than the
Company’s historical volatility. The Company bases the risk-free interest rate
for option valuation on Constant Maturity Rates provided by the U.S. Treasury
with remaining terms similar to the expected term of the options.
40
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
The
Company does not anticipate paying any cash dividends in the foreseeable future
and therefore uses an expected dividend yield of zero in the option valuation
model. In addition, SFAS No. 123(R) requires forfeitures of share-based
awards to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. As this is
the Company’s initial issuance and no historical data exists to estimate
pre-vesting option forfeitures the Company has recorded stock-based compensation
expense for the all the awards vested. The Company uses the straight-line
attribution as its expensing method of the value of share-based compensation for
options and awards.
Advertising – The Company
generally expenses advertising when it is incurred in accordance with Statement
of Position 93-7 Accounting for
Advertising. Commencing in the current fiscal year the Company began
engaging for the production of infomercials related to its Retail Products
Business, which is expected to be an increasing activity and cost. The Company’s
accounting policy provides that the costs of infomercials are deferred in
prepaid assets until the first airing, at which time the cost is
expensed.
Financial instruments –
Financial instruments, as defined in Financial Accounting Standard No.
107 Disclosures about
Fair Value of Financial Instruments (Statement 107), consist of cash,
evidence of ownership in an entity, and contracts that both (i) impose on one
entity a contractual obligation to deliver cash or another financial instrument
to a second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (ii) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity, or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Accordingly, our financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, derivative financial instruments, long-term debt, and
redeemable preferred stock.
We carry
cash and cash equivalents, accounts payable and accrued liabilities and
long-term debt at historical costs; their respective estimated fair values
approximate carrying values due. We carry derivative financial instruments at
fair value in accordance with Financial Accounting Standard No. 133 Accounting for Derivative
Financial Instruments and Hedging Activities (Statement 133). We carry
redeemable preferred stock at either its basis derived from the cash received or
fair value depending upon the classification afforded the preferred stock, or
embedded components thereof, in accordance with Statement 133 and Financial
Accounting Standard No. 150 Financial Instruments with
Characteristics of both Equity and Liabilities (Statement
150).
Derivative financial
instruments – Derivative financial instruments, as defined in Statement
133 consist of financial instruments or other contracts that contain a notional
amount and one or more underlying (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets. See Note 11 for additional information.
41
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
We
generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as redeemable preferred
stock arrangements and freestanding warrants with features that are either (i)
not afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by Statement 133, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial statements.
Redeemable preferred stock –
Redeemable preferred stock (and, if ever, any other redeemable financial
instrument we may enter into) is initially evaluated for possible classification
as liabilities under Statements of Financial Accounting Standards No. 150 Financial Instruments with
Characteristics of Both Liabilities and Equity. Redeemable preferred
stock classified as liabilities is recorded and carried at fair value.
Redeemable preferred stock that does not, in its entirety, require liability
classification is evaluated for embedded features that may require bifurcation
and separate classification as derivative liabilities under Statement 133. In
all instances, the classification of the redeemable preferred stock host
contract that does not require liability classification is evaluated for equity
classification or mezzanine classification based upon the nature of the
redemption features. Generally, any feature that could require cash redemption
for matters not within our control, irrespective of probability of the event
occurring, requires classification outside of stockholders’ equity. See Note 10
for further disclosures about our redeemable preferred stock.
Fair value measurements -
Fair value measurement requirements are embodied in certain accounting standards
applied in the preparation of our financial statements. Significant fair value
measurements resulted from the application of SFAS 133 to our preferred stock
and warrant financing arrangements and SFAS 123R to our share-based payment
arrangements.
Financial
Accounting Standard No. 157 Fair Value
Measurements defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. It is effective for our fiscal year beginning
October 1, 2008. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this new standard did not require any new
fair value measurements. We do not believe that adoption of this standard
resulted in a material financial affect.
Financial
Accounting Standard No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities permits entities to choose to
measure many financial instruments and certain other items at fair value. It is
effective for our fiscal year beginning October 1, 2008. At this time, we do not
intend to reflect any of our current financial instruments at fair value (except
that we are required to carry our derivative financial instruments at fair
value). However, we will consider the appropriateness of recognizing financial
instruments at fair value on a case by case basis as they arise in future
periods.
42
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Registration payment arrangements
– Certain
financial instruments, including convertible preferred stock and the related
freestanding warrants issued in connection with those convertible instruments,
are subject to registration rights agreements, which may impose penalties for
our failure to register the underlying common stock by a defined date. These
potential cash penalties, which are referred to as registration payment
arrangements, are recorded when payments are both probable and reasonably
estimable, in accordance with FAS No. 5, Accounting for
Contingencies.
These liquidated damages were included in the liabilities that were exchanged
for the Series C Preferred Stock. Accordingly, we no longer have an obligation
to pay registration payments.
Income taxes – Deferred taxes
are provided on an asset and liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest and
penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of operations. Three years of our consolidated
income tax returns are subject to examination by the Internal Revenue Service.
However, the Service has not indicated to us its intention to perform an audit
of any prior filing.
Comprehensive income –
Comprehensive income is defined as all changes in stockholders’ equity
from transactions and other events and circumstances. Therefore, comprehensive
income includes our net income (loss) and all charges and credits made directly
to stockholders’ equity other than stockholder contributions and distributions,
such as the changes in fair value of our available for sale
investments.
43
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Loss per common share - We
have applied the provisions in Statement of Financial Accounting Standards No.
128, Earnings per
Share (SFAS 128) in calculating our basic and diluted loss per common
share. Basic loss per common share represents our loss applicable to common
shareholders divided by the weighted average number of common shares outstanding
during the period. Diluted loss per common share gives effect to all potentially
dilutive securities. We compute the effects on diluted loss per common share
arising from warrants and options using the treasury stock method or, in the
case of liability classified warrants, the reverse treasury stock method. We
compute the effects on diluted loss per common share arising from convertible
securities using the if-converted method. The effects, if anti-dilutive are
excluded.
Our loss
per common share for the year ended June 30, 2009 excludes the effects of
106,464,170 warrants, 2,145,000 stock options and 42,952,461 shares indexed to
preferred stock, because the effects would be anti-dilutive. Our loss per common
share for the years ended June 30, 2008 excludes the effects of 68,964,171
warrants, 300,000 stock options and 34,619,128 shares indexed to preferred
stock, because the effects would be anti-dilutive.
Reclassifications – We have
reclassified accretions of our preferred stock, amounting to $23,229,888, from
accumulated deficit to paid-in capital, at the request of the Securities and
Exchange Commission during a review of our filings. Certain other
reclassifications have been made to the prior period financial statements for
them to conform to the condensed classifications in the current
period.
Recent accounting pronouncements –
We have reviewed accounting pronouncements and interpretations thereof
that have effectiveness dates during the periods reported and in future periods.
We believe that the following impending standards may have an impact on our
future filings. Also see Fair Value Measurements, above. The applicability of
any standard is subject to the formal review of our financial management and
certain standards are under consideration.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS 141(R)"), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS 141R is effective as of the beginning of the first
fiscal year beginning on or after December 15, 2008. The effective date
therefore is July 1, 2009. Earlier adoption is prohibited. As more fully
discussed in the Subsequent Events footnote, we completed the acquisition of
Abazias on August 27, 2009. Our accounting for the Abazias acquisition will be
reflected in our first quarterly report on Form 10-Q for the quarterly period
ended September 30, 2009 and will be recorded and presented in accordance with
SFAS 141(R).
44
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51
(“SFAS 160”). This statement amends ARB No. 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary (including
minority interests) and for the deconsolidation of a subsidiary. SFAS 160 will
change the classification and reporting for minority interest and
non-controlling interests of variable interest entities. Following the
effectiveness of SFAS 160, the minority interest and non-controlling interest of
variable interest entities will be carried as a component of stockholders’
equity. This statement is effective for fiscal years and interim periods within
those fiscal years, beginning on or after December 15, 2008 and earlier adoption
is prohibited. We do not currently have Variable Interest Entities consolidated
in our financial statements. However, the adoption of SFAS 160 may result in
certain classification changes.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133 (“SFAS 161”). SFAS 161 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years beginning after November 15, 2008, with early
adoption encouraged. We are currently evaluating the impact of SFAS 161, if any,
will have on our financial position, results of operations or cash flows. This
standard will affect the disclosures in our financial statements to provide the
required information.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." The Company does not expect the adoption of
SFAS 162 will have a material effect on its financial position, results of
operations or cash flows.
In April
2008, the FASB issued FSP No. FAS 142-3 Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. The Company is required to adopt FSP 142-3 on October
1, 2008. The guidance in FSP 142-3 for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. The Company is currently evaluating the impact of FSP 142-3 on its
financial position, results of operations or cash flows, and believes that the
established lives will continue to be appropriate under the FSP.
45
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
In May
2008, the FASB issued FSP Accounting Principles Board 14-1 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
Company is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its financial position, results of operations or cash
flows.
In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock,
which supersedes the definition in EITF 06-01 for periods beginning after
December 15, 2008 (our fiscal year ending June 30, 2010). The objective of this
Issue is to provide guidance for determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entity's own stock and it
applies to any freestanding financial instrument or embedded feature that has
all the characteristics of a derivative in of Statement 133, for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception in paragraph 11(a) of Statement 133 (the “Paragraph
11(a) Exemption). This Issue also applies to any freestanding financial
instrument that is potentially settled in an entity's own stock, regardless of
whether the instrument has all the characteristics of a derivative in Statement
133, for purposes of determining whether the instrument is within the scope of
Issue 00-19. We currently have warrants linked to 29,956,171 shares of our
common stock that embody terms and conditions that require the reset of their
strike prices upon our sale of shares or equity-indexed financial instruments
and amounts less than the conversion prices. These features will no longer be
treated as “equity” under the EITF once it becomes effective on July 1, 2009.
Rather, such instruments will require classification on July 1, 2009 as
liabilities and measured at fair value, which we have currently estimated
amounts to approximately $4,000,000. Early adoption is precluded.
In June
2008, the Emerging Issues Task Force issue EITF Consensus No. 08-04 Transition
Guidance for Conforming Changes to Issue 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, which is effective for years ending after December 15,
2008 (our fiscal year ending June 30, 2009). Early adoption is not permitted.
The overall objective of the Issue is to conform the requirements of EITF 00-27
and Financial Accounting Standard No. 150 with EITF 98-5 to provide for
consistency in application of the standard. We computed and recorded a
beneficial conversion feature in connection with certain of our prior financing
arrangements and do not believe that this standard has any material effect on
that accounting.
46
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
In June
2009, the Financial Accounting Standards Board Issued Statements of Financial
Accounting Standards No. 168 The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). The FASB Accounting Standards
Codification has become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB effective September
15, 2009. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws continue to be
sources of authoritative GAAP for SEC registrants. On the effective date of this
Statement, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. As the principal source of authoritative accounting
literature following its release, we will be required to revise our filings
commencing with our quarterly period ended September 30, 2009 to reflect
references to the Codification.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future financial
statements.
Note 4 –
Investments:
Available
for sale investments accounted for under SFAS 115 consisted of the following on
June 30, 2009 and 2008:
June
30,
|
||||||||
2009
|
2008
|
|||||||
Available-for-sale
investments:
|
||||||||
Beyond
Commerce, 10%, face value $1,158,330 notes receivable, due June 26, 2010
(see Note 8)
|
$ | 976,083 | $ | — | ||||
Abazias,
Inc., face value $700,000, 10.0% convertible note receivable, due December
31, 2009 (Cost basis: $700,000)
|
732,227 | — | ||||||
Valcom,
face value $100,000, 10.0% convertible note receivable, due January 2010
(Cost basis $100,000)
|
103,365 | — | ||||||
Carolyn
& Company, 6%, face value $450,000 note receivable, due February
2010
|
— | 426,558 | ||||||
Held-to-maturity
investments:
|
||||||||
RPS
Trading, LLC, variable rate (currently 4.75%), face value $650,000 notes
receivable, due in November and December 2009
|
650,000 | — | ||||||
2,461,675 | 426,558 | |||||||
Current
portion of investments
|
(1,729,448 | ) | — | |||||
Total
non-current investments
|
$ | 732,227 | $ | 426,558 |
47
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 4 –
Investments (continued):
Non-marketable
and other equity investments accounted for at cost or under the equity method of
accounting consisted of the following as of and for the year ended June 30,
2009:
Voting
Ownership
|
Initial
Investment
|
Equity in
Earnings
|
Balance
June 30, 2009
|
|||||||||||||
Equity
method investees:
|
||||||||||||||||
Cellular
Blowout
|
50.0 | % | $ | 1,030,000 | $ | — | $ | 1,030,000 | ||||||||
Wineharvest
|
30.0 | % | 278,050 | (17,807 | ) | 260,243 | ||||||||||
A
Perfect Pear
|
49.5 | % | 300,000 | (55,912 | ) | 244,088 | ||||||||||
Webcarnation
|
40.0 | % | 250,000 | (19,022 | ) | 230,978 | ||||||||||
For
Your Imagination
|
20.0 | % | 200,000 | 200,000 | ||||||||||||
2,058,050 | (92,741 | ) | 1,965,309 | |||||||||||||
Cost
method investees:
|
||||||||||||||||
Nested
Media
|
— | 250,000 | — | 250,000 | ||||||||||||
Total
non-marketable and other equity investments
|
$ | 2,308,050 | $ | (92,741 | ) | $ | 2,215,309 |
We
recorded interest income of $75,309 and $7,693 during the years ended June 30,
2009 and 2008, respectively, related to available for sale debt-type
investments.
Changes
in fair value of available for sale investments are recorded in other
comprehensive income. During the years ended June 30, 2009 and 2008, the fair
value of our available for sale investments decreased $51,605 and 31,135,
respectively. During the year ended June 30, 2009, we concluded that our
investment in Carolyn & Company was fully impaired. The carrying value of
$438,587, plus the amount recorded in other comprehensive income of $11,413, or
$450,000 was charged to expense.
As more
fully discussed in Note 16 Subsequent Events, we completed our acquisition of
all of the outstanding common stock of Abazias on August 27, 2009. Effective on
that date, Abazias has become a wholly owned, consolidated subsidiary and we
will consolidate its operations with ours on the effective date of the
acquisition and thereafter.
As more
fully discussed in Notes 13 and 16, Subsequent Events, on July 31, 2009, we
entered into an Asset Purchase Agreement with Designer Liquidator, Inc., (“DLI”)
which is a company owned by a shareholder and director, that provides for the
purchase its assets and liabilities, subject to customary due diligence. The
purchase price is $150,000 in cash, 100,000 shares of our common stock, the
assumption of liabilities, as defined, and an earnout that provides for 10% of
the net profits generated from a specific product line. One of DLI’s assets is a
50% interest in RPS Traders, LLC, reflected in the table, above. The acquisition
of DLI has not been completed as of the filing of this report and we have not
established the application of accounting principles to the acquisition or the
effects on our investment in RPS.
48
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 5 –
Property and equipment:
Property
and equipment consisted of the following on June 30, 2009 and 2008:
June 30,
|
||||||||
2009
|
2008
|
|||||||
Land
|
$ | 500,000 | $ | — | ||||
Buildings
and building improvements
|
1,529,755 | — | ||||||
Furnishings
and office equipment
|
782,146 | — | ||||||
2,811,901 | — | |||||||
Less
accumulated depreciation
|
(232,353 | ) | — | |||||
$ | 2,579,548 | $ | — |
Depreciation
expense amounted to $232,353 during the year ended June 30, 2009.
Note 6 –
Intangible assets:
Intangible
assets consisted of the following on June 30, 2009 and 2008:
June 30,
|
||||||||
2009
|
2008
|
|||||||
Patent
costs
|
$ | 1,169,412 | $ | 1,169,412 | ||||
License
agreement
|
— | 653,005 | ||||||
Other
|
79,402 | 79,402 | ||||||
1,248,814 | 1,901,819 | |||||||
Less
accumulated amortization
|
(125,479 | ) | (623,307 | ) | ||||
Total
|
$ | 1,123,335 | $ | 1,278,512 | ||||
Amortization
expense:
|
||||||||
Year
ended June 30, 2009
|
$ | 376,226 | ||||||
Year
ended June 30, 2008
|
$ | 623,804 | ||||||
Estimated
Amortization Expense:
|
||||||||
Year
ending June 30:
|
||||||||
2010
|
$ | 88,079 | ||||||
2011
|
88,079 | |||||||
2012
|
88,078 | |||||||
2013
|
88,078 | |||||||
2014
|
88,078 | |||||||
Thereafter
|
682,943 | |||||||
$ | 1,123,335 |
49
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 6 –
Intangible assets (continued):
Licensing Agreement – Under
the terms of the Licensing Agreement we obtained the exclusive right and license
to the Kathy Hilton “Private Beauty Spa” product line through December 31, 2011
with an option to renew for an additional five year period provided all the
minimum royalty payments have been paid during the initial term. Our original
cost of the license amounted to $953,502 and had a net carrying value of $78,952
at the time we concluded that future cash flows from this arrangement would be
insufficient to recover the remaining carrying value. Accordingly, we have
recorded an impairment charge of $78,952 during our year ended June 30, 2009
related to this arrangement.
Patent costs— On June 18,
2007, we entered into an Agreement for Acquisition of a Patent Application with
Product & Technology Partners LLC. Pursuant to the Agreement, we acquired
the rights to a patent-pending self-warming topical pharmaceutical product
capable of delivering salicylic acid foam suitable for consumer use. In
consideration for the rights to the product, we agreed to pay Seller in the
following manner:
|
a)
|
Upon
execution of the Agreement, we paid Seller (i) an aggregate of Twenty Five
Thousand dollars ($25,000) and (ii) issued to the Seller Two Hundred
Thousand (200,000) shares of our common
stock.
|
|
b)
|
Following
the completion of due diligence (which shall be six months from the date
of the Agreement), if the Company is satisfied with the Product and
intends to offer Product for sale, the Company shall pay to Seller Twenty
Five Thousand dollars ($25,000), paid January 22,
2008.
|
|
c)
|
We
will also pay Seller installment payments of up to a maximum of Four
Hundred Thousand Dollars ($400,000), payable over a period of 4 years
beginning six months from the date of the Agreement. If no revenues are
generated from the sale of the Product, no installment payments shall be
due.
|
We have
received a written opinion issued by the USPTO as International Search Authority
and a response was filed as entering Chapter ii of the PCT designating the USPTO
as International Examining Authority. We have consulted with the scientist
regarding the application and we believe the technology has many future uses.
Once approved, we plan to market and sell products using the technology
acquired.
We
currently estimate the patent pending application will take up to 3 years to go
through the approval process. At such time we will begin amortizing the cost
over 20 years, the useful life of the asset. In the event additional assistance
is required with the patent pending application or development of a product the
members of Product & Technology Partners, LLC have agreed to work with us on
a consulting basis.
50
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 7 –
Long-term debt:
Long-term
debt consisted of the following at June 30, 2009:
Amount
|
||||
Initial
$2,000,000 six-year, variable rate mortgage note, with interest at the
Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75%
during the first three years and a floor of 6.75% and a cap of 8.75%
during the second three years; principal and interest payments of $13,507
are payable over the six year term based upon a twenty-five year
amortization schedule, with $1,766,016 payable at maturity; secured by
real estate; guaranteed by related parties.
|
$ | 1,978,877 | ||
Less
current maturities
|
(33,230 | ) | ||
Long-term
debt
|
$ | 1,945,647 | ||
Maturities
of long-term debt are as follows:
|
||||
Year
ending June 30:
|
||||
2010
|
$ | 35,477 | ||
2011
|
37,876 | |||
2012
|
40,437 | |||
2013
|
43,172 | |||
2014
|
1,788,685 | |||
$ | 1,945,647 |
We have
concluded that the interest rate collar is clearly and closely related to the
host debt instrument and, accordingly, it does not require bifurcation and
recognition at fair value. The interest rate in effect during the current
quarterly period was at the 6.5% floor.
51
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 8 –
Commitments and contingencies:
Legal:
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.
Employment
Agreements:
Paul
Morrison – On October 31, 2006 we entered into an employment agreement with Paul
Morrison to act as President and Chief Operating Officer. Subsequently, Mr.
Morrison was appointed Chief Executive Officer. This agreement provides for a
term of two (2) years with automatic successive two (2) year term renewals
subject to a notice of non-renewal. In consideration for the services he is to
receive a base salary of $120,000 per year with annual pay increases of ten
percent (10%); incentive bonus of one and half percent (1.5%) of pretax profits
on the sales of certain products payable the day after the Company's Form 10-K
annual report is filed with the SEC; the issuance of 300,000 shares the
Company's restricted common stock payable as follows: 150,000 shares upon
execution of the agreement and 150,000 shares on the first anniversary of
employment with the Company.
Allen
Clary – On July 16, 2009, we entered into an employment agreement with Allen
Clary to act as Chief Operating Officer. This agreement is “at will” and
provides for an annual salary of $95,000 and an annual bonus of 1.0% of net
profits. The agreement also awarded Mr. Clary options to purchase 100,000 shares
of common stock that vest 20,000 a year over five years.
Abazias,
Inc. – As more fully discussed in Note 16, we completed our acquisition of
Abazias, Inc. (“Abazias”) on August 27, 2009. In connection with our acquisition
of Abazias, we have entered into employment arrangements with its two principal
officers. The arrangements provide for base annual salaries ranging from $85,000
to $100,000, discretionary bonuses, participation in existing employee benefit
program, and non-competition and non-solicitation. The arrangements also provide
for contingent incentive compensation that is payable in the event that we sell
Abazias at certain levels. Finally, the employment arrangements provide for the
payment of signing bonuses to the Abazias officers, aggregating $417,650 upon
the completion of our acquisition.
Beyond
Commerce Investment:
On June
29, 2009, we entered into a Securities Purchase Agreement with Beyond Commerce,
Inc. (BYOC), which was amended on July 10, 2009 (see Note 4) pursuant to which
we agreed to purchase additional original issue discount secured convertible
debentures up to $3,000,000, plus warrants to purchase up to 15,000,000 shares
of BYOC common stock. The Debentures are due one year from when they are issued
and are convertible into shares of BYOC’s common stock at any time at our option
at a conversion price of $0.70 per share, subject to adjustment (the “Conversion
Price”). If BYOC does not repay the respective Debentures within six months of
their issuance, or upon a default of the Debenture, the Conversion Price shall
be reset to equal 80% of the lowest closing bid prices for the three days prior
to the date such Debenture is being converted. Further, BYOC has pledged
7,467,000 shares of its common stock as collateral for its performance under
this arrangement. Interest on the Debenture is 10% per annum, payable in cash or
common stock, at the option of BYOC, provided that, interest may only be paid in
common stock if certain Equity Conditions (as defined in the Debenture) are met
or waived by Omni. Interest is payable on each monthly redemption date, upon
conversion, and upon maturity.
52
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 8 –
Commitments and contingencies (continued):
The
Warrants may be exercised until the fifth anniversary of their issuance at an
exercise price of $.70 per share subject to adjustment. In connection with the
sale of the Debentures, BYOC issued Midtown Partners & Co., LLC, the
placement agent for the sale of the Debentures, warrants to purchase a total of
1,600,008 shares of the Company’s common stock and fees totaling an aggregate of
$104,000.
BYOC
repaid $500,000 of the secured convertible debentures subsequent to year
end.
Other
Commitments:
In
connection with our Retail Products Segment, we enter into other arrangements
from time to time that are routine and customary for the operation of our
business that include commitments, typically of a short duration. These
arrangements include, among other things, infomercial development and production
arrangements and royalty or contingent consideration to product manufacturers or
infomercial hosts. As of June 30, 2009, we do not believe that our routine and
customary business arrangements are material.
Note 9 –
Stockholders’ equity (deficit):
Change in Authorized Shares:
Effective August 25, 2008, the Company amended its articles of
incorporation to increase the number of authorized shares from 100,000,000 to
500,000,000, including 100,000,000 authorized shares of preferred
stock.
Stock Options and Warrants:
The following table summarizes the activity related to warrants and stock
options for the period from July 1, 2007 through June 30, 2009:
Weighted Average
|
||||||||||||||||||||||||
Exercise Price
|
Exercise Price
|
|||||||||||||||||||||||
Stock
|
Per Share
|
Per Share
|
||||||||||||||||||||||
Warrants
|
Options
|
Warrants
|
Options
|
Warrants
|
Options
|
|||||||||||||||||||
July
1, 2007
|
9,004,000 | — | 1.00-3.75 | — | 2.13 | — | ||||||||||||||||||
Granted
|
60,056,171 | 350,000 | 0.50-2.00 | 1.00 | 0.86 | 1.00 | ||||||||||||||||||
Exercised
|
(96,000 | ) | (50,000 | ) | (1.25-3.75 | ) | (1.00 | ) | (1.93 | ) | (1.00 | ) | ||||||||||||
Cancelled
or expired
|
— | — | — | — | — | — | ||||||||||||||||||
June
30, 2008
|
68,964,171 | 300,000 | 0.75-3.75 | 1.00 | 0.63 | 1.00 | ||||||||||||||||||
Granted
|
37,499,999 | 1,845,000 | 0.50-1.50 | 0.50 | 1.34 | 0.50 | ||||||||||||||||||
Exercised
|
— | — | — | — | — | — | ||||||||||||||||||
Cancelled
or expired
|
— | — | — | — | — | — | ||||||||||||||||||
June
30, 2009
|
106,464,170 | 2,145,000 | 0.50-3.75 | 0.50-1.00 | 0.92 | 0.57 | ||||||||||||||||||
Exercisable
at June 30, 2009
|
106,464,170 | 2,145,000 | 0.50-3.75 | 0.50-1.00 | 0.92 | 0.57 |
The
warrants expire at various dates ranging from April 2010 through October
2017.
53
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 9 –
Stockholders’ equity (deficit) (continued):
On
January 15, 2009, the Company 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%.
Series
E Convertible Preferred Stock:
On
December 3, 2008, we designated 13,001,000 shares of our newly designated
$0.00001 par value, $1.00 stated value, Series E Convertible Preferred Stock
(the “Series E Preferred Stock”) of which 13,000,000 were issued on August 27,
2009 in connection with our acquisition of Abazias.
The
Series E Preferred Stock will vote with the common shareholders on an
if-converted basis. The Series E Preferred Stock does not provide for either a
liquidation preference or a dividend right. The Series E Preferred Stock was
initially convertible into common stock on a one-for-one basis. However, this
conversion rate was subject to a one-time adjustment, on the closing date of the
Abazias purchase, where the conversion price was adjusted downward on a pro rata
basis for common market values below $1.20, subject to a floor of $0.50. Since
the market value on the closing date, August 27, 2009, was $1.01, the effective
conversion price is $0.84; resulting in the 13,000,000 Series E Convertible
Preferred Shares issued being indexed to 15,476,190 common shares.
In
addition to the aforementioned conversion adjustment, the Series E Preferred
Stock provides for down-round price protection in the event that we sell shares
or indexed securities below $1.20 during the two year period following issuance.
In the event of a down-round financing, the conversion price is adjusted
similarly to the one-time adjustment described above. That is, on a pro rata
basis for down round financings at less than $1.20. This protection has a floor
of $0.50. The Series E Preferred Stock conversion price is otherwise subject to
adjustment for traditional reorganizations, such as stock splits, stock
dividends and similar restructuring of equity. Finally, OmniReliant is precluded
from changing the designations of the Series E Preferred Stock without the
approval of at least 80% of the holders.
Accounting
for the Series E Convertible Preferred Stock will be recorded in the period in
which issued, in the quarterly period ending September 30, 2009. See Note 16
Subsequent events for additional considerations.
54
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 9 –
Stockholders’ equity (deficit) (continued):
Exchange
and Conversion Transactions:
On July
20, 2009, we entered into a securities purchase agreement (the “Purchase
Agreement”) with Vicis Capital Master Fund (“Vicis”), a sub-trust of the Vicis
Capital Series Master Trust, a unit trust organized under the laws of the Cayman
Islands, whereby Vicis purchased from the Company a warrant to purchase
97,606,276 shares of the Company’s Common Stock (the “New Warrant”) for a
purchase price of five million dollars ($5,000,000). The Warrant has an exercise
price of $0.25 per share and is exercisable for ten years from the date of
issuance. The Warrant is exercisable on a cashless basis at any time after six
months from the date of issuance if there is no effective registration statement
registering the resale of the shares underlying the Warrant. As further
consideration for the sale of the Warrant, Vicis surrendered for cancellation
all existing warrants that it currently holds that are indexed to 97,606,276
shares of common stock. These transactions are collectively referred to as the
Exchange Transaction.
The
Exchange Transaction has 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.
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.
55
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 9 –
Stockholders’ 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
if these transactions had occurred on June 30, 2009:
Historical
|
Exchange
|
Conversion
|
Pro Forma
|
|||||||||||||
Common
shares outstanding
|
14,509,225 | 105,141,416 | 119,650,641 | |||||||||||||
Preferred
Stock:
|
||||||||||||||||
Series
C Convertible Preferred
|
20,619,128 | 22,796,231 | (37,141,416 | ) | 6,273,943 | |||||||||||
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 | 68,462,898 | (105,141,416 | ) | 6,273,943 | ||||||||||||
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 | ) | 2,731,228 | ||||||||||||
Class
D-1
|
30,100,000 | (30,100,000 | ) | — | ||||||||||||
Class
E
|
37,499,999 | (33,333,333 | ) | 4,166,666 | ||||||||||||
Other
Warrants
|
1,000,000 | — | 1,000,000 | |||||||||||||
Employee
stock options
|
2,145,000 | — | 2,145,000 | |||||||||||||
108,609,170 | — | 108,609,170 | ||||||||||||||
Common
and common equivalent shares
|
166,070,856 | 68,462,898 | — | 234,533,754 |
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. The Exchange and Conversion Transactions will be recorded in
the period in which they occurred in the quarterly period ending September 30,
2009.
2007
Long Term Incentive Plan:
On
November 21, 2007 the Company established a Long Term Incentive Plan (the “2007
Incentive Plan”) for the purposes of advancing the interests of the Company and
our shareholders by providing incentives to certain of our employees and other
key individuals who perform services for us, including those who contribute
significantly to the strategic and long-term performance objectives and growth
of the Company. The 2007 Incentive Plan is administered by a committee (the
“Committee”) appointed by the Board of Directors. Currently, the Committee is
comprised of all members of the Board of Directors acting as a group. The
Committee has the power to interpret the 2007 Incentive Plan and to prescribe
rules, regulations and procedures in connection with the operations of the 2007
Incentive Plan. The Committee may delegate administrative responsibilities under
the 2007 Incentive Plan to any one or more of its members or other persons,
except as may otherwise be required under applicable law or listing standards
for an exchange on which the Company’s common stock may be listed.
56
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 9 –
Stockholders’ equity (deficit) (continued):
The 2007
Incentive Plan provides for the granting of several types of awards, including
stock options, performance grants and other awards deemed by the Committee to be
consistent with the purposes of the 2007 Incentive Plan. Awards may be granted
alone, or in conjunction with one or more other awards, as determined by the
Committee.
The 2007
Incentive Plan was effective as of November 21, 2007, and was approved by the
Company’s board of directors. The Company’s shareholders have not voted on
approval of the 2007 Incentive Plan. A maximum of two million shares (2,000,000)
of common stock has been authorized to be issued under the 2007 Incentive Plan
in connection with the grant of awards, subject to adjustment for corporate
transactions, including, without limitation, any stock dividend, forward stock
split, reverse stock split, merger or recapitalization. Of this amount, no more
than two million (2,000,000) shares of common stock may be issued as incentive
stock options. Common stock issued under the 2007 Incentive Plan may be either
newly issued shares, treasury shares, reacquired shares or any combination
thereof. If common stock issued as restricted stock, restricted stock units or
otherwise subject to repurchase or forfeiture rights is reacquired by us
pursuant to such rights, or if any award is cancelled, terminates, or expires
unexercised, the common stock which would otherwise have been issuable pursuant
to such awards will be available for issuance under new awards. All awards under
the 2007 Incentive Plan shall be granted within 10 years of the date the plan
was adopted.
The
Committee has exclusive discretion to select to whom awards will be granted; to
determine the type, size, terms and conditions of each award; to modify or
waive, within certain limits, the terms and conditions of any award; to
determine the time when awards will be granted; to establish performance
objectives; to prescribe the form of documents representing awards under the
2007 Incentive Plan; and to make all other determinations which it deems
necessary, advisable or desirable in the interpretation and administration of
the 2007 Incentive Plan. At the discretion of the Committee, awards may be made
under the 2007 Incentive Plan in assumption of, or in substitution for,
outstanding awards previously granted by the Company, any predecessor or a
company acquired by the Company or with which it combines. The Committee has the
authority to administer and interpret the 2007 Incentive Plan, and its decisions
are final, conclusive and binding. We anticipate that all of our employees and
directors will be eligible to participate in the 2007 Incentive
Plan.
On January 15, 2009, the Company amended the 2009 Incentive Plan
to increase the maximum authorized shares to three million five hundred thousand
(3,500,000).
57
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock:
Redeemable
preferred stock consists of the following as of June 30, 2009 and June 30,
2008:
June 30,
2009
|
June 30,
2008
|
|||||||
Series
C Convertible Preferred Stock, 10,620,000 shares issued and outstanding
(liquidation value $10,620,000)
|
$ | 28,969,634 | $ | 28,969,634 | ||||
Series
D Convertible Preferred Stock, 7,000,000 shares issued and outstanding
(liquidation value $7,000,000)
|
7,000,000 | 7,000,000 | ||||||
Series
F Convertible Preferred Stock, 10,000,000 shares issued and outstanding
(liquidation value $10,000,000)
|
10,000,000 | — | ||||||
$ | 45,969,634 | $ | 35,969,634 |
See Note
9 for information on our Series E Convertible Preferred Stock and the Exchange
and Conversion Transactions.
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 | $ | 0.50 | |||||||||||||||||
D
|
4/30/2008
|
7,000,000 | $ | 0.00001 | $ | 1.00 | $ | 1.00 | — | $ | 0.50 | $ | 0.50 | |||||||||||||||||
F
|
2/12/2009
|
10,000,000 | $ | 0.00001 | $ | 1.00 | $ | 1.00 | — | $ | 1.20 | $ | 1.20 |
Conversion price
adjustments: The conversion prices of our outstanding convertible
preferred stock are subject to adjustment for anti-dilution protection for (i)
traditional capital restructurings, such as splits, stock dividends and
reorganizations (traditional restructuring events), and (ii) sales or issuances
of common shares or contracts to which common shares are indexed at less than
the stated conversion prices (down-round protections). As it relates to
adjustments to conversion prices arising from down-round financing triggering
events, we account for the incremental value to convertible preferred stock
classified as liabilities by charging earnings. For convertible preferred stock
classified in stockholders’ equity or redeemable preferred stock (mezzanine
classification) we charge the incremental value to accumulated deficit as a
deemed dividend.
Redemption features:
The Series C, Series D and Series F Preferred are redeemable for cash in an
amount representing the stated value. The following events give rise to a
redemption triggering event:
|
·
|
The
Corporation shall fail to have available a sufficient number of authorized
and unreserved shares of Common Stock to issue to such Holder upon a
conversion hereunder;
|
58
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
|
·
|
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 Triggering Redemption amount on the date it is due,
interest will accrue at a rate equal to the lesser of 18% per year, or the
maximum rate permitted by applicable law, accruing daily from the date of the
Triggering event until the amount is paid in full.
Events
that may result in the redemption for cash of preferred stock, and that are not
within a company’s control, are required to be classified outside of
stockholders’ equity (in the mezzanine section), as required in EITF D-98 Classification and
Measurement of Redeemable Securities (EITF D-98). The specific triggering
event presumed not to be within our control is the change of control redemption
event. Accordingly, these instruments are recorded in our balance sheet in the
caption Redeemable Preferred Stock, which is outside of stockholders’
equity.
Sale
and Exchange of Series C Preferred Stock:
On
October 18, 2007, we sold 6,400,000 Series C Preferred shares plus two tranches
of warrants. We also issued warrants to placement agents. On October 18, 2007,
we also exchanged all outstanding Series A Preferred, and Series B Preferred,
for 3,909,564 shares of Series C Preferred and two tranches of warrants. The
following table illustrates details of the sales of these financial
instruments:
59
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
Series C
Financing
|
Series C
Exchange
|
Total
|
||||||||||
Gross
proceeds
|
$ | 6,400,000 | $ | — | $ | 6,400,000 | ||||||
Financing
costs paid in cash
|
(340,000 | ) | — | (340,000 | ) | |||||||
Net
proceeds
|
$ | 6,060,000 | $ | — | $ | 6,060,000 | ||||||
Common
shares indexed to financial instruments:
|
||||||||||||
Series
C Preferred
|
8,533,333 | 5,212,752 | 13,746,085 | |||||||||
Investor
warrants:
|
||||||||||||
Tranche
C-1
|
8,533,334 | 5,212,752 | 13,746,086 | |||||||||
Tranche
C-2
|
8,533,334 | 5,212,752 | 13,746,086 | |||||||||
Placement
agent warrants
|
2,559,999 | — | 2,559,999 | |||||||||
28,160,000 | 15,638,256 | 43,798,256 |
Apogee
Financial Investments, Inc., a company owned by certain of our stockholders, and
Midtown Partners & Company LLC, a related company, received cash fees of
$340,000 for consulting and due diligence services rendered in connection with
the transactions, which amount is included in the financing costs paid in cash
in the table above.
The
following table illustrates the terms of the warrants issued in connection with
the Series C Preferred Financing:
Warrant terms:
Strike Price
Original/Reset
|
Term
|
|||
Tranche
C-1
|
$1.50/$0.50 |
5
years
|
||
Tranche
C-2
|
$2.00/$0.50 |
10
years
|
||
Placement
agents
|
$0.75-$2.00/$0.50 |
10
years
|
The
following tables illustrate how the net proceeds arising from each of the Series
C Preferred Financing and Exchange was allocated on the inception
dates:
60
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
Series C
Financing
|
Series C
Exchange
|
Total
|
||||||||||
Redeemable
preferred stock (mezzanine)
|
$ | — | $ | (13,553,155 | ) | $ | (13,553,155 | ) | ||||
Beneficial
conversion feature (paid-in capital)
|
(2,766,833 | ) | — | (2,766,833 | ) | |||||||
Derivative
put liability
|
(399,150 | ) | — | (399,150 | ) | |||||||
Sub-total
redeemable preferred
|
(3,165,983 | ) | (13,553,155 | ) | (16,719,138 | ) | ||||||
Paid-in
capital (investor warrants)
|
(3,633,167 | ) | (17,796,834 | ) | (21,430,001 | ) | ||||||
Loss
on extinguishment of redeemable preferred stock
|
— | 26,247,006 | 26,247,006 | |||||||||
Day-one
derivative loss
|
399,150 | — | 399,150 | |||||||||
Loss
on extinguishment of other liabilities
|
— | 271,109 | 271,109 | |||||||||
Gross
proceeds (financing) basis (exchange)
|
$ | (6,400,000 | ) | $ | (4,831,874 | ) | $ | (11,231,874 | ) |
The
Exchange of Series A and B Preferred for Series C Preferred and related
warrants, was accounted for as the settlement of the former financial
instruments resulting in (i) an extinguishment loss, to the extent that the fair
value of the Series C Preferred and related warrants exceeded the carrying
values of the Series A and B Preferred (included in liabilities). The following
table illustrates the calculations related to the Exchange.
Fair
value of Series C Preferred
|
$ | 13,553,155 | ||
Fair
value of Series C investor warrants
|
17,796,834 | |||
31,349,989 | ||||
Carrying
values of financial instruments exchanged:
|
||||
Series
A Preferred
|
(5,200,000 | ) | ||
Series
B Preferred
|
(780,000 | ) | ||
Accrued
dividends
|
(309,564 | ) | ||
Accrued
damages
|
(542,080 | ) | ||
Unamortized
finance costs
|
1,999,771 | |||
Total
carrying values
|
(4,831,873 | ) | ||
Excess
of fair values over carrying values
|
$ | 26,518,116 | ||
Allocation
of excess:
|
||||
Extinguishment
of redeemable preferred
|
$ | 26,247,007 | ||
Extinguishment
of other liabilities
|
271,109 | |||
Excess
of fair values over carrying values
|
$ | 26,518,116 |
61
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
The
investor warrants were valued using BSM. Significant assumptions underlying the
BSM calculations are as follows:
Financing
Inception Dates:
|
A-1 | A-2 | B-1 | B-2 | ||||||||||||
Trading
market price
|
$ | 3.50 | $ | 3.50 | $ | 3.50 | $ | 3.50 | ||||||||
Strike
or exercise price
|
$ | 1.50 | $ | 1.00 | $ | 1.87 | $ | 3.75 | ||||||||
Expected
term in years
|
5yrs
|
10yrs
|
3yrs
|
5yrs
|
||||||||||||
Volatility
|
43.91 | % | 51.15 | % | 39.86 | % | 42.19 | % | ||||||||
Risk-free
rate
|
4.57 | % | 4.57 | % | 4.81 | % | 4.80 | % |
October
18, 2007:
|
A-1 | A-2 | B-1 | B-2 | ||||||||||||
Trading
market price
|
$ | 2.60 | $ | 2.60 | $ | 2.60 | $ | 2.60 | ||||||||
Strike
or exercise price:
|
||||||||||||||||
Contract
price
|
$ | 1.50 | $ | 1.00 | $ | 1.87 | $ | 3.75 | ||||||||
Repriced
|
$ | 0.75 | $ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||||
Expected
term in years
|
4.10yrs
|
9.10yrs
|
2.60yrs
|
4.60yrs
|
||||||||||||
Volatility
|
39.73 | % | 50.03 | % | 34.98 | % | 40.08 | % | ||||||||
Risk-free
rate
|
4.17 | % | 4.52 | % | 3.98 | % | 4.17 | % |
On
October 18, 2007, certain warrants were repriced from their original exercise
price to $0.75 in connection with the Series C Preferred financing. On April 30,
2008 certain warrants were repriced to $0.50 in connection with the Series D
Preferred Financing. We recorded an expense of approximately $3.2 million
resulting from repricing of warrants.
The fair
value of the warrants issued to placement agents in connection with the Series A
Preferred and Series B Preferred financing transactions amounted to $2,492,312
and $384,034, respectively; $2,876,346 in the aggregate. The fair values were
calculated using the Black-Scholes-Merton (“BSM”) valuation
technique.
Notes to
BSM: We did not have a historical trading history sufficient to develop an
internal volatility rate for use in BSM. As a result, we have used a peer
approach wherein the historical trading volatilities of certain companies with
similar characteristics as ours and who had a sufficient trading history were
used as an estimate of our volatility. In developing this model, no one company
was weighted more heavily. We do not have a history to develop the expected term
for our warrants. Accordingly, we have used the contractual remaining term in
our calculations. Finally, for purposes of our risk-free rate, we have used the
publicly-available yields on zero-coupon Treasury securities with remaining
terms to maturity consistent with the remaining contractual term of the
warrants. These assumptions are estimates of future trends. Actual results
during the periods that the warrants are outstanding will most likely be
different.
62
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
Sales
of Series D Preferred Stock and Warrants:
On April
30, 2008, we entered into securities purchase agreement (the “Purchase
Agreement”) with Vicis Capital Master Fund (“Vicis”) pursuant to which Vicis
purchased 7,000,000 shares of our Series D Convertible Preferred Stock (“Series
D Preferred Stock”), respectively for an aggregate purchase price of $7,000,000.
The Series D Preferred Stock has a conversion price of $0.50 and is convertible
into an aggregate amount of 14,000,000 shares of common stock. The Series D
Preferred Stock does not pay annual dividends but each holder of Series D
Preferred Stock has the right to such number of votes equal to the number of
shares of common stock that the Series D Preferred Stock may be converted into,
subject to the beneficial ownership limitation described below.
In
connection with the Agreement, Vicis received a Series D warrant to purchase
28,000,000 shares of common stock of the Company (“Series D Warrants”). The
Series D Warrants are exercisable for a period of seven years from the date of
issuance at an initial exercise price of $0.75. Vicis may exercise the Series D
Warrants on a cashless basis if the shares of common stock underlying the Series
D Warrants are not then registered pursuant to an effective registration
statement. In the event Vicis exercises the Series D Warrants on a cashless
basis, then we will not receive any proceeds.
The
conversion price of the Series D Preferred Stock and the exercise price of the
Series D Warrants are subject to full ratchet and anti-dilution adjustment for
subsequent lower price issuances by the Company, as well as customary adjustment
provisions for stock splits, stock dividends, and
recapitalizations.
In
addition, the Company, Vicis and Dynamic Decisions Strategic Opportunities
(“Dynamic Decisions”) have entered into Amendment No. 1 to its amended and
restated registration rights agreement (“Amended Registration Rights Agreement”)
pursuant to which if at any time after the date of the Amended Registration
Rights Agreement we shall decide to prepare and file with the Commission a
registration statement relating to an offering for our own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with the stock option or other employee
benefit plans, then we will send to each holder a written notice of such
determination and, if within fifteen days after the date of such notice, any
such holder shall so request in writing, we will include in the registration
statement, all or any part of such Registrable Securities (as defined in Amended
Registration Rights Agreement) such holders request to be
registered.
Vicis has
contractually agreed to restrict their ability to convert the Series D Preferred
Stock and exercise the Series D Warrants and receive shares of our common stock
such that the number of shares of the Company common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of our
issued and outstanding shares of common stock. See Note 16 Subsequent events
Exchange and Conversion Transactions related to the elimination of the 4.99%
beneficial ownership limitation.
63
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
At any
time before the one year anniversary of the date we initially issued the shares
of Series D Preferred Stock, we may, upon written notice, redeem the outstanding
shares of Series D Preferred Stock in cash at a price equal to 110% of Stated
Value (as such term is defined in the Certificate of Designations).
The
following table illustrates (i) how the net proceeds arising from the Series D
Preferred financing were allocated on the financing inception
date and (ii) how the aggregate financing costs (both cash and warrant
consideration) were allocated on the inception
date:
Classification
|
Series D
|
|||
Redeemable
Preferred Stock (Mezzanine)
|
$ | — | ||
Derivative
warrants (investor warrants)
|
(18,174,800 | ) | ||
Derivative
warrants (agent warrants)
|
(1,131,620 | ) | ||
Beneficial
conversion feature
|
(2,839,864 | ) | ||
Derivative
put liability
|
(1,024,605 | ) | ||
Deferred
financing costs
|
1,077,268 | |||
Retained
earnings (financing fees)
|
316,615 | |||
Paid-in
capital (financing fees)
|
286,487 | |||
Day-one
derivative loss
|
14,965,519 | |||
Net
proceeds
|
$ | 6,525,000 |
The
accounting and reporting for complex financing transactions that embody multiple
financial instruments, some of which are features embedded within financial
instruments, can best be described as a step-by-step process where the terms and
features of the financial instruments are compared to multiple standards in a
hierarchy of decision making. The following summarizes this process and
conclusions during the process.
As an
initial consideration, we are required to consider whether the Series D
Preferred Stock are, by its terms, financial instruments that require liability
classification under Statements on Financial Accounting Standards No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Equity and Liability.
Statement 150 generally provides that financial instruments that are issued in
the form of shares that are mandatorily redeemable on a fixed or determinable
date or upon an event certain to occur be classified as
liabilities.
The
Series D Preferred did not require liability classification on the inception
date because the contract did not provide for a fixed or determinable redemption
(an unconditional payment requirement) and events that could give rise to cash
redemption were conditional and not certain to occur on the inception date.
However, other standards exist that provide for classification of redeemable
securities outside of stockholders’ equity when, irrespective of probability,
contingent redemption events are outside of the issuer’s control. As a result,
the Series D Preferred required classification outside of stockholders’ equity
on the inception date.
64
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
The terms
and conditions of the Series D Preferred were also subject to evaluation under
SFAS 133. Derivative financial instruments, as defined in SFAS 133 consist of
financial instruments or other contracts that contain a notional amount and one
or more underlying (e.g. interest rate, security price or other variable),
require no initial net investment and permit net settlement. Derivative
financial instruments may be free-standing or embedded in other financial
instruments. Further, derivative financial instruments are initially, and
subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
In
considering the application of SFAS 133, we identified those specific terms and
features embedded in the contracts that possess the characteristics of
derivative financial instruments. Those features included the conversion option,
redemption features and other equity-indexed terms and conditions. In evaluating
the respective classification of these embedded derivatives, we are required to
determine whether the host contract (the Series D Preferred) is more akin to a
debt or equity instrument in regards to the risks. This determination is
subjective. However, in complying with the guidance provided in EITF D-109 Determining the Nature of a
Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a
Share under Statement No. 133 we concluded, based upon the preponderance
and weight of all terms, conditions and features of the host contracts, that the
Series D Preferred was more akin to an equity instrument for purposes of
considering the clear and close relation of the embedded feature to the host
contract. Based upon this conclusion, we further concluded that (i) the equity
indexed and settled embedded features did not require derivative liability
classification and (ii) certain redemption features (that is, features that
afford the investor the right to put the instruments for cash) required
bifurcation and classification as compound embedded derivative liabilities, at
fair value on the inception date. These amounts are reflected in the table above
as derivative put liabilities and are valued using multiple,
probability-weighted cash flow outcomes and market discount rates that are
commensurate with our estimated credit risk.
Although,
as described above, the embedded conversion feature did not require liability
classification under Statement 133, we were required to consider if the hybrid
preferred contracts embodied beneficial conversion features (“BCF”). A BCF is
present when the “effective” conversion price ascribed to the conversion feature
has intrinsic value. Further, a BCF is accounted for as a component of paid-in
capital on the inception date. As reflected in the tables above, the Series D
Preferred was found to have a BCF. The aggregate BCF at its intrinsic value
amounted to $38,460,136. This amount gives effect to the (i) the trading market
price on the contract dates and (ii) the effective conversion price of each
preferred issuance after allocation of proceeds to all financial instruments
sold based upon their relative fair values. Notwithstanding, BCF was limited to
the value ascribed to the remaining hybrid contract (using the relative fair
value approach). Accordingly, the BCF allocated to paid-in capital amounted to
$2,839,864.
65
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
As
discussed above, the initial allocation of the basis in the Series D Preferred
Financing transaction resulted in no basis ascribed to the redeemable preferred
stock. According to EITF D-98 Classification and
Measurement of Redeemable Securities, if the security is not currently
redeemable and it is not probable that the security will be become redeemable,
accretion to face value is not necessary. The Series D Preferred is
convertible upon inception and there was no persuasive evidence that the
Preferred Stock would not be redeemed. Based on this information,
redemption could not be considered “not probable” of occurring and accretion was
necessary. Redeemable preferred stock is required to be accreted to its
redemption values through periodic charges to available paid-in capital and then
to retained earnings or, if no term of redemption is embodied in the contract,
as is the case of the Series D Preferred, on the date of issuance. As a result,
a day-one deemed dividend of $7,000,000 was recorded as a charge to paid-in
capital to accrete the Series D Preferred to its redemption value.
The
allocation of the basis of the Series D Financing transaction required the
allocation to certain financial instruments at their respective fair values, and
these fair values in each instance exceeded the cash proceeds obtained from the
transactions. As a result, we were required to record a day-one derivative loss
in connection with this transaction because fair value was the required
standard.
Subsequent and Ongoing
Classification Considerations: The evaluation of the
classification of the Series D Preferred is required at each reporting date.
SFAS 150 requires reclassification of financial instruments otherwise classified
in stockholders’ equity or redeemable preferred stock to liabilities when the
conditional redemption becomes certain of occurrence. As of June 30, 2009, the
conditional redemption was not considered certain to occur and the Series D
Preferred continued to be recorded in the mezzanine section.
Midtown
Partners & Co., LLC, (“Midtown”), which served as the Company’s placement
agent in connection with the Purchase Agreement, received aggregate placement
agent fees of approximately $350,000, as well as the following common stock
purchase warrants: (a) a Series BD-10 warrant entitling Midtown to purchase
700,000 shares of the Company's common stock at an exercise price of fifty cents
($0.50) per share, and (b) a Series BD-11 warrant entitling Midtown to purchase
1,400,000 shares of our common stock at an exercise price of seventy-five cents
($0.75) per share. The Series BD-10 and BD-11 warrants have a term of five years
from the date of issuance. Midtown is a FINRA registered broker-dealer. Pursuant
to the terms of the Registration Rights Agreement by and between the Company and
Midtown, if at any time after the date of the Registration Rights Agreement the
Company decides to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or Form
S-8 (each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with the stock option or other employee benefit plans, then the
Company shall send to each holder a written notice of such determination and, if
within fifteen days after the date of notice, the holder requests in writing,
the Company will include in such registration statement, all or any part of such
Registrable Securities (as defined in Registration Rights Agreement) the holders
request to be registered.
66
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
The
Series D Preferred Stock is convertible into shares of common stock at a
conversion price of $0.50. Any previously issued and outstanding financial
instruments afforded full ratchet protection with a conversion price greater
than $0.50 automatically had their conversion price ratcheted down to the lower
conversion price. These financial instruments included the Series C Preferred
Financing and the investor and placement agent warrants related to the Series A,
Series B, and Series C Financings.
The
investor warrants were valued using BSM. Significant assumptions underlying the
BSM calculations are as follows:
April
30, 2008 (inception):
|
Series D
|
|||
Trading
market price
|
$ | 2.95 | ||
Strike
or exercise price:
|
$ | 0.75 | ||
Expected
term in years
|
7yrs
|
|||
Volatility
|
43.82 | % | ||
Risk-free
rate
|
3.34 | % | ||
Expected
dividend rate
|
$ | 0.00 |
Series
F Preferred Stock and Warrant Financing Arrangement:
On
February 12, 2009, we entered into a securities purchase agreement with Vicis
Capital Master Fund (“Vicis”) pursuant to which Vicis purchased 10,000,000
shares of our newly designated Series F Convertible Preferred Stock (“Series F
Preferred Stock”), par value $0.00001, stated value $1.00, respectively for an
aggregate purchase price of $10,000,000 ($9,166,994 net of direct expenses). The
Series F Preferred Stock has a conversion price of $1.20 and is convertible into
an aggregate amount of 8,333,333 shares of common stock. The Series F Preferred
stock does not provide for annual dividends but each holder of Series F
Preferred Stock has the right to such number of votes equal to the number of
shares of common stock that the Series F Preferred Stock shall be converted
into, subject to the beneficial ownership limitation described below. Vicis also
received a warrant to purchase 33,333,333 shares of our common stock. The
warrant is exercisable for a period of ten years from the date of issuance at an
initial exercise price of $1.50. The warrant provides its redemption for cash or
other assets in the event of a fundamental transaction involving either (i) a
merger or consolidation, (ii) a sale of all or substantially all assets, (iii) a
tender offer is completed or (iv) a reclassification of the common stock or any
compulsory share exchange pursuant to which the common stock is effectively
converted into or exchanged for other securities, cash, or
property.
67
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
The
conversion price of the Series F Preferred Stock and the exercise price of the
Warrants are subject to full ratchet and anti-dilution adjustment for subsequent
lower price issuances by the Company, as well as customary adjustments
provisions for stock splits, stock dividends, recapitalizations and the like.
Midtown Partners & Co., LLC, which served as our placement agent in
connection with the Securities Purchase Agreement (“Midtown”), received
aggregate placement agent fees of $700,000.00, as well as the following common
stock purchase warrants: (a) a warrant entitling Midtown to purchase 833,333
shares of our common stock at an exercise price of $1.20 per share, and (b) a
warrant entitling Midtown to purchase 3,333,333 shares of our common stock at an
exercise price of $1.50 per share. The warrants have a term of five years from
the date of issuance and embody the same fundamental transaction provision as
the warrant issued to Vicis. Other direct, incremental finance costs amounted to
$133,006.
We have
evaluated the Series F Convertible Preferred Stock, the investor warrants and
the placement agent warrants for classification under SFAS 150. The Series F
Convertible Preferred Stock is conditionally redeemable under certain
circumstances, including (i) a change in control, (ii) insufficient authorized
shares to settle the conversion option, (iii) bankruptcy and (iv) significant
monetary judgments against the Company. These terms and features do not rise to
the level of “unconditionally” redeemable under SFAS 150. Accordingly, the
Series F Convertible Preferred Stock was found not to be within the scope of
SFAS 150. The investor and placement agent warrant provide for their redemption
for cash or other assets in the event of a fundamental transaction involving
either (i) a merger or consolidation, (ii) a sale of all or substantially all
assets, (iii) a tender offer is completed or (iv) a reclassification of the
common stock or any compulsory share exchange pursuant to which the common stock
is effectively converted into or exchanged for other securities, cash, or
property. SFAS 150 explicitly establishes put warrants that are redeemable for
cash or other assets within its scope. Accordingly, these fundamental
transaction provisions result in classification of the warrants as liabilities,
and at fair value, with changes in fair value charged or credited to
income.
We then
evaluated the conversion feature embedded in the Series F Convertible Preferred
Stock, and certain other features (i.e. the contingent redemption elements) for
classification and measurement under SFAS 133. Generally, embedded terms and
features that both (i) meet the definition of derivatives and (ii) are clearly
and closely related to the host contract in terms of risks, do not require
bifurcation and separate measurement. In order to develop these conclusions, we
first evaluated the hybrid contract under EITF D-109 to determine if the hybrid
contract, with all features included, was more akin to an equity instrument or a
debt instrument. Significant indicators of equity were the non-existence of a
fixed and determinable redemption provision, the non-existence of any dividend
feature and the existence of voting rights based upon the if-converted number of
common shares. Significant indicators of debt were the Company’s ability to
redeem the preferred stock at a 10% premium and redemption features that require
redemption of the preferred stock for events that embody credit risk (i.e.
bankruptcy event and monetary judgments). The weight of these indicators led us
to the conclusion that the hybrid contract was more akin to an equity
instrument. Accordingly, the conversion option does not require bifurcation
because its risks and the risks of the hybrid are clearly and closely related.
The contingent redemption features, conversely, do require bifurcation because
their risks and the risks of the host are not clearly and closely
related.
68
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
Further
consideration of the classification of the Series F Convertible Preferred Stock
was required under EITF D-98. Generally, EITF D-98 provides that redeemable
instruments, where redemption is either stated or outside the control of
management, require classification outside of stockholders’ equity. Because the
definition of redeemable is much broader under EITF D-98 than SFAS 150, events
such as redemption in the event of a change in control require the Series F
Convertible Preferred Stock to be classified outside of stockholders’ equity.
This classification is often referred to as the mezzanine.
For
purposes of our accounting, we were required to develop estimates of fair value
of each component of the transaction, including the Series F Convertible
Preferred Stock, the investor warrants and the broker warrants. The fair values
of the Series F Convertible Preferred Stock and investor warrants are necessary
to develop the relative fair values for purposes of (i) identifying the presence
of a beneficial conversion feature and (ii) make certain allocations, such as
financing costs among the components. In addition, the warrants require fair
value measurement on the inception date and thereafter.
The
following table reflects the components of fair value and related
allocations:
Fair Value
|
Allocated
Value
|
Allocation of
Cash Costs
|
Allocation of
Warrant Costs
|
|||||||||||||
Gross
consideration
|
$ | 10,000,000 | ||||||||||||||
Cash
financing costs
|
$ | (863,006 | ) | |||||||||||||
Warrant
financing costs (fair value)
|
$ | (253,750 | ) | |||||||||||||
Financial
instruments sold:
|
||||||||||||||||
Series
F Convertible Preferred
|
$ | 10,002,594 | $ | 7,970,000 | $ | (717,410 | ) | $ | (210,940 | ) | ||||||
Investor
warrants
|
2,030,000 | 2,030,000 | (145,596 | ) | (42,810 | ) | ||||||||||
$ | 12,032,594 | $ | 10,000,000 | $ | (833,006 | ) | $ | (253,750 | ) |
The gross
proceeds were allocated to the Series F Convertible Preferred and Investor
Warrants, first to the fair value of the Investor warrants, because they
required liability classification on the inception date, and the residual to the
Series F Convertible Preferred. Cash and warrant financing costs were allocated
to the Series F Convertible Preferred and the Investor Warrants based upon their
relative fair values. We evaluate all terms and features in estimating the fair
value of our hybrid contracts, such as the Series F Preferred Stock. The fair
value of the Series F Preferred Stock is derived from a combination of the
common stock equivalent value plus the value of the liquidation preference. On a
combined basis, these features are enhanced by the incremental values associated
the down-round, anti-dilution protection and the significant voting influence
that the investor has in the Series F Preferred Stock and all other voting
investments that the investor has in our company. The fair value of the investor
and broker warrants was based upon the Black-Scholes-Merton option valuation
technique.
69
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
Components
of the fair value of the Series F Preferred Stock are as follows:
Series
F Preferred Stock:
|
Amount
|
|||
Common
stock equivalent value (8,333,333 indexed shares at $0.60)
|
$ | 5,000,000 | ||
Liquidation
preference
|
3,003,174 | |||
Voting
features
|
1,528,802 | |||
Down-round,
anti-dilution protection
|
470,618 | |||
$ | 10,002,594 |
Details
of the fair value of the investor and broker warrants (inception) are as
follows:
Warrants:
|
Investor
|
Broker
|
Broker
|
|||||||||
Indexed
common shares
|
33,333,333 | 3,333,333 | 833,333 | |||||||||
Strike
|
$ | 1.50 | $ | 1.50 | $ | 1.20 | ||||||
Term
(contractual in years)
|
10 | 10 | 10 | |||||||||
Volatility
|
64.40 | % | 64.40 | % | 64.40 | % | ||||||
Risk
free rate
|
2.75 | % | 2.75 | % | 2.75 | % | ||||||
Fair
value
|
$ | 2,030,000 | $ | 203,000 | $ | 50,750 |
EITF
98-5, as amended by EITF 00-27, provides that the effective conversion price
necessary to establish the presence of a beneficial conversion feature is the
relative fair value of the convertible instrument ($8,312,916) divided by the
number of common shares indexed to the convertible instrument (8,333,333). As a
result, the conversion price is $1.20, but the effective conversion price is
$1.00. In light of the fact that the trading market price of our common stock on
the transaction date was $0.60, there is no beneficial conversion feature
present.
The above
allocation resulted in the Series F Convertible Preferred to be initially
recognized at a discount to its redemption value of $10,000,000. As a result, we
recognized a deemed dividend by charging paid-in capital for $2,958,350 for the
discount since the security does not have a stated maturity or redemption date
and it is convertible at any time after the issuance date. The following table
shows the details of the allocation and the dividend:
Amount
|
||||
Allocation
of gross proceeds
|
$ | 7,970,000 | ||
Allocation
of cash finance costs
|
(717,410 | ) | ||
Allocation
of warrant finance costs
|
(210,940 | ) | ||
7,041,650 | ||||
Deemed
dividend
|
2,958,350 | |||
$ | 10,000,000 |
70
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Redeemable preferred stock (continued):
Direct
Financing Costs:
Aggregate
financing costs arising from the Series A, Series B, Series C, Series D and
Series F Preferred financings amounted to $2,967,313, $479,034, $5,538,797,
$1,680,370 and $1,116,756 respectively. As noted in the tables below, these
financing costs were allocated among deferred financing costs, redeemable
preferred stock, paid-in capital and retained earnings based upon the relative
fair values of the components of the financing. That is, liability classified
financial instruments (i.e. derivatives), mezzanine financial instruments and
equity classified financial instruments (i.e. BCF). Since, as previously
discussed, no basis was ascribed to the redeemable preferred stock, the amount
of financing costs allocated to this category were reflected as a charge to
retained earnings.
The
following table illustrates the allocation of financing costs associated with
the Series A, Series B, Series C, Series D and Series F Financing
Transactions:
Classification
|
Series A
|
Series B
|
Series C
|
Series D
|
Series F
|
|||||||||||||||
Deferred
financing costs
|
$ | 1,898,875 | $ | 479,034 | $ | 43,079 | $ | 1,077,268 | $ | — | ||||||||||
Paid-in
capital
|
1,068,438 | — | 4,998,925 | 603,102 | 928,350 | |||||||||||||||
Redeemable
preferred
|
— | — | 496,793 | — | — | |||||||||||||||
Day-one
derivative loss
|
— | — | — | — | 188,406 | |||||||||||||||
Aggregate
finance costs
|
$ | 2,967,313 | $ | 479,034 | $ | 5,538,797 | $ | 1,680,370 | $ | 1,116,756 |
71
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 11 –
Derivative financial instruments:
The
following table summarizes the components of derivative liabilities as of June
30, 2009 and 2008:
Financing—Financial
Instrument
|
June 30,
2009
|
June 30,
2008
|
||||||
Series
A Preferred Financing—Investor warrants
|
$ | 716,700 | $ | 1,093,500 | ||||
Series
B Preferred Financing—Investor warrants
|
75,312 | 42,384 | ||||||
Series
C Preferred Financing—Put derivative
|
199,993 | 733,144 | ||||||
Series
D Preferred Financing—Investor warrants
|
1,752,800 | 3,329,200 | ||||||
Series
D Preferred Financing—Placement agent warrants
|
166,950 | 148,509 | ||||||
Series
D Preferred Financing—Put derivative
|
253,417 | 1,014,363 | ||||||
Series
F Preferred Financing—Investor warrants
|
2,946,667 | — | ||||||
Series
F Preferred Financing—Placement agent warrants
|
370,000 | — | ||||||
Derivative
liabilities
|
$ | 6,481,839 | $ | 6,361,100 |
The
following table summarizes the number of common shares index to derivative
financial instruments as of June 30, 2009 and 2008:
Financing—Financial
Instrument
|
June 30,
2009
|
June 30,
2008
|
||||||
Series
A Preferred Financing—Investor warrants
|
6,000,000 | 6,000,000 | ||||||
Series
B Preferred Financing—Investor warrants
|
960,000 | 960,000 | ||||||
Series
D Preferred Financing—Investor warrants
|
28,000,000 | 28,000,000 | ||||||
Series
D Preferred Financing—Placement agent warrants
|
2,100,000 | 2,100,000 | ||||||
Series
F Preferred Financing—Investor warrants
|
33,333,333 | — | ||||||
Series
F Preferred Financing—Placement agent warrants
|
4,166,666 | — | ||||||
74,559,999 | 37,060,000 |
The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the year ended June 30, 2009:
Financing—Financial
Instrument
|
Embedded
Derivatives
|
Warrant
Derivatives
|
Total
|
|||||||||
Series
A Preferred Financing
|
$ | — | $ | 376,800 | $ | 376,800 | ||||||
Series
B Preferred Financing
|
— | (32,928 | ) | (32,928 | ) | |||||||
Series
C Preferred Financing
|
533,151 | — | 533,151 | |||||||||
Series
D Preferred Financing
|
760,946 | 1,557,959 | 2,318,905 | |||||||||
Series
F Preferred Financing—Warrants
|
— | (1,221,323 | ) | (1,221,323 | ) | |||||||
Derivative
income (expense)
|
$ | 1,294,097 | $ | 680,508 | $ | 1,974,605 |
72
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 11 –
Derivative financial instruments (continued):
The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the year ended June 30, 2008:
Financing—Financial
Instrument
|
Embedded
Derivatives
|
Warrant
Derivatives
|
Total
|
|||||||||
Series
A Preferred Financing
|
$ | — | $ | 18,208,598 | $ | 18,208,598 | ||||||
Series
B Preferred Financing
|
— | 1,733,309 | 1,733,309 | |||||||||
Series
C Preferred Financing
|
(333,994 | ) | — | (333,994 | ) | |||||||
Series
D Preferred Financing
|
10,242 | 15,826,580 | 15,836,822 | |||||||||
Other
warrants, reclassified
|
— | 1,614,360 | 1,614,360 | |||||||||
Day-one
derivative losses
|
(15,364,669 | ) | — | (15,364,669 | ) | |||||||
Derivative
income (expense)
|
$ | (15,688,421 | ) | $ | 37,382,847 | $ | 21,694,426 |
Fair
Value Considerations – We adopted the provisions of FAS 157 as of
January 1, 2008, with respect to financial instruments. As required by FAS
157, assets and liabilities measured at fair value are classified in their
entirety based on the lowest level of input that is significant to their fair
value measurement. Our derivative financial instruments which are required to be
measured at fair value on a recurring basis under FAS 133 and as of June 30,
2009 are all measured at fair value using Level 3 inputs. Level 3 inputs are
unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the year ended June 30, 2009:
Beginning
balance: Derivative financial instruments
|
$ | 6,361,100 | ||
Total
gains (losses)
|
— | |||
Transfers
in/out of Level 3
|
120,739 | |||
Ending
Balance
|
$ | 6,481,839 |
The
overall accounting for the Preferred Financings described in Note 10 required
consideration regarding the classification of the investor and placement agent
warrants. Warrants are derivative financial instruments that are indexed to the
Company’s own stock and, accordingly, equity classification of the warrants is
dependent upon (i) meeting the exemption to liability classification in SFAS 150
and (ii) meeting eight specific conditions for equity classification provided in
EITF 00-19 Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock. In evaluating the warrants under SFAS 150 and EITF
00-19, we noted that there were no explicit conditions that required net cash
settlement. However, with the exception of the warrants issued with the Series C
Preferred Financing Arrangement, each of our warrants embodies a fundamental
transaction provision wherein a change in control or similar transaction could
require settlement of the warrant for cash and/or assets. In FSP FAS150-1, the
Financial Accounting Standards Board clarified its view related to the
classification of freestanding contracts that are composed of more than one
option (e.g. a puttable warrant).
73
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 11 –
Derivative financial instruments (continued):
The FSP
provides that if a freestanding instrument is composed of a written call option
and a written put option, the existence of the written call option does not
affect the classification. As a result, a puttable warrant is a liability under
SFAS 150, because it embodies an obligation indexed to an obligation to
repurchase the issuer's shares and may require a transfer of assets. The
warrants issued in the subject financing transactions are call options that
include a written put. Such put is embodied as a “fundamental transaction
provision” described above. That is, in a transaction involving the
consolidation or merger of the Company, the holder may put the warrants to the
Company for assets similar to those that the common holders in such transaction
would receive. Since the warrant embodies both a call and a put, in accordance
with FSP FAS150-1, the call in not considered in classifying the instrument.
Under SFAS 150, written put options do not constitute equity and are required to
be recorded in liabilities. Accordingly, the warrants require liability
classification.
Derivative
financial instruments are recorded initially and on an ongoing basis at fair
value with changes in fair value reflected in earnings.
We
estimate fair values of derivative financial instruments using various
techniques (and combinations thereof) that are considered to be consistent with
the objective measuring fair values. In selecting the appropriate technique, we
consider, among other factors, the nature of the instrument, the market risks
that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, we generally use the
Black-Scholes-Merton option valuation technique because it embodies all of the
requisite assumptions (including trading volatility, estimated terms and risk
free rates) necessary to fair value these instruments. For forward contracts
that contingently require net-cash settlement as the principal means of
settlement, we project and discount future cash flows applying
probability-weightage to multiple possible outcomes.
Estimating
fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques are highly volatile and
sensitive to changes in the trading market price of our common stock, which has
a high estimated historical volatility. Since derivative financial instruments
are initially and subsequently carried at fair values, our income will reflect
the volatility in these estimate and assumption changes.
74
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 11 –
Derivative financial instruments (continued):
The
warrants were valued using BSM. Our trading market price on June 30, 2009 was
$1.01. Significant assumptions underlying the BSM calculations are as follows as
of June 30, 2009:
Indexed
Shares
|
Exercise
Price
|
Remaining
Term
|
Expected
Volatility
|
Risk-Free
Rate
|
||||||||||||||||
Series
A Preferred Financing:
|
||||||||||||||||||||
A-1
Investor Warrants
|
3,000,000 | $ | 0.50 | 2.39 | 120.04 | % | 1.11 | % | ||||||||||||
A-2
Investor Warrants
|
3,000,000 | $ | 0.50 | 7.39 | 70.20 | % | 3.19 | % | ||||||||||||
Series
B Preferred Financing:
|
||||||||||||||||||||
B-1
Investor Warrants
|
480,000 | $ | 0.50 | 0.90 | 164.77 | % | 0.56 | % | ||||||||||||
B-2
Investor Warrants
|
480,000 | $ | 0.50 | 2.90 | 108.45 | % | 1.64 | % | ||||||||||||
Series
D Preferred Financing:
|
||||||||||||||||||||
D-1
Investor Warrants
|
28,000,000 | $ | 0.75 | 5.83 | 71.99 | % | 3.19 | % | ||||||||||||
BD-10
Placement agent warrants
|
700,000 | $ | 0.50 | 3.83 | 93.95 | % | 1.64 | % | ||||||||||||
BD-11
Placement agent warrants
|
1,400,000 | $ | 0.75 | 3.83 | 93.95 | % | 1.64 | % | ||||||||||||
Series
F Preferred Financing:
|
||||||||||||||||||||
E-1
Warrants
|
33,333,333 | $ | 1.13 | 9.62 | 65.61 | % | 3.53 | % | ||||||||||||
BD-12
Placement agent warrants
|
833,333 | $ | 1.11 | 9.62 | 65.61 | % | 3.53 | % | ||||||||||||
BD-13
Placement agent warrants
|
3,333,333 | $ | 1.13 | 9.62 | 65.61 | % | 3.53 | % |
The
warrants were valued using BSM. Our trading market price on June 30, 2008 was
$1.50. Significant assumptions underlying the BSM calculations are as follows as
of June 30, 2008:
Indexed
Shares
|
Exercise
Price
|
Remaining
Term
|
Expected
Volatility
|
Risk-Free
Rate
|
||||||||||||||||
Series
A Preferred Financing:
|
||||||||||||||||||||
A-1
Investor Warrants
|
3,000,000 | $ | 0.50 | 3.40 | 38.55 | % | 2.91 | % | ||||||||||||
A-2
Investor Warrants
|
3,000,000 | $ | 0.50 | 8.40 | 45.64 | % | 3.61 | % | ||||||||||||
Series
B Preferred Financing:
|
||||||||||||||||||||
B-1
Investor Warrants
|
480,000 | $ | 0.50 | 1.90 | 38.91 | % | 1.63 | % | ||||||||||||
B-2
Investor Warrants
|
480,000 | $ | 0.50 | 3.90 | 38.91 | % | 2.91 | % | ||||||||||||
Series
D Preferred Financing:
|
||||||||||||||||||||
D-1
Investor Warrants
|
28,000,000 | $ | 0.75 | 6.83 | 44.29 | % | 3.61 | % | ||||||||||||
BD-10
Placement agent warrants
|
700,000 | $ | 0.50 | 4.83 | 41.33 | % | 3.34 | % | ||||||||||||
BD-11
Placement agent warrants
|
1,400,000 | $ | 0.75 | 4.83 | 41.33 | % | 3.34 | % |
The
remaining term of our warrants is used as our term input. Since our trading
history does not cover a period sufficient for computing volatility, we use a
weighted average of our history for two years of trading and the trading history
of a peer group. For purposes of the risk-free rate, we use the published yields
on zero-coupon Treasury Securities with maturities consistent with the remaining
term of the warrant.
75
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 11 –
Derivative financial instruments (continued):
Our put
derivatives, which were bifurcated from our Series C and Series D Preferred
Stock, are estimated based upon a multiple, probability-weighted outcomes, cash
flow model that is present valued using risk-adjusted interest rates. We use
publicly available bond-rate curves for companies that we estimate have credit
ratings similar to what ours may be based upon Standard & Poors and Moody’s
rating scales. Those ratings generally fall in the highly speculative to
in-poor-standing categories of these ratings, and ranged from 15.56% to 19.04%
for periods from one to five years, respectively.
Note 12 –
Income taxes:
Income
tax benefit resulting from applying statutory rates in jurisdictions in which we
are taxed (Federal and State of Florida) differs from the income tax provision
(benefit) in our consolidated financial statements. The following table reflects
the reconciliation for the years ended June 30, 2009 and 2008:
Year
ended June 30
|
||||||||
2009
|
2008
|
|||||||
Benefit
at federal statutory rate
|
(34.00 | )% | (34.00 | )% | ||||
State,
net of federal deduction
|
(3.30 | )% | (3.96 | )% | ||||
Derivative
income
|
(28.05 | )% | 31.66 | % | ||||
Minority
interest in unconsolidated subsidiary
|
(1.75 | )% | — | |||||
Change
in valuation allowances
|
67.09 | % | 6.30 | % | ||||
Effective
tax rate
|
0.00 | % | 0.00 | % |
Deferred
income taxes arise from temporary differences in the recognition of certain
items for income tax and financial reporting purposes, including depreciation
and allowance for doubtful accounts. The approximate tax effects of significant
temporary differences which comprise the deferred tax assets and liabilities are
as follows:
June
30
|
||||||||
2009
|
2008
|
|||||||
Unrecognized
impairment in investments
|
$ | 3,087,929 | $ | 2,920,079 | ||||
Net
operating loss carry forward
|
2,898,060 | 1,543,311 | ||||||
Compensation
arising from share-based payment
|
1,490,114 | 1,361,676 | ||||||
Impairment
charges
|
74,024 | |||||||
Allowances
for bad debts
|
51,790 | — | ||||||
Inventory
reserves
|
35,972 | |||||||
Losses
on unconsolidated investees
|
34,592 | — | ||||||
Amortization
of intangible assets
|
(368,286 | ) | (282,718 | ) | ||||
7,304,197 | 5,542,348 | |||||||
Valuation
allowances
|
(7,304,197 | ) | (5,542,348 | ) | ||||
Net
deferred tax assets (liabilities)
|
$ | — | $ | — |
76
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Income taxes (continued):
Our
valuation allowances increased $1,761,849 and $4,021,830 during the years ended
June 30, 2009 and 2008, respectively.
As of
June 30, 2009, we have $7,769,599 in net operating loss carry forward that,
subject to limitation, may be available in future tax years to offset taxable
income.
The
amount of income taxes and related income tax positions taken are subject to
audits by federal and state tax authorities. As of June 30, 2009, the Company’s
most recently filed income tax return dates are as of June 30, 2006, and
generally three years of income tax returns commencing with that date are
subject to audit by these authorities. Our estimate of the potential outcome of
any uncertain tax positions is subject to management’s assessment of relevant
risks, facts, and circumstances existing at that time, pursuant to Financial
Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 requires a
more-likely-than-not threshold for financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. The
Company’s policy is to record a liability for the difference between the benefit
recognized and measured pursuant to FIN 48 and tax position taken or expected to
be taken on the tax return. Then, to the extent that the assessment of such tax
positions changes, the change in estimate is recorded in the period in which the
determination is made. The Company reports tax-related interest and penalties as
a component of income tax expense. During the periods reported, management of
the Company has concluded that no significant tax position requires recognition
under FIN 48.
Note 13 –
Related Party Transactions:
Production Agreement: On May
31, 2009, we entered into a production agreement with the minority shareholder
of Omnicom Studios. The agreement provides for the production of commercials.
Compensation under the arrangement was $58,000, plus royalties ranging from 0.5%
to 1.0% of gross sales receipts from the associated product sales, capped at
$250,000.
Consulting Agreement - On
October 1, 2006 we entered into a consulting arrangement with Harrington
Business Development, LLC (“HBD”) that provided for services related to media
production, management and supervision. The shareholders of HBD are also
shareholders of the Company. Expense recorded related to this arrangement
amounted to $334,000 during the year ended June 30, 2009. The arrangement was
terminated prior to year end.
Placement Agent and Related Services
- Midtown Partner & Co. LLC and Apogee Financial Investments, serve
as our placement agents and merchant banker, respectively, in connection with
our financing and other strategic transactions. These companies are owned by
certain shareholders and Board Members. We compensated these companies in cash
of $700,000 and $690,000 and in warrants with fair values of $757,916 and
$6,330,417, during the years ended June 30, 2009 and 2008, respectively, related
to financing arrangements involving the placement of our preferred stock and
warrants.
77
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Related party transactions (continued):
Financial Consulting Agreement
– We have engaged TotalCFO to provide financial services. TotalCFO is
owned by certain shareholders and Board members. We recognized $345,000 and
$84,000 of expense related to this arrangement for the year ended June 30, 2009
and 2008.
RPS Trading, LLC: As
disclosed in Note 4 Investments, we have an investment in certain debt
securities of RPS Trading, LLC (“RPS”). RPS is a company that is owned 50% by
Designer Liquidator, Inc., a company that is owned by a shareholder and
director. Also, see Note 16 Subsequent Events.
Note 14 –
Transactions with ResponzeTV:
On
October 19, 2007, we entered into a sublicense arrangement with ResponzeTV PLC
providing for restricted rights to use the Kathy Hilton Trademark, as provided
in our Principal License Agreement with KHL Holdings, Inc., without territorial
restriction. The only restriction is as to fragrance related products. The
structure of this arrangement was accomplished, as follows:
|
·
|
We
created a wholly-owned subsidiary named KHL Holdings, Inc. with minimal
capitalization on October 12, 2007. This subsidiary had no operations; nor
were any operations transferred to the
subsidiary.
|
|
·
|
Also
on October 12, 2007, we executed a formal sublicense agreement with the
newly formed for the use of the licensed trademark, which agreement
required and received the formal acknowledgement of Kathy
Hilton.
|
|
·
|
On
October 19, 2007 all outstanding common stock KHL Holdings, Inc. was sold
to ResponzeTV for 10,000,000 shares of their common stock, which had a
value of $6,538,240 based upon ResponzeTV’s trading market
price.
|
|
·
|
Also
on October 19, 2007, we executed a formal assignment agreement providing
for the assignment of KHL Holdings, Inc. rights in the sublicense
agreement to ResponzeTV.
|
The
sublicense agreement provides for Minimum Annual Guaranteed Payments that
coincide with the Principal License Agreement (although in lower amounts in
recognition of the restriction as to product types) and royalty payments in
amounts consistent with the Principal License Agreement.
The
substance of the above series of transactions is that of a sublicense
arrangement between us and ResponzeTV; that is, a revenue arrangement. Our
accounting for the activity arising from this arrangement, which will commence
in the second fiscal quarter of our year ending June 30, 2008, provides for
recognition of deferred revenue to the extent of the consideration received for
the sublicense, which amounts will be recognized in our earnings when amounts
are earned. As of the years ending June 30, 2009 and 2008 we had recognized $-0-
and $546,917 of earnings, respectively.
78
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 14 –
Transactions with ResponzeTV (continued):
Investment
in ResponzeTV:
On
October 19, 2007, we purchased 8,500,000 shares of ResponzeTV common stock
(valued at $5,557,504 based upon the trading market price of $0.653824, as
translated to US$) and warrants to purchase ResponzeTV common stock at prices
between $0.75 and $2.04 for $5,100,000. The common shares purchased were, then,
freely trading in the United Kingdom; however, the warrants are not traded. We
issued 500,000 of the purchased shares to brokers.
Upon the
completion of the aforementioned sublicense agreement, the purchase and the
issuance of shares to the brokers, we owned 16.78% of ResponzeTV’s outstanding
common stock. Our voting control coupled with our representation on ResponzeTV’s
board of directors indicated that we have substantial influence with respect to
ResponzeTV. As a result, the Company is accounting for the investment under the
equity method of accounting in accordance with Accounting Principles Board
Opinion No.18, “The Equity Method for Accounting for Investments in Common
Stock” (APB 18).
During
the second half of our prior fiscal year ended June 30, 2008, ResponzeTV began
experiencing financial difficulties and delisted its shares for trading. Based
upon the preponderance of all available information, the Company’s management
concluded that the Company’s investment was not recoverable and impaired the
investment, included in other expense, in the amount of $5,776,919. There have
been no further developments related to the investment’s recovery. In addition,
the Company’s note receivable amounting to $2,051,712 is included in other
expense as an impairment expense as recovery on this is doubtful.
79
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 15 –
Segment information:
Our
business segments consist of (i) Retail Products and Licensing and (ii) Real
Estate. Our real estate business commenced during the current fiscal year upon
the purchase of an office building in Pinellas County, Florida. Our chief
decision making officer considers income (loss) from operations as the basis to
measure segment profitability. The following table summarizes important
financial information about our business segments as of June 30, 2009 and for
the years ended June 30, 2009 and 2008:
Retail Products
|
Real
Estate
|
Consolidated
|
||||||||||
Year Ended June 30, 2009
|
||||||||||||
Revenues
from external customers
|
$ | 9,552,892 | $ | 236,021 | $ | 9,788,913 | ||||||
Depreciation
expense
|
$ | 11,647 | $ | 220,706 | $ | 232,353 | ||||||
Loss
from operations
|
$ | (3,722,464 | ) | $ | (307,216 | ) | $ | (4,029,680 | ) | |||
Capital
expenditures
|
$ | 87,310 | $ | 2,724,591 | $ | 2,811,901 |
June 30, 2009
|
||||||||||||
Total
assets
|
$ | 12,561,429 | $ | 2,524,769 | $ | 15,086,198 |
During
the year ended June 30, 2009 the Real Estate operation received $65,943 in
rental revenue from the Retail Products and Licensing business, which amount is
eliminated in the table above.
Note 16 –
Subsequent events:
Exchange
and Conversion Transactions:
On July
20, 2009, we entered into a securities purchase agreement (the “Purchase
Agreement”) with Vicis Capital Master Fund (“Vicis”), a sub-trust of the Vicis
Capital Series Master Trust, a unit trust organized under the laws of the Cayman
Islands, whereby Vicis purchased from the Company a warrant to purchase
97,606,276 shares of the Company’s Common Stock (the “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. Furthermore, Vicis is the primary holder of the Company’s
Series C, Series D and Series F Convertible Preferred Stock (the “Preferred
Stock”). Pursuant to the terms of the Purchase Agreement, the Company
amended and restated the certificates of designation of the Preferred Stock to
remove the beneficial ownership limitations contained therein, thus allowing the
holder to convert that amount of Preferred Stock that would cause the holder to
beneficially own greater than 4.99% or 9.99% of the issued and outstanding
Common Stock of the Company.
80
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 16 –
Subsequent events (continued):
We have
evaluated the New Warrant for classification under Statements of Financial
Accounting Standards No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (“SFAS
150”). The Exchange Warrant provides for its redemption for cash or other assets
in the event of a fundamental transaction involving either (i) a merger or
consolidation, (ii) a sale of all or substantially all assets, (iii) a tender
offer is completed or (iv) a reclassification of the common stock or any
compulsory share exchange pursuant to which the common stock is effectively
converted into or exchanged for other securities, cash, or property. SFAS 150
explicitly establishes put warrants that are redeemable for cash or other assets
within its scope. Accordingly, upon issuance in July 2009, these fundamental
transaction provisions will result in classification of the Exchange Warrant as
a liability, and at fair value, with changes in fair value charged or credited
to income.
On July
31, 2009, Vicis Capital Master Fund (Vicis) converted its shares of OmniReliant
Holdings, Inc. (the “Company”) preferred stock into shares of the Company’s
common stock. Prior to conversion, Vicis held 5,754,749 shares of the Company’s
common stock, 9,285,354 shares of Series C Preferred Stock, 7,000,000 shares of
Series D Preferred Stock and 10,000,000 shares of Series F Preferred Stock
(collectively, the “Preferred Stock”). The Preferred Stock has a
conversion price of $0.25 per share. Additionally, Vicis holds warrants to
purchase 97,606,276 shares of the Company’s common stock with an exercise price
of $0.25 per share. Upon conversion of the Preferred Stock, Vicis holds
110,896,165 shares of the Company’s Common Stock and is the beneficial owner of
95.98% of the Company’s issued and outstanding common stock on a fully-diluted
basis.
As
previously mentioned, the Conversion Transaction resulted in the conversion of
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. Prior to
the aforementioned Exchange Transaction, the conversion prices ranged from
$0.50, $0.50 and $1.20 for the Series C, D and F Preferred. As a result of
anti-dilution provisions embodied in the respective Certificates of Designation,
the conversion prices were adjusted to $0.25.
The
increase in value associated with the anti-dilution reset, amounting to
$67,575,733, will be reflected in our financial report for the quarterly period
ending September 30, 2009 as a deemed dividend to the benefit of the preferred
shareholders by charging paid-in capital and crediting redeemable preferred
stock. The amount of deemed dividend was calculated based upon the common stock
equivalent value of each class of preferred. In addition, our redeemable
preferred stock will be reduced by approximately $106,000,000 and paid-in
capital will be increased for the same amount to give effect to the conversion
of the applicable Series C, D and F Preferred Stock to Common Stock on the
conversion date.
On
September 30, 2009, the Vicis warrant for 97,606,276, to purchase shares of the
Company common stock, is modified to reduce the warrant conversion exercise
price from $.25 to $.2029 for each warrant. Vicis exercised 27,606,276 of
its warrants resulting in cash proceeds to the Company of
$5,600,000. In addition, the Company’s placement agent,
Midtown Partner & Co. LLC, has the right to receive a 5% fee upon
warrant exercises. Accordingly, the placement agent is to receive a warrant
to purchase 1,380,314 of the Company’s common stock at an exercise price of
$.2029 per share.
Also see
Note 9 for additional information related to the Exchange and Conversion
Transactions.
81
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 16 –
Subsequent events (continued):
Abazias
Acquisition:
On April
29, 2009, we entered into an Agreement and Plan of Merger (the “Agreement”) with
Abazias, a Delaware Corporation and Abazias.com, Inc., a Nevada corporation and
wholly owned subsidiary of Abazias, to acquire all of the outstanding common
stock of Abazias for 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”). On August 27, 2009, we completed the
acquisition.
The
Agreement also requires that we provide Abazias with inter-divisional funding of
$500,000 during the six months following the closing of the merger transaction.
If any requested advance is not made within a seven day period following the
request by the then Abazias divisional management, we would be required to
distribute additional common shares to the sellers equal to the number of common
shares into which the Series E Preferred Stock would be convertible. We have
previously funded Abazias $500,000 in the form of convertible promissory notes.
In addition, due to the delay in closing our merger, we have agreed to fund
Abazias an additional $200,000, which amount will be applied to our post-merger
funding commitment. Accordingly, our current commitment under this arrangement
is $300,000.
In
connection with our acquisition of Abazias, we have entered into employment
arrangements with its two principal officers. The arrangements provide for base
annual salaries ranging from $85,000 to $100,000, discretionary bonuses,
participation in existing employee benefit program, and non-competition and
non-solicitation. The arrangements also provide for contingent incentive
compensation that is payable in the event that we sell Abazias at certain
levels. Finally, the employment arrangements provide for the payment of signing
bonuses to the Abazias officers, aggregating $417,650.
We will
account for our acquisition of Abazias as a business acquisition (the
“Acquisition Method”), applying Statements of Financial Accounting Standards No.
141, revised 2007, Business
Combinations (“SFAS 141R”), which became effective for application to our
business acquisitions on July 1, 2009. Under SFAS 141R, we will recognize,
separately from goodwill, the identifiable tangible and intangible assets
acquired and liabilities assumed at their fair values on the acquisition date.
We anticipate that goodwill will arise from our acquisition of Abazias, which
amount will be determined as the aggregate of the acquisition consideration
transferred to the sellers, less the fair values of identifiable assets acquired
and liabilities assumed. Acquisition consideration, under this standard,
includes all assets and securities transferred, plus any contingent
consideration, at fair value. We will further apply Statements of Financial
Accounting Standards No. 142 Intangible Assets (“SFAS
142”) and Statements of Financial Accounting Standards No. 144 Accounting for the Impairment or
Disposal of Long-lived Assets (“SFAS 144”) in evaluating the
recoverability of the goodwill and intangible assets, respectively arising from
our acquisition of Abazias.
82
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 16 –
Subsequent events (continued):
The
Series E Preferred Stock issued in connection with the Abazias acquisition was
designated on December 3, 2008, as amended on April 29, 2009. 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 right to dividends. 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
acquisition, where the conversion price was adjusted downward on a pro rata
basis for common market values of our shares below $1.20, subject to a floor of
$0.50. Since the market price on the closing date was $1.01, the final
conversion price was $0.84, resulting in the Series E Preferred being linked to
15,476,190 common shares. In addition to the conversion adjustment, the Series E
Preferred Stock provides for down-round price protection in the event that we
sell common 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
may be 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 also has a floor of $0.50. The Series E Preferred Stock conversion
price is otherwise subject to adjustment for traditional reorganizations, such
as stock splits, stock dividends and similar restructuring of
equity.
The
embedded conversion feature in the Series E Preferred Stock was evaluated for
derivative classification under Statement of Financial Accounting Standards No.
133 Accounting for Derivative
Financial Instruments and Hedging Activities (“SFAS 133”). A requisite
consideration for applying SFAS 133 is making a determination regarding whether
the contract is more akin to an equity instrument or more akin to a debt
instrument based upon all features, terms and conditions in the contract.
Applying the guidance of EITF D-109 Determining the Nature of a Host
Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share
under FASB Statement No. 133 we concluded that Series E Preferred Stock
was more akin to an equity instrument on the basis that it has no redemption
requirements, no dividend requirements and no features that would indicate
credit or interest risk components. As an “akin-to-equity” instrument, the
embedded conversion feature is clearly and closely related to the risks of the
contract and derivative classification is not require.
The
Series E Preferred Stock was also evaluated for classification under Statement
of Financial Accounting Standards No. 150 Accounting for Financial Instruments
with Characteristics of Both Equity and Liabilities (“SFAS 150”) and EITF
D-98 Classification and
Measurement of Redeemable Securities (EITF D-98). Generally, these
standards require financial instruments that are mandatorily redeemable,
including instances where contingent redemption events may be beyond the control
of management, to be classified outside of stockholders’ equity in liabilities
or mezzanine, respectively. As a result of our evaluation, the Series E
Preferred does not embody any terms or features that require or could
contingently require redemption.
83
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 16 –
Subsequent events (continued):
Finally,
the Series E Preferred Stock was evaluated for the presence of a beneficial
conversion feature under the guidance of EITFs 98-5 and 00-27 Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios (EITF 98-5). A beneficial conversion feature is present when the
effective conversion price of the convertible instrument is lower than the fair
value of the common shares to which it is indexed. Upon issuance, the beneficial
conversion feature is estimated to be approximately $2,600,000. Accounting for
beneficial conversion features provides for the allocation of the intrinsic
value in the conversion option to paid-in capital.
Our
accounting for the Abazias Acquisition and the issuance of Series E Preferred
Stock therefore will be reflected in our quarterly report for the period ending
September 30, 2009.
Other
investments:
Beyond Commerce, Inc.: On
July 30, 2009, we entered into a Securities Purchase Agreement with Beyond
Commerce, Inc. (“BYOC”) (see Note 4) pursuant to which we agreed to purchase
additional original issue discount secured convertible debentures up to
$1,820,000, plus warrants to purchase up to 9,100,000 shares of BYOC common
stock. The Debentures are due one year from when they are issued and are
convertible into shares of BYOC’s common stock at any time at our option at a
conversion price of $0.70 per share, subject to adjustment (the “Conversion
Price”). If BYOC does not repay the respective Debentures within six months of
their issuance, or upon a default of the Debenture, the Conversion Price shall
be reset to equal 80% of the lowest closing bid prices for the three days prior
to the date such Debenture is being converted. Interest on the Debenture is 10%
per annum, payable in cash or common stock, at the option of BYOC, provided
that, interest may only be paid in common stock if certain Equity Conditions (as
defined in the Debenture) are met or waived by Omni. Interest is payable on each
monthly redemption date, upon conversion, and upon maturity. The Warrants may be
exercised until the fifth anniversary of their issuance at an exercise price of
$.70 per share subject to adjustment. In connection with the sale of the
Debentures, BYOC issued Midtown Partners & Co., LLC, the placement agent for
the sale of the Debentures, warrants to purchase a total of 917,335 shares of
the Company’s common stock and fees totaling an aggregate of $104,000. A portion
of the Securities Purchase Agreement with BYOC was in part, financed by an
advance of $600,000 from our majority shareholder who funded the purchase in
that amount.
BYOC has
pledged 10,812,416 shares of its common stock as collateral for its performance
under this arrangement.
84
Omninreliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 16 –
Subsequent events (continued):
Designer Liquidator, Inc.: On
July 31, 2009, we entered into an Asset Purchase Agreement with Designer
Liquidator, Inc., (“DLI”) which is a company owned by a shareholder and
director, that provides for the purchase its assets and liabilities, subject to
customary due diligence. The purchase price is $150,000 in cash, 100,000 shares
of our common stock, the assumption of liabilities, as defined, and an earn out
that provides for 10% of the net profits generated from a specific product line.
One of DLI’s assets is a 50% interest in RPS Traders, LLC, in which, as
described in Note 4, we have an investment. The acquisition of DLI has not been
completed as of the filing of this report and we have not established the
application of accounting principles to the acquisition or the effects on our
investment in RPS.
RPS Trading, LLC: In several
transactions subsequent to June 30, 2009, we invested an additional $2,549,072
in RPS Trading LLC (“RPS”). As disclosed in Note 4 Investments, our investment
in RPS at June 30, 2009 amounted to $650,000. The subsequent investments were
made in the form of variable interest promissory notes with maturities of six
months. We will reflect these additional investments in RPS as held-to-maturity
investments.
Other
subsequent events:
On
September 15, 2009, we borrowed $116,000 from Debt Opportunity Fund LLP, an
affiliate of a major shareholder, pursuant to a 12% promissory note with a two
month maturity.
On July 30, 2009 the Company entered into an advertising agreement
with Zurvita Holdings, Inc. (ZRVT.OB). Pursuant to this agreement, the Company
will provide certain marketing services, including the production of
infomercials, video production services, managing call centers, media buying and
fulfillment services for a period of one year. Zurvita will advertise the
Company's products on its website and receive a commission, and will have access
to the Company's production studio under a cost plus fixed fee arrangement. In
consideration for the advertising services, the Company received 3,800,000
shares of common stock in the parent company of Zurvita. The Company has not yet
determined its accounting for this arrangement.
85
ITEM 9 - CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are
no events required to be disclosed under the Item.
ITEM
9A. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
Our
principal executive and principal financial officer has evaluated the
effectiveness 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
(the “Exchange Act”), as of the end of the period covered by this annual
report. He has concluded that, based on such evaluation, our
disclosure controls and procedures were not effective due to the material
weaknesses in our internal control over financial reporting as of June 30, 2009,
as further described below.
(b)
Management’s Annual Report on Internal Control Over Financial
Reporting
Overview
Internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
refers to the process designed by, or under the supervision of, our principal
executive officer and principal financial officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Management is responsible for establishing and
maintaining adequate internal control over financial reporting for
OmniReliant.
86
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management
has used the framework set forth in the report entitled “Internal Control —
Integrated Framework” published by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission to evaluate the effectiveness of
OmniReliant’s internal control over financial reporting. As a result
of the material weaknesses described below, management has concluded that the
Company’s internal control over financial reporting was not effective as of June
30, 2009.
Management’s
Assessment
Management
has determined that, as of the June 30, 2009 measurement date, there were
material weaknesses in both the design and effectiveness of our internal control
over financial reporting. Management has assessed these deficiencies
and has determined that there were four general categories of material
weaknesses in OmniReliant’s internal control over financial
reporting. As a result of our assessment that material weaknesses in
our internal control over financial reporting existed as of June 30, 2009,
management has concluded that our internal control over financial reporting was
not effective as of June 30, 2009. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
In
management’s opinion, our assessment as of June 30, 2009 regarding the existence
of material weaknesses in our internal control over financial reporting relates
to (1) the absence of adequate staffing, (2) the lack of controls or
ineffectively designed controls, (3) the failure in design and operating
effectiveness of information technology controls over financial reporting, and
(4) failures in operating control effectiveness identified during the testing of
the internal control over financial reporting. Management and our
Board of Directors have assigned a high priority to the short-term and long-term
improvement of our internal control over financial reporting.
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 employee. 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
annual report does not include an attestation report of the Company’s registered
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission
(c)
Changes in Internal Control over Financial Reporting
There has
been no change in our internal control over financial reporting, as defined in
Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. However, we have initiated
or intend to initiate a number of remediation measures to address the control
deficiencies and material weaknesses identified above. The
remediation measures include or are expected to include the
following:
¨
|
Hiring
of an outside consultant to evaluate the derivatives and fair value
accounting.
|
¨
|
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.
|
87
¨
|
Reassigning
and altering functional responsibilities among new and existing employees
to provide appropriate segregation of duties among functional groups
within the Company.
|
¨
|
Updating
of our policies and procedures along with control matrices and
implementing testing procedures to ensure ongoing
compliance.
|
¨
|
Establishing
programs to provide ongoing training and professional education and
development plans for accounting department
personnel.
|
¨
|
Adding
additional information technology staffing and implementing information
technology policies and procedures to ensure adequate system controls are
in place and compliance testing occurs on a regular
basis.
|
¨
|
Restoring
our executive management team with qualified and experienced business
leaders to provide day-to-day management oversight and strategic
direction.
|
We intend
to adopt additional remediation measures related to the identified control
deficiencies as necessary as well as to continue to evaluate our internal
controls on an ongoing basis in order to upgrade and enhance when
appropriate. Our Board of Directors has taken an active role in
reviewing and discussing the internal control deficiencies with our auditors and
financial management. Our management and the Board of Directors will
actively monitor the implementation and effectiveness of the remediation efforts
undertaken by our financial management.
ITEM
9B - Other Information
None.
PART
III
ITEM 10 - DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNACE
The
following table sets forth certain information with respect to our directors and
executive officers.
Below are
the names and certain information regarding the Company's executive officers,
directors and director nominees. Officers are elected annually by the Board of
Directors.
Name
|
Age
|
Position
|
||
Christopher
D. Phillips
|
37
|
Director
|
||
Paul
Morrison
|
42
|
Chief
Executive Officer, Director
|
||
Richard
Diamond
|
46
|
Director
|
||
Alan
Clary*
|
39
|
Chief
Operating Officer
|
||
Robert
DeCecco**
|
41
|
Chief
Financial
Officer
|
*Appointed
on July 27, 2009
**Appointed
on September 21, 2009
Background
of Executive Officers and Directors
Paul Morrison . On January 24,
2008, Mr. Morrison was appointed Chief Executive Officer of the Company On
November 22, 2006 Mr. Morrison was elected Chief Operating Officer, President
and Assistant Secretary of the Company. Mr. Morrison has served as the
President, Chief Operating Officer and Assistant Secretary of OmniReliant
Corporation since October 31, 2006. From October 2005 until October 2006, Mr.
Morrison was the COO of WG Products, a cosmetic company, where he directed all
facets of operations including production, customer service, planning,
scheduling, maintenance, warehousing, distribution, purchasing, sales, and
strategic initiatives. From 2001 through 2005 he managed various operations at
Wyeth Pharmaceuticals. Mr. Morrison started his career working for Calvin Klein
Cosmetics, and has accumulated sixteen years of experience serving in cosmetic
and pharmaceutical operations management roles for Fortune 100 companies. He
received a Bachelor’s of Science degree in Business Management from the Rutgers
University and an Honorable discharge from the United States Air
Force.
Christopher D. Phillips. Mr.
Phillips has been a managing director for Vicis Capital, LLC since February
2008. From 2004 through January 2008, Mr. Phillips served as
President and CEO of Apogee Financial Investments, Inc., a merchant bank that
owns 100% of Midtown Partners & Co., LLC, a FINRA licensed broker-dealer.
From 2000 through January 2008, he also served as managing member of TotalCFO,
LLC, which provides consulting and CFO services to a number of public and
private companies and high net worth individuals. From November 2007
through January 2008 Mr. Phillips served as the CEO and Chief Accounting Officer
of the Company.
88
Presently,
he is a member of the Board of Directors OmniReliant Holdings, Inc., Precision
Aerospace Components, Inc. (OTCBB: PAOS), Amacore Group, Inc. (OTCBB:
ACGI), Brookside Technology Holdings Corp. (OTCBB: BKSD), MDwerks, Inc. (OTCBB:
MDWK) and a few private companies. Mr. Phillips received a B.S. in Accounting
and Finance and a Masters of Accountancy, with a concentration in Tax, both from
the University of Florida. Mr. Phillips is a Florida CPA.
Richard Diamond . On November
30, 2006 Mr. Diamond was named as a Director of the Company. Mr. Diamond has
served as a Director of OmniReliant Corporation since its inception in August
2006. Since January 2008, Mr. Diamond has served as President and CEO of Apogee
Financial Investments, Inc. (“Apogee”) a private merchant bank incorporated in
Florida. From October 2004 to January 2008, Mr. Diamond served as Senior Vice
President of Apogee. His areas of responsibility include administration, due
diligence, document preparation and review, and assisting clients with corporate
filings and compliance. Apogee owns 100% of Midtown Partners & Co., LLC, a
FINRA licensed broker-dealer. From April 2000 until December 2005, Mr. Diamond
served as Managing Member and Vice President of Apogee Business Consultants,
LLC, a Nevada limited liability corporation specializing in reverse mergers and
acquisitions. From October 2001 until December 2005, Mr. Diamond served as
founder, President and sole director of RJ Diamond Consulting, Inc., a privately
owned Florida corporation specializing in financial and public company
consulting. From July 2003 until December 2003, Mr. Diamond served as a Director
of Sabre Marketing, Inc. a private Florida corporation. From August 2001 until
August 2002, Mr. Diamond served as the sole officer and director of Conus
Holdings, Inc., a publicly reporting Nevada shell corporation.
Allen Clary. On July 27, 2009,
Mr. Clary was appointed Chief Operating Officer of the Company. Mr. Clary
is also the the founder and CEO of Jibidee.com, a personal/home organization
website and minority owned entity of OmniReliant. September 2005 to
present, Mr. Clary held positions of Director of Professional Services and
Senior Manager with ERP software consulting firms Ideal Consulting and Tribridge
(Ideal Consulting acquired by Tribridge Sept. 2006). From July 2003 to
September 2006, Allen was General Manager of Fortis Software, a custom web and
software development company. Mr. Clary has over 13 years of management
and technology experience and holds a Bachelor's of Science degree from the
University of Florida and an MBA from the University of South
Florida.
Robert DeCecco. On
September 21, 2009, the Board of Directors of the Company approved the
appointment of Robert John DeCecco III as Chief Financial
Officer. Prior to his current role as CFO of OmniReliant, Mr. DeCecco
has spent the past 3 years as President & CEO of Bobari Holdings, a holding
company which owned and operated companies with a specific focus on internet
marketing, network marketing, affiliate marketing and social media
marketing. Prior to that, Mr. DeCecco held the position of President
& CEO of a Mortgage Bank, Aclarian Mortgage, which was eventually acquired
by Opteum Inc. a publicly traded company on the NYSE; OPX (now BNMN). Prior to
Aclarian, Mr. DeCecco was the CFO of two venture backed 'enterprise software'
companies; Skyway Software, a rapid application development suite, and Q-Link
Technologies, a business process management software company which was sold to
Adobe Systems for more than $20mm, returning a profit to the company founders
and investor group. In addition, he was the corporate controller and
interim CFO for Peak Performance Coach and Speaker Anthony Robbins in La Jolla,
Calif., heading a finance department of more than 35 finance professionals and
managing nearly $100 million in revenue at Robbins Research
International. As a CPA, Mr. DeCecco worked for
PricewaterhouseCoopers - Boston in the Assurance and Business Advisory services
practice, assisting high-tech and financial services clients through the audit
and due diligence process; participating in Initial Public Offerings, and
Secondary Market Offerings. A native of Massachusetts, now
living in Sarasota, Florida, Mr. DeCecco is a CPA and holds a B.S. in Accounting
from Franklin Pierce College in Rindge, N.H. He is also a founding member and
past chairman of the Lakewood Ranch Business Alliance (www.lwrba.org) and served
on the Mortgage Technology Advisory Board.
Legal
Proceedings
No
officer, director, promoter or significant employee has been involved in the
last five years in any of the following:
|
●
|
Any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that
time;
|
|
●
|
Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
|
●
|
Being
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoying, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
and
|
|
●
|
Being
found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated or
state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
|
Employment
Agreements
On
September 21, 2009, the Company entered into an employment agreement (the
“Employment Agreement”) with Paul Morrison, the Company’s current Chief
Executive Officer, pursuant to which the Company employed Mr. Morrison as its
President and Chief Executive Officer. The term of the Employment Agreement is
two years with an automatic two year renewal. Pursuant to the terms of the
Employment Agreement, Mr. Morrison would receive an annual base salary of
$150,000 per year plus an incentive bonus of 1.5% of pre-tax profits on the sale
of all products marketed by, or otherwise, related to, the
Company.
89
Committees
Our
business, property and affairs are managed by or under the direction of the
board of directors. Members of the board are kept informed of our business
through discussion with the chief executive and financial officers and other
officers, by reviewing materials provided to them and by participating at
meetings of the board and its committees. We presently do not have any
committees of our board of directors, however, our board of directors intends to
establish various committees at some point in the near future.
The total
number of meetings of the Board of Directors during the fiscal year ended June
30, 2008 was three. The Board of Directors decided matters by written consent on
fifteen occasions. Each of the incumbent directors attended a majority of (i)
the meetings of the Board during the year and (ii) the total number of meetings
of all committees of the Board on which the incumbent directors
served.
Compliance with Section 16(a) of
the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other equity
securities of our company. Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year
ended June 30, 2009, and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended June 30, 2009, we believe that during the year
ended June 30, 2009, our executive officers, directors and all persons who own
more than ten percent of a registered class of our equity securities have
complied with all Section 16(a) filing requirements, except
for the changes on holdings of beneficial owners, as set forth
below:
Paul Morrison, CEO and Director, received 1,500,000 options to
purchase shares of the Company's common stock on January 15, 2009.
Code of
Ethics
We have not yet adopted a code of business conduct
and ethics that applied to all directors, officers and employers. We wanted to
adopt a plan in the near future.
Item 11. EXECUTIVE
COMPENSATION
The
following table sets forth information concerning the annual and long-term
compensation earned by or paid to our Chief Executive Officer and to other
persons who served as executive officers as at and/or during the fiscal year
ended June 30, 2009 who earned compensation exceeding $100,000 during 2009 (the
“named executive officers”), for services as executive officers for the last two
fiscal years.
Summary
Compensation Table
Name &
Principal
Position
|
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in Pension Value and
Non-Qualified Deferred
Compensation Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||
Christopher
Phillips, Director
|
2008
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||
Paul
Morrison, CEO, Director
|
2008
|
120,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
2009
|
120,000 | 0 | 0 | 1,500,000 | (1) | 0 | 0 | 0 | 0 | ||||||||||||||||||
Richard
Diamond, Director
|
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
(1)
|
Issued
on January 15, 2009 to buy shares of the Company’s common stock at $0.50
per share.
|
Outstanding
Equity Awards at Fiscal Year-End Table
Option Awards
|
Stock Awards
|
||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#) Unexercisable
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
Equity Incentive
Plan Awards:
Number Of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
(#)
|
Equity Incentive
Plan Awards: Market
or Payout Value Of
Unearned Shares,
Units or Other Rights
That Have Not
Vested
($)
|
||||||||||
Chris
Phillips
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
||||||||||
Paul
Morrison,
|
1,500,000
|
0
|
0
|
0.50
|
1/15/14
|
1,000,000
|
$990,000
|
0
|
0
|
||||||||||
Richard
Diamond
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
(1)
Represents the market value of 1,500,000 shares of common stock (based on $1.01
per share, the closing price of the Company's common stock on the
Over-the-Counter Bulletin Board on October 1, 2009)
90
Directors’
Compensation
For the
fiscal year ended June 30, 2009, directors did not receive any remuneration in
their capacity as a director.
Item 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information, as of October 9, 2009 with
respect to the beneficial ownership of the Company’s outstanding common stock by
(i) any holder of more than five (5%) percent; (ii) each of the named executive
officers, directors and director nominees; and (iii) our directors, director
nominees and named executive officers as a group. Except as otherwise indicated,
each of the stockholders listed below has sole voting and investment power over
the shares beneficially owned.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS OF OMNIRELIANT CORPORATION
The
following table sets forth certain information, as of October 9, 2009 with
respect to the beneficial ownership of the Company’s outstanding common stock by
(i) any holder of more than five (5%) percent; (ii) each of the named executive
officers, directors and director nominees; and (iii) our directors, director
nominees and named executive officers as a group. Except as otherwise indicated,
each of the stockholders listed below has sole voting and investment power over
the shares beneficially owned.
Name of Beneficial Owner(1)
|
Common Stock
Beneficially
Owned
|
Percentage of Common
Stock
Beneficially Owned (2)
|
||||||
Paul
Morrison (3)
|
2,100,000
|
1.73
|
%
|
|||||
Vicis
Capital, LLC (5)(6)
|
208,502,441
|
95.98
|
%
|
|||||
Chris
Phillips
|
0
|
*
|
||||||
Richard
Diamond (4)
|
5,366,666
|
4.33
|
%
|
|||||
Alan
Clary
|
100,000(7)
|
*
|
||||||
Robert
DeCecco
|
300,000(8)
|
*
|
||||||
All
officers and directors as a group (5 persons)
|
7,466,666
|
17.9
|
%
|
* Less
than 1%
(1)
Except as otherwise indicated, the address of each beneficial owner is c/o
OmniReliant Corporation 14375 Myerlake Circle, Clearwater, FL
33760.
(2)
Applicable percentage ownership of common stock is based on 119,650,641
shares of common stock outstanding as of October 9, 2009, together with
securities exercisable or convertible into shares of common stock within 60 days
of October 9, 2009 for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock underlying convertible securities that are currently exercisable
or exercisable within 60 days of October 9, 2009 are deemed to be
beneficially owned by the person holding such securities for the purpose of
computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
(3)
Represents (i) 300,000 shares of common stock, (ii) an option to purchase
300,000 shares of common stock at a conversion price of $1.00, and (iii) an
option to purchase 1,500,000 shares of common stock at a conversion price of
$0.50.
(4)
Represents 1,200,000 shares of the Registrant’s common stock owned by Deecembra
Diamond, (ii) 4,166,666 common stock purchase warrants owned by Midtown Partners
& Co., LLC. Mr. Diamond’s spouse, Deecembra Diamond, owns 36% of Apogee
Financial Investments, Inc., which owns 100% of Midtown Partners & Co., LLC,
a FINRA licensed broker-dealer. Mr. Diamond specifically disclaims beneficial
ownership of these shares except to the extent of his pecuniary interests
therein.
(5) The
address for Vicis Capital LLC is 445 Park Avenue, 16 th Floor, New York, NY
10022.
(6)
Includes (i) 110,896,165 shares of Omni’s common stock and (ii) a warrant to
purchases 97,606,276 shares of Omni’s common stock with an exercise price of
$0.25 per share. On September 30, 2009, Vicis’
warrant exercise price was ratcheted down
to $0.20 and Vicis exercised the warrant in part to
purchase 27,606,276 shares of Omni’s common
stock.
91
(7)
Includes 100,000 options to purchase shares of Omni’s common stock at an
exercise price of $1.00 per share.
(8)
Includes 300,000 options to purchase shares of Omni’s common stock at an
exercise price of $1.00 per share.
I ITEM 13 - CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as
set forth below, there were no transactions during the last fiscal year, and
there are no proposed transactions, to which the Company was or is to become a
party in which any director, executive officer, director nominee, beneficial
owner of more than five percent (5%) of any class of our stock, or members of
their immediate families had, or is to have, a direct or indirect material
interest:
Christopher
Phillips, OmniReliant’s director, is the managing member of Vicis Capital, LLC,
the investment advisor to Vicis Capital Master Fund
(“Vicis”). Richard Diamond’s spouse, Deecembra Diamond, owns 36% of
Apogee Financial Investments, Inc., which owns 100% of Midtown Partners &
Co., LLC, a FINRA licensed broker-dealer. On December 19, 2008, Vicis entered
into a securities purchase agreement with Midtown Partners & Co, LLC,
whereby Vicis purchased from Midtown a common stock purchase warrant to purchase
1,400,000 shares of OmniReliant’s common stock with an exercise price of $0.75
and a common stock purchase warrant to purchase 700,000 shares of OmniReliant’s
common stock with an exercise price of $0.50, for an aggregate purchase price of
$600,000.
On
February 12, 2009, OmniReliant entered into securities purchase agreement with
Vicis, pursuant to which, Vicis purchased 10,000,000 shares of OmniReliant’s
series F convertible preferred stock (“Series F Preferred Stock”), or an
aggregate purchase price of $10,000,000. The Series F Preferred Stock
has a conversion price of $1.20 and is convertible into an aggregate amount of
8,333,333 shares of common stock. In addition, Vicis received Series
E Warrants to purchase 33,333,333 shares of OmniReliant’s common stock. Midtown
Partners & Co., LLC, in consideration for its services as placement agent,
received a warrant to purchase 3,333,333 shares of OmniReliant’s common
stock.
On July
20, 2009, OmniReliant entered into a securities purchase agreement with Vicis
pursuant to which Vicis purchased a Warrant to purchase 97,606,276 shares of
OmniReliant’s common stock for a purchase price of $5,000,000. As
further consideration for the purchase of the Warrant, Vicis returned to
OmniReliant for cancellation all unexercised warrants held in Vicis’
name. Midtown Partners & Co., LLC, in consideration for its
services as placement agent, received a warrant to purchase 1,000,000 shares of
OmniReliant’s common stock.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
Company's board of directors reviews and approves audit and permissible
non-audit services performed by its independent accountants, as well as the fees
charged for such services. In its review of non-audit service fees and its
appointment of KLB LLP. as the Company's independent accountants, the board of
directors considered whether the provision of such services is compatible with
maintaining independence. All of the services provided and fees charged by KLB
LLP were approved by the board of directors.
Audit
Fees
The
aggregate fees billed for professional services for the audit of the annual
financial statements of the Company and the reviews of the financial statements
included in the Company's quarterly reports on Form 10-Q for 2009 and 2008 were
$163,000 and $55,000 respectively, net of expenses.
Other
Securities Exchange Commission services for registration and related services
$45,000.
Audit-Related
Fees
There
were no other fees billed by during the last two fiscal years for assurance and
related services that were reasonably related to the performance of the audit or
review of the Company's financial statements and not reported under "Audit Fees"
above.
Tax Fees
There
were $-0- per year spent on tax filings.
All Other
Fees
There
were no other fees billed during the last two fiscal years for products and
services provided.
ITEM 15 - EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
(a)(2) Financial Statement
Schedules
We do not
have any financial statement schedules required to be supplied under this
Item.
92
(a)(3) Exhibits
Exhibit
|
||
Number
|
Description
|
|
3.1
|
Certificate
of Designation Series F Convertible Preferred Stock (Incorporated by
reference to the Company's Current Report on Form 8-K filed with the SEC
on February 17, 2009)
|
|
3.2
|
Certificate
of Designation Series E Convertible Preferred Stock (Incorporated by
reference to the company’s Current Report on Form 8-K, filed with the SEC
on September 24, 2009)
|
|
4.1
|
Form
of Series E Common Stock Purchase Warrant (Incorporated by reference to
the Company's Current Report on Form 8-K filed with the SEC on February
17, 2009)
|
|
4.2
|
Form
of Series BD Common Stock Purchase Warrant (Incorporated by reference to
the Company's Current Report on Form 8-K filed with the SEC on February
17, 2009)
|
|
4.3
|
Form
of Senior Secured Working Capital (Incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on May 5,
2009)
|
|
10.1
|
Form
of Securities Purchase Agreement by and between OmniReliant Holdings,
Inc., Abazias, Inc. and Abazias.com, Inc. dated December 3, 2008
(Incorporated by reference to the Company’s Current Report on Form 8-K
filed with the SEC on December 9, 2008).
|
|
10.2
|
Form
of Note issued by Abazias, Inc. to OmniReliant Holdings, Inc.
(Incorporated by reference to the Company’s Current Report on Form 8-K
filed with the SEC on December 9, 2008).
|
|
10.3
|
Form
of Employment Agreement between Abazias.com, Inc and Oscar Rodriguez
attached as Exhibit D-1 to Exhibit Number 10.1 (Incorporated by reference
to the Company’s Current Report on Form 8-K filed with the SEC on December
9, 2008).
|
|
10.4
|
Form
of Employment Agreement between Abazias.com, Inc and Jesus Diaz attached as
Exhibit D-1 to Exhibit Number 10.1 (Incorporated by reference to the
Company’s Current Report on Form 8-K filed with the SEC on December 9,
2008).
|
|
10.5
|
Form
of Note Purchase Agreement dated January 6, 2009 by and between Valcom,
Inc. and Omnireliant Holdings, Inc. (Incorporated by reference to the
Company’s Current Report on Form 8-K filed with the SEC on January 8,
2008)
|
|
10.6
|
Form
of 10% Secured Promissory Note dated January 6, 2009 by and between
Valcom, Inc. and Omnireliant Holdings, Inc. (Incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on January 8,
2008)
|
|
10.7
|
Form
of Warrant dated January 6, 2009 by and between Valcom, Inc. and
Omnireliant Holdings, Inc. (Incorporated by reference to the Company’s
Current Report on Form 8-K filed with the SEC on January 8,
2008)
|
|
10.8
|
Form
of Security Agreement dated January 6, 2009 by and between Valcom, Inc.
and Omnireliant Holdings, Inc. (Incorporated by reference to the Company’s
Current Report on Form 8-K filed with the SEC on January 8,
2008)
|
|
10.9
|
Amended
Stock Purchase Agreement (Incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC on February 17,
2009)
|
|
10.10
|
Form
of Securities Purchase Agreement dated July 20, 2009 by and between
Omnireliant Holdings, Inc. and Vicis Capital Master Fund (Incorporated by
reference to the Company’s Current Report on Form 8-K filed with the SEC
on July 21, 2009).
|
|
10.11
|
Form
of Warrant dated July 20, 2009 (Incorporated by reference to the Company’s
Current Report on Form 8-K filed with the SEC on July 21,
2009).
|
|
10.12
|
Form
of Kathy Hilton License Agreement (Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on August 13,
2009).
|
|
10.13
|
Form
of Merger Agreement (Incorporated by reference to the company’s Current
Report on Form 8-K, filed with the SEC on September 24,
2009)
|
93
10.14
|
Form
of Employment Agreement between the Company and Paul Morrison
(Incorporated by reference to the company’s Current Report on Form 8-K,
filed with the SEC on September 24, 2009)
|
|
99.1
|
Consulting
Agreement by and between OmniResponse, Inc. and Harrington Business
Development, dated July 14, 2008 (Incorporated by reference to the
Company’s Current Report on Form 8-K filed with the SEC on July 18,
2008).
|
|
99.2
|
Form
of Assignment of Purchase and Sale Agreement (Incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on July 29,
2008)
|
|
99.3
|
Purchase
and Sale Agreement dated April 22, 2008 by and between Mr. Frankie “Buddy”
Winsett and Mr. Vince Vellardita and Daktronics, Inc (Incorporated by
reference to the Company’s Current Report on Form 8-K filed with the SEC
on July 29, 2008).
|
|
99.4
|
Securities
Purchase Agreement, dated February 12, 2009, by and between OmniReliant
Holdings, Inc. and Vicis Capital Master Fund (Incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on February
17, 2009)
|
|
99.5
|
First
Amendment to the Registration Rights Agreement, dated February 12, 2009,
between OmniReliant Holdings, Inc. and Midtown Partners & Co.,
LLC(Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on February 17, 2009)
|
|
99.6
|
Second
Amendment to the Amended and Restated Registration Rights Agreement, dated
February 12, 2009, by and among OmniReliant Holdings, Inc., Vicis Capital
Master Fund and Dynamic Decisions Strategic Opportunities(Incorporated by
reference to the Company's Current Report on Form 8-K filed with the SEC
on February 17, 2009)
|
|
99.7
|
Securities
Purchase Agreement between Strathmore Investments, Inc. and OmniReliant
Holdings, Inc. (Incorporated by reference to the Company's Current Report
on Form 8-K filed with the SEC on May 5, 2009)
|
|
99.8
|
Security
Agreement between OmniReliant Holdings, Inc. and Strathmore Investments,
Inc. (Incorporated by reference to the Company's Current Report on Form
8-K filed with the SEC on May 5,
2009)
|
94
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OMNIRELIANT
HOLDINGS, INC.
|
||
Date:
October 9, 2009
|
By:
|
/s/ Paul Morrison
|
Paul
Morrison
|
||
Chief
Executive Officer and President (Principal Executive
Officer)
|
Date
October 9, 2009
|
By:
|
/s/Robert DeCecco
|
Robert
DeCecco
|
||
Chief
Financial Officer ( Principal Financial Officer and Principal Accounting
Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name
|
Position
|
Date
|
||
/s/ Paul Morrison
|
Director,
Chief Executive Officer and President
|
October 9,
2009
|
||
Paul Morrison
|
||||
/s/ Christopher Phillips
|
Director
|
October 9,
2009
|
||
Christopher Phillips
|
||||
/s/ Richard Diamond
|
Director
|
October 9,
2009
|
||
Richard Diamond
|
95