Attached files
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EX-32.1 - Infusion Brands International, Inc. | v198524_ex32-1.htm |
EX-31.1 - Infusion Brands International, Inc. | v198524_ex31-1.htm |
EX-23.1 - Infusion Brands International, Inc. | v198524_ex23-1.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, 2010
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission
File No. 000-51599
OmniReliant Holdings,
Inc.
(Exact
name of registrant as specified in its charter)
Nevada
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54-2153837
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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14375 Myerlake Circle
Clearwater, Florida
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33760
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(Address
of principal executive offices)
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(Zip
Code)
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(813)
885-5998
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
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||
Title of each class
registered:
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Name of each exchange on which
registered:
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None.
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None.
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Securities
registered under Section 12(g) of the Exchange Act: Common Stock, $0.00001 par
value per share.
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 Section 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 website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) 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. Yes x
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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¨
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Accelerated
filer
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¨
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Non-accelerated
filer
(Do
not check if a smaller reporting company)
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¨
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Smaller
reporting company
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x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No x
Revenues
for year ended June 30, 2010: $24,828,417
The
aggregate market value of the registrant’s voting common stock held by
non-affiliates as of June 30, 2010 based upon the closing price reported for
such date on the OTC Bulletin Board was US $1,957,088.
As of
October 13, 2010 the registrant had 158,073,323 shares of its common stock
issued and outstanding.
Documents
Incorporated by Reference: None.
OmniReliant Holdings,
Inc.
FORM
10-K
For the
Fiscal Year Ended June 30, 2010
TABLE OF
CONTENTS
PAGE
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PART
I
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ITEM
1.
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Business
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4
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ITEM
1A.
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Risk
Factors
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7
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ITEM
2.
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Properties
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11
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ITEM
3.
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Legal
Proceedings
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12
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ITEM
4.
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Removed
and Reserved
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14
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PART
II
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ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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ITEM
6.
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Selected
Financial Data
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17
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ITEM
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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17
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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37
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ITEM
8.
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Consolidated
Financial Statements
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38
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ITEM
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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97
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ITEM
9A(T).
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Controls
and Procedures
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97
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ITEM
9B.
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Other
Information
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100
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PART
III
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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101
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ITEM
11.
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Executive
Compensation
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106
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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108
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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109
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ITEM
14.
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Principal
Accounting Fees and Services
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111
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PART
IV
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ITEM
15.
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Exhibits,
Financial Statement Schedules
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113
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SIGNATURES
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116
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2
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
Description
of Business
General
Development of Business:
OmniReliant
Holdings, Inc. (the “Company”, “OmniReliant”, “we”, or “our”) is a Nevada
Corporation. Prior to the fourth quarter of our year ended June 30, 2010, we
engaged in the acquisition, creation, design, distribution, and sale of various
product lines, both proprietary and licensed. We planned to create synergies and
increase shareholder value through the acquisition of these assets. In
connection with that business model we acquired a portfolio of interests in
various companies, patents and products to bring to the market, seeking to
leverage our various assets to work together to ensure success of each entity
and the holding company.
During
the third quarter of our year ended June 30, 2010, we appointed a new management
team that has changed the direction of our business to that of a consumer
products company which focuses its efforts on building demonstrable brands
globally by deploying direct-to-consumer marketing channels internationally that
include live shopping, infomercials, eCommerce and traditional
“brick-and-mortar” channels of distribution. By leveraging its capital, human
resource expertise, and infrastructure the Company will create operational
excellence within its portfolio of wholly owned subsidiaries, while continuing
to incorporate certain aspects of our prior business model. The new model has
reorganized our consolidated subsidiaries and equity investees to operate in
three distinct industry segments, as determined by our Chief Executive Officer.
Each of the three operating segments and condensed financial information for
each are summarized below:
Consumer
Products Segment
Our
Consumer Products Segment has historically been engaged in identifying
affordable and demonstrable products to market principally to domestic customers
through direct to consumer channels such as television infomercials, live
shopping networks, and ecommerce channels. Commencing in the fourth quarter of
our current fiscal year, our new management team has recruited leading product
development and international direct to consumer marketing experts with deep
experience in the direct to consumer marketing industry to help our new
management execute our vision of becoming a world class consumer products
company which builds demonstrable brands globally through direct to consumer
marketing channels. This new management team has initiated a strategic
redirection of the Consumer Products Segment away from its roots of simply being
a reseller of “products” to becoming more focused on growing long term sales
through brand development, combined with product line extension of its new and
existing brands. Moreover, we are implementing international direct-to-consumer
distribution strategies as well as extending our reach to standard “brick and
mortar” retailers on a global basis. In our current state, this new
direction of the Consumer Products Segment is evident in our Dual Saw Brand,
which contributed $12,325,884 (or 49.6% of our consolidated product sales during
the year ended June 30, 2010). In the case of Dual Saw, we own the rights to the
brand, as well as the product. Due to this ‘brand ownership’ approach, we are
not limited to only one specific product. We also possess the rights to develop
and own next generation versions of the Dual Saw, as well as related types of
products and accessories. In addition to owning and developing our own brands to
fuel our organic growth, our management team will continue to identify existing
products in the market place where we can help product owners drive
significantly more sales on a worldwide basis by leveraging our capital,
relationships and management expertise in building global brands. As such, our
new management believes that the shift in focus from solely product reseller
status to one of brand management and brand ownership, will result in long term
overall better performance for the Consumer Products Segment while
simultaneously reducing operational and financial risk.
4
Fashion
Goods Segment
Our newly
formed Fashion Goods segment is engaged in the business of sourcing and
distributing designer fashion goods and accessories on a discounted basis to
both the Business-to-Business (“B2B”) wholesale and Business-to-Consumer (“B2C”)
retail channels of distribution. Our Fashion Goods Segment will focus on our B2C
retail distribution, while also combining the existing operations of our
wholly-owned subsidiary Designer Liquidator, Inc. (“Designer”), which is
principally a liquidator of designer fashion goods on a wholesale basis to the
B2B channels of distribution. Similar to the Consumer Products Segment,
substantial operational restructuring activities have been initiated, including,
but not limited to initiating the process of discontinuing operations of RPS
Trading LLC (“RPS”), which manufactured goods for retail
distributors. In addition, we have focused on hiring deep industry
expertise to move the Company away from being solely dependent upon the
wholesale B2B liquidation business in order to grow a more consistent and
profitable revenue B2C channel. Due to recent macro-economic changes
in the world economy, there is a significant trend of growing sales in the
discounted designer fashion goods and accessories marketplace, specifically
within the ecommerce B2C distribution channel. Our new management is currently
undertaking an opportunistic approach to capitalize upon this new B2C trend by
leveraging its deep executive management expertise, as well as its current
working knowledge of acting as a vendor for current B2C ecommerce channels such
as Overstock.com. By leveraging our existing designer goods sourcing
relationships as well as our B2B revenue via Designer, our Fashion Good Segment
is building its own world class B2C ecommerce sales and distribution platform to
bring to the markets which are craving designer fashion goods and apparel at
deep discounts.
eCommerce
Segment
Our newly
formed eCommerce segment is engaged in retail and wholesale distribution of
specific products and types or categories of products that do not fit into our
Consumer Products or Fashion Goods Segment. The eCommerce
segment combines the existing operations of our wholly owned
subsidiary, OmniReliant Acquisition Sub, Inc. (“Abazias”), which is an Internet
retailer of diamonds and jewelry, Wineharvest LLC (“Wineharvest”), which is an
Internet retailer of wines, and several equity method available-for-sale method
and cost method investees acquired prior to our change in business model at the
parent company level. As more fully discussed in Note 2 to our Financial
Statements, the companies within the eCommerce Segment (while some are revenue
producing) have been largely dependent upon the holding company to fund their
individual ongoing operations and development. In light of the continuing
depressed economy, among other reasons, our new management team has determined
that the proper amount of funds are not available to continue to fund these
operations for the foreseeable future; rather, funding sources that are
available will be directed toward the development of the Consumer Products and
Fashion Goods Segments. Accordingly, substantial operational restructuring
activities have been initiated and are ongoing to curtail costs of the companies
within this segment giving rise to substantial doubt surrounding their ability
to continue. Management will continue to find ways to create value
from the assets within this portfolio without significant reliance upon the
parent company holding assets.
In the
prior year we reported two operating segments: Response and Real Estate. The
changes to our segments is the direct result of decisions related to our
structure and direction that have been made by our newly appointed executive
management during the fourth fiscal quarter of our year ended June 30, 2010. We
continue to own and operate the real estate that underlined our former Real
Estate Segment. However, management has determined that the level of Company use
of the commercial property and future plans for its expanded use indicate that
it is better represented as a component of the Consumer Products
Segment.
5
Business
and Material Asset Acquisitions
On July
31, 2009, we acquired the assets and assumed certain liabilities of Designer in
exchange for 100,000 shares of common stock and cash of $150,000. Designer is
engaged in the manufacture and wholesale distribution of brand-name apparel and
the retail sale of other accessories. We acquired Designer to expand our retail
sales and enter manufacturing and wholesale distribution. On August 27, 2009, we
completed our acquisition of the outstanding common stock of Abazias through the
merger of Abazias with and into our newly-created, wholly-owned subsidiary,
OmniReliant Acquisition Sub, Inc., in exchange for 13,000,000 shares of our
newly designated Series E Convertible Preferred Stock. Abazias
is an online retailer of high quality loose diamonds and fine jewelry settings
for diamonds. We acquired Abazias for the purpose of building brand recognition
and increasing retail market penetration.
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 13, 2010 we have 19 employees, who work full-time. We consider our
relations with our employees to be good.
Competition
Competition
in the consumer products industry is intense and may be expected to intensify.
There are other, larger and well-established consumer products companies with
whom we must compete. We compete directly with several companies which generate
sales from direct to consumer marketing methods. 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 many 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 discernment of management. Our major competitors include consumer
products companies such as Church & Dwight Co., Este Lauder, Alberto Culver,
Reckitt Benckiser, Thane International, and Guthy Renker.
6
ITEM 1A –
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.
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, 2010 was $(30,811,723) resulting in an accumulated deficit of $(52,707,780).
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.
WE LACK
PROPER INTERNAL CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
and Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure based on the definition of “disclosure controls and
procedures” in Rule 13a-15(e). In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
During
the course of the preparation of our June 30, 2010 financial statements, we
identified certain material weaknesses relating to our internal controls and
procedures within the areas of revenue recognition and inventory accounting.
Some of these internal control deficiencies may also constitute deficiencies in
our disclosure and internal controls.
OUR
AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
In their
report dated October 13, 2010, Meeks International LLC stated that our financial
statements for the fiscal year ended June 30, 2010, 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.
7
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
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
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. Our inability to
overcome these risks could materially and adversely affect our
operations.
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.
8
OUR
BUSINESS IS CONDUCTED WORLDWIDE PRIMARILY IN THE SINGULAR CHANNEL OF DIRECT
SELLING.
We plan
to market our products primarily through direct to consumer marketplaces. If
consumers change their purchasing habits, such as by reducing purchase
behaviors, 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 CONVERTIBLE PREFERRED STOCK, WARRANTS
AND STOCK OPTIONS THAT MAY AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
We have
158,073,323 common shares outstanding as of October 13, 2010. Also as of October
13, 2010, we have 227,729,846 common shares linked to our Convertible Preferred
Stock, Warrants and Stock Options, as follows. The conversion or exercise, as
the case may be, of these securities, will result in the dilution of our current
shareholders
Securities
|
Common Stock
Equivalent
|
|||
Convertible
Preferred Stock:
|
||||
Series
C Convertible Preferred Stock
|
10,242,100 | |||
Series
E Convertible Preferred Stock
|
5,769,200 | |||
Series
G Convertible Preferred Stock
|
50,000,000 | |||
Total
Convertible Preferred Stock
|
66,011,300 | |||
Warrants:
|
||||
Class
B-2
|
480,000 | |||
Class
C-1
|
1,365,614 | |||
Class
C-2
|
1,365,614 | |||
Class
G
|
50,000,000 | |||
Vicis
Warrant
|
70,000,000 | |||
Warrants
issued to Broker Dealers
|
5,546,980 | |||
Total
Warrants
|
128,758,209 | |||
Stock
Options
|
32,960,337 | |||
Total
Common Equivalent Shares
|
227,729,846 |
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.
9
Our
common stock currently trades on the Over-the-Counter Bulletin Board (“OTC:BB”)
under the symbol “ORHI.” Companies trading on the OTC:BB 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 OWNS APPROXIMATELY 93.7% OF OUR COMMON
STOCK. THIS SOLE SHAREHOLDER’S INTERESTS COULD CONFLICT WITH YOURS
AND SIGNIFICANT SALES OF STOCK HELD BY THEM COULD HAVE A NEGATIVE EFFECT ON OUR
STOCK PRICE. ADDITIONALLY, BECAUSE THIS SHAREHOLDER HOLDS A MAJORITY
OF THE VOTING POWER OF OUR CAPITAL STOCK, OTHER SHAREHODLERSS MAY BE UNABLE TO
EXERCISE CONTROL.
As of
October 13, 2010, Vicis Capital Master Fund beneficially owned approximately
93.7% of our common stock. As a result, Vicis Capital Master Fund will have
significant influence to:
-
|
elect
or defeat the election of our
directors;
|
-
|
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.
-
|
According
to the SEC, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns
include:
|
-
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
-
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
-
|
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
10
-
|
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.
ITEM
1B—UNRESOLVED STAFF COMMENTS
None
ITEM
2—PROPERTIES
We own
our principal office building and land that are located at 14375 Myerlake
Circle, Clearwater, Florida 33760. Our building has 34,000 square feet and it is
situated on approximately 5 ½ acres of land. This facility is used in the
Consumer Products Segment of our business operations. Our building and land
serve as collateral for a $1,947,080 mortgage note payable. See Note 11 to our
Consolidated Financial Statements included elsewhere herein for information on
our long-term debt.
We also
lease three facilities under non-cancellable lease arrangements for office and
warehouse space and one lease with a subsidiary officer that has month to month
terms, as follows:
Wineharvest,
in our eCommmerce Segment, leases approximately 2,500 square feet of retail and
warehouse space in Wesley Chapel, Florida. The lease provides for
non-cancellable lease payments through April 2014. OminReliant is a guarantor of
this lease.
Designer,
in our Fashion Goods Segment, leases approximately 3,500 square feet of
warehouse space in Pinellas Park, Florida. The lease provides for
non-cancellable lease payments through April 2012.
RPS, in
our Fashion Goods Segment, leases under 1,000 square feet of office space in New
York, New York. The lease provides for non-cancellable lease payments through
September 2011.
Abazias,
in our eCommerce Segment, leases approximately 2,500 square feet of office space
in Gainesville, Florida. The lease is a month-to-month arrangement with the
former owner and current President of this subsidiary.
11
Mediaxposure Limited
(Cayman) v. Omnireliant Holdings, Inc., Kevin Harrington, Timothy Harrington,
Chris Philips, Richard Diamond, Paul Morrison, Vicis Capital Master Fund and
Vicis Capital LLC:
Supreme
Court of the State of New York, County of New York, Index No.
09603325
On
October 30, 2009, Mediaxposure Limited filed a complaint against the named
defendants alleging certain causes of actions, including aiding and abetting a
breach of fiduciary duty. In January 2010, all defendants moved to dismiss the
complaint. The Company’s motion was fully briefed and argued. We are
awaiting a decision on the Company’s motion.
OmniReliant Holdings, Inc v.
ResponzeTV, et al.:
Supreme
Court of the State of New York, County of New York, Index No.
600646/2009
The
Company commenced this action on March 2, 2009 in the Supreme Court of the State
of New York, County of New York against ResponzeTV, PLC, and two of its
directors, Grahame Farquhar and Steven Goodman to recover $2,000,000, due and
owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in
favor of the Company, and also asserts causes of action for fraud and unjust
enrichment.
Defendants
have moved to dismiss the Complaint, and the Company has opposed this motion.
The court denied the motion as against Grahame Farquhar.
Based
upon ResponzeTV’s dissolution, the Company stipulated to dismiss the action
against it, without prejudice. The Company moved to amend the complaint in July,
2010 to add Mediaxposure (Cayman) as a defendant.
Local Ad Link, Inc., et al.
v. AdzZoo, LLC, et al. v. OmniReliant Holdings, Inc., et
ano:
United
States District Court, District of Nevada, Case No.
2:08-cv-00457-LRH-PAL
On or
about February 19, 2010, AdzZoo, LLC (“AdzZoo”) and the other defendants in the
above-referenced action commenced a third-party action against the Company and
Zurtvita Holdings, Inc. In the Third-Party Complaint, AdzZoo alleges
a cause of action for fraud against the Company, in which it seeks unspecified
monetary damages. Defendants also allege a claim for a declaratory
judgment in which they seek a judgment declaring the rights with respect to
certain representative agreements entered into between certain individual
Defendants and Plaintiff.
On April
13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted
against it. By Order, dated September 9, 2010, the Court granted the
Company’s motion and dismissed the Third-Party Complaint against the
Company.
Davlyn Industries, Inc. v.
ResponzeTV America, LLC f/k/a Reliant International Media, LLC and
OmniReliant Corporation:
Circuit
Court, Pinellas County, Florida, Case No: 09-11763 CI
Davlyn
Industries, Inc. filed this lawsuit asserting a claim for breach of contract in
connection with the purchase of cosmetic skin care products. Davlyn Industries,
Inc. demands judgment against OmniReliant Corporation of $293,600 plus interest
and court costs. This case is in the discovery stage. The Company believes the
lawsuit is without merit and intends to vigorously defend this action.
12
OmniResponse, Inc. v. Global
TV Concepts, Ltd., Laurie Braden and Lee Smith, case number
0-10:61029 in the Southern
District Court of Florida (SDFL).
United
States District Court, Southern District of Florida, Case No.
10-CV-61029
On June
17, 2010, OmniResponse, Inc. filed a complaint against Global Concepts Limited,
Inc., d/b/a Global TV Concepts, LTD, Laurie Braden and Lee Smith alleging
trademark infringement, unfair competition, violations of Florida’s Deceptive
and Unfair Trade Practices Act and breach of contract. OmniResponse,
Inc. is seeking monetary damages and injunctive relief.
On July
17, 2010, the United States District Court for the Southern District of Florida
entered an order preliminarily enjoining Defendants from the use of infringing
trademarks. The matter is presently scheduled for trial at
the end of June, 2011.
Global TV Products, Ltd. v.
Omni Reliant Holdings, Inc., Trademark Opposition No. 91195187
before the Trademark Trial
and Appeal Board (TTAB).
Global TV
Concepts, Ltd. objected to OmniReliant Holdings, Inc.’s DualSaw trademark
application serial number 77721489. Omni filed a motion to stay this Trademark
Office proceeding in favor of the federal litigation. There are no damages, fees
or costs to be assessed. The only relevant issue is OmniReliant’s entitlement to
federally register its DualSaw trademark. The proceeding shall be resolved based
upon final judgment in the federal litigation.
OmniReliant Holdings, Inc.
v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder
Products and Professor Amos Wonder Products, Inc.) et al. Index No.
651635/2010
On
October 4, 2010, the Company, the exclusive licensee of the “Professor Amos”
brand, commenced this action against Professor Amos Wonder Products, the
licensor, and certain of its officers and employees arising from certain wrongful and tortious conduct of the
defendant. Plaintiff alleges claims for breach of an amended
license agreement, tortious interference with the contract, tortious
interference with business relationships, trade libel, fraud and seeks permanent
injunctive relief. No answer has been filed as of the date of this Annual
Report.
Omnicomm Studios, LLC v.
Vince Vellardita, D/B/A Valcom Studios, Inc., Valcom Studios, Inc., and Valcom,
Inc. (collectively, the "Defendants"), in Circuit Court, Pinellas County,
Florida (Case No: 10 7111 CI 15).
Omnicomm
Studios, LLC filed this lawsuit asserting a claim for breach of a real estate
lease agreement by the Defendants. Omnicomm Studios, LLC demands
judgment against the Defendants for payment of past due rent in excess of
$85,000, plus subsequent accruing rent, reasonable attorney’s fees and
costs.
13
Revenue Frontier, LLC v.
OmniReliant Holdings, Inc., in the Superior Court of California for Los Angeles
County, Western District (Case No. SC106265).
Revenue
Frontier, LLC filed this claim asserting a breach of contract related to
delivery of media services. OmniReliant denied Revenue Frontier’s
assertions. In order to avoid the cost and risk of
litigation, the parties entered into a Settlement Agreement dated January
19, 2010.
ITEM 4 —
REMOVED AND RESERVED
14
PART
II
ITEM 5 —
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Shares of
the Company’s common stock are quoted on the Over the Counter Bulletin Board
("OTCBB") under the symbol ORHI. Our shares were listed for trading in July of
2006. The following table sets forth, since July, 2008, the range of high and
low intraday closing bid information per share of our common stock as quoted on
the Over the Counter Bulletin Board.
Quarter Ended
|
High ($)
|
Low ($)
|
||||||
June
30, 2010
|
0.11 | 0.06 | ||||||
March
31, 2010
|
0.40 | 0.11 | ||||||
December
31, 2009
|
0.99 | 0.35 | ||||||
September
30, 2009
|
1.01 | 0.40 | ||||||
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 |
Holders:
As of
October 13, 2010, we had approximately 64 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 Registrar 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
following table summarizes the equity compensation plans under which our
securities may be issued as of June 30, 2010.
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
|
— | $ | 0.00 | — | ||||||||
Equity
compensation plan not approved by security holders
|
32,960,337 | $ | 0.05 | — |
15
RECENT
SALES OF UNREGISTERED SECURITIES
On June
30, 2010, we issued and sold 5,000,000 shares of our Series G Convertible
Preferred Stock and Series G Warrants to purchase an aggregate of 50,000,000
shares of our common stock at a per share exercise price of $0.10 for an
aggregate purchase price value of $5,000,000 consisting of (1) $3,500,000 in
cash and (2) the return and cancellation of the note in the principal amount of
$1,500,000 issued to Vicis Capital Master Fund pursuant to a Note Purchase
Agreement dated June 4, 2010 between Vicis and the Company. Vicis is a
beneficial owner of 93.7% of our outstanding capital stock.
On June
4, 2010, we entered into a Note Purchase Agreement with Vicis Capital Master
Fund pursuant to which we sold an 8% convertible promissory note in the
principal amount of $1,500,000 for an aggregate purchase price of $1,500,000
(the “Note”). The Note is due on demand in the holder’s
discretion. The Note is convertible into securities offered by the
Company in a future financing pursuant to the terms of the Note Purchase
Agreement. Vicis is a beneficial owner of 93.7% of our outstanding capital
stock.
On July
20, 2009, the Company entered into a securities purchase agreement with Vicis
Capital Master Fund whereby Vicis purchased from the Company a warrant to
purchase 97,606,276 shares of the Company’s common stock for a purchase price of
five million dollars ($5,000,000). The warrant has an exercise price
of $0.25 per share and is exercisable for ten years from the date of
issuance. The warrant is exercisable on a cashless basis at any time
after 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. Vicis is a beneficial owner of 93.7% of our outstanding
capital stock.
On July
20, 2009 Vicis exercised in part, the warrant it holds, into 27,606,276 shares
of the Company’s common stock at an adjusted aggregate exercise price of
$5,600,000.
On July
31, 2009, Vicis converted 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 into 105,141,416 shares of the Company’s common
stock.
We
believe that the offer and sale of the securities referenced in this section
were exempt from registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and/or Regulation D promulgated
there under as transactions not involving any public offering. All of the
purchasers of unregistered securities for which we relied on Section 4(2)
and/or Regulation D represented that they were accredited investors as
defined under the Securities Act, except for up to 35 non-accredited investors.
The purchasers in each case represented that they intended to acquire the
securities for investment only and not with a view to the distribution thereof
and that they either received adequate information about the registrant or had
access, through employment or other relationships, to such information;
appropriate legends were affixed to the stock certificates issued in such
transactions; and offers and sales of these securities were made without general
solicitation or advertising.
16
ITEM 6 -
SELECTED FINANCIAL DATA
As a
smaller reporting company we are not required to provide the information
required by this Item.
Management’s
discussion and analysis of financial condition and results of operations should
be read in conjunction with our consolidated financial statements for the years
ended June 30, 2010 and 2009, included elsewhere in this Annual Report on Form
10-K.
Overview
and Developments
Operating
Segments
Certain
changes in our business direction and operating structure have been made or are
planned by our recently appointed Chief Executive Officer. As a result of these
changes, we have restructured our operating segments. These changes are
discussed below. Condensed disclosure of operating results and financial
condition for each segment are provided in Note 16 to the accompanying
consolidated financial statements.
Consumer
Products Segment
Our
Consumer Products Segment has historically been engaged in identifying
affordable and demonstrable products to market principally to domestic customers
through direct to consumer channels such as television infomercials, live
shopping networks, and ecommerce channels. Commencing in the fourth quarter of
our current fiscal year, our new management team has recruited leading product
development and international direct to consumer marketing experts with deep
experience in the direct to consumer marketing industry to help our new
management execute our vision of becoming a world class consumer products
company which builds demonstrable brands globally through direct to consumer
marketing channels. This new management team has initiated a strategic
redirection of the Consumer Products Segment away from its roots of simply being
a reseller of “products” to becoming more focused on growing long term sales
through brand development, combined with product line extension of its new and
existing brands. Moreover, we are implementing international distribution
strategies as well as extending our reach to standard brick and mortar retailers
on a global basis.
Fashion
Goods Segment
Our new
Fashion Goods segment is engaged in the business of sourcing and distributing
designer fashion goods and accessories on a discounted basis to both the
Business-to-Business (“B2B”) wholesale and Business-to-Consumer (“B2C”) retail
channels of distribution. Our Fashion Good Segment will focus on our B2C retail
distribution, while combining the existing operations of Designer, which is
principally a liquidator of designer fashion goods on a wholesale basis to the
B2B channels of distribution. Similar to the Consumer Products Segment,
substantial operational restructuring activities have been initiated, including
and not limited to initiating the process of discontinuing operations of RPS,
which manufactured goods for retail distributors.
17
eCommerce
Segment
Our new
eCommerce segment is engaged in retail and wholesale distribution of specific
products and types or categories of products that do not fit into our Consumer
Products or Fashion Goods Segment. The eCommerce segment combines Abazias and
Wineharvest and several unconsolidated investee companies. As more fully
discussed in Note 2 Going Concern in our consolidated financial statements, the
companies within the eCommerce Segment, while some are revenue producing, have
been largely dependent upon the holding company to fund their individual ongoing
operations and development. In light of the continuing depressed economy, among
other reasons, our new management team has determined that the proper amount of
funds are not available to continue to fund these operations for the foreseeable
future; rather, funding sources that are available will be directed toward the
development of the Consumer Products and Fashion Goods Segments. Accordingly,
substantial operational restructuring activities have been initiated and are
ongoing to curtail costs of the companies within this segment giving rise to
substantial doubt surrounding their ability to continue.
In prior
periods we reported two operating segments: Consumer Products and Real Estate.
The changes to our segments is the direct result of decisions related to our
structure and direction that have been made by our newly appointed executive
management during the fourth fiscal quarter of our year ended June 30, 2010. We
continue to own and operate the real estate that underlined our former Real
Estate Segment. However, management has determined that the level of company use
of the commercial property and future plans for its expanded use indicate that
it is better represented as a component of the Consumer Products
Segment.
Business
acquisitions:
On July
31, 2009, we acquired the assets and assumed certain liabilities of Designer in
exchange for 100,000 shares of common stock and cash of $150,000. Designer is
engaged in the manufacture and wholesale distribution of brand-name apparel and
the retail sale of other accessories. We acquired Designer to expand our retail
sales and enter manufacturing and wholesale distribution. On August 27, 2009, we
completed our acquisition of the outstanding common stock of Abazias, Inc. in
exchange for 13,000,000 shares of our newly designated Series E Convertible
Preferred Stock. Abazias is an online retailer of high quality loose diamonds
and fine jewelry settings for diamonds. We acquired Abazias for the purpose of
building brand recognition and increasing retail market penetration. The
following table summarizes the results of the allocation:
Abazias
|
Designer
|
Total
|
||||||||||
Current
assets, including cash of $127,530 and $612,702 from Abazias and Designer,
respectively
|
$ | 523,307 | $ | 1,964,119 | $ | 2,487,425 | ||||||
Property
and equipment
|
2,027 | — | 2,027 | |||||||||
Intangible
assets:
|
||||||||||||
Customer
lists and customer related
|
2,545,930 | 484,353 | 3,030,283 | |||||||||
Dealer
network intangibles
|
2,133,679 | — | 2,133,679 | |||||||||
Registered
trademarks, trade names and dress
|
1,642,420 | — | 1,642,420 | |||||||||
Executive
employment contracts
|
210,928 | — | 210,928 | |||||||||
Software
and operational processes
|
35,000 | — | 35,000 | |||||||||
Trade
liabilities assumed
|
(347,905 | ) | (124,728 | ) | (472,633 | ) | ||||||
Notes
payable
|
— | (250,000 | ) | (250,000 | ) | |||||||
Deferred
income taxes
|
(2,281,029 | ) | (60,967 | ) | (2,341,966 | ) | ||||||
4,464,357 | 2,012,777 | 6,477,133 | ||||||||||
Consideration
transferred (excluding direct expenses):
|
||||||||||||
Cash
consideration
|
— | 150,000 | 150,000 | |||||||||
Fair
value of OmniReliant Securities
|
15,841,323 | 101,000 | 15,942,323 | |||||||||
Investments
|
1,042,789 | 1,857,383 | 2,900,172 | |||||||||
Non-controlling
interest in RPS Trading LLC
|
— | 163,450 | 163,450 | |||||||||
Consideration
transferred, plus non-controlling interests
|
16,884,112 | 2,271,833 | 19,155,945 | |||||||||
Goodwill
arising from the acquisitions under ASC 805
|
$ | 12,419,756 | $ | 259,056 | $ | 12,678,812 |
18
The
following table summarizes the pro forma affects on our consolidated statements
of operations, as if the acquisitions had occurred on July 1, 2009 and 2008,
respectively:
Years
ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Sales
and other revenues
|
$ | 27,005,272 | $ | 15,156,974 | ||||
Net
loss attributable to OmniReliant
|
(31,595,843 | ) | (4,140,026 | ) | ||||
Loss
per common share—basic
|
(0.71 | ) | (0.49 | ) | ||||
Loss
per common share—diluted
|
(0.71 | ) | (0.49 | ) |
Pro forma
financial information is not necessarily indicative of the results that we would
have achieved had the acquisitions occurred on the dates referred to
above.
We
accounted for our acquisitions applying the Acquisition Method. Accordingly, we
recognized, separately from goodwill, the identifiable tangible and intangible
assets acquired and liabilities assumed at their fair values on the acquisition
dates. The excess of the fair value of the consideration transferred, plus the
fair value of non-controlling interests in the acquired assets, over the fair
values of assets acquired and liabilities assumed is recorded as
goodwill.
The
Series E Preferred shares issued in connection with the acquisition of Abazias
are non-redeemable and do not bear a dividend feature. They were convertible
into 15,476,190 shares of our common stock. The Series E Preferred shares were
recorded at their fair value. Fair value was established based upon the common
stock equivalent value of the Series E Preferred, using our trading market price
on the closing date of the transaction ($1.01 on August 27, 2009), plus the
incremental value associated with the anti-dilution protections afforded the
holders of the Series E Preferred. The fair values of intangible assets acquired
were estimated using techniques believed to be suitable for the circumstances.
Customer and vendor intangible were value using an income approach that relies
on projected cash flows. Trademarks were valued using the relief from royalty
methods. These methods required significant and subjective estimates at the time
of the acquisitions. All estimates were made by competent employees under the
direct supervision of our management. The estimates are more fully discussed in
the footnotes to our consolidated financial statements. The acquisition gave
rise to net deferred tax liabilities that became available to reduce our
preexisting valuation allowances. Under current accounting standards, reductions
in deferred tax valuation allowances arising from acquisition accounting are
recorded in equity.
The
principal factor giving rise to the amount of goodwill at the time of our
acquisitions was the expected synergies that would have resulted from the
combined companies’ efforts to jointly promote existing and new retail product
offerings. However, as more fully discussed in Note 1 and Note 8, our new
management’s plans no longer contemplate integration of these companies with the
Consumer Products segment. As a result, substantially all identifiable
intangible assets and goodwill were impaired during the fourth quarter of the
year ended June 30, 2010.
19
Abazias’
operations were consolidated with our operations commencing with the closest
monthly closing date near the date of acquisition, or September 1, 2009.
Designer operations were consolidated with our operations commencing August 1,
2009.
Changes in
accounting:
We
adopted two accounting standards during our year ended June 30, 2010 that had a
material effect on our financial statements and presentation. The standards
adopted and the associated effects were as follows:
Effective
on July 1, 2009, we adopted the requirements of Accounting Standards
Codification (“ASC”) 810 Consolidations that
required (i) presentation of non-controlling interests (formerly referred to as
minority interests) as a component of equity and (ii) presentation of income
(loss) associated with OmniReliant separately from income (loss) associated with
non-controlling interests. This accounting standard required retrospective
adoption and, accordingly, the comparable amounts in prior periods have been
reclassified to conform to this new standard. The effect of this change in
accounting was to increase beginning stockholders’ equity that was previously
reported in the amount of $40,109,747 as of June 30, 2010 by the amount of
non-controlling interests in the amount of $197,114 as of June 30, 2010. See
Note 14 for information on Non-Controlling Interests.
Effective
on July 1, 2009, we also adopted the requirements of ASC 815 Derivatives and Hedging
Activities that revised the definition of “indexed to a company’s own
stock” for purposes of continuing classification of derivative contracts linked
to our equity instruments. Derivative contracts may be classified in equity only
when they both are indexed to a company’s own stock and meet certain conditions
for equity classification. Under the revised definition, an instrument (or
embedded feature) would be considered indexed to an entity's own stock if its
settlement amount will equal the difference between the fair value of a fixed
number of the entity's equity shares and a fixed monetary amount. We were unable
to continue to carry 30,904,171 warrants in equity because they embodied
anti-dilution protections that did not achieve the fixed-for-fixed definition.
The reclassification of the fair value of the warrants, amounting to $4,045,146,
to liabilities was recorded on July 1, 2009 as a cumulative effect in accounting
principle wherein the original amounts recorded were removed from paid-in
capital $28,719,115 and the difference $24,673,969, representing the fair value
changes, was recorded as an adjustment to beginning accumulated
deficit.
Year
ended June 30, 2010 compared to year ended June 30, 2009:
Revenues – Our Revenues
increased 165% to $25,903,046 for the year ended June 30, 2010 compared to
$9,788,913 for the year ended June 30, 2009. The increase is primarily related
to the increase in our consumer products, and the acquisitions of Abazias and
Designer. We derive the majority of our revenues from the sale of tangible
products in our Consumer Products, Fashion Goods and eCommerce segments. We also
derive services revenue from providing marketing and distribution services in
our Consumer Products segment. Finally, we collect rents from leasing a portion
of the real estate we own described in the Properties Section. Our analysis of
the material components of changes in revenues are as follows:
20
|
·
|
Product
sales: Our product sales increased $15,275,525 to $24,828,417 for the year
ended June 30, 2010 compared to $9,552,892 for the year ended June 30,
2009. Recently acquired subsidiaries Abazias and Designer contributed
$3,803,809 and $4,262,137, respectively, of this increase. However, it
should be noted that we began consolidating Abazias and Designer on
September 1, 2009 and August 1, 2009, respectively. Therefore, their sales
represent ten and eleven months of revenue producing activities for those
companies. Our product sales for the years ended June 30, 2010 and 2009
are net of estimated returns and allowances of $289,378 and $8,744,
respectively, which amounts are normal in retail sales and within the
expectations of our management. Due to the nature of the retail business
sector, our revenues may be concentrated from time-to-time in the sale of
certain specific products or a single product. These concentrations
generally arise from the timing and intensity of our direct to consumer
marketing campaigns related to those specific products. During the year
ended June 30, 2010, two products comprised 50% and 16%, respectively, of
our consolidated product sales. In the aggregate, these two products
comprised 63% of our consolidated revenue from all sources for the year
ended June 30, 2010. Similarly, during our year ended June 30, 2009, two
products comprised 34% and 29%, respectively, of our consolidated product
sales and, in the aggregate, 62% of our consolidated revenue from all
sources. During the year ended June 30, 2010, our Abazias product line
(included in our eCommerce Segment), consisting of precious gems and
jewelry comprised 15% of our consolidated product sales and our RPS
product line (included in our Fashion Goods Segment), consisting of
manufactured apparel comprised 17% of our consolidated product
sales.
|
Commencing
in the first quarter of our year ending June 30, 2011, we have substantially
curtailed, although we did not exit, the manufacturing operations at RPS.
Curtailment of these operations was believed necessary by our new management
team when it became apparent that RPS was not operating efficiently and our new
management’s efforts are required in other developing initiatives related to our
operations. Accordingly, our consolidated revenue and our Fashion Goods Segment
revenue will be substantially lower as a result of this curtailment of
activities. Other significant declines in the sales volumes associated with
these products or product lines, should that occur, could have a material
adverse effect on our operations and financial position, should our management
be unable to timely replace the lines with alternative retail
products.
·
|
Cost
of product sales: Our cost of product sales increased $12,660,212 to
$17,802,422 for the year ended June 30, 2010 compared to $5,142,210 for
the year ended June 30, 2009. Our gross margin as a percent of product
sales during the year ended June 30, 2010 amounted to 28% compared to 46%
during the year ended June 30, 2009. Gross margin as a percent of product
sales in our Consumer Products segment amounted to 46% for each year ended
June 30, 2010 and 2009. However, margins on retail products are largely
dependent upon the types and demands for specific types of products.
Accordingly, our ongoing margins will likely be volatile until we
establish the types of products that will serve as our long-term base of
offerings. Gross margins as a percent of sales in our Fashion Goods and
eCommerce segments amounted to (28)% and 13%, respectively, for the year
ended June 30, 2010. As it relates to the eCommerce segment, substantially
all revenues were derived from the Abazias subsidiary and margins as a
percent of revenue were lower than the 15% Abazias was experiencing prior
to our acquisition, but the current levels are within our management’s
expectations. As it relates to our Fashion Goods segment, our margin
deficit is due primarily to our RPS subsidiary. Due to manufacturing and
personnel challenges in Bangladesh, we experienced a number of delays in
receiving finished goods. This delay lead to increased
production and freight costs which negated any planned gross margin. As a
result of these matters, and as discussed in Product Sales above, our new
management has substantially curtailed the RPS operations until efficient
processes can be developed and put in place to avoid these
losses.
|
·
|
Services
revenue: Our Service revenues increased $742,167 for the year ended June
30, 2010 compared to the year ended June 30, 2009. Services revenue of
$742,167 for the year ended June 30, 2010 was derived from two customer
contracts that were prepaid with common stock of the customers. We
recorded the common stock at their fair values on the date we received
them, which amounted to $796,000 based upon listed values in trading
markets and which we believe was a fair estimate of the value of the
services underlying the agreements. The investments were recorded in
available for sale investments and equity method investments in the
amounts of $150,000 and $646,000, respectively. The ownership level in the
second customer arising from the common stock of 23% gave rise to the
equity method accounting. As of June 30, 2010, there remains $53,833 of
deferred revenue associated with these two contracts that will be recorded
as the services are provided during the first fiscal quarter of our fiscal
year ending June 30, 2010. In addition to the aforementioned arrangements,
as of June 30, 2010, we also have $2,000,000 remaining in non-current
deferred revenue associated with a licensing agreement with the customer
from whom we acquired the aforementioned equity method investment and for
which we were compensated in the form of a face value $2,000,000
convertible debenture, due October 9, 2012. Current accounting standards
provide that any extended payment terms in revenue arrangements, and in
particular terms that extend beyond twelve months, indicate that the
compensation is not fixed and determinable, a requisite criteria for
recognition of revenue in our income. Accordingly, this revenue will not
be recognized until all requisite criteria for revenue recognition are
met, which will be in periods after the fiscal year ending June 30, 2011.
The convertible debenture that we received is recorded on our balance
sheet as a component of our equity method investment in this
company.
|
21
·
|
Rental
income: Rental income of commercial real estate amounted to $332,462 for
the year ended June 30, 2010, an increase of $96,441, when compare to
$236,021 of that we reported for the year ended June 30, 2009. Increases
are associated with increased occupancy of our building. We anticipate
rental revenues in the near term to be consistent with levels experienced
in the current annual period.
|
Other operating expenses –
Other operating expenses consist of advertising expense, accounting and
professional expenses, employment costs and general, depreciation and
amortization and administrative expenses. Our analysis of the material
components of changes in other operating expenses are as follows:
|
·
|
Impairment
Charges: We recorded impairment charges related to long-lived assets in
the amount of $22,972,854 during the fourth fiscal quarter of our year
ended June 30, 2010 and $198,456 during our year ended June 30, 2009. Of
the current year amount, $18,323,731 related to the Abazias purchase
earlier in the current fiscal year and $12,419,756 of that amount related
to the goodwill recorded in connection with that purchase business
combination. The original purchase price for Abazias contemplated
significant synergies between our Consumer Products segment and what is
now our eCommerce segment. However, our new management’s plans for the
Company no longer include or contemplate the integration and synergies
from the assets acquired from Abazias. Further, the restructuring of the
overall Company by our new management resulted in the reallocation of
goodwill among reporting units, as defined in current accounting
standards, which in turn exposed Abazias’s goodwill, for purposes of
impairment evaluation, and other identifiable intangible assets to lower
allocated values and, thus, resulted in the impairment charges. Under
similar analysis, the Designer and RPS assets required impairment
amounting to $595,412. In addition, as it relates to certain software
technologies owned by OmniReliant, an abandonment decision was made by new
management when it was determined that insufficient funds would be
available to develop the technology to a marketable state. Accordingly,
these circumstances resulted in a direct write off of the carrying value
of the software technologies. The following table summarizes the
impairment charges by reporting unit during the year ended June 30,
2010:
|
Reporting Unit:
|
Identifiable
Intangible Asset
|
Goodwill
|
Total
|
|||||||||
Abazias
|
$ | 5,903,975 | $ | 12,419,756 | $ | 18,323,731 | ||||||
OmniReliant
|
3,882,461 | — | 3,882,461 | |||||||||
RPS
Trading LLC
|
336,356 | — | 336,356 | |||||||||
Designer
Liquidator
|
— | 259,056 | 259,056 | |||||||||
Wineharvest
|
— | 172,250 | 172,250 | |||||||||
$ | 10,121,792 | $ | 12,851,062 | $ | 22,972,854 |
22
·
|
Advertising
and promotion: Advertising and promotion expense increased $1,099,947 for
the year ended June 30, 2010 to $6,150,505 as compared to $5,050,558 for
the year ended June 30, 2009. Of the current year advertising and
promotion spending, $5,835,199 related to our Consumer Products Segment.
We began incurring substantial advertising media expense during the prior
fiscal year which is necessary to promote our brands. The increase in
expense over the prior fiscal year relates to the higher sales levels of
advertising activities associated with certain products that management
believe are close to market saturation. Management believes
that advertising expense decreased relative to sales for two reasons (1)
as brands are established, less advertising is required to maintain brand
recognition, and (2) in the case of DualSaw, we decreased advertising for
a period of time during the third and fourth quarter of 2010, but were
still able to generate sales activity. Moreover,
management purposefully slowed the rate of advertising expenditure in all
of our operating segments in order to make the necessary operational
changes to our business and growth plans for the future under our new
business plan for OmniReliant and its wholly owned
subsidiaries.
|
·
|
Employment
Costs: Employment related costs consist of salaries and payroll, employee
insurance, and share-based payment. These costs increased by $1,975,117 to
$2,601,800 for the year ended June 30, 2010. Our employment costs in the
current period include $883,273 related to Abazias and $96,731 related to
Designer. Also, our employment costs included non-cash share-based payment
expense of $518,886 and $387,672 during the years ended June 30, 2010 and
2009, respectively. Unamortized share-based payment expense amounts to
$2,423,529 as of June 30, 2010. This amount will be amortized into expense
as the stock options vest, generally over the next two to five years.
Employment costs for the year ended June 30, 2010 also include severance
expense in the amount of $400,009 related to the separation of our former
Chief Executive Officer. Additionally, the increase in our employment cost
is due to higher employment levels. In order to execute our new
strategy, management intends on hiring key personnel at the executive and
staff levels. Although this will increase our employment costs
over time, management believes that employment costs under the new
strategy will be offset by a decrease due to an overall shift in
acquisition strategy as well as a projected decrease in severance related
costs.
|
·
|
Other
general and administrative: These costs and expenses include bad debts,
occupancy costs and general office expenses. Our general and
administrative costs increased $2,573,385 to $3,147,058 for the year ended
June 30, 2010 compared to $573,673 for the year ended June 30, 2009.
Abazias contributed $240,013 to this increase and Designer contributed
$217,668. Otherwise, the largest single component of the increase related
to our bad debts expense. Overall, we believe that our reserves are
reasonable and appropriate for our current levels of operations. In the
year ended June 30, 2010 our bad debt expense amounted to $1,072,176
compared to $138,848 during the year ended June 30, 2009. In addition, we
commenced incurring royalties in the current year related to our Professor
Amos license and certain other licensed programs. Royalty expense amounted
to $829,322 during the year ended June 30, 2010 where we incurred no
royalty expense in the prior year. Engaging in licensing agreements to
sell products is an industry practice and, accordingly, we will likely
incur higher levels of royalty charges as our operations mature and we add
additional products to our retail offerings. Finally, included within
general and administrative expenses are real estate operation expenses of
$234,073 and $248,617 during the years ended June 30, 2010 and 2009,
respectively. Our real estate operation expenses include property taxes,
utilities, repairs and maintenance and insurance costs. These expenses are
expected to remain consistent with levels experienced in the current
period.
|
·
|
Accounting
and professional expense: Accounting and consulting professional expenses
increased $1,132,624 to $2,703,527 for the year ended June 30, 2010 from
$1,570,903 for the year ended June 30, 2009. These costs include fees
relating to other professional consulting and audit related expenses. Our
fees have increased due to our increased consulting fees for outsourced
accountants and financial services, audit fees and operating activities
and acquisitions we conducted in fiscal year
2010.
|
23
·
|
Depreciation
and amortization: Our amortization of intangible assets and depreciation
of property and equipment amounted to $1,836,071 and $170,169,
respectively, for the year ended June 30, 2010. Our amortization of
intangible assets and depreciation of property and equipment amounted to
$376,226 and $232,353, respectively for the year ended June 30, 2009.
Increases in depreciation and amortization are largely due to the higher
levels of intangible assets arising from our acquisitions of Abazias and
Designer. In addition, during the current fiscal quarter, we exchanged
certain investments for software having an estimated value of $3,782,717.
As noted in the discussion related to impairments, above, we have impaired
all of our intangible assets. Accordingly, no further amortization expense
will be recorded in future periods unless we acquire other intangible
assets.
|
Other income (expense) –
Other income and expense include fair value adjustments related to our
derivative financial instruments, interest expense and income, extinguishments
and impairments. Our analysis of the material components of changes in the other
income (expense) section of the statement of operations are as
follows:
·
|
Extinguishment expense:
On July 20, 2009, we entered into a securities purchase agreement with
Vicis whereby Vicis purchased from the Company a warrant to purchase
97,606,276 shares of the Company’s Common Stock for a purchase price of
five million dollars ($5,000,000). The Warrant has an exercise price of
$0.25 per share and is exercisable for ten years from the date of
issuance. The Warrant is exercisable on a cashless basis at any time after
nine months from the date of issuance if there is no effective
registration statement registering the resale of the shares underlying the
Warrant.
|
As
further consideration for the sale of the Warrant, Vicis surrendered for
cancellation all existing warrants that it currently holds that are indexed to
97,606,276 shares of common stock. These transactions are collectively referred
to as the Exchange Transaction. The Exchange Transaction triggered certain
down-round anti-dilution protection in an aggregate of 102,732,942 of our
outstanding warrants, resulting in revisions of the exercise prices from a range
of $0.50 – $2.00 to $0.25.
Prior to
the Exchange Transaction, we carried the surrendered warrants as derivative
liabilities and at fair value. The new warrant did not achieve equity
classification because it did not meet the definition of “indexed to a company’s
own stock.” Accordingly, we accounted for the exchange analogously to an
exchange of debt instruments; that is as an extinguishment. The following table
summarizes the components of the extinguishment calculation:
Fair
value of New Warrant
|
$ | 37,090,385 | ||
Fair
value of surrendered warrants
|
(9,761,869 | ) | ||
Consideration
|
(5,000,000 | ) | ||
Extinguishment
loss
|
$ | 22,328,516 |
·
|
Derivative
income (expense): Derivative income (expense) increased $27,632,367 to
$29,606,972 during the year ended June 30, 2010 compared to $1,974,605 for
the year ended June 30, 2009. Derivative income (expense) results from
certain financial instruments (principally warrants, but also including
embedded derivative financial instruments) that are required to be
measured at fair value. The changes in the fair value of these derivatives
are significantly influenced by changes in our trading stock price and
changes in interest rates in the public markets. Further, certain elements
of the fair value techniques require us to make estimates about the
outcome of certain events, such as defaults. We will continue to record
income or expense related to derivatives until they are settled or
reclassified to equity.
|
24
The
following table summarizes the components of derivative income (expense) arising
from fair value adjustments during the years ended June 30, 2010 and
2009:
2010:
|
Embedded
|
Warrant
|
||||||||||
Financing—Financial Instrument
|
Derivatives
|
Derivatives
|
Total
|
|||||||||
Series
A Preferred Financing
|
$ | — | $ | (1,020 | ) | $ | (1,020 | ) | ||||
Series
B Preferred Financing
|
— | 60,188 | 60,188 | |||||||||
Series
C Preferred Financing
|
(6,739 | ) | 256,263 | 249,524 | ||||||||
Series
D Preferred Financing
|
(11,032 | ) | (410,620 | ) | (421,652 | ) | ||||||
Series
F Preferred Financing
|
— | 209,168 | 209,168 | |||||||||
Series
G Preferred Financing (1)
|
— | — | — | |||||||||
Warrant
Financing (2)
|
— | 29,510,764 | 29,510,764 | |||||||||
Derivative
income (expense)
|
$ | (17,771 | ) | $ | 29,624,743 | $ | 29,606,972 |
(1) The
Series G Preferred Financing was effected on June 30, 2010. There was no change
in fair value.
(2) The
significant level of income, or decrease in fair value, resulted when these
warrants were re-priced earlier in our fiscal year resulting in charges to our
income and recorded as extinguishment and inducement, and then declines in
subsequent value of our trading market price, a significant influence on fair
value, declined substantially, causing the fair value of the derivative to
decline.
2009:
|
Embedded
|
Warrant
|
||||||||||
Financing—Financial Instrument
|
Derivatives
|
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
|
— | (1,221,323 | ) | (1,221,323 | ) | |||||||
Derivative
income (expense)
|
$ | 1,294,097 | $ | 680,508 | $ | 1,974,605 |
·
|
Inducement expense: On
March 31, 2010, pursuant to an inducement offer wherein we reduced the
strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276
warrants, Vicis exercised 27,606,276 warrants for an adjusted aggregate
exercise price of $5,600,000. We accounted for the warrant exercise
analogously to an inducement offer to convert debt instruments; that is
the inducement value is recorded as a charge to income. The following
table summarizes the components of the inducement
calculation:
|
Fair
value of warrants following inducement
|
$ | 26,851,487 | ||
Fair
value of warrants preceding inducement
|
25,377,632 | |||
Inducement
expense
|
$ | 1,473,855 |
·
|
Interest and other
income: Income generated from interest on notes receivable from
investees increased $118,363 to $317,820 during the year ended June 30,
2010 compared to $199,457 for the year ended June 30, 2009. The increase
is attributable to higher balances cash on
hand.
|
25
·
|
Equity in losses of
investees: We hold investments accounted for under the equity
method. Our pro rata share of net loss and related book adjustments in
these investments equaled $1,975,846 for the year ended June 30, 2010
compared to $92,741. 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. See
discussion on Impairment of
investments.
|
·
|
Impairment of
investments: Investments have been made in certain Internet retail
businesses. During the year ended June 30, 2010, we recorded impairment
charges aggregating $3,590,196 associated with six investments. During the
year ended June 30, 2010, we recorded impairment charges associated with
one investment carried on the cost basis in the amount of $450,000. During
the fourth quarter of the current fiscal year, our new management
performed a review of all investments and determined that (i) certain
non-performing investments should be impaired and (ii) curtailment of
funding of certain other investments would be required to preserve
operating capital, thus resulting in the impairment. Details of our
impairment charges by investee name and type during the years ended June
30, 2010 and 2009 are as follows:
|
2010
|
2009
|
|||||||
Investments
carried under the equity method:
|
||||||||
Cellular
Blowout
|
$ | 1,442,731 | $ | — | ||||
Perfect
Pear
|
352,683 | — | ||||||
For
your imagination
|
255,925 | — | ||||||
2,051,339 | — | |||||||
Available
for sale investments:
|
||||||||
Beyond
Commerce
|
1,249,021 | — | ||||||
Valcom
|
102,336 | — | ||||||
Carolyn
and Company
|
— | 450,000 | ||||||
1,351,357 | 450,000 | |||||||
Nested
Media (Cost basis)
|
187,500 | — | ||||||
$ | 3,590,196 | $ | 450,000 |
·
|
Interest expense:
Interest expense includes amortization of deferred finance costs and
interest on our mortgage loan. Interest expense decreased $126,494 to
$223,997 during the year ended June 30, 2010 compared to $350,491 for the
year ended June 30, 2009. Our interest expense declined in the currently
year after we wrote off certain deferred finance costs that were subject
to amortization in connection with the extinguishment transaction referred
to above.
|
Non-controlling interests – A
non-controlling interest, formerly called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Non-controlling interests arise from the consolidation of subsidiaries as a
result of voting control or based upon benefits of an entity’s variable
interests. We consolidate three entities that have non-controlling interests.
Our subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated in 2010 and
2009 because we own the majority of the voting control. Our subsidiary, RPS is
consolidated in 2010 because we own a 50% voting interest, it meets the
definition of a variable interest entity, and we are the primary beneficiary.
Our subsidiary Wineharvest is consolidated in 2010 because we own 40% voting
interest, it meets the definition of a variable interest entity and we are the
primary beneficiary, principally due to our guarantee of their lease.
Non-controlling interests in the (income) loss of consolidated entities amounted
to $337,255 and $122,886 during the year ended June 30, 2010 and 2009,
respectively. During the year ended June 30, 2010, we liquidated the total
balance in non-controlling interest associated with RPS; therefore, there will
be no further credits in our income.
26
Net loss – We have reported
net loss of $30,811,723 during the year ended June 30, 2010 compared to a loss
of $2,625,964 during the year ended June 30, 2009. The increase is a result of
the items discussed in the preceding discussion.
Loss applicable to common
stockholders – Loss applicable to common
stockholders represents our net loss or income as adjusted for dividends and
accretions on our Preferred Stock. Our increase in loss applicable to common
shareholders is attributable to the $66,948,653 increase in deemed dividends on
our preferred stock arising from the exchange transaction. That is, the exchange
transaction triggered anti-dilution protection adjustments to the conversion
price of the preferred stock. The amount recorded as the deemed dividend is the
fair value of the incremental value associated with the post-exchange
transaction preferred balances. Accordingly, our loss applicable to common
shareholders and our loss per common share (basic and diluted) amounted to
$97,760,376 and $0.71, respectively, for the year ended June 30, 2010. Our loss
applicable to common shareholders and our loss per common share, basic and
diluted, amounted to $5,584,314, $0.39, respectively, for the year ended June
30, 2009. Our weighted average outstanding common shares amounted to 137,891,440
and 14,503,289 during the years ended June 30, 2010 and 2009,
respectively.
Liquidity
and Capital Resources
The
preparation of financial statements in accordance with generally accepted
accounting principles contemplates that operations will be sustained for a
reasonable period. However, we have incurred operating losses of $31,481,360 and
$4,029,680 during the years ended June 30, 2010 and 2009, respectively. In
addition, during these periods, we used cash of $5,963,466 and $5,859,217,
respectively, in support of our operating activities. As of June 30, 2010, we
have cash on hand of $5,691,422. Since our inception, we have been substantially
dependent upon funds raised through the sale of preferred and common stock and
warrants to sustain our operating and investing activities. However, recent
reviews of the current market, which included discussions with prior and
potential funding sources by our executive management, indicate that additional
funding at levels to maintain operations at their historical levels and under
the existing structure are doubtful. As more fully discussed in the next
paragraphs, our new management team has commenced certain significant
initiatives focused on restructuring and redirection. These initiatives will
require substantially all available liquid resources and, if positive outcomes
from these initiatives are not realized by approximately April 2011, much of our
liquid resources may be depleted. While we will still be able to continue as a
going concern, these conditions would raise substantial doubt about our ability
to continue all reporting segments as a going concern for a reasonable
period.
Our new
management has developed strategic plans during the fourth quarter of the
current fiscal year with the intent of alleviating ongoing operating losses. The
principal focus of these plans is an emphasis on the redesign of the Consumer
Products Segment, shifting its focus from the highly expensive product based
distribution model to a global brand development and brand ownership model.
Compared to the historical model for the Consumer Products Segment, much of the
exorbitant advertising, distribution and administrative costs are able to be
shifted to third party organizations that are more entrenched in those types of
activities and networks, while allowing the Company to develop and brand
specific products that management believes have substantive market potential.
Management believes that the planned model, which is currently under
development, will provide better current and long-term profitability by
curtailing the cost structure, allowing for longer product life, and providing
for next-version, next-generation and follow-on opportunities to those products
ultimately developed. However, substantial investment is required to support
this change and, as a result, the Company will be unable to continue to provide
significant operating capital to the operating entities within eCommerce
Segment. As a result, while developing the new Consumer Products model,
management has also been engaged in overseeing subsidiary managements’ efforts
to both curtail costs and, to the extent possible, develop alternative operating
models that have the result of minimally achieving a state of neutral cash flow.
There can be no assurances that either the aforementioned Consumer Products
model can be accomplished nor, if accomplished, can there be any assurances of
its operational success.
27
Management’s
plans in their current form, including the effects and implications on the
Fashion Goods Segments and eCommerce Segments as discussed in the preceding
paragraph have had, and may continue to have, substantial unfavorable financial
consequences as implementation of these plans further develops. During the
fiscal year ended June 30, 2010, the Company recorded impairments of
equity-method and cost-method investments in the Fashion Goods Segment in the
amount of $3,590,196. The inability of the Company to continue to provide
operational funding to these entities in the foreseeable future, coupled with
their historical poor operating performance and limited business prospects, gave
rise to management’s conclusion that recoverability was doubtful. Also during
the current fiscal year, the Company recorded impairments of long-lived assets,
principally identifiable intangible assets and goodwill, in the amount of
$22,972,854. Of this amount, $18,323,731 related to the Abazias purchase earlier
in the current fiscal year and $12,419,756 related to the goodwill recorded in
connection with that purchase business combination. The original purchase price
for Abazias contemplated significant synergies between the Consumer Products
Segment and what is now the eCommerce Segment. However, new management’s plans
for the Company no longer include or contemplate the integration and synergies
from the assets acquired from Abazias. Further, the restructuring of the overall
Company resulted in the reallocation of goodwill among reporting units, as
defined in current accounting standards, which in turn exposed Abazias’s
goodwill and other identifiable intangible assets to lower allocated values and,
thus, resulted in the impairment charges. Under similar analysis, the Designer
and RPS assets required impairment amounting to $595,412.
Management
currently has no active plans to dispose or discontinue any of the operating
units within the Fashion Goods and eCommerce Segments. To the extent that these
operating units are unable to achieve at least neutral cash flows, management
may discontinue the operations of the non-performing unit. The discontinuance of
any operating unit or a segment in its entirety may have the financial
consequence of requiring us to restate our financial statements to reflect only
those operations of continuing operating units.
The
Company received $15,600,000 and $9,136,994 in funding from the sale of
preferred stock and warrants and similar transactions during the years ended
June 30, 2010 and 2009, respectively. However, since further funding of our
operating structure in its current form has been determined to be doubtful, our
ability to continue as a going concern for a reasonable period is initially
dependent upon achieving our new management’s plans for the Company’s
reorganization and, ultimately, generating profitable operations from those
restructured operations. We cannot give any assurances regarding the success of
management’s plans. Our consolidated financial statements do not include
adjustments relating to the recoverability of recorded assets or liabilities
that might be necessary should we be unable to continue as a going
concern.
Cash and
cash equivalents amounted to $5,691,422 as of June 30, 2010 compared to
$2,005,702 at June 30, 2009. We have working capital deficiency of $3,281,685 as
of June 30, 2010 and a working capital of $454,249 at June 30, 2009. Our working
capital increased generally as a result of a restructuring in operating
activities in our operating segments and the sale of Series G Preferred stock
for $5,000,000 on June 30, 2010.
Cash Flow from Operating Activities
– We used cash of $5,963,499 and $5,859,217 in our operating activities
during the years ended June 30, 2010 and 2009, respectively.
28
We
recorded net income (loss) of ($30,811,723) and $(2,625,964) during the years
ended June 30, 2010 and 2009, respectively that was offset by net non-cash
charges (credits) of $25,364,402 and $19,792, respectively. Our analysis of the
material components of changes in non-cash charges are as follows:
·
|
Extinguishment:
Non-cash charges included an extinguishment of $22,328,516 triggered by a
July 20, 2009 exchange transaction, whereby Vicis purchased from the
Company a warrant to purchase 97,606,276 shares of the Company’s Common
Stock for a purchase price of five million dollars
($5,000,000).
|
·
|
Derivative
income: Non-cash charges and (credits) include changes in the fair value
of derivative financial instruments and other activity associated with our
financial instruments, amounting to ($29,606,972) and ($1,974,605) during
the years ended June 30, 2010 and 2009, respectively. We estimate fair
values of derivative financial instruments using various techniques (and
combinations thereof) that are considered to be consistent with the
objective measuring fair values. In selecting the appropriate technique,
we consider, among other factors, the nature of the instrument, the market
risks that it embodies and the expected means of settlement. For less
complex derivative instruments, such as free-standing warrants, we
generally use the Black-Scholes Merton (“BSM”) option valuation technique,
adjusted for the effect of dilution, because it embodies all of the
requisite assumptions (including trading volatility, estimated terms,
dilution and risk free rates) necessary to fair value these instruments.
For compound derivative instruments, comprising certain redemption and put
features embodied in our convertible preferred stock, we use discounted
cash flow models involving multiple, probability-weighted outcomes and
risk-adjusted rates. Estimating fair values of derivative financial
instruments requires the development of significant and subjective
estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors.
In addition, option-based techniques (such as BSM) are highly volatile and
sensitive to changes in the trading market price of our common stock,
which has a high-historical volatility. Since derivative financial
instruments are initially and subsequently carried at fair values, our
income (loss) will reflect the volatility in these estimate and assumption
changes.
|
·
|
Inducement
expense: Non-cash charges also included an extinguishment loss of
$1,473,855, pursuant to an inducement offer wherein we reduced the strike
price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants
and Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise
price of $5,600,000. We accounted for the warrant exercise analogously to
an inducement offer to convert debt instruments; that is the inducement
value is recorded as a charge to
income.
|
·
|
Impairment
of investments: Non-cash charges recorded included impairment charges
aggregating $3,590,196 during the year ended June 30, 2010 and $450,000
during the year ended June 30, 2009. See discussion on impairments in the
operations discussion above.
|
·
|
Equity in losses of
investees: We hold investments accounted for under the equity
method. Our pro rata share of net loss and related book adjustments in
these investments equaled $1,975,846 for the year ended June 30, 2010 and
$92,741 for the year ended June 30, 2009. We will continue to report our
interests in the earnings or losses of these equity investees so long as
our investments remain at levels required for accounting treatment under
this method. Our equity investment balance as of June 30, 2010 amounts to
$1,340,583 we are not obligated to recognize losses above our investment
balances computed discretely as to each individual
investment.
|
·
|
Bad
debts expense: Bad debt expense amounted to $1,072,176 and $138,848 during
the years ended June 30, 2010 and 2009,
respectively. Management has undertaken significant measures to
reduce its bad debt expense in future periods. Most of the bad
debt we had was due to our increase in Dual Saw revenue. When
we curtailed our advertising expense in the third and fourth quarter of FY
2010, management implemented significant changes to its infomercial
campaign which management believes will decrease bad debt expense
exponentially.
|
29
·
|
Amortization
of intangible assets: Amortization costs consisted of $1,836,071 and
$376,226 during the years ended June 30, 2010 and 2009, respectively. As
discussed under impairments in the operating discussion above, all
intangible assets were impaired during the fourth quarter of our year
ended June 30, 2010.
|
·
|
Other
material components of change in our non-cash charges and (credits) were
related to non-controlling interests of ($337,256) and ($122,886);
depreciation expense of $170,169 and $232,353; amortization of deferred
revenue of $742,167 and $-0- (see our Revenue discussion, above, and
Deferred Revenue discussion, below); share based payment of $518,886 and
$387,672; and, amortization of finance costs of $36,150 and $240,987
during the year ended June 30, 2010 and 2009,
respectively.
|
Our cash
from operating activities also includes cash flow from changes in our operating
assets and liabilities of ($516,145) for the year ended June 30, 2010 compared
to a use of cash of $(3,253,045) for the year ended June 30, 2009.
·
|
Accounts
receivable: Accounts receivable represents normal trade obligations from
customers that are subject to normal trade collection terms, without
discounts or rebates. Notwithstanding these collections, we periodically
evaluate the collectability of our accounts receivable and consider the
need to establish an allowance for doubtful accounts based upon our
historical collection experience and specifically identifiable information
about our customers. We experienced an increase of $460,918, in our
accounts receivable (a use of cash) for the year ended June 30, 2010 as
compared to an increase of $1,955,082 in our accounts receivable (a use of
cash) for the year ended June 30,
2009.
|
·
|
Inventories:
Inventories consist of retail merchandise that is in its finished form and
ready for sale to end-user customers. Inventories are recorded at the
lower of average cost or market. In-bound freight-related costs from our
vendors are included as part of the net cost of merchandise inventories.
Other costs associated with acquiring, storing and transporting
merchandise inventories are expensed as incurred and included in cost of
goods sold. Our inventories are acquired and carried for retail sale and,
accordingly, the carrying value is susceptible to, among other things,
market trends and conditions and overall customer demand. We use our best
estimates of all available information to establish reasonable inventory
quantities. However, these conditions may cause our inventories to become
obsolete and/or excessive. We review our inventories periodically for
indications that reserves are necessary to reduce the carrying values to
the lower of cost or market values. Inventories increased (a use of cash)
$565,284 during the year ended June 30, 2010 as compared to an increase (a
use of cash) of $1,181,329 during the year ended June 30,
2009.
|
·
|
Prepaid
expenses and other assets: We experienced a decrease in our prepaid
expenses and other assets (a source of cash) of $89,053 and an increase in
our prepaid expenses and other assets (a use of cash) of $-0- during the
year ended June 30, 2010 and 2009,
respectively.
|
·
|
Accounts
payable and accrued expenses: Our accounts payable and accrued liabilities
decreased (a use of cash) an aggregate of $73,937 and increased (a source
of cash) $446,366 during the years ended June 30, 2010 and 2009,
respectively.
|
30
·
|
Deferred
revenue: As of June 30, 2010, we are carrying $53,833 in deferred revenue
that will be earned and recognized in the first fiscal quarter of our year
ending June 30, 2011 and $2,000,000 in a non-current deferred revenue
classification on our June 30, 2010 balance sheet. We did not have similar
arrangements in place on June 30, 2009. On July 30, 2009, we entered into
an Marketing and Sales Agreement with Zurvita Holdings, Inc. (“Zurvita”).
Compensation for the Marketing and Sales Agreement represented 15,200,000
shares of Zurvita common stock, which had a fair value of $646,000, based
upon quoted market prices. Additionally we entered into a License and
Marketing Agreement (the “License Agreement”) with Zurvita whereby we
granted a perpetual right and license, under all intellectual property
rights applicable to our LocalAdLink software, to access, use, execute,
display, market, and sell the software for consideration of a 6%
convertible debenture in the principal amount of $2,000,000, payable
October 9, 2012 and convertible at any time at our option at a conversion
price of $0.25 per share. The aggregate consideration was recorded as
deferred revenue and is subject to amortization into income when all
requisite criteria for revenue recognition have been achieved. Current
accounting standards provide that any extended payment terms in revenue
arrangements, and in particular terms that extend beyond twelve months,
indicate that the compensation is not fixed and determinable, a requisite
criteria for recognition of revenue in our income. Accordingly, revenue
associated with the License Agreement will not be recognized until all
requisite criteria for revenue recognition are met, which will be in
periods after the fiscal year ending June 30, 2011. The convertible
debenture that we received is recorded on our balance sheet as a component
of our equity method investment in this company because we have acquired
significant influence over the company through our common stock holding,
representing 23%, described above, and the convertible debenture..
Similarly, we also entered into a arrangement with Net Talk.com for
marketing and services during the year ended June 30, 2010, receiving
1,000,000 shares of common stock, which had a value of $150,000 based upon
quoted market prices. The fair value of the consideration received was
recorded as deferred revenue and is subject to amortization over the
contractual terms. During the year ended June 30, 2010, $742,167 of
deferred revenue was amortized into income. Amortization consisted of
$646,000 associated with the Zurvita arrangement and $96,167 associated
with the Net Talk.com arrangement.
|
Cash Flow from Investing Activities
– We used cash of $5,818,622 and $7,625,801 in our investing activities
during the years ended June 30, 2010 and 2009, respectively. Our analysis of the
material components of the changes in our investing activities is as
follows:
·
|
We
made investments in investee companies of $6,495,500 and $4,758,050 during
the years ended June 30, 2010 and 2009, respectively non-cash investments
in the amounts of $2,796,000 and $-0-, respectively. This increase in
investments was as a result of our increased commitment to further invest
in meaningful ventures in support of our Consumer Products business.
However, many of the investments proved to be either non-performing or
required ongoing funding that our Company could not commit to. All
investments included in the cash paid amounts have been written
off.
|
31
Investee Company
|
Nature
|
2010
|
2009
|
|||||||
Available
for sale investments (cash transactions):
|
||||||||||
Beyond
Commerce (1)
|
Debt
|
$ | 3,949,235 | $ | 1,000,000 | |||||
RPS
Trading LLC (2)
|
Debt
|
1,207,383 | 650,000 | |||||||
Abazias,
Inc. (2)
|
Debt
|
342,798 | 700,000 | |||||||
Valcom
(3)
|
Debt
|
— | 100,000 | |||||||
Total
available for sale investments (cash transactions)
|
5,499,416 | 2,450,000 | ||||||||
Equity
and cost investment s(cash transactions) (4)
|
||||||||||
Cellular
Blowout
|
Equity
|
500,000 | 1,030,000 | |||||||
Perfect
Pear
|
Equity
|
194,084 | 300,000 | |||||||
Webcarnation
|
Equity
|
165,000 | 250,000 | |||||||
For
Your Imagination
|
Equity
|
100,000 | 200,000 | |||||||
Wineharvest
(5)
|
Equity
|
37,000 | 278,050 | |||||||
Nested
Media (cost-type investment) (6)
|
Equity
|
— | 250,000 | |||||||
Total
equity and cost investments (cash transactions)
|
996,084 | 2,308,050 | ||||||||
Total
cash investments
|
$ | 6,495,500 | $ | 4,758,050 | ||||||
Available
for sale investments (non-cash transactions)
|
||||||||||
Net
Talk.com, Inc. (7)
|
Equity
|
$ | 150,000 | |||||||
Equity
investments (non-cash transactions) (4)
|
||||||||||
Zurvita
Holdings, Inc. (8)
|
Debt
|
2,000,000 | ||||||||
Zurvita
Holdings, Inc. (8)
|
Equity
|
646,000 | ||||||||
Total
non-cash investments
|
$ | 2,796,000 |
(1)
|
During
the period from June 2009 to September 2009, we invested approximately
$4,950,000 in Beyond Commerce 13.5% Notes Receivable, due at various dates
through October 9, 2010. During the quarterly period ended December 31,
2009, our management evaluated the continuing carrying value of the Beyond
Commerce investment. As a result of the review, and after extensive
negotiations, we exchanged a portion of the notes receivable with a
principal amount of $3,428,574 and accrued interest of $135,355, and a
fair value of $3,782,717, for certain of Beyond Commerce’s software
pursuant to an Asset Purchase Agreement dated October 9, 2009, and
provided a reserve on the balance. The remaining balance on the notes at
face value amounts to $1,391,426, which with interest of $231,896, is due
October 9, 2010. Although the balance was not paid on or before that date,
we will continue to pursue collection of this amount from the debtor.
There can be no assurances that we will be able to recover the balance due
on the note receivable. As it relates to the software acquired, we
recorded the software at the fair value of the available for sale
securities exchanged, which amount was viewed as a reasonable estimate of
the fair value of the software.
|
(2)
|
During
the year ended June 30, 2009 and the first fiscal quarter of the year
ended June 30, 2010, we invested $1,857,383 in RPS Trading LLC and
$1,042,798 in Abazias, each in the form of interest bearing notes
receivable. As more fully discussed in Note 4 Business Acquisitions, we
acquired Abazias on August 27, 2009 and Designer, parent company to RPS
Trading LLC, on July 31, 2009. Upon acquisition of these companies our
investment was adjusted to fair values because they were classified as
available for sale and included in the acquisition cost of these companies
that was subject to allocation to the assets acquired and liabilities
assumed.
|
(3)
|
We
invested an aggregate of $100,000 in interest bearing notes receivable
from Valcom. During the quarterly period ended March 31, 2010, our
management evaluated the continuing carrying value of Valcom and concluded
that recoverability was improbable and wrote off the carrying value of
$102,336.
|
(4)
|
Our
equity method investments generally represent our ownership in voting
common stock and the percentage represents our votes divided by the number
of total votes of these companies. Current accounting standards provide
that voting interests of 20% or greater afford the investor substantial
influence. However, we consider all aspects of our relationships with the
investee companies in determining whether our investment rises to the
level of influential as is contemplated for equity accounting. Our equity
method investments are evaluated periodically for impairment. See the
table below for impairment charges that have resulted from our review of
the carrying values of our equity
investments.
|
32
(5)
|
During
the years ended June 30, 2010 and 2009, we invested an aggregate of
$315,050 in Wineharvest. As more fully disclosed in Note 18 and in the
next item, we also acquired an additional 10% interest in Wineharvest in
connection with the settlement of a former Officer. In addition to our
purchases of Wineharvest equity and the exchange of securities with the
former Officer, we also agreed to guarantee the lease of Wineharvest,
which is material to these operations. As a result of these transactions,
we concluded that Wineharvest met the definition of a variable interest
entity and that our equity was the sole equity at risk. Accordingly, we
are the primary beneficiary and consolidated Wineharvest under the rules
for consolidation during the fourth fiscal
quarter.
|
(6)
|
During
our year ended June 30, 2009, we made a $250,000 cash investment for a
minority, non-influential position in the common stock of Nested Media, a
private company. As more fully discussed in Note 18, our separation
agreement with our former Officer included a portion of our equity
holdings in Nested Media, which using an average cost basis, had a
carrying value of $62,500, and we received the former Officer’s investment
in Wineharvest, which increased our ownership percentage from 30% to
40%.
|
(7)
|
During
our quarterly period ended December 31, 2009, we entered into a services
agreement with Net Talk.com, Inc. and were compensated in the form of its
common stock, which is publicly listed. The fair value of the common stock
using the quoted price amounted to $150,000. We recorded the revenue
associated with the services agreement as deferred revenue and are
amortizing such amount into income as it is
earned.
|
(8)
|
During
our quarterly periods ended September 30, 2009 and December 31, 2009, we
entered into a Marketing and Sales Agreement and a License and Marketing
Agreement, respectively, with Zurvita Holdings, Inc. These agreements are
more fully discussed in Note 17. We received 15,200,000 shares of
Zurvita’s common stock, representing a 23% voting interest, for the
Advertising and Marketing Agreement. The common stock was valued at
$646,000 using the quoted market price of Zurvita’s common stock. We
received a 9.0% face value $2,000,000 convertible debenture due October 9,
2012, which is convertible at our option at any time at a conversion rate
of $0.25 per common share, for the License and Marketing
Agreement.
|
·
|
We
were also a party to two acquisitions during our year ended June 30, 2010.
On July 31, 2009 we acquired Designer in which we received cash proceeds
of $612,702 (net of $150,000 in cash payments). On August 27, 2009 we
completed our acquisition of the outstanding common stock of Abazias in
which we received cash proceeds of $127,530. We acquired Abazias for the
purpose of building brand recognition and increasing retail market
penetration. As discussed in the operations discussion for impairments,
while we continue to operate these companies, we have impaired
substantially all of their long-lived
assets.
|
·
|
Other
material components of change in our investing activities were related to
purchase of property and equipment of $89,053 and $2,811,901, during the
years ended June 30, 2010 and 2009, respectively. The 2009 purchases
largely related to our purchase of our real estate in Clearwater,
Florida.
|
|
·
|
We
have no commitments for the purchase of property and equipment, or other
long lived assets.
|
Cash Flow from Financing Activities
– We generated $15,467,808 and $11,054,906 in cash from our financing
activities during the years ended June 30, 2010 and 2009. Our analysis of the
material components of the changes in our financing activities is as
follows:
·
|
$15,600,000
and $9,136,994 in cash was received during the years ended June 30, 2010
and June 30, 2009, respectively, from the sale of preferred stock and
warrants. We have been substantially dependent on these types of
financings during our history. Current indications are that there are no
funding sources available for our prior business plan and structure.
Funding sources may become available based upon interest in our
reorganized business model. However, there can be no assurances that
funding sources will become available or at terms that are suitable to our
new management.
|
33
·
|
Other
material components of change in our financing activities were related to
principal payments on long-term debt of $32,192 during the year ended June
30, 2010 and $21,123 during the same period in the prior year. During
2009, we obtained bank financing of $1,939,036 for the purchase of our
real estate.
|
Series G Convertible Preferred Stock
Redemption Requirements — On June 30, 2010, we sold 5,000,000 shares of
Series G Convertible Preferred Stock. The Series G Preferred requires the
payment of cash dividends quarterly at a rate of 8.0% of the stated value,
regardless of declaration, and is mandatorily redeemable for cash of up to
$50,600,000, which is mandatorily payable $5,000,000 on June 30, 2011 and
$45,600,000 on June 30, 2013 as follows:
|
·
|
The
stated value of $5,000,000 is payable on June 30,
2013.
|
|
·
|
An
additional dividend equal to $1.00 per share of Series G Preferred is
payable on June 30, 2011 if the special preferred distribution discussed
in the next bullet point has not been paid before that date (aggregate
redemption value $5,000,000).
|
|
·
|
A
special preferred distribution equal to $8.12 per share of Series G
Preferred is payable on June 30, 2013 or earlier at our option (aggregate
redemption value of $40,600,000). This special preferred distribution is
reduced by the amount of the additional dividend discussed in the
preceding bullet point if it the additional dividend is paid on the June
30, 2011.
|
In
summary, if the additional dividend described in the second bullet point above
is paid on or before June 30, 2011, the mandatory redemption amount is
$45,600,000. If the additional dividend is not paid on or before June 30, 2011,
the mandatory redemption amount is $50,600,000. Quarterly and annual regular
dividend requirements are $100,000 and $400,000, respectively, in cash only
while the Series G Preferred Stock is outstanding.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to reserves, deferred tax assets and valuation allowance,
impairment of long-lived assets, fair value of our financial instruments and
equity instruments. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
While all
of our accounting policies impact the consolidated financial statements, certain
policies are viewed to be critical. Critical accounting policies are those that
are both most important to the portrayal of our financial condition and results
of operations and that require management’s most subjective or complex judgments
and estimates. Management believes the policies that fall within this category
are the policies on revenue recognition and accounts receivable and other
intangible assets, investments, financial and derivative
instruments.
34
Revenue recognition – Revenue
is recognized when evidence of the arrangement exists, the product is shipped to
a customer, or in the limited circumstances, at destination, when terms provide
that title passes at destination, the fee for the service is fix or determinable
and when we have concluded that amounts are collectible from the customers.
Estimated amounts for sales returns and allowances are recorded at the time of
sale. Shipping costs billed to customers are included as a component of product
sales. The associated cost of shipping is included as a component of cost of
product sales.
Accounts receivable –
Accounts receivable represents normal trade obligations from customers
that are subject to normal trade collection terms, without discounts or rebates.
Notwithstanding these collections, we periodically evaluate the collectability
of our accounts receivable and consider the need to establish an allowance for
doubtful accounts based upon our historical collection experience and
specifically identifiable information about our customers.
Inventories – Inventories
consist of retail merchandise that is in its finished form and ready for sale to
end-user customers. Inventories are recorded at the lower of average cost or
market. Normal in-bound freight-related costs from our vendors are included as
part of the net cost of merchandise inventories. Other costs associated with
acquiring, storing and transporting merchandise inventories are expensed as
incurred and included in cost of goods sold. Our inventories are acquired and
carried for retail sale and, accordingly, the carrying value is susceptible to,
among other things, market trends and conditions and overall customer demand. In
addition, the prices of commodity products, such as diamonds, colored gemstones,
platinum, gold and silver, carried by our Abazias subsidiary, are subject to
fluctuations arising from changes in supply and demand, competition and market
speculation. Rapid and significant changes in commodity prices, particularly
diamonds, may materially and adversely affect our sales and profit margins by
increasing the prices for our products. We use our best estimates of all
available information to establish reasonable inventory quantities. However,
these conditions may cause our inventories to become obsolete and/or excessive.
We review our inventories periodically for indications that reserves are
necessary to reduce the carrying values to the lower of cost or market
values.
Impairments – Our management
evaluates its tangible and definite-lived intangible assets for impairment under
ASC 350 Intangible
Assets and ASC 360 Impairments and
Disposals.
·
|
Our
evaluation related to goodwill provides for a two step process. The first
step is to compare the carrying value of the company to the enterprise
value, generally determined using the market in which our common stock
trades. If the carrying value, including goodwill, exceeds the enterprise
value, the implied goodwill is determined by reevaluating the carrying
values of all assets. The excess of the carrying value of goodwill over
its implied value requires recognition as an operating
expense.
|
·
|
Our
evaluation related to tangible and intangible long-lived assets provides a
two step process. The first step is to compare our undiscounted cash
flows, as projected over the remaining useful lives of the assets, to
their respective carrying values. In the event that the carrying values
are not recovered by future undiscounted cash flows, as a second step, we
compare the carrying values to the related fair values and, if lower,
record an impairment adjustment. For purposes of fair value, we generally
use replacement costs for tangible fixed assets and discounted cash flows,
using risk-adjusted discount rates, for intangible
assets.
|
Investments – Our investments
consist of available for sale securities, non-marketable securities and other
equity investments.
Available-for-Sale
Investments: Investments that we designate as available-for-sale are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in accumulated other comprehensive income (loss). We base the cost of the
investment sold on the specific identification method using market rates for
similar financial instruments.
35
Non-Marketable and Other
Equity Investments: We account for non-marketable and other equity
investments under either the cost or equity method and include them in other
long-term assets. Our non-marketable and other equity investments
include:
Equity method investments
when we have the ability to exercise significant influence, but not control,
over the investee. We record equity method adjustments in gains (losses) on
equity investments, net. Equity method adjustments include: our proportionate
share of investee income or loss, gains or losses resulting from investee
capital transactions, amortization of certain differences between our carrying
value and our equity in the net assets of the investee at the date of
investment, and other adjustments required by the equity method.
Non-marketable cost method
investments when we do not have the ability to exercise significant
influence over the investee.
Other-Than-Temporary
Impairment: All of our non-marketable and other investments are subject
to a periodic impairment review. Investments are considered to be impaired when
a decline in fair value is judged to be other-than-temporary. The indicators
that we use to identify those events and circumstances include:
the
investee's revenue and earnings trends relative to predefined milestones and
overall business prospects;
the
technological feasibility of the investee's products and
technologies;
the
general market conditions in the investee's industry or geographic area,
including regulatory or economic changes;
factors
related to the investee's ability to remain in business, such as the investee's
liquidity, debt ratios, and the rate at which the investee is using its cash;
and
the
investee's receipt of additional funding at a lower valuation. If an investee
obtains additional funding at a valuation lower than our carrying amount or a
new round of equity funding is required for the investee to remain in business,
and the new round of equity does not appear imminent, it is presumed that the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise.
Investments
that we identify as having an indicator of impairment are subject to further
analysis to determine if the investment is other than temporarily impaired, in
which case we write down the investment to its estimated fair value. For
non-marketable equity investments that we do not consider viable from a
financial or technological point of view, we write the entire investment down,
since we consider the estimated fair value to be nominal.
Financial instruments –
Financial instruments consist of cash, evidence of ownership in an
entity, and contracts that both (i) impose on one entity a contractual
obligation to deliver cash or another financial instrument to a second entity,
or to exchange other financial instruments on potentially unfavorable terms with
the second entity, and (ii) conveys to that second entity a contractual right
(a) to receive cash or another financial instrument from the first entity, or
(b) to exchange other financial instruments on potentially favorable terms with
the first entity. Accordingly, our financial instruments consist of cash and
cash equivalents, investments, accounts receivable, accounts payable, accrued
liabilities, derivative financial instruments, long-term debt, and redeemable
preferred stock.
36
We carry
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities and long-term debt at historical costs; their respective estimated
fair values approximate carrying values. We carry derivative financial
instruments at fair value in accordance with Financial ASC 815 Accounting for Derivative
Financial Instruments and Hedging Activities (“ASC 815”). We carry
redeemable preferred stock at either its basis derived from the cash received or
fair value depending upon the classification afforded the preferred stock, or
embedded components thereof, in accordance with ASC 815 and ASC 480 Financial Instruments with
Characteristics of both Equity and Liabilities (“ASC 480”).
Derivative financial
instruments – Derivative financial instruments, as defined in ASC 815
consist of financial instruments or other contracts that contain a notional
amount and one or more underlying (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
We
generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as redeemable preferred
stock arrangements and freestanding warrants with features that are either (i)
not afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by Statement 133, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial statements.
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.
37
ITEM 8 –
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
38
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, 2010 and 2009 and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for the years
ended June 30, 2010 and 2009. 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 audits 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 audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OmniReliant
Holdings, Inc. and subsidiaries at June 30, 2010 and 2009, and the consolidated
results of their operations, changes in their stockholders’ deficit and their
cash flows for the years ended June 30, 2010 and 2009, 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 consolidated financial
statements, the Company has incurred significant recurring losses from
operations and is dependent on outside sources of financing for continuation of
its operations and management is restructuring and redirecting its operating
initiatives that require the use its available capital resourceThese factors
raise substantial doubt about the Company's ability to continue as a going concern.
/s/Meeks
International LLC
Tampa,
Florida
October
13, 2010
39
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Balance Sheets
June
30,
|
||||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 5,691,422 | $ | 2,005,702 | ||||
Accounts
receivable, net of $168,355 and $187,763
|
1,464,254 | 1,864,465 | ||||||
Inventories,
net
|
3,326,346 | 1,294,250 | ||||||
Investments
|
180,000 | 1,729,448 | ||||||
Prepaid
expenses and other current assets
|
140,575 | 632,200 | ||||||
Total
current assets
|
10,802,597 | 7,526,065 | ||||||
Property
and equipment, net
|
2,527,816 | 2,579,548 | ||||||
Investments,
equity method
|
1,340,583 | 2,215,309 | ||||||
Intangible
assets, net
|
— | 1,123,335 | ||||||
Investments,
available-for-sale
|
— | 732,227 | ||||||
Other
assets
|
29,519 | 909,714 | ||||||
Total
assets
|
$ | 14,700,515 | $ | 15,086,198 | ||||
Liabilities,
Redeemable Preferred Stock and Deficit
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 996,138 | $ | 556,747 | ||||
Deferred
revenue
|
53,833 | — | ||||||
Notes
payable and maturities of long-term debt
|
284,985 | 33,230 | ||||||
Derivative
liabilities
|
4,185,956 | 6,481,839 | ||||||
Total
current liabilities
|
5,520,912 | 7,071,816 | ||||||
Deferred
revenue
|
2,000,000 | — | ||||||
Long-term
debt
|
1,946,900 | 1,945,647 | ||||||
Security
deposits on leases
|
9,193 | 11,734 | ||||||
Total
liabilities
|
9,477,005 | 9,029,197 | ||||||
Commitments
and contingencies (Note 17)
|
— | — | ||||||
Redeemable
preferred stock
|
7,816,910 | 45,969,634 | ||||||
Deficit:
|
||||||||
OmniReliant
shareholders’ deficit:
|
||||||||
Series
E Preferred Stock, $0.00001 par, 13,000,000 shares authorized and issued,
and 2,884,601 outstanding
|
2,937,004 | — | ||||||
Common
Stock, $0.00001 par, 400,000,000 shares authorized; 158,073,323 and
14,509,225 outstanding
|
1,581 | 145 | ||||||
Paid-in
capital
|
47,029,421 | 6,532,238 | ||||||
Accumulated
deficit
|
(52,707,780 | ) | (46,570,028 | ) | ||||
Other
comprehensive items
|
30,000 | (72,102 | ) | |||||
Total
OmniReliant shareholders’ deficit
|
(2,709,774 | ) | (40,109,747 | ) | ||||
Non-controlling
interests
|
116,374 | 197,114 | ||||||
Total
deficit
|
(2,593,400 | ) | (39,912,633 | ) | ||||
Total
liabilities, redeemable preferred stock and deficit
|
$ | 14,700,515 | $ | 15,086,198 |
See
accompanying notes.
40
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Operations
Years
Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Product
sales
|
$ | 24,828,417 | $ | 9,552,892 | ||||
Cost
of product sales (excluding depreciation expense reflected in other
operating expenses)
|
17,802,422 | 5,142,210 | ||||||
Gross
profit
|
7,025,995 | 4,410,682 | ||||||
Services
and other revenues
|
742,167 | — | ||||||
Rental
income
|
332,462 | 236,021 | ||||||
1,074,629 | 236,021 | |||||||
Other
operating expenses:
|
||||||||
Impairment
of long-lived assets
|
22,972,854 | 198,456 | ||||||
Advertising
and promotional
|
6,150,505 | 5,050,558 | ||||||
Other
general and administrative
|
3,147,058 | 573,673 | ||||||
Accounting
and professional
|
2,703,527 | 1,570,903 | ||||||
Employment
costs
|
2,601,800 | 626,683 | ||||||
Depreciation
and amortization
|
2,006,240 | 656,110 | ||||||
39,581,984 | 8,676,383 | |||||||
Loss
from operations
|
(31,481,360 | ) | (4,029,680 | ) | ||||
Other
income (expense):
|
||||||||
Derivative
(expense) income
|
29,606,972 | 1,974,605 | ||||||
Extinguishment
expense
|
(22,328,516 | ) | — | |||||
Equity
in losses of investees
|
(1,975,846 | ) | (92,741 | ) | ||||
Impairment
of investments
|
(3,590,196 | ) | (450,000 | ) | ||||
Inducement
expense
|
(1,473,855 | ) | — | |||||
Interest
and other income
|
317,819 | 199,457 | ||||||
Interest
expense
|
(223,997 | ) | (350,491 | ) | ||||
Total
other income (expense)
|
332,381 | 1,280,830 | ||||||
Net
loss
|
(31,148,979 | ) | (2,748,850 | ) | ||||
Net
loss attributable to non-controlling interests
|
337,256 | 122,886 | ||||||
Net
loss attributable to OmniReliant
|
$ | (30,811,723 | ) | $ | (2,625,964 | ) |
Continued
on next page.
See
accompanying notes.
41
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Operations
Years
Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Reconciliation
of net loss attributable to OmniReliant to loss applicable to OmniReliant
common shareholders:
|
||||||||
Net
loss attributable to OmniReliant
|
$ | (30,811,723 | ) | $ | (2,625,964 | ) | ||
Preferred
dividends and accretion
|
(66,948,653 | ) | (2,958,350 | ) | ||||
Loss
applicable to OmniReliant common shareholders
|
$ | (97,760,376 | ) | $ | (5,584,314 | ) | ||
Loss
per common share:
|
||||||||
Basic
|
$ | (0.71 | ) | $ | (0.39 | ) | ||
Diluted
|
$ | (0.71 | ) | $ | (0.39 | ) | ||
Weighted
average common shares—basic
|
137,891,440 | 14,503,289 | ||||||
Weighted
average common shares—diluted
|
137,891,440 | 14,503,289 |
See
accompanying notes.
42
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (30,811,723 | ) | $ | (2,625,964 | ) | ||
Adjustments
to reconcile net loss to net cash from operating
activities:
|
||||||||
Derivative
income
|
(29,606,972 | ) | (1,974,605 | ) | ||||
Impairment
of long-lived assets
|
22,972,854 | 198,456 | ||||||
Extinguishment
|
22,328,516 | — | ||||||
Impairment
of investments
|
3,590,196 | 450,000 | ||||||
Equity
in losses of investees
|
1,975,846 | 92,741 | ||||||
Amortization
of intangible assets
|
1,836,071 | 376,226 | ||||||
Inducement
expense
|
1,473,855 | — | ||||||
Bad
debts expense
|
1,072,176 | 138,848 | ||||||
Amortization
of deferred revenue
|
(742,167 | ) | — | |||||
Share-based
payment
|
518,886 | 387,672 | ||||||
Non-controlling
interests
|
(337,256 | ) | (122,886 | ) | ||||
Depreciation
expense
|
170,169 | 232,353 | ||||||
Non-cash
severance costs
|
76,077 | — | ||||||
Amortization
of deferred finance costs
|
36,150 | 240,987 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(460,918 | ) | (1,955,082 | ) | ||||
Inventories
|
(565,284 | ) | (1,181,329 | ) | ||||
Prepaid
expenses and other assets
|
583,995 | (563,000 | ) | |||||
Accounts
payable and accrued expenses
|
(73,937 | ) | 446,366 | |||||
Net
cash used in operating activities
|
(5,963,466 | ) | (5,859,217 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of investments
|
(6,495,500 | ) | (4,758,050 | ) | ||||
Acquisition
of Designer Liquidators
|
612,702 | — | ||||||
Acquisition
of Abazias
|
127,530 | — | ||||||
Purchases
of property and equipment
|
(68,615 | ) | (2,811,901 | ) | ||||
Consolidation
of Wineharvest
|
5,261 | — | ||||||
Investment
by non-controlling interest holders
|
— | 320,000 | ||||||
Payments
for licenses and patents
|
— | (300,000 | ) | |||||
Security
deposits
|
— | (75,850 | ) | |||||
Net
cash flow from investing activities
|
(5,818,622 | ) | (7,625,801 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of preferred stock and warrants
|
15,600,000 | 9,136,994 | ||||||
Redemption
of common stock
|
(100,000 | ) | — | |||||
Principal
payments on long-term debt
|
(32,192 | ) | (21,124 | ) | ||||
Proceeds
from long-term debt, net of $60,964 in loan costs
|
— | 1,939,036 | ||||||
Net
cash flow from financing activities
|
15,467,808 | 11,054,906 | ||||||
Net
change in cash and cash equivalents
|
3,685,720 | (2,430,112 | ) | |||||
Cash
and cash equivalents at beginning of period
|
2,005,702 | 4,435,814 | ||||||
Cash
and cash equivalents at end of period
|
$ | 5,691,422 | $ | 2,005,702 |
Continued
on the next page.
See
accompanying notes.
43
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Supplemental
Cash Flow Information
Years
ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
paid for interest
|
$ | 128,860 | $ | 86,937 | ||||
Cash
paid for income taxes
|
$ | — | $ | — | ||||
Non-cash
investing and financing activities:
|
||||||||
Issuance
of 100,000 shares of common stock for partial consideration transferred in
acquiring Designer Liquidators
|
$ | 101,000 | $ | — | ||||
Issuance
of 13,000,000 shares of Series E Preferred Stock for consideration
transferred in acquiring Abazias:
|
||||||||
Classified
as preferred stock
|
$ | 13,236,165 | $ | — | ||||
Classified
in paid-in capital, representing beneficial conversion
|
2,605,159 | — | ||||||
Total
fair value of Series E Preferred Stock
|
$ | 15,841,323 | $ | — | ||||
Exchange
of available for sale investments for intangible asset
|
$ | 3,782,717 | $ | — | ||||
Consideration
for marketing agreements in the form of common stock and notes receivable,
carried as investments:
|
||||||||
Zurvita,
15,200,000 common shares (fair value of $646,000), plus face value
$2,000,000, 6% per annum note receivable due October 2012, at fair
value
|
$ | 2,646,000 | $ | — | ||||
Net
Talk.com, 1,000,000 common shares at fair value
|
150,000 | — | ||||||
$ | 2,796,000 | $ | — | |||||
Common
stock issued for loan
|
$ | — | $ | 43,333 |
See
accompanying notes.
44
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Deficit
Series
E
|
Common
Stock
|
Paid-in
|
Comprehensive
|
Accumulated
|
OmniReliant
|
Non-Controlling
|
Total
|
|||||||||||||||||||||||||||||
Preferred
Stock
|
Shares
|
Amount
|
Capital
|
Income
Items
|
Deficit
|
Equity
(deficit)
|
Interests
|
Deficit
|
||||||||||||||||||||||||||||
Balances,
July 1, 2009
|
$ | — | 14,509,225 | $ | 145 | $ | 6,532,238 | $ | (72,102 | ) | $ | (46,570,028 | ) | $ | (40,109,747 | ) | $ | 197,114 | $ | (39,912,633 | ) | |||||||||||||||
Change
in accounting for derivatives
|
— | — | — | (28,719,115 | ) | — | 24,673,969 | (4,045,146 | ) | — | (4,045,146 | ) | ||||||||||||||||||||||||
Balances,
adjusted for change In accounting for derivatives
|
14,509,225 | 145 | (22,186,877 | ) | (72,102 | ) | (21,896,059 | ) | (44,154,893 | ) | 197,114 | (43,957,779 | ) | |||||||||||||||||||||||
Warrant
exchange
|
— | — | — | (66,948,653 | ) | — | — | (66,948,653 | ) | — | (66,948,653 | ) | ||||||||||||||||||||||||
Conversions
of preferred stock
|
— | 105,141,416 | 1,051 | 107,587,408 | — | — | 107,588,459 | — | 107,588,459 | |||||||||||||||||||||||||||
Acquisition
– Designer Liquidator
|
||||||||||||||||||||||||||||||||||||
Issuance
of common stock
|
— | 100,000 | 1 | 100,999 | — | — | 101,000 | 163,450 | 264,450 | |||||||||||||||||||||||||||
Income
taxes
|
— | — | — | 60,967 | — | — | 60,967 | — | 60,697 | |||||||||||||||||||||||||||
Acquisition
– Abazias:
|
||||||||||||||||||||||||||||||||||||
Issuance
of Series E Preferred
|
15,841,323 | — | — | — | — | — | 15,841,323 | — | 15,841,323 | |||||||||||||||||||||||||||
Beneficial
conversion feature
|
(2,605,158 | ) | — | — | 2,605,158 | — | — | — | — | — | ||||||||||||||||||||||||||
Income
taxes
|
— | — | — | 2,281,030 | — | — | 2,281,030 | — | 2,281,030 | |||||||||||||||||||||||||||
Warrant
exercises
|
— | 27,606,276 | 276 | 12,811,450 | — | — | 12,811,726 | — | 12,811,726 | |||||||||||||||||||||||||||
Cashless
option exercises
|
— | 4,167 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Conversions
of Series E
|
(10,299,161 | ) | 12,012,239 | 121 | 10,299,040 | — | — | — | — | — | ||||||||||||||||||||||||||
Redemption
|
(1,300,000 | ) | (13 | ) | (99,987 | ) | — | — | (100,000 | ) | — | (100,000 | ) | |||||||||||||||||||||||
Share-based
payment
|
— | — | — | 518,886 | — | — | 518,886 | — | 518,886 | |||||||||||||||||||||||||||
Unrealized
gains (losses)
|
— | — | — | — | 102,102 | — | 102,102 | — | 102,102 | |||||||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | (30,811,723 | ) | (30,811,723 | ) | (337,256 | ) | (31,148,979 | ) | |||||||||||||||||||||||
Balances,
June 30, 2010
|
$ | 2,937,004 | 158,073,323 | $ | 1,581 | $ | 47,029,421 | $ | 30,000 | $ | (52,708,780 | ) | $ | (2,709,774 | ) | $ | 116,374 | $ | (2,593,400 | ) |
See
accompanying notes.
45
OmniReliant
Holdings, Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Deficit
Series
E
|
Common
Stock
|
Paid-in
|
Comprehensive
|
Accumulated
|
OmniReliant
|
Non-Controlling
|
Total
|
|||||||||||||||||||||||||||||
Preferred
Stock
|
Shares
|
Amount
|
Capital
|
Income
Items
|
Deficit
|
Equity
(deficit)
|
Interests
|
Deficit
|
||||||||||||||||||||||||||||
Balances,
July 1, 2008
|
$ | — | 14,475,892 | $ | 145 | $ | 9,102,916 | $ | (31,135 | ) | $ | (43,944,064 | ) | $ | (34,872,138 | ) | $ | — | $ | (34,872,138 | ) | |||||||||||||||
Fair
value adjustments on available for sale securities
|
— | — | — | — | (40,967 | ) | — | (40,967 | ) | — | (40,967 | ) | ||||||||||||||||||||||||
Non-controlling
interests in consolidated subsidiaries
|
— | — | — | — | — | — | — | 320,000 | 320,000 | |||||||||||||||||||||||||||
Non-controlling
interests in net loss
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Share-based
payments (employees)
|
— | 33,333 | — | 327,016 | — | — | 327,016 | — | 327,016 | |||||||||||||||||||||||||||
Share-based
payments (others)
|
— | — | — | 60,656 | — | — | 60,656 | — | 60,656 | |||||||||||||||||||||||||||
Accretion
of Series F Preferred Stock
|
— | — | — | (2,958,350 | ) | — | — | (2,958,350 | ) | — | (2,958,350 | ) | ||||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | (2,625,964 | ) | (2,625,964 | ) | (122,886 | ) | (2,748,850 | ) | |||||||||||||||||||||||
Balances,
June 30, 2009
|
$ | — | 14,509,225 | $ | 145 | $ | 6,532,238 | $ | (72,102 | ) | $ | (46,570,028 | ) | $ | (40,109,747 | ) | $ | 197,114 | $ | (39,912,633 | ) |
See
accompanying notes.
46
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 1 –
Organization and nature of business operations:
OmniReliant
Holdings, Inc. is a Nevada Corporation that serves as a holding company for
consolidated subsidiaries and equity investees that operate in three distinct
industry segments, as determined by our Chief Executive Officer. Certain changes
in our business direction and operating structure have been made or are planned
by our Chief Executive Officer. These changes are discussed below. Condensed
disclosure of operating results and financial condition for each segment are
provided in Note 16.
Consumer Products
Segment: Our Consumer Products Segment has historically been engaged in
the marketing and sale of affordable consumer products made principally to
domestic customers through direct to consumer channels such as television
infomercials, live shopping networks, ecommerce and traditional brick and mortar
channels. Commencing in the fourth quarter of our current fiscal year, our new
management team has recruited leading experts with deep experience in the direct
to consumer marketing industry to help our new management execute our vision of
becoming a world class consumer products company which builds brands globally
through direct to consumer marketing channels. This new management team has
initiated a strategic redirection of the Consumer Products Segment away from its
roots of simply being a reseller of “products” to becoming more focused on
growing long term sales through brand development and product line extension of
its new and existing brands. In our current state, this new direction of the
Consumer Products Segment is evident in our Dual Saw Brand, which contributed
$12,325,884 (or 49.6% of our consolidated product sales during the year ended
June 30, 2010). In the case of Dual Saw, we own the property rights to the
brand, as well as the product. Due to this ‘brand ownership’ approach, we are
not limited to only one specific product. We also possess the rights to develop
and own next generation versions of the Dual Saw, as well as related types of
products and accessories. In addition to owning and developing our own brands to
fuel our organic growth, our management team will continue to identify existing
products in the market place where we can help product owners drive
significantly more sales on a worldwide basis by leveraging our
relationships and management expertise in building brands globally. As such, our
new management believes that the shift in focus from solely product reseller
status to one of brand management and brand ownership, will result in long term
overall better performance for the Consumer Products Segment while
simultaneously reducing operational and financial risk.
Fashion Goods
Segment: Our newly formed Fashion Goods Segment is engaged in the
designer goods business as a retail product liquidator to both the
Business-to-Business (“B2B”) and Business-to-Consumer (“B2C”) channels of
distribution. Our Fashion Goods Segment combines the existing operations of our
wholly owned subsidiary Designer which is principally a liquidator of consumer
designer goods. Similar to the Consumer Products Segment, substantial
operational restructuring activities have been initiated, including and not
limited to hiring deep industry expertise to move the company away from being
solely dependent upon the wholesale B2B liquidation business. Due to
recent macro-economic changes in the world economy, there is a significant new
trend of growing sales in the designer fashion goods industry, specifically
within the ecommerce B2C distribution channel. Our new management is currently
undertaking an opportunistic approach to capitalize upon this new B2C trend by
leveraging its deep executive management expertise, as well as its current
working knowledge of acting as a vendor for current B2C ecommerce channels such
as Overstock.com. By leveraging our existing B2B revenue and profits,
as well as our new managements knowledge and industry experience, Fashion Safari
is building our its world class ecommerce sales and distribution platform to
bring to the B2C markets that are craving designer goods and apparel at deep
discounts.
47
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 1 –
Organization and nature of business operations (continued):
eCommerce Segment:
Our newly formed eCommerce Segment is engaged in retail and wholesale
distribution of specific products and types or categories of products that do
not fit into our Consumer Products or Fashion Goods Segment. The eCommerce
combines the existing operations of our wholly owned subsidiary, OmniReliant
Acquisition Sub, Inc. (“Abazias”), which is an Internet retailer of diamonds and
jewelry, Wineharvest LLC, which is an Internet retailer of fine wines, and
several equity method available-for-sale method and cost method investees. As
more fully discussed in Note 2 Going Concern, the companies within the eCommerce
Segment, while some are revenue producing, have been largely dependent upon the
holding company to fund their individual ongoing operations and development. In
light of the continuing depressed economy, among other reasons, our new
management team has determined that the proper amount of funds are not available
to continue to fund these operations for the foreseeable future; rather, funding
sources that are available will be directed toward the development of the
Consumer Products and Fashion Goods Segments. Accordingly, substantial
operational restructuring activities have been initiated and are ongoing to
curtail costs of the companies within this segment giving rise to substantial
doubt surrounding their ability to continue. Management will continue
to find ways to create value from the assets within this portfolio without
significant reliance upon the parent company holding assets.
In prior
periods we reported two operating segments: Retail Products and Real Estate. The
changes to our segments is the direct result of decisions related to our
structure and direction that have been made by our newly appointed executive
management during the fourth fiscal quarter of our year ended June 30, 2010. We
continue to own and operate the real estate that underlined our former Real
Estate Segment. However, management has determined that the level of company use
of the commercial property and future plans for its expanded use indicate that
it is better represented as a component of the Consumer Products
Segment.
Note 2 –
Going concern and management’s plans:
The
preparation of financial statements in accordance with generally accepted
accounting principles contemplates that operations will be sustained for a
reasonable period. However, we have incurred operating losses of $31,481,360 and
$4,029,680 during the years ended June 30, 2010 and 2009, respectively. In
addition, during these periods, we used cash of $5,963,466 and $5,859,217,
respectively, in support of our operating activities. As of June 30, 2010, we
have cash on hand of $5,691,422. Since our inception, we have been substantially
dependent upon funds raised through the sale of preferred and common stock and
warrants to sustain our operating and investing activities. However, recent
reviews of the current market, which included discussions with prior and
potential funding sources by our executive management, indicate that additional
funding at levels to maintain operations at their historical levels and under
the existing structure are doubtful. As more fully discussed in the next
paragraphs, our new management team has commenced certain significant
initiatives focused on restructuring and redirection. These initiatives will
require substantially all available liquid resources and, if positive outcomes
from these initiatives are not realized by approximately April 2011, much of our
liquid resources may be depleted. While we will still be able to continue as a
going concern, these conditions would raise substantial doubt about our ability
to continue as a going concern for a reasonable period.
48
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 2 –
Going concern and management’s plans (continued):
Our new
management has developed strategic plans during the fourth quarter of the
current fiscal year with the intention of alleviating ongoing operating losses.
The principal focus of these plans is an intensified emphasis on the redesign of
the Consumer Products Segment, shifting its focus from the highly expensive
product based distribution model to a global brand development and brand
ownership model. Compared to the historical model for the Consumer Products
Segment, the exorbitant advertising, distribution and administrative costs are
able to be shifted to third party organizations that are more entrenched in
those types of activities and networks, while allowing the Company to develop
and brand specific products that management believes have substantive market
potential. Management believes that the planned model, which is currently under
development, will provide better current and long-term profitability by
curtailing the cost structure, allowing for longer product life, and providing
for next-version, next-generation and follow-on opportunities to those products
ultimately developed. However, substantial investment is required to support
this change and, as a result, the Company will be unable to continue to provide
significant operating capital to the operating entities within eCommerce
Segment. As a result, while developing the new Consumer Products Model,
management has also been engaged in overseeing subsidiary managements’ efforts
to both curtail costs and, to the extent possible, develop alternative operating
models that have the result of minimally achieving a state of neutral cash flow.
There can be no assurances that either the aforementioned Response Model can be
accomplished nor, if accomplished, can there be any assurances of its
operational success.
Management’s
plans in their current form, including the effects and implications on the
eCommerce and Fashion Goods Segments as discussed in the preceding paragraph
have had, and may continue to have, substantial unfavorable financial
consequences as implementation of these plans further develops. During the
fiscal year ended June 30, 2010, the Company recorded impairments of
equity-method and cost-method investments in the Fashion Goods Segment in the
amount of $3,590,196. The inability of the Company to continue to provide
operational funding to these entities in the foreseeable future, coupled with
their historical poor operating performance and limited business prospects, gave
rise to management’s conclusion that recoverability was doubtful. Also during
the current fiscal year, the Company recorded impairments of long-lived assets,
principally identifiable intangible assets and goodwill, in the amount of
$22,972,854. Of this amount, $18,323,731 related to the Abazias purchase earlier
in the current fiscal year and $12,419,756 of the total related to the goodwill
recorded in connection with that purchase business combination. The original
purchase price for Abazias contemplated significant synergies between Consumer
Products and what is now eCommerce. However, new management’s plans for the
Company no longer include or contemplate the integration and synergies from the
assets acquired from Abazias. Further, the restructuring of the overall Company
resulted in the reallocation of goodwill among reporting units, as defined in
current accounting standards, which in turn exposed Abazias’s goodwill and other
identifiable intangible assets to lower allocated values and, thus, resulted in
the impairment charges. Under similar analysis, the Designer and RPS assets
required impairment amounting to $595,412.
49
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 2 –
Going concern and management’s plans (continued):
The
Company received $15,600,000 and $9,136,994 in funding from the sale of
preferred stock and warrants and similar transactions during the years ended
June 30, 2010 and 2009, respectively. However, since further funding of our
operating structure in its current form has been determined to be doubtful, our
ability to continue as a going concern for a reasonable period is initially
dependent upon achieving our new management’s plans for the Company’s
reorganization and, ultimately, generating profitable operations from those
restructured operations. We cannot give any assurances regarding the success of
management’s plans. Our consolidated financial statements do not include
adjustments relating to the recoverability of recorded assets or liabilities
that might be necessary should we be unable to continue as a going
concern.
Note 3 –
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) estimating the
collectability of accounts receivable and the recoverability of inventories and
(ii) developing cash flow projections for purposes of evaluating the
recoverability of long-lived assets. All estimates are developed by or under the
direction of our Chief Financial Officer using the best available information at
the time of the estimate. However, actual results could differ from those
estimates.
Accounting changes – We
adopted two accounting standards during our year ended June 30, 2010 that had a
material effect on our financial statements and presentation. The standards
adopted were as follows:
Effective
on July 1, 2009, we adopted the requirements of Accounting Standards
Codification (“ASC”) 810 Consolidations that
required (i) presentation of non-controlling interests (formerly referred to as
minority interests) as a component of equity and (ii) presentation of income
(loss) associated with OmniReliant separately from income (loss) associated with
non-controlling interests. This accounting standard required retrospective
adoption and, accordingly, the comparable amounts in prior periods have been
reclassified to conform to this new standard. The effect of this change in
accounting was to increase beginning stockholders’ equity that was previously
reported in the amount of $(40,109,747) as of June 30, 2010 by the amount of
non-controlling interests in the amount of $197,114 as of June 30, 2010. See
Note 14 for information on Non-Controlling Interests.
Effective
on July 1, 2009, we also adopted the requirements of ASC 815 Derivatives and Hedging
Activities that revised the definition of “indexed to a company’s own
stock” for purposes of continuing classification of derivative contracts linked
to our equity instruments. Derivative contracts may be classified in equity only
when they both are indexed to a company’s own stock and meet certain conditions
for equity classification. Under the revised definition, an instrument (or
embedded feature) would be considered indexed to an entity's own stock if its
settlement amount will equal the difference between the fair value of a fixed
number of the entity's equity shares and a fixed monetary amount. We were unable
to continue to carry 30,904,171 warrants in equity because they embodied
anti-dilution protections that did not achieve the fixed-for-fixed definition.
The reclassification of the fair value of the warrants, amounting to $4,045,146,
to liabilities was recorded on July 1, 2009 as a cumulative effect of a change
in accounting principle wherein the original amounts recorded were removed from
paid-in capital ($28,719,115) and the difference ($24,673,969), representing the
fair value changes, was recorded as an adjustment to beginning accumulated
deficit.
50
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Principles of consolidation and
equity method investees – Our consolidated financial statements include
the accounts of OmniReliant Holdings, Inc., its wholly and majority owned
subsidiaries, and Variable Interest Entities (“VIE”) where we are the primary
beneficiary. See Note 14 for additional information about VIEs that we
consolidate. We account for investments that we do not control, but exert
significant influence using the equity method of accounting. For purposes of
determining control, we consider all facts and circumstances surrounding our
investment in addition to common equity ownership. However, in the absence of
evidence to the contrary, we consider investments between 20% and 50% of common
equity to be subject to significant influence. See Note 6 for additional
information about investees that we account for using the equity method of
accounting. The following companies are consolidated or accounted for under the
equity method as of June 30, 2010:
Companies
Consolidated:
|
·
|
OmniResponse
(100%)
|
|
·
|
OmniReliant
Acquisition Sub, Inc. (100%)
|
|
·
|
Designer
Liquidator, Inc. (100%)
|
|
·
|
OmniComm
Studios (60%)
|
|
·
|
RPS
Trading LLC (50%; a VIE)
|
|
·
|
Wineharvest,
Inc. (40%; a VIE)
|
Companies
under Equity Method:
|
·
|
Zurvita
Holdings, Inc. (23%)
|
|
·
|
Webcarnation,
Inc. (40%)
|
|
·
|
Cellular
Blowout, Inc. (45%)
|
|
·
|
A
Perfect Pear, Inc. (49.5%)
|
|
·
|
For
Your Imagination, Inc. (20%)
|
At June
30, 2009, our consolidated companies consisted of OmniResponse, Inc. and
OmniComm Studios, and we had no investments that rose to equity method
accounting treatment. All significant intercompany accounts, profits and
transactions have been eliminated in consolidation.
Business segments — We
apply the management approach to the identification of our reportable business
segments, which requires us to report our segment information based on how our
Chief Executive Officer internally evaluates our operating activities and
performance. As of June 30, 2010, our business segments consist of (i) Consumer
Products, (ii) eCommerce, and (iii) Fashion Goods. These identifiable business
segments have changed from previously reported segments, which consisted of (i)
Retail Product Sales and (ii) Commercial Real Estate Services, when our new
management team developed their plans for the Company. See Notes 1 and 2 for
additional information about the description of our segments and managements
plans, respectively. See Note 16 for financial disclosure about our business
segments.
Revenue recognition – We
derive revenue from (i) product sales, (ii) marketing services and license
revenue and (iii) commercial rents. All revenues are recognized when evidence of
the arrangement exists, in the case of products, when the product is shipped to
a customer, or in the case of certain marketing agreements that span periods,
pro-rata over the contractual term, when the fee is fixed or determinable and
finally when we have concluded that amounts are collectible from the customers.
Estimated amounts for product 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.
51
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
During
the year ended June 30, 2010, we entered into two services and one license
agreements for aggregate consideration of $2,796,000 that we received in the
form of common stock of the customers with a fair values aggregating $796,000,
based upon quoted market prices and a $2,000,000 convertible debenture, due
October 9, 2012. We deferred the revenue for which we received the common stock
and are amortizing the revenue into our sales as the services are provided or on
a straight line basis over the license term. We also deferred the revenue for
which we received the convertible debenture. However, current accounting
standards provide that any extended payment terms in revenue arrangements, and
in particular terms that extend beyond twelve months, indicate that the
compensation is not fixed and determinable, a requisite criteria for revenue
recognition as noted above. Accordingly, this revenue will not be recognized
until all requisite criteria for revenue recognition are met. Rental revenues
are recognized on a straight-line basis over the term of the tenants’ lease
agreements.
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, 2010, two products comprised 48% and 16% of our consolidated
Product Sales. During the year ended June 30, 2009, two products comprised 67%
and 29%, respectively, of our consolidated Product Sales. In addition to our
product concentrations, our Fashion Goods Segment revenues were concentrated
during the year ended June 30, 2010 with one customer in the retail industry.
Total revenues derived from this customer comprised 16.9% of our consolidated
product sales.
Inventories – Inventories at
June 30, 2010 and 2009 include retail merchandise that is in its finished form
and ready for sale to end-user customers and, at June 30, 2010, also include
manufacturing inventories. 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. See Note 5 for additional information on our
inventories.
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 30 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.
52
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Intangible assets and impairment
– Our intangible assets consist of identifiable intangible assets and
goodwill that we acquired in connection with our purchases of Abazias, Inc. and
Designer Liquidator. See Note 4 for additional information on our purchase
business combinations and Note 8 for additional information on the components of
intangible assets. We have also purchased individual intangible assets, such as
patents. Intangible assets are recorded at cost and are amortized using straight
line methods over estimated lives
Identifiable Intangible
Assets: We evaluate the carrying value of identifiable intangible assets
for impairment annually or at more frequent intervals should circumstances
indicate impairment may be present. 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 a discounted cash flow approach, using risk-adjusted
discount rates.
Goodwill: We evaluate
the carrying value of goodwill for impairment annually. Generally, goodwill
impairment testing is a two step process wherein initially the net carrying
values of assets, including goodwill, are compared to the fair value. For
purposes of this initial step, we are required to identify the reporting units
within our organization and both allocate assets, including goodwill, and
develop fair value estimates for the reporting unit. In performing our analysis
for the year ended June 30, 2010, we concluded that the reporting units
consisted of the individual companies in our consolidated reporting structure;
that is, one step below the segment reporting previously outlined. Since, in no
instance did the fair value exceed the carrying value of the reporting unit, we
were required to perform the second step, which consists of a hypothetical
purchase allocation based upon fair values of assets and liabilities of each
reporting unit in order to arrive at the implied value of goodwill.
Our
impairment analyses for both identifiable intangibles and goodwill indicated
that full impairment was required. Our impairment testing of both goodwill and
identifiable intangible assets was significantly influenced by the operating
plans of our new management that were made during the fourth quarter of our year
ended June 30, 2010, and in summary, (i) no longer contemplate the integration
of operations of the Response and eCommerce or Fashion Goods Segments and (ii)
no longer contemplate operational funding of eCommerce Segment companies and
curtailed funding of Fashion Safari. As a result of these plans, goodwill was
allocated solely to the defined reporting units for purposes of analysis (that
is, no synergies are contemplated to support allocation to other operating
units) and the fair values of the reporting units and assets, which were based
upon discounted cash flow models, was substantially lower than was anticipated
when the initial investments were made in these assets. In addition, as it
relates to certain software technologies owned by OmniReliant, an abandonment
decision was made by new management when it was determined that insufficient
funds would be available to develop the technology to a marketable state.
Accordingly, these circumstances resulted in a direct write off of the carrying
value of the software technologies. The following table summarizes the
impairment charges by reporting unit during the year ended June 30,
2010:
53
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
Reporting Unit:
|
Identifiable
Intangible Asset
|
Goodwill
|
Total
|
|||||||||
Abazias
|
$ | 5,903,975 | $ | 12,419,756 | $ | 18,323,731 | ||||||
OmniReliant
|
3,882,461 | — | 3,882,461 | |||||||||
RPS
Trading LLC
|
336,356 | — | 336,356 | |||||||||
Designer
Liquidator
|
— | 259,056 | 259,056 | |||||||||
Wineharvest
|
— | 172,250 | 172,250 | |||||||||
$ | 10,121,792 | $ | 12,851,062 | $ | 22,972,854 |
During
our year ended June 30, 2009, we recorded impairment charges of $198,456 that
related to certain technologies that management concluded to not further
pursue.
Investments – Our investments
consist of available for sale securities, non-marketable securities and other
equity investments.
Available-for-Sale
Investments: Investments that we designate as available-for-sale are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in accumulated other comprehensive income (loss). We base the cost of the
investment sold on the specific identification method using market rates for
similar financial instruments.
Non-Marketable and Other
Equity Investments: We account for non-marketable and other equity
investments under either the cost or equity method and include them in other
long-term assets.
|
·
|
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.
|
54
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
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.
During
the years ended June 30, 2010 and 2009, we recorded investment impairments of
$3,590,196 and $450,000, respectively, based upon this policy. See Note 6 for
additional information about our investments and the impairments. 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 $-0- and $898,214, as of June 30, 2010 and June 30, 2009,
respectively. These amounts are net of accumulated amortization of $36,150 and
$283,097 as of June 30, 2010 and June 30, 2009, respectively.
Share-based payment – We
apply the grant-date fair value method to our share-based payment arrangements
with employees. Under this method, 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.
55
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
We apply
the Binomial Lattice 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. However, we continue to weight our own trading activity into this
calculation as our trading history grows. We base 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. 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, current accounting standards require 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. The
Company uses the straight-line attribution as its expensing method of the value
of share-based compensation for options and awards.
Advertising – We generally
expense advertising costs when it is incurred. Commencing in the prior fiscal
year we began engaging for the production of infomercials related to its
Consumer Products Segment. Our accounting policy for infomercial production
costs provides that the costs are deferred in prepaid assets until the first
airing, at which time the cost is expensed in its entirety.
Financial instruments –
Financial instruments consist of cash, evidence of ownership in an
entity, and contracts that both (i) impose on one entity a contractual
obligation to deliver cash or another financial instrument to a second entity,
or to exchange other financial instruments on potentially unfavorable terms with
the second entity, and (ii) conveys to that second entity a contractual right
(a) to receive cash or another financial instrument from the first entity, or
(b) to exchange other financial instruments on potentially favorable terms with
the first entity. Accordingly, our financial instruments consist of cash and
cash equivalents, 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 to the limited terms. We carry
derivative financial instruments at fair value as is required under current
accounting standards. We carry redeemable preferred stock at historical cost and
accrete carrying values to estimated redemption values over the term of the
financial instrument.
Derivative financial
instruments – Derivative financial instruments 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 10 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.
56
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
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 in instances where redemption is certain to occur. 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. 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. Redeemable preferred stock that
is recorded in the mezzanine section is accreted to its redemption value through
charges to stockholders’ equity when redemption is probable using the effective
interest method. See Note 12 for further disclosures about our redeemable
preferred stock.
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.
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.
57
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 3 –
Summary of significant accounting policies (continued):
The
following table reflects the components of our calculation of loss per common
share:
Year ended June 30
|
2010
|
2009
|
||||||
Net
loss
|
$ | (30,811,723 | ) | $ | (2,625,964 | ) | ||
Deemed
dividend on preferred stock
|
(66,948,653 | ) | (2,958,350 | ) | ||||
Numerator
for basic
|
$ | (97,760,376 | ) | $ | (5,584,314 | ) | ||
Denominator:
|
||||||||
Weighted
averages shares
|
137,891,440 | 14,503,289 | ||||||
Potentially
dilutive equity-linked contracts:
|
— | — | ||||||
Warrants
and options
|
— | — | ||||||
Convertible
preferred stock
|
— | - | ||||||
137,891,440 | 14,503,289 | |||||||
Loss
per common share:
|
||||||||
Basic
|
$ | (0.71 | ) | $ | (0.39 | ) | ||
Diluted
|
$ | (0.71 | ) | $ | (0.39 | ) |
The
denominator in our calculation as of June 30, 2010 above excludes 66,011,300
potentially issuable common shares that are linked to convertible preferred
stock, 128,758,209 potentially issuable common shares that are linked to
warrants, and 32,960,337 potentially issuable common shares that are linked to
employee stock options.
Note 4 –
Business acquisitions:
On July
31, 2009, we acquired the assets and assumed certain liabilities of Designer
Liquidator, Inc. (“Designer”) in exchange for 100,000 shares of common stock and
cash of $150,000. Designer is engaged in the manufacture and wholesale
distribution of brand-name apparel and the retail sale of other accessories. We
acquired Designer to expand our retail sales and enter manufacturing and
wholesale distribution. On August 27, 2009, we completed our acquisition of the
outstanding common stock of Abazias, Inc. (“Abazias”) in exchange for 13,000,000
shares of our newly designated Series E Convertible Preferred Stock. Abazias is an online retailer of high quality loose diamonds and
fine jewelry settings for diamonds. We acquired Abazias for the purpose of
building brand recognition and increasing retail market
penetration.
We
accounted for our acquisitions applying the Acquisition Method. Accordingly, we
recognized, separately from goodwill, the identifiable tangible and intangible
assets acquired and liabilities assumed at their fair values on the acquisition
dates. The excess of the fair value of the consideration transferred, plus the
fair value of non-controlling interests in the acquired assets, over the fair
values of assets acquired and liabilities assumed is recorded as
goodwill.
58
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 4 –
Business acquisitions (continued):
The
following table summarizes the results of the allocation:
Abazias
|
Designer
|
Total
|
||||||||||
Current
assets, including cash of $127,530 and $612,702 from Abazias and Designer,
respectively
|
$ | 523,307 | $ | 1,964,119 | $ | 2,487,425 | ||||||
Property
and equipment
|
2,027 | — | 2,027 | |||||||||
Intangible
assets:
|
||||||||||||
Customer
lists and customer related
|
2,545,930 | 484,353 | 3,030,283 | |||||||||
Dealer
network intangibles
|
2,133,679 | — | 2,133,679 | |||||||||
Registered
trademarks, trade names and dress
|
1,642,420 | — | 1,642,420 | |||||||||
Executive
employment contracts
|
210,928 | — | 210,928 | |||||||||
Software
and operational processes
|
35,000 | — | 35,000 | |||||||||
Trade
liabilities assumed
|
(347,905 | ) | (124,728 | ) | (472,633 | ) | ||||||
Notes
payable
|
— | (250,000 | ) | (250,000 | ) | |||||||
Deferred
income taxes
|
(2,281,029 | ) | (60,967 | ) | (2,341,966 | ) | ||||||
4,464,357 | 2,012,777 | 6,477,133 | ||||||||||
Consideration
transferred (excluding direct expenses):
|
||||||||||||
Cash
consideration
|
— | 150,000 | 150,000 | |||||||||
Fair
value of OmniReliant Securities (See Note 13)
|
15,841,323 | 101,000 | 15,942,323 | |||||||||
Investments
(see Note 6)
|
1,042,789 | 1,857,383 | 2,900,172 | |||||||||
Non-controlling
interest in RPS Trading LLC
|
— | 163,450 | 163,450 | |||||||||
Consideration
transferred, plus non-controlling interests
|
16,884,112 | 2,271,833 | 19,155,945 | |||||||||
Goodwill
arising from the acquisitions under ASC 805
|
$ | 12,419,756 | $ | 259,056 | $ | 12,678,812 |
The
principal factor giving rise to the amount of goodwill at the time of our
acquisitions was the expected synergies that would have resulted from the
combined companies’ efforts to jointly promote existing and new retail product
offerings. However, as more fully discussed in Note 1 and Note 8, our new
management’s plans no longer contemplate integration of these companies with the
Consumer Products Segment. As a result, substantially all identifiable
intangible assets and goodwill were impaired during the fourth quarter of the
year ended June 30, 2010.
The terms
of the acquisition of Designer included the assumption of a $250,000 note
payable with Heritage Bank which requires interest payments at the bank’s
borrowing rate, plus 1.0%, and is due on demand.
Our
acquisition of Designer included a 50% equity interest in RPS Trading LLC
(“RPS”), which is engaged in the manufacture of apparel and the sale of
accessories. RPS is a variable interest entity which is an entity that has (i)
an insufficient amount of equity to absorb the entity’s expected losses, (2)
equity owners as a group that are not able to make decisions about the entity’s
activities, or (3) equity that does not absorb the entity’s losses or receive
the entity’s residual returns. Prior to our acquisition of Designer, we invested
$1,857,383 in RPS secured notes, which was the principal funding of RPS’s early
operations. Our interests in these notes, and rights there under, coupled with
our purchase of the 50% equity interest held by Designer place us as the primary
beneficiary to RPS expected losses. As a result, the values of RPS assets are
included in the assets acquired from RPS and the non-controlling interest is
reflected as a component of the consideration transferred for purposes of
computing goodwill. Also see Note 14.
Abazias’
operations are consolidated with our operations commencing with the closest
monthly closing date near the date of acquisition, or September 1, 2009.
Designer operations are consolidated with our operations commencing August 1,
2009.
59
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 4 –
Business acquisitions (continued):
The
following table summarizes the pro forma affects on our consolidated statements
of operations, as if the acquisition had occurred on July 1, 2009 and 2008,
respectively:
Years
ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Sales
and other revenues
|
$ | 27,005,272 | $ | 15,156,974 | ||||
Net
loss attributable to OmniReliant
|
(31,595,843 | ) | (4,140,026 | ) | ||||
Loss
per common share—basic
|
(0.71 | ) | (0.49 | ) | ||||
Loss
per common share—diluted
|
(0.71 | ) | (0.49 | ) |
Pro forma
financial information is not necessarily indicative of the results that we would
have achieved had the acquisitions occurred on the dates referred to
above.
The
allocation of the acquisition consideration issued or paid for our business
acquisitions required us to estimate the fair values of assets acquired (both
tangible and intangible) and liabilities assumed. Significant elements of our
estimation processes are as follows:
Current
assets and liabilities: Current assets of Abazias consisted of cash, accounts
receivable and inventories of $127,530, $48,715, and $347,062, respectively.
Current assets of Designer consisted of cash, accounts receivable and
inventories of $612,702, $312,331 and $1,039,086, respectively. We concluded
that the carrying values of the accounts receivable and inventories by these
companies were a fair and appropriate estimation of their net realizable values.
Current liabilities largely comprised trade accounts payable and demand notes.
We concluded that the carrying values of liabilities werean appropriate
estimation of their fair values.
Customer
intangibles: Abazias and Designer each owned customer lists and data bases of
customers that we believed had substantial value. We valued the customer
intangibles using the income approach, wherein the projected future cash flows
associated with these assets were discounted to net present value using
risk-adjusted interest rates over the estimated useful lives of the assets of
seven years for the Abazias asset and three years for the Designer asset.
Discount rates that were built based upon both market data and company-specific
data ranged from 27.18% to 31.87% for the Abazias asset and 29.9% for the
Designer asset.
Dealer
network intangible: Abazias operated in a highly-valued, strategic captive
precious gems dealer network that we considered as having substantial value in
our purchase consideration because the network afforded substantial and
beneficial financing arrangements and associated terms. For purposes of
valuation, we used the income approach giving effect to the overall savings that
the network afforded Abazias at discount rates similar to those used in the
customer intangible calculations.
Trademark:
The Abazias name, which is a registered trademark, is a significant asset that
brings brand recognition. We valued the trademark using the Relief from
Royalties technique wherein future cash flows associated with the brand
recognition are measured at a market royalty rate and then present valued using
risk adjusted rates. We developed the royalty rate of 7.68% based upon a
compilation of twelve actual negotiated royalty rates derived from actual market
transactions that ranged from 4.5% to 15.0%. Discount rates used to present
value cash flows were consistent with those used in the customer intangible
valuation, above.
60
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 5 –
Inventories:
Our
inventories consist of the following as of June 30, 2010 and 2009:
2010
|
2009
|
|||||||
Finished
goods
|
$ | 2,708,974 | $ | 1,510,194 | ||||
Work-in-process
|
897,681 | — | ||||||
3,606,655 | 1,510,194 | |||||||
Reserves
for obsolescence and excess quantities
|
(280,309 | ) | (215,944 | ) | ||||
$ | 3,326,346 | $ | 1,294,250 |
Our
subsidiary, RPS is engaged in the manufacture of apparel and relies on
outsourced manufacturing facilities in foreign countries that provide low-cost
labor. As of June 30, 2010, RPS carries approximately $719,000 of inventories
that are located in foreign countries. While we and RPS take precautions against
loss, there is a higher risk associated with these assets due to their physical
location. Risks include theft and nationalization events that could result in a
total loss of the assets.
Note 6 –
Investments:
Investments
have been made in certain Internet retail and other businesses. Available for
sale and held-to-maturity investments consisted of the following on June 30,
2010 and 2009:
2010
|
2009
|
|||||||
Available-for-sale
investments:
|
||||||||
NetTalk.com,
Inc., 1,000,000 shares of common stock; cost basis
$150,000
|
$ | 180,000 | $ | — | ||||
Beyond
Commerce, 10% notes receivable, due October 2010; face value $1,391,426
and $1,000,000 at 2010 and 2009
|
— | 976,083 | ||||||
Valcom,
10% face value $100,000 convertible note receivable, plus accrued interest
of $2,336, due January 6, 2010; cost basis $100,000 at June 30,
2009
|
— | 103,365 | ||||||
Abazias,
Inc., face value $700,000, 10.0% convertible note receivable, originally
due December 31, 2009
|
— | 732,227 | ||||||
Held-to-maturity
investments:
|
||||||||
RPS
Trading LLC, variable rate (currently 4.75%), face value $650,000 notes
receivable, originally due in November and December 2009
|
— | 650,000 | ||||||
180,000 | 2,461,675 | |||||||
Current
portion of investments
|
(180,000 | ) | (1,729,448 | ) | ||||
Total
non-current investments
|
$ | — | $ | 732,227 |
61
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 6 –
Investments (continued):
Unrealized
(gains) losses related to available for sale investments are recorded as a
component of other comprehensive income in stockholders’ equity. The composition
of other comprehensive income related to these investments is as follows as of
June 30, 2010 and 2009:
2010
|
2009
|
|||||||
NetTalk.com
Common Stock
|
$ | 30,000 | $ | — | ||||
Beyond
Commerce Notes Receivable
|
— | (23,917 | ) | |||||
Valcom
Notes Receivable
|
— | (1,430 | ) | |||||
Abazias
|
— | (17,960 | ) | |||||
Other
investments
|
— | (28,795 | ) | |||||
$ | 30,000 | $ | (72,102 | ) |
Equity
method investments and an investment accounted for at cost or method
of accounting consisted of the following as of June 30, 2010 and
2009:
Voting
Ownership
|
Investment
Cost
|
Equity in
Earnings
|
Impaired
|
June 30,
2010
|
June 30,
2009
|
|||||||||||||||||||
Equity
method investees:
|
||||||||||||||||||||||||
Zurvita
Holdings
|
23.0 | % | $ | 2,646,000 | $ | (1,600,214 | ) | $ | — | $ | 1,045,786 | $ | — | |||||||||||
Webcarnation
|
40.0 | % | 415,000 | (101,181 | ) | — | 294,797 | 230,978 | ||||||||||||||||
Cellular
Blowout
|
45.0 | % | 1,530,000 | (87,269 | ) | (1,442,731 | ) | — | 1,030,000 | |||||||||||||||
A
Perfect Pear
|
49.5 | % | 494,084 | (84,405 | ) | (352,683 | ) | — | 244,088 | |||||||||||||||
Wineharvest
|
40.0 | % | 315,050 | (61,803 | ) | — | — | 260,243 | ||||||||||||||||
For
Your Imagination
|
20.0 | % | 300,000 | (40,974 | ) | (255,925 | ) | — | 200,000 | |||||||||||||||
5,700,134 | (1,975,846 | ) | (2,051,339 | ) | 1,340,583 | 1,965,309 | ||||||||||||||||||
Cost
method investees:
|
||||||||||||||||||||||||
Nested
Media
|
— | 187,500 | — | (187,500 | ) | — | 250,000 | |||||||||||||||||
Total
non-marketable and other equity investments
|
$ | 5,887,634 | $ | (1,975,846 | ) | $ | (2,238,839 | ) | $ | 1,340,583 | $ | 2,215,309 |
Equity in
earnings (losses) of investments carried under the equity method amounted to
$(92,741) during the year ended June 30, 2009.
62
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 6 –
Investments (continued):
During
the years ended June 30, 2010 and 2009, we made cash investments in companies in
the amounts of $6,495,500 and $4,758,050, respectively, and non-cash investments
in the amounts of $2,796,000 and $-0-, respectively. The following table
summarizes the investee company, the nature of the investment security and the
cost basis of the investment, for cash and non-cash transactions, for each of
the years ended June 30, 2010 and 2009:
Investee Company
|
Nature
|
2010
|
2009
|
|||||||
Available
for sale investments (cash transactions):
|
||||||||||
Beyond
Commerce (1)
|
Debt
|
$ | 3,949,235 | $ | 1,000,000 | |||||
RPS
Trading LLC (2)
|
Debt
|
1,207,383 | 650,000 | |||||||
Abazias,
Inc. (2)
|
Debt
|
342,798 | 700,000 | |||||||
Valcom
(3)
|
Debt
|
— | 100,000 | |||||||
Total
available for sale investments (cash transactions)
|
5,499,416 | 2,450,000 | ||||||||
Equity
and cost investment s(cash transactions) (4)
|
||||||||||
Cellular
Blowout
|
Equity
|
500,000 | 1,030,000 | |||||||
Perfect
Pear
|
Equity
|
194,084 | 300,000 | |||||||
Webcarnation
|
Equity
|
165,000 | 250,000 | |||||||
For
Your Imagination
|
Equity
|
100,000 | 200,000 | |||||||
Wineharvest
(5)
|
Equity
|
37,000 | 278,050 | |||||||
Nested
Media (cost-type investment) (6)
|
Equity
|
— | 250,000 | |||||||
Total
equity and cost investments (cash transactions)
|
996,084 | 2,308,050 | ||||||||
Total
cash investments
|
$ | 6,495,500 | $ | 4,758,050 | ||||||
Available
for sale investments (non-cash transactions)
|
||||||||||
Net
Talk.com, Inc. (7)
|
Equity
|
$ | 150,000 | |||||||
Equity
investments (non-cash transactions) (4)
|
||||||||||
Zurvita
Holdings, Inc. (8)
|
Debt
|
2,000,000 | ||||||||
Zurvita
Holdings, Inc. (8)
|
Equity
|
646,000 | ||||||||
Total
non-cash investments
|
$ | 2,796,000 |
(1)
|
During
the period from June 2009 to September 2009, we invested approximately
$4,950,000 in Beyond Commerce 13.5% Notes Receivable, due at various dates
through October 9, 2010. During the quarterly period ended December 31,
2009, our management evaluated the continuing carrying value of the Beyond
Commerce investment. As a result of the review, and after extensive
negotiations, we exchanged a portion of the notes receivable with a
principal amount of $3,428,574 and accrued interest of $135,355, and a
fair value of $3,782,717, for certain of Beyond Commerce’s software
pursuant to an Asset Purchase Agreement dated October 9, 2009, and
provided a reserve on the balance. The remaining balance on the notes at
face value amounts to $1,391,426, which with interest of $231,896, is due
October 9, 2010 and is convertible into the common stock of Beyond
Commerce at $0.10 per share. Warrants associated with these notes total
5,778,963. Although the balance was not paid on or before that date, we
will continue to pursue collection of this amount from the debtor. There
can be no assurances that we will be able to recover the balance due on
the note receivable. As it relates to the software acquired, we recorded
the software at the fair value of the available for sale securities
exchanged, which amount was viewed as a reasonable estimate of the fair
value of the software.
|
(2)
|
During
the year ended June 30, 2009 and the first fiscal quarter of the year
ended June 30, 2010, we invested $1,857,383 in RPS Trading LLC and
$1,042,798 in Abazias, each in the form of interest bearing notes
receivable. As more fully discussed in Note 4 Business Acquisitions, we
acquired Abazias on August 27, 2009 and Designer, parent company to RPS
Trading LLC, on July 31, 2009. Upon acquisition of these companies our
investment was adjusted to fair values because they were classified as
available for sale and included in the acquisition cost of these companies
that was subject to allocation to the assets acquired and liabilities
assumed.
|
63
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 6 –
Investments (continued):
(3)
|
We
invested an aggregate of $100,000 in interest bearing notes receivable
from Valcom. During the quarterly period ended March 31, 2010, our
management evaluated the continuing carrying value of Valcom and concluded
that recoverability was improbable and wrote off the carrying value of
$102,336.
|
(4)
|
Our
equity method investments generally represent our ownership in voting
common stock and the percentage represents our votes divided by the number
of total votes of these companies. Current accounting standards provide
that voting interests of 20% or greater afford the investor substantial
influence. However, we consider all aspects of our relationships with the
investee companies in determining whether our investment rises to the
level of influential as is contemplated for equity accounting. Our equity
method investments are evaluated periodically for impairment. See the
table below for impairment charges that have resulted from our review of
the carrying values of our equity
investments.
|
(5)
|
During
the years ended June 30, 2010 and 2009, we invested an aggregate of
$315,050 in Wineharvest. As more fully disclosed in Note 18 and in the
next item, we also acquired an additional 10% interest in Wineharvest in
connection with the settlement of a former Officer. In addition to our
purchases of Wineharvest equity and the exchange of securities with the
former Officer, we also agreed to guarantee the lease of Wineharvest,
which is material to these operations. As a result of these transactions,
we concluded that Wineharvest met the definition of a variable interest
entity and that our equity was the sole equity at risk. Accordingly, we
are the primary beneficiary and consolidated Wineharvest under the rules
for consolidation during the fourth fiscal
quarter.
|
(6)
|
During
our year ended June 30, 2009, we made a $250,000 cash investment for a
minority, non-influential position in the common stock of Nested Media, a
private company. As more fully discussed in Note 18, our separation
agreement with our former Officer included a portion of our equity
holdings in Nested Media, which using an average cost basis, had a
carrying value of $62,500, and we received the former Officer’s investment
in Wineharvest, which increased our ownership percentage from 30% to
40%.
|
(7)
|
During
our quarterly period ended December 31, 2009, we entered into a services
agreement with Net Talk.com, Inc. and were compensated in the form of its
common stock, which is publicly listed. The fair value of the common stock
using the quoted price amounted to $150,000. We recorded the revenue
associated with the services agreement as deferred revenue and are
amortizing such amount into income as it is
earned.
|
(8)
|
During
our quarterly periods ended September 30, 2009 and December 31, 2009, we
entered into a Marketing and Sales Agreement and a License and Marketing
Agreement, respectively, with Zurvita Holdings, Inc. These agreements are
more fully discussed in Note 17. We received 15,200,000 shares of
Zurvita’s common stock, representing a 23% voting interest, for the
Advertising and Marketing Agreement. The common stock was valued at
$646,000 using the quoted market price of Zurvita’s common stock. We
received a 6.0% face value $2,000,000 convertible debenture due October 9,
2012, which is convertible at our option at any time at a conversion rate
of $0.25 per common share, for the License and Marketing
Agreement.
|
64
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 6 –
Investments (continued):
During
the year ended June 30, 2010, we recorded impairment charges aggregating
$3,590,196 associated with six investments. During the year ended June 30, 2009,
we recorded impairment charges associated with one investment carried on the
cost basis in the amount of $450,000. During the fourth quarter of the current
fiscal year, our new management performed a review of all investments and
determined that (i) certain non-performing investments should be impaired and
(ii) curtailment of funding of certain other investments would be required to
preserve operating capital, thus resulting in the impairment. Details of our
impairment charges by investee name and type during the years ended June 30,
2010 and 2009 are as follows:
Investee
Company
|
2010
|
2009
|
||||||
Investments
carried under the equity method:
|
||||||||
Cellular
Blowout
|
$ | 1,442,731 | $ | — | ||||
Perfect
Pear
|
352,683 | — | ||||||
For
your imagination
|
255,925 | — | ||||||
2,051,339 | — | |||||||
Available
for sale investments:
|
||||||||
Beyond
Commerce
|
1,249,021 | — | ||||||
Valcom
|
102,336 | — | ||||||
Carolyn
and Company
|
— | 450,000 | ||||||
1,351,357 | 450,000 | |||||||
Nested
Media (Cost basis)
|
187,500 | — | ||||||
$ | 3,590,196 | $ | 450,000 |
Note 7 –
Property and equipment:
Our
property and equipment consisted of the following as of June 30, 2010 and
2009:
2010
|
2009
|
|||||||
Land
|
$ | 500,000 | $ | 500,000 | ||||
Buildings
and improvements
|
1,529,755 | 1,529,755 | ||||||
Office
equipment
|
877,066 | 782,146 | ||||||
Leasehold
improvements
|
21,403 | — | ||||||
2,938,224 | 2,811,901 | |||||||
Accumulated
depreciation
|
(410,408 | ) | (232,353 | ) | ||||
$ | 2,527,816 | $ | 2,579,548 |
Depreciation
of property and equipment amounted to $170,169 and $232,353 during the years
ended June 30, 2010 and 2009, respectively.
65
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 8 –
Intangible assets:
During
the year ended June 30, 2010, we acquired intangible assets in connection with
our acquisition accounting for Abazias and Designer. See Note 4 for additional
information. In addition to the business acquisitions, and as also discussed in
Note 6 Investments, we exchanged notes receivable carried at a fair value of
$3,782,717 related to our investment in Beyond Commerce for certain of Beyond
Commerce’s software that we concluded had a value reasonably in line with our
carrying value of the investment. The software was subject to further
development and did not possess the attributes of a business and, accordingly,
we accounted for our purchase of the software technologies as the purchase of an
intangible asset. Finally, we consolidated Wineharvest, which we previously
accounted for using the equity method, when Wineharvest met the definition of a
VIE and we concluded that OmniReliant was the primary beneficiary. See Note 14
for additional information. The consolidation of Wineharvest gave rise to
goodwill. During the fourth quarter of our current fiscal year, our impairment
analyses for both identifiable intangibles and goodwill indicated that full
impairment was required.
The
following table reflects the beginning balances in our intangible assets,
originating acquisitions, amortization and impairments for the year ended June
30, 2010:
66
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 8 –
Intangible assets (continued):
Intangible Acquisition
Year ended June 30, 2010
|
||||||||||||||||||||||||||||||||
June 30,
2009
|
(Note 4)
Abazias
|
(Note 4)
Designer
|
Omni
Reliant
|
Wine
Harvest
|
Sub-Total
|
Impaired
|
June 30,
2010
|
|||||||||||||||||||||||||
Patent
and related
|
$ | 1,248,814 | $ | — | $ | — | $ | — | $ | — | $ | 1,248,814 | $ | (1,248,814 | ) | $ | — | |||||||||||||||
Customer
lists
|
— | 2,545,930 | 484,353 | — | — | 3,030,283 | (3,030,283 | ) | — | |||||||||||||||||||||||
Dealer
network
|
— | 2,133,679 | — | — | — | 2,133,679 | (2,133,679 | ) | — | |||||||||||||||||||||||
Employment
|
— | 210,928 | — | — | — | 210,928 | (210,928 | ) | — | |||||||||||||||||||||||
Software
|
— | 35,000 | — | 3,783,216 | — | 3,818,216 | (3,818,216 | ) | — | |||||||||||||||||||||||
1,248,814 | 4,925,537 | 484,353 | 3,783,216 | — | 10,441,920 | (10,441,920 | ) | — | ||||||||||||||||||||||||
Amortization
|
(125,479 | ) | (663,983 | ) | (147,997 | ) | (1,024,091 | ) | — | (1,961,550 | ) | 1,961,550 | — | |||||||||||||||||||
Net
carrying values
|
1,123,335 | 4,261,554 | 336,356 | 2,759,125 | — | 8,479,872 | (8,479,872 | ) | — | |||||||||||||||||||||||
Trademarks
|
— | 1,642,420 | — | — | — | 1,642,420 | (1,642,420 | ) | — | |||||||||||||||||||||||
Goodwill
|
— | 12,419,756 | 259,056 | — | 172,250 | 12,851,062 | (12,851,062 | ) | — | |||||||||||||||||||||||
Other
adjustments
|
— | — | — | — | — | — | 998 | — | ||||||||||||||||||||||||
$ | 1,123,335 | $ | 18,323,730 | $ | 595,412 | $ | 2,759,125 | $ | 172,250 | $ | 22,973,852 | $ | (22,972,854 | ) | $ | — |
Amortization
of intangible assets was recorded through the end of the fourth fiscal quarter
of June 30, 2010 and amounted to $1,836,071 and $376,226 during the year ended
June 30, 2009.
Our
impairment testing of both goodwill and identifiable intangible assets was
significantly influenced by the operating plans of our new management that were
made during the fourth quarter of our year ended June 30, 2010, and in summary,
(i) no longer contemplate the integration of operations of the Response and
eCommerce or Fashion Safari and (ii) no longer contemplate operational funding
of eCommerce companies and curtailed funding of Fashion Goods Segment
operations. As a result of these plans, goodwill was allocated solely to the
defined reporting units for purposes of analysis (that is, no synergies are
contemplated to support allocation to other operating units) and the fair values
of the reporting units and assets, which were based upon discounted cash flow
models, was substantially lower than was anticipated when the initial
investments were made in these assets. In addition, as it relates to certain
software technologies owned by OmniReliant, including the software acquired in
the Beyond Commerce exchange discussed above, an abandonment decision was made
by new management when it was determined that insufficient funds would be
available to develop the technology to a marketable state. Accordingly, these
circumstances resulted in a direct write off of the carrying value of the
software technologies.
67
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 9 –
Accounts payable and accrued expenses:
Our
accounts payable and accrued expenses consisted of the following as of June 30,
2010 and 2009:
2010
|
2009
|
|||||||
Accounts
payable
|
$ | 750,103 | $ | 485,791 | ||||
Accrued
expenses:
|
||||||||
Employment
related
|
75,000 | — | ||||||
Warranty
|
71,324 | 52,989 | ||||||
Interest
|
44,257 | 2,521 | ||||||
Real
estate taxes
|
15,000 | — | ||||||
Other
accrued expenses
|
40,454 | 15,446 | ||||||
Total
accrued expenses
|
246,035 | 70,956 | ||||||
Total
accounts payable and accrued expenses
|
$ | 996,138 | $ | 556,747 |
Note 10 –
Derivative financial instruments:
The
following table summarizes the components of derivative liabilities as of June
30, 2010 and 2009 by financing transaction from which they originated and by
category:
Financing—Financial Instrument
|
2010
|
2009
|
||||||
Freestanding
Warrants:
|
||||||||
Series
A Preferred Financing—Investor warrants
|
$ | — | $ | 716,700 | ||||
Series
B Preferred Financing—Investor warrants
|
15,312 | 75,312 | ||||||
Series
C Preferred Financing—Investor warrants
|
78,250 | — | ||||||
Series
D Preferred Financing—Investor warrants
|
— | 1,752,800 | ||||||
Series
D Preferred Financing—Placement agent warrants
|
— | 166,950 | ||||||
Series
F Preferred Financing—Investor warrants
|
— | 2,946,667 | ||||||
Series
F Preferred Financing—Placement agent warrants
|
104,166 | 370,000 | ||||||
Series
G Preferred Financing-Investor warrants
|
1,330,000 | — | ||||||
Warrant
financing Transaction—Investor warrants
|
1,806,000 | — | ||||||
Warrant
Financing Transaction—Placement agent warrants
|
35,750 | — | ||||||
Total
derivative warrants
|
3,369,478 | 6,028,429 | ||||||
Embedded
Derivatives:
|
||||||||
Series
C Preferred Financing—Put derivative
|
16,478 | 199,993 | ||||||
Series
D Preferred Financing—Put derivative
|
— | 253,417 | ||||||
Series
C Preferred Financing—Conversion option
|
800,000 | — | ||||||
Total
embedded derivatives
|
816,478 | 453,410 | ||||||
Derivative
liabilities
|
$ | 4,185,956 | $ | 6,481,839 |
68
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Derivative financial instruments (continued):
The
following table summarizes the number of common shares index to derivative
financial instruments as of June 30, 2010 and 2009:
Financing—Financial Instrument
|
2010
|
2009
|
||||||
Freestanding
Warrants:
|
— | |||||||
Series
A Preferred Financing—Investor warrants
|
— | 6,000,000 | ||||||
Series
B Preferred Financing—Investor warrants
|
480,000 | 960,000 | ||||||
Series
C Preferred Financing—Investor warrants
|
2,731,228 | — | ||||||
Series
D Preferred Financing—Investor warrants
|
— | 28,000,000 | ||||||
Series
D Preferred Financing—Placement agent warrants
|
— | 2,100,000 | ||||||
Series
F Preferred Financing—Investor warrants
|
— | 33,333,333 | ||||||
Series
F Preferred Financing—Placement agent warrants
|
4,166,666 | 4,166,666 | ||||||
Series
G Preferred Financing—Investor warrants
|
50,000,000 | |||||||
Warrant
Financing Transaction—Investor warrants
|
70,000,000 | |||||||
Warrant
Financing Transaction—Placement agent warrants
|
1,380,314 | |||||||
Total
derivative warrants
|
128,758,208 | 74,559,999 | ||||||
Embedded
Derivative:
|
||||||||
Series
G Preferred Financing—Conversion options
|
50,000,000 | — | ||||||
178,758,208 | 74,559,999 |
Effective
July 1, 2009, we adopted the requirements of ASC 815 Derivatives and Hedging
Activities that revised the definition of “indexed to a company’s own
stock” for purposes of continuing classification of derivative contracts in
equity. Derivative contracts may be classified in equity only when they are both
indexed to a company’s own stock and meet certain conditions for equity
classification. Under the revised definition, an instrument (or embedded
feature) would be considered indexed to an entity's own stock if its settlement
amount will equal the difference between the fair value of a fixed number of the
entity's equity shares and a fixed monetary amount. We were unable to continue
to carry 30,904,171 warrants in equity because they embodied anti-dilution
protections that did not achieve the fixed-for-fixed definition. The
reclassification of the fair value of the warrants, amounting to $4,045,146, to
liabilities was recorded on July 1, 2009 as a cumulative effect of a change in
accounting principle wherein the original amounts recorded were removed from
paid-in capital ($28,719,115) and the difference ($24,673,969), representing the
fair value changes, was recorded as an adjustment to beginning accumulated
deficit.
Also, as
discussed in Note 13, on September 30, 2009, pursuant to an inducement offer
wherein we reduced the strike price on the certain investor warrants from $0.25
to $0.2029 on 97,606,276 warrants, the investor exercised 27,606,276 warrants
for an adjusted aggregate exercise price of $5,600,000. We accounted for the
warrant exercise analogously to an inducement offer to convert debt instruments;
that is the inducement value is recorded as a charge to income for the
inducement value, which was calculated as the increase in fair value resulting
from the modified strike price in the amount of $1,473,855.
69
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Derivative financial instruments (continued):
Changes
in the fair value of derivative financial instruments are recorded in income.
The following table summarizes the components of derivative income (expense)
arising from fair value adjustments during the years ended June 30, 2010 and
2009:
2010:
Financing—Financial Instrument
|
Embedded
Derivatives
|
Warrant
Derivatives
|
Total
|
|||||||||
Series
A Preferred Financing
|
$ | — | $ | (1,020 | ) | $ | (1,020 | ) | ||||
Series
B Preferred Financing
|
— | 60,188 | 60,188 | |||||||||
Series
C Preferred Financing
|
(6,739 | ) | 256,263 | 249,524 | ||||||||
Series
D Preferred Financing
|
(11,032 | ) | (410,620 | ) | (421,652 | ) | ||||||
Series
F Preferred Financing
|
— | 209,168 | 209,168 | |||||||||
Series
G Preferred Financing (1)
|
— | — | — | |||||||||
Warrant
Financing (2)
|
— | 29,510,764 | 29,510,764 | |||||||||
Derivative
income (expense)
|
$ | (17,771 | ) | $ | 29,624,743 | $ | 29,606,972 |
(1) The
Series G Preferred Financing was effected on June 30, 2010. There was no change
in fair value.
(2) The
significant level of income, or decrease in fair value, resulted when these
warrants were re-priced earlier in our fiscal year resulting in charges to our
income and recorded as extinguishment and inducement, and then declines in
subsequent value of our trading market price, a significant influence on fair
value, declined substantially, causing the fair value of the derivative to
decline.
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
|
— | (1,221,323 | ) | (1,221,323 | ) | |||||||
Derivative
income (expense)
|
$ | 1,294,097 | $ | 680,508 | $ | 1,974,605 |
70
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Derivative financial instruments (continued):
The
following table represents a reconciliation of the changes in our derivatives
and the related changes in fair value on a recurring basis using significant
unobservable inputs (Level 3) during the years ended June 30, 2010 and
2009:
2010
|
2009
|
|||||||
Balances
at the beginning of the year
|
$ | 6,481,839 | $ | 6,361,100 | ||||
Change
in accounting, described above
|
4,045,146 | — | ||||||
Balances
at July 1
|
10,526,985 | 6,361,100 | ||||||
Issuances
(Note 13):
|
||||||||
Exchange
transaction
|
37,090,385 | — | ||||||
Warrant
financing transaction
|
382,761 | — | ||||||
Series
G Preferred Financing Transaction:
|
||||||||
Compound
embedded derivative
|
800,000 | — | ||||||
Warrant
derivatives
|
1,330,000 | — | ||||||
Series
F Preferred Financing Transaction
|
— | 2,095,344 | ||||||
Total
|
39,603,148 | 2,095,344 | ||||||
Conversions
and cancellations (Note 13):
|
||||||||
Exchange
transaction
|
(9,761,869 | ) | — | |||||
Conversion
transaction
|
(454,702 | ) | — | |||||
Exercises
|
(7,594,487 | ) | — | |||||
Total
|
(17,811,058 | ) | — | |||||
Fair
value adjustments:
|
||||||||
Anti-dilution
re-pricing events (1)
|
1,436,735 | — | ||||||
Inducement
adjustment (Note 13)
|
1,473,855 | — | ||||||
Other
assumption changes (1)
|
(31,043,707 | ) | (1,974,605 | ) | ||||
Total
|
(28,133,117 | ) | (1,974,605 | ) | ||||
Balances
at the end of the year
|
$ | 4,185,956 | $ | 6,481,839 |
(1) The
aggregate amount of these two components equals our derivative (income) expense
for the period.
Estimating
fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques are highly volatile and
sensitive to changes in the trading market price of our common stock, which has
a high estimated volatility. Since derivative financial instruments are
initially and subsequently carried at fair values, our income will reflect the
volatility in these estimate and assumption changes.
71
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Derivative financial instruments (continued):
Freestanding
derivative warrants were valued using the Black-Scholes-Merton (“BSM”) option
value technique. Significant assumptions underlying the calculations are as
follows as of June 30, 2010 and 2009:
June 30, 2010:
|
Indexed
Shares
|
Exercise
Price
|
Remaining
Term
|
Expected
Volatility
|
Risk-Free
Rate
|
|||||||||||||||
Warrant
Financing:
|
||||||||||||||||||||
Investor
Warrants
|
70,000,000 | $ | 0.10 | 9.05 | 70.88 | % | 2.97 | % | ||||||||||||
Placement
agent warrants
|
1,380,314 | $ | 0.10 | 9.26 | 70.00 | % | 2.97 | % | ||||||||||||
Series
B Preferred Financing:
|
||||||||||||||||||||
B-1
Investor Warrants (expired)
|
— | — | — | — | % | — | % | |||||||||||||
B-2
Investor Warrants
|
480,000 | $ | 0.10 | 1.90 | 186.22 | % | 0.61 | % | ||||||||||||
Series
C Preferred Financing:
|
||||||||||||||||||||
C-1
Investor Warrants
|
1,365,614 | $ | 0.10 | 2.30 | 173.21 | % | 0.61 | % | ||||||||||||
C-2
Investor Warrants
|
1,365,614 | $ | 0.10 | 7.31 | 77.86 | % | 2.42 | % | ||||||||||||
Series
F Preferred Financing:
|
||||||||||||||||||||
BD-12
Placement agent warrants
|
833,333 | $ | 0.10 | 8.63 | 71.47 | % | 2.97 | % | ||||||||||||
BD-13
Placement agent warrants
|
3,333,333 | $ | 0.10 | 8.63 | 71.47 | % | 2.97 | % | ||||||||||||
Series
G Investor Warrants
|
50,000,000 | $ | 0.10 | 10.01 | 68.01 | % | 2.97 | % |
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
E Preferred Financing:
|
||||||||||||||||||||
E
Investor 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
remaining term of our warrants is used as our term input. Since our trading
history does not cover a period sufficient for computing volatility in all
instances, we use a weighted average of our historical volatility based upon
days of trading history over the days of the remaining term, coupled with the
trading history of a peer group. For purposes of the risk-free rate, we use the
published yields on zero-coupon Treasury Securities with maturities consistent
with the remaining term of the warrant.
72
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 10 –
Derivative financial instruments (continued):
Our
embedded conversion option derivative represents the conversion option, certain
redemption and put features in our Series G Preferred Stock. See Note 12 for
additional information about our Series G Preferred Stock. These embedded
features (i) met the definition of derivatives individually and (ii) were not
clearly and closely related to the host preferred stock based upon risks. This
is because the Series G Preferred Stock, being both redeemable for cash on a
specific future date, coupled with a periodic return (i.e. cumulative dividend)
that was consistent with returns for debt, caused us to conclude that the Series
G Preferred Stock bore risks more closely associated with debt-type financial
instruments. Accordingly, when comparing the risks of the debt-type host
contract with the risks of the equity-type embedded features, they were not
clearly and closely related.
The
features embedded in the Series G Preferred Stock were combined into one
compound embedded derivative that we fair valued using the Monte Carlo valuation
technique. Monte Carlo was believed by our management to be the best available
technique for this compound derivative because, in addition to providing for
inputs such as trading market values, volatilities and risk free rates, Monte
Carlo also embodies assumptions that provide for credit risk, interest risk and
redemption behaviors (i.e. assumptions market participants exchanging debt-type
instruments would also consider). Monte Carlo simulates multiple outcomes over
the period to maturity using multiple assumption inputs also over the period to
maturity. The following table sets forth (i) the range of inputs for each
significant assumption and (ii) the equivalent, or averages, of each significant
assumption as of June 30, 2010, which was the date of the financing
transaction:
Range
|
||||||||||||
Assumption:
|
Low
|
High
|
Equivalent
|
|||||||||
Volatility
|
65.99 | % | 92.51 | % | 82.57 | % | ||||||
Market
adjusted interest rates
|
4.28 | % | 8.00 | % | 5.70 | % | ||||||
Credit
risk adjusted rates
|
12.34 | % | 13.77 | % | 13.04 | % | ||||||
Implied
expected life (years)
|
— | — | 2.38 |
Our
embedded put derivatives represent features embedded in the Series C and Series
D Preferred Stock that (i) met the definition of a derivative and (ii) were not
clearly and closely related to the host preferred contract. Accordingly, we were
required to bifurcate these derivatives from our Series C and Series D Preferred
Stock, classify them in liabilities and carry them at fair value. The put
derivative fair values are estimated based upon a multiple, probability-weighted
outcomes, cash flow model that is present valued using risk-adjusted market
interest rates. We use publicly available bond-rate curves for companies that we
estimate have credit ratings similar to what ours may be based upon Standard
& Poors and Moody’s rating scales. Those ratings generally fall in the
highly speculative to in-poor-standing categories of these ratings, and ranged
from 8.07% to 10.29% for periods from one to five years, respectively, as of
June 30, 2010. The range at June 30, 2009 was 15.56% and 19.04%,
respectively.
73
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 11 —
Long-term debt:
Long-term
debt consisted of the following at June 30, 2010 and 2009:
2010
|
2009
|
|||||||
Initial
$2,000,000 six-year, variable rate mortgage note, with interest at the
Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75%
during the first three years and a floor of 6.75% and a cap of 8.75%
during the second three years; principal and interest payments of $13,507
are payable over the six year term based upon a twenty-five year
amortization schedule, with $1,775,557 payable at maturity; secured by
real estate; guaranteed by related parties.
|
$ | 1,947,080 | $ | 1,978,877 | ||||
Bank
lending rate (3.8% at June 30, 2010) demand bank note
|
249,605 | — | ||||||
Other
long-term debt
|
35,200 | — | ||||||
2,231,885 | 1,978,877 | |||||||
Less
current maturities
|
(284,985 | ) | (33,230 | ) | ||||
Long-term
debt
|
$ | 1,946,900 | $ | 1,945,647 | ||||
Maturities
of long-term for each year ended June 30 are as follows:
|
||||||||
2011
|
$ | 284,985 | ||||||
2012
|
37,773 | |||||||
2013
|
40,427 | |||||||
2014
|
43,054 | |||||||
2015
|
1,825,746 | |||||||
$ | 2,231,885 |
We have
concluded that the interest rate collar on the variable rate mortgage note is
clearly and closely related to the host debt instrument and, accordingly, it
does not require bifurcation and recognition at fair value. The interest rate in
effect during the current quarterly period was at the 6.5% floor.
Note 12 –
Redeemable preferred stock:
Redeemable
preferred stock consists of the following as of June 30, 2010 and
2009:
2010
|
2009
|
|||||||
Series
C Convertible Preferred Stock, 1,024,210 and 10,620,000 shares issued and
outstanding at June 30, 2010 (liquidation value $1,024,210) and June 30,
2009 (liquidation value $10,620,000), respectively
|
$ | 4,946,910 | $ | 28,969,634 | ||||
Series
D Convertible Preferred Stock, -0- and 7,000,000 shares issued and
outstanding at June 30, 2010 and June 30, 2009 (liquidation value
$7,000,000), respectively
|
— | 7,000,000 | ||||||
Series
F Convertible Preferred Stock, -0- and 10,000,000 shares issued and
outstanding at June 30, 2009 and June 30, 2009 (liquidation value
$10,000,000), respectively
|
— | 10,000,000 | ||||||
Series
G Convertible Preferred Stock, 5,000,000 shares issued and outstanding at
June 30, 2010 (liquidation value $5,000,000)
|
2,870,000 | — | ||||||
$ | 7,816,910 | $ | 45,969,634 |
74
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Redeemable preferred stock (continued):
Redeemable
preferred stock represents preferred stock that is either redeemable for cash on
a specific date or contingently redeemable for cash for events that are not
within the control of management. Preferred stock where redemption for cash is
certain to occur is classified in liabilities. We currently have no preferred
stock classified in liabilities. Redeemable preferred stock is required to be
classified outside of stockholders’ equity (in the mezzanine
section).
As more
fully discussed in Note 13, on July 31, 2009, investors converted 9,285,354
shares of Series C Convertible Preferred Stock, 7,000,000 shares of Series D
Convertible Preferred Stock, and 10,000,000 shares of Series F Convertible
Preferred Stock into 105,141,416 shares of common stock, after the reset of the
conversion prices from $0.50, $0.50 and $1.20 for the Series C, D and F
Preferred, respectively, to $0.25. This transaction is referred to in Note 13 as
the Conversion Transaction and is more fully disclosed therein to integrate the
disclosure with the Exchange Transaction also disclosed therein.
Terms,
Features and Conditions of our Redeemable Preferred Stock:
Series
|
Date of
Designation
|
Number of
Shares
|
Par
Value
|
Stated
Value
|
Liquidation
Value
|
Dividend
Rate
|
Initial
Conversion
|
Current
Conversion
|
||||||||||||||||||||||
C
|
10/18/2007
|
10,620,000 | $ | 0.00001 | $ | 1.00 | $ | 1.00 | — | $ | 0.75 | $ | 0.25 | |||||||||||||||||
D
|
4/30/2008
|
7,000,000 | $ | 0.00001 | $ | 1.00 | $ | 1.00 | — | $ | 0.50 | — | ||||||||||||||||||
F
|
2/12/2009
|
10,000,000 | $ | 0.00001 | $ | 1.00 | $ | 1.00 | — | $ | 1.20 | — | ||||||||||||||||||
G
|
6/30/2010
|
5,000,000 | $ | 0.00001 | $ | 1.00 | $ | 1.00 | 8.0 | % | $ | 0.10 | $ | 0.10 |
The
conversion prices of all classes of our designated convertible preferred stock
are subject to adjustment for anti-dilution protection for (i) traditional
capital restructurings, such as splits, stock dividends and reorganizations
(traditional restructuring events), and (ii) sales or issuances of common shares
or contracts to which common shares are indexed at less than the stated
conversion prices (down-round protections). As it relates to adjustments to
conversion prices arising from down-round financing triggering events, we
account for the incremental value to convertible preferred stock classified as
liabilities by charging earnings. For convertible preferred stock classified in
stockholders’ equity or redeemable preferred stock (mezzanine classification) we
charge the incremental value to paid-in capital or accumulated deficit, if
paid-in capital is exhausted, as a deemed dividend.
All
outstanding series of our convertible preferred stock have voting rights equal
to the if-converted number of common shares.
The
Series C Preferred is redeemable for cash in an amount representing the stated
value only in the event of a redemption triggering event as discussed
below:
|
·
|
The
Corporation shall fail to have available a sufficient number of authorized
and unreserved shares of Common Stock to issue to such Holder upon a
conversion hereunder;
|
|
·
|
Unless
specifically addressed elsewhere in the Certificate of Designation as a
Triggering Event, the Corporation shall fail to observe or perform any
other covenant, agreement or warranty contained in the Certificate of
Designation, and such failure or breach shall not, if subject to the
possibility of a cure by the Corporation, have been cured within 20
calendar days after the date on which written notice of such failure or
breach shall have been delivered;
|
|
·
|
The
Corporation shall be party to a Change of Control
Transaction;
|
|
·
|
There
shall have occurred a Bankruptcy Event or Material Monetary
Judgment;
|
75
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Redeemable preferred stock (continued):
If the
Company fails to pay the Series C Preferred Triggering Redemption amount on the
date it is due, interest will accrue at a rate equal to the lesser of 18% per
year, or the maximum rate permitted by applicable law, accruing daily from the
date of the Triggering event until the amount is paid in full.
The
Series G Preferred requires the payment of cash dividends quarterly at a rate of
8.0% of the stated value, regardless of declaration, and is mandatorily
redeemable for cash of up to $50,600,000, which is mandatorily payable
$5,000,000 on June 30, 2011 and $45,600,000 on June 30, 2013 as
follows:
|
·
|
The
stated value of $5,000,000 is payable on June 30,
2013.
|
|
·
|
An
additional dividend equal to $1.00 per share of Series G Preferred is
payable on June 30, 2011 if the special preferred distribution discussed
in the next bullet point has not been paid before that date (aggregate
redemption value $5,000,000).
|
|
·
|
A
special preferred distribution equal to $8.12 per share of Series G
Preferred is payable on June 30, 2013 or earlier at our option (aggregate
redemption value of $40,600,000). This special preferred distribution is
reduced by the amount of the additional dividend discussed in the
preceding bullet point if the additional dividend is paid on the June 30,
2011.
|
In
summary, if the additional dividend described in the second bullet point above
is paid on or before June 30, 2011, the mandatory redemption amount is
$45,600,000. If the additional dividend is not paid on or before June 30, 2011,
the mandatory redemption amount is $50,600,000. Quarterly and annual regular
dividend requirements are $100,000 and $400,000, respectively, while the Series
G Preferred Stock is outstanding.
The
mandatory redemption feature embodied in the Series G Preferred Stock is
probable of payment. Accordingly, we are required to accrete the carrying value
of the Series G Preferred Stock to its redemption value by charges to paid in
capital using the effective interest method. The following summarizes the annual
accretion for each fiscal year ending June 30: 2011-$4,345,109;
2012-$10,923,495; and, 2013-$27,461,396.
Fiscal 2010 Series G
Preferred Stock and Warrant Financing Arrangement:
On June
30, 2010, we entered into a securities purchase agreement with Vicis pursuant to
which Vicis purchased 5,000,000 shares of our newly designated Series G
Convertible Preferred Stock and Series G Warrants to purchase 50,000,000 shares
of our common stock for $0.10 per share for a period of ten years. Aggregate
proceeds amounted to $5,000,000. The Series G Preferred is convertible into
common shares at $0.10 (or 50,000,000 common shares) and is mandatorily
redeemable as discussed in the preceding paragraphs. A placement agent was not
engaged in this transaction.
We have
evaluated the Series G Preferred and the Series G Warrants for purposes of
classification.
76
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Redeemable preferred stock (continued):
The
Series G Preferred embodies a conversion option which (i) met the definition of
a derivative and (ii) was not considered clearly and closely related to the host
preferred stock based upon economic risks. Establishing a clear and close
relationship between the host preferred contract and the embedded feature is
necessary to avoid bifurcation, liability classification and fair value
measurement of the embedded feature. In order to establish a clear and close
relationship, we were first required to establish the nature of the host
preferred instrument as either an akin to equity or an akin to debt type
instrument. Because the Series G Preferred Stock is both redeemable for cash on
a specific future date and embodies a periodic return (i.e. cumulative dividend)
that was consistent with returns for debt we concluded that the Series G
Preferred Stock bore risks more closely associated with debt-type financial
instruments. The risks of the equity linked conversion option not being clearly
and closely related to the risks of the debt-type preferred host contract,
required us to bifurcate the embedded conversion feature at its fair value and
classify such amount in liabilities.
The
Series G Warrants were evaluated for classification in either liabilities or
equity. Generally, a freestanding warrant agreement must both (i) be indexed to
the Company’s own stock and (ii) meet certain explicit criteria in order to be
classified in stockholders’ equity. Because the Series G Warrants embodied
anti-dilution features that would adjust the exercise price in the event of a
sale of securities below the $0.10 exercise price, the Series G Warrants do not
meet the indexed test; and, therefore, the explicit criteria does not require
evaluation. As a result, the Series G Warrants require liability classification
at their fair value both on the inception date of the financing arrangement and
subsequently.
The
following table summarizes the allocation of the proceeds from the Series G
Preferred Stock and Warrant Financing Arrangement on June 30, 2010:
Financial Instrument:
|
Allocation
|
|||
Series
G Preferred
|
$ | 2,870,000 | ||
Embedded
Conversion Feature
|
800,000 | |||
Series
G Warrants
|
1,330,000 | |||
$ | 5,000,000 |
Our
allocation methodology provided that the proceeds were allocated first to the
Series G Warrants at their fair value, second to the Embedded Conversion Feature
at its fair value and, lastly, the residual to the Series G Preferred.
Information about the valuation of these derivative financial instruments is
provided in Note 10. We will accrete the Series G Preferred to its redemption
value with charges to stockholders’ equity over the term to its mandatory
redemption date using the effective interest method.
Fiscal 2009 Series F
Preferred Stock and Warrant Financing Arrangement:
On
February 12, 2009, we entered into a securities purchase agreement with 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). As discussed in Note 13, the
Series F Preferred Stock was converted in connection with the Conversion
Transaction on July 31, 2009.
77
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Redeemable preferred stock (continued):
The
Series F Preferred stock did not provide for 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 in
connection with this transaction. 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 is classified in liabilities, at fair value, because anti-dilution
protection features cause it not to meet the test for indexed to the Company’s
own stock.
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
evaluated the Series F Convertible Preferred Stock, the investor warrants and
the placement agent warrants for classification. The Series F Convertible
Preferred Stock was 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 for purposes of liability classification. The
investor and placement agent warrant embodied the same anti-dilution protections
that caused the investor warrants to be classified in liabilities.
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. 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 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.
Further
consideration of the classification of the Series F Convertible Preferred Stock
as either equity or mezzanine was required. Generally, redeemable instruments
where redemption is either stated or outside the control of management, require
classification outside of stockholders’ equity. Redemption in the event of a
change in control required the Series F Convertible Preferred Stock to be
classified outside of stockholders’ equity in the mezzanine.
78
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Redeemable preferred stock (continued):
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 were 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 | $ | (863,006 | ) | $ | (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.
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 |
79
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 12 –
Redeemable preferred stock (continued):
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 |
Accounting
standards provide 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 initial
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 was 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 |
Note 13 –
Equity (deficit):
Changes in
accounting:
Effective
July 1, 2009, we adopted the requirements of ASC 810 Consolidations that
required (i) presentation of non-controlling interests (formerly referred to as
minority interests) as a component of equity and (ii) presentation of income
(loss) associated with OmniReliant separately from income (loss) associated with
non-controlling interests. These standards required retrospective adoption and,
accordingly, the comparable amounts in prior periods have been reclassified to
conform to the new standard.
80
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Equity (deficit) (continued):
Effective
July 1, 2009, we also adopted the requirements of ASC 815 Derivatives and Hedging
Activities that revised the definition of “indexed to a company’s own
stock” for purposes of continuing classification of derivative contracts in
equity. Derivative contracts may be classified in equity only when the both are
indexed to a company’s own stock and meet certain conditions for equity
classification. Under the revised definition, an instrument (or embedded
feature) would be considered indexed to an entity's own stock if its settlement
amount will equal the difference between the fair value of a fixed number of the
entity's equity shares and a fixed monetary amount. We were unable to continue
to carry 30,904,171 warrants in equity because they embodied anti-dilution
protections that did not achieve the fixed-for-fixed definition.
The
reclassification of the fair value of the warrants, amounting to $4,045,146, to
liabilities was recorded on July 1, 2009 as a cumulative effect of a change in
accounting principle wherein the original amounts recorded were removed from
paid-in capital $28,719,115 and the difference $24,673,969, representing the
fair value changes, was recorded as an adjustment to beginning accumulated
deficit.
Series
E Convertible Preferred Stock:
On
December 3, 2008, we designated 13,001,000 shares of our newly designated
$0.00001 par value, $1.00 stated value, Series E Convertible Preferred Stock
(the “Series E Preferred Stock”) of which 13,000,000 were issued on August 27,
2009 in connection with our acquisition of Abazias. See Note 4 for additional
information about our purchase of Abazias. The Series E Preferred Stock votes
with the common shareholders on an if-converted basis. The Series E Preferred
Stock does not provide for either a liquidation preference or a dividend right.
The Series E Preferred Stock was initially convertible into common stock on a
one-for-one basis. However, this conversion rate was subject to a one-time
adjustment, on the closing date of the Abazias purchase, where the conversion
price was adjusted downward on a pro rata basis for common market values below
$1.20, subject to a floor of $0.50. Since the market value on the closing date,
August 27, 2009, was $1.01, the effective conversion price is $0.84; resulting
in the 13,000,000 Series E Convertible Preferred Shares issued being indexed to
15,476,190 common shares. In addition to the aforementioned conversion
adjustment, the Series E Preferred Stock provides for down-round price
protection in the event that we sell shares or indexed securities below $1.20
during the two year period following issuance. In the event of a down-round
financing, the conversion price is adjusted similarly to the one-time adjustment
described above. That is, on a pro rata basis for down round financings at less
than $1.20. This protection has a floor of $0.50. The current conversion price
is $0.50. The Series E Preferred Stock conversion price is otherwise subject to
adjustment for traditional reorganizations, such as stock splits, stock
dividends and similar restructuring of equity. Finally, OmniReliant is precluded
from changing the designations of the Series E Preferred Stock without the
approval of at least 80% of the holders.
The
following table reflects the activity in our Series E Convertible Preferred
Stock during the year ended June 30, 2010:
Shares
|
Amount
|
|||||||
Shares
issued to acquire Abazias, Inc. on August 27, 2009
|
13,000,000 | $ | 15,841,323 | |||||
Beneficial
conversion feature
|
— | (2,605,158 | ) | |||||
Conversion
into 12,012,239 shares of common stock
|
(10,115,399 | ) | (10,299,161 | ) | ||||
Balances
at June 30, 2010
|
2,884,601 | $ | 2,937,004 |
81
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Equity (deficit) (continued):
The
Series E Preferred shares issued in connection with the acquisition of Abazias
were recorded at their fair value. Fair value was established based upon the
common stock equivalent value of the Series E Preferred, using our trading
market price on the closing date of the transaction ($1.01 on August 27, 2009),
plus the incremental value associated with the anti-dilution protections
afforded the holders of the Series E Preferred.
The
effective conversion price of the Series E Preferred on the closing date of the
Abazias acquisition was $0.84, which gave rise to a beneficial conversion
feature. The beneficial conversion feature, which is recorded as a component of
paid-in capital, was calculated by multiplying the linked common shares
(15,476,190 common shares) times the spread between the trading market price of
$1.01 and the conversion price of $0.84, or $2,605,158.
As of
June 30, 2010, the remaining shares of Series E Preferred are convertible into
5,769,200 shares of common stock.
Exchange
and conversion transactions:
On July
20, 2009, we entered into a securities purchase agreement (“Purchase Agreement”)
with Vicis, whereby Vicis purchased from the Company a warrant to purchase
97,606,276 shares of the Company’s Common Stock (the “New Warrant”) for a
purchase price of five million dollars $5,000,000. The Warrant has an exercise
price of $0.25 per share and is exercisable for ten years from the date of
issuance. The Warrant is exercisable on a cashless basis at any time after six
months from the date of issuance if there is no effective registration statement
registering the resale of the shares underlying the Warrant.
As
further consideration for the sale of the Warrant, Vicis surrendered for
cancellation all existing warrants that it currently holds that are indexed to
97,606,276 shares of common stock. These transactions are collectively referred
to as the Exchange Transaction. The Exchange Transaction triggered certain
down-round anti-dilution protection in an aggregate of 105,464,170 of our
outstanding warrants, resulting in revisions of the exercise prices from a range
of $0.50 – $2.00 to $0.25.
Prior to
the exchange transaction, we carried the surrendered warrants as derivative
liabilities and at fair value. The new warrant did not achieve equity
classification because it did not meet the definition of “indexed to a company’s
own stock.” Accordingly, we accounted for the exchange analogously to an
exchange of debt instruments; that is as an extinguishment. The following table
summarizes the components of the extinguishment calculation:
Fair
value of New Warrant
|
$ | 37,090,385 | ||
Fair
value of surrendered warrants
|
(9,761,869 | ) | ||
Consideration
|
(5,000,000 | ) | ||
Extinguishment
loss
|
$ | 22,328,516 |
As
previously mentioned the exchange transaction triggered certain anti-dilution
protection provisions in other derivative warrants and preferred stock. Changes
in the fair value of derivative warrants arising from reductions in strike
prices are recorded in income. Changes in the fair value of preferred stock
arising from reductions in conversion prices increase the number of equity
linked shares and, accordingly, are recorded in equity, as a deemed
dividend.
82
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Equity (deficit) (continued):
Changes
in fair value are summarized as follows:
Incremental
value of derivative warrants linked to 7,857,894 shares of common stock,
recorded in derivative expense
|
$ | 1,436,735 | ||
Incremental
value of redeemable preferred stock linked to 42,952,461 shares of common
stock before the anti-dilution trigger and 109,238,256 after, recorded in
paid-in capital
|
$ | 66,948,653 |
On July
31, 2009, Vicis converted 9,285,354 shares of Series C Convertible Preferred
Stock, 7,000,000 shares of Series D Convertible Preferred Stock, and 10,000,000
shares of Series F Convertible Preferred Stock into 105,141,416 shares of common
stock, after the reset of the conversion prices from $0.50, $0.50 and $1.20 for
the Series C, D and F Preferred, respectively, to $0.25. This transaction is
referred to as the Conversion Transaction.
The
following table summarizes the effects on our capital structure (reflected as
common and equivalent common shares) of the Exchange and Conversion
Transactions:
Pre-Exchange
and
Conversion
|
Exchange (1)
|
Conversion
|
Post-Exchange
and
Conversion
|
|||||||||||||
Common
shares outstanding
|
14,509,225 | 105,141,416 | 119,650,641 | |||||||||||||
Preferred
Stock:
|
||||||||||||||||
Series
C Convertible Preferred
|
20,619,128 | 20,619,128 | (37,141,416 | ) | 4,096,840 | |||||||||||
Series
D Convertible Preferred
|
14,000,000 | 14,000,000 | (28,000,000 | ) | — | |||||||||||
Series
F Convertible Preferred
|
8,333,333 | 31,666,667 | (40,000,000 | ) | — | |||||||||||
42,952,461 | 66,285,795 | (105,141,416 | ) | 4,096,840 | ||||||||||||
Warrants
and Stock Options:
|
||||||||||||||||
Exchange
Warrant
|
— | 97,606,276 | 97,606,276 | |||||||||||||
Class
A Warrants
|
6,900,000 | (6,900,000 | ) | — | ||||||||||||
Class
B-1 and B-2
|
1,008,000 | (48,000 | ) | 960,000 | ||||||||||||
Class
C-1 and C-2
|
29,956,171 | (27,224,943 | ) | 2,731,428 | ||||||||||||
Class
D-1
|
30,100,000 | (30,100,000 | ) | — | ||||||||||||
Class
F
|
37,499,999 | (33,333,333 | ) | 4,166,666 | ||||||||||||
Other
Warrants
|
1,000,000 | — | 1,000,000 | |||||||||||||
Employee
stock options
|
2,145,000 | — | 2,145,000 | |||||||||||||
108,609,170 | — | 108,609,170 | ||||||||||||||
Common
and common equivalent shares
|
166,070,856 | 66,285,795 | — | 232,356,561 |
(1) The
Exchange column in the above table gives effect to the triggering of
anti-dilution protection wherein the exercise and conversion prices were
adjusted to $0.25.
83
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Equity (deficit) (continued):
Warrant
exercise:
On
September 30, 2009, pursuant to an inducement offer wherein we reduced the
strike price on the Vicis warrants from $0.25 to $0.2029 on 97,606,276 warrants,
Vicis exercised 27,606,276 warrants for an adjusted aggregate exercise price of
$5,600,000. We accounted for the warrant exercise analogously to an inducement
offer to convert debt instruments; that is the inducement value is recorded as a
charge to income. The following table summarizes the components of the
inducement calculation:
Fair
value of warrants following inducement
|
$ | 26,851,487 | ||
Fair
value of warrants preceding inducement
|
25,377,632 | |||
Inducement
expense
|
$ | 1,473,855 |
84
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Equity (deficit) (continued):
Stock
Options and Warrants:
The
following table summarizes the activity related to warrants and stock options
for the years ended June 30, 2010 and 2009:
Linked Common
Shares
|
Exercise Prices
Per Share
|
Weighted Average
Exercise Prices Per Share
|
||||||||||||||||||||||
Warrants
|
Stock
Options
|
Warrants
|
Stock
Options
|
Warrants
|
Stock
Options
|
|||||||||||||||||||
Outstanding
at July 1, 2008
|
38,694,171 | 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
|
— | — | — | — | — | — | ||||||||||||||||||
Outstanding
at June 30, 2009
|
106,464,170 | 2,145,000 | 0.50-3.75 | 0.50-1.00 | 0.92 | 0.57 | ||||||||||||||||||
Granted
|
148,986,590 | 37,448,671 | 0.10-0.25 | 0.01-0.35 | 0.20 | 0.06 | ||||||||||||||||||
Exercised
|
(27,606,275 | ) | (8,334 | ) | 0.20 | 0.50 | 0.25 | 0.50 | ||||||||||||||||
Exchanged
|
(97,606,276 | ) | (4,800,000 | ) | 0.25 | 0.19-0.35 | 0.25 | 0.22 | ||||||||||||||||
Cancelled
or expired
|
(1,480,000 | ) | (1,825,000 | ) | 0.10-1.00 | 0.05-1.00 | 0.76 | 0.58 | ||||||||||||||||
Outstanding
at June 30, 2010
|
128,758,209 | 32,960,337 | $ | 0.10 | $ | 0.01-0.50 | $ | 0.10 | $ | 0.05 | ||||||||||||||
Exerciseable
at June 30, 2010
|
126,758,209 | 311,666 | $ | 0.10 | $ | 0.50 | $ | 0.10 | $ | 0.50 | ||||||||||||||
Exerciseable
at June 30, 2009
|
106,464,170 | 2,145,000 | $ | 0.20-1-00 | $ | 0.50-1.00 | $ | 0.20 | $ | 0.57 | ||||||||||||||
Compensation
expense:
|
||||||||||||||||||||||||
Grant
date fair values:
|
||||||||||||||||||||||||
Year
ended June 30, 2010
|
$ | 2,942,415 | ||||||||||||||||||||||
Year
ended June 30, 2009
|
$ | 344,339 | ||||||||||||||||||||||
Compensation
expense recorded:
|
||||||||||||||||||||||||
Year
ended June 30, 2010
|
$ | 518,886 | ||||||||||||||||||||||
Year
ended June 30, 2009
|
$ | 344,339 | ||||||||||||||||||||||
Compensation
subject to amortization in future periods as options vest
|
$ | 2,423,529 |
85
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 13 –
Equity (deficit) (continued):
Stock
Options: Grant date fair values of stock options are calculated using the
Binomial Lattice Valuation Technique. In previous years we used Black Scholes
Merton; the effect of this change was immaterial and we believe that Binomial
Lattice is a preferable technique. Significant assumptions for estimated grant
date fair values issued are as follows:
Fiscal 2010 Awards:
We awarded stock options during the year ended June 30, 2010, as
follows:
|
·
|
On
December 31, 2009, we awarded employees 2,400,000 stock options with
exercise prices of $0.35, pro rata vesting of four years and terms of four
years. The grant date fair value amounted to $689,450. Volatility
assumptions ranged from 139.35% to 282.51%; Risk-free rate assumptions
ranged from 0.06% to 1.70%.
|
|
·
|
On
March 31, 2010, we awarded employees 4,825,000 stock options with exercise
prices of $0.19, pro rata vesting of five years and terms of five years.
The grant date fair value amounted to $435,025. Volatility assumptions
ranged from 138.40% to 211.91%; Risk-free rate assumptions ranged from
0.16% to 1.60%.
|
|
·
|
On
June 30, 2010, we awarded 30,243,671 stock options to employees and
consultants (12,097,468 shares) (of which 4,800,000 replaced previously
issued stock options) with exercise prices of $0.01, pro rata vesting of
three years and terms of ten years. The grant date fair value amounted to
$1,723,890. Volatility assumptions ranged from 156.05% to 217.79%;
Risk-free rate assumptions ranged from 0.18% to
1.00%.
|
Fiscal 2010
Exchanges: On June 30, 2010, we granted 4,800,000 stock options to one
officer and two directors in exchange for an equal number of previously
issued stock options. The 4,800,000 stock options have an exercise price of
$0.01. The 4,800,000 stock options exchanged had exercise prices ranging from
$0.19 to $0.35. The difference in fair value between the newly issued stock
options and those exchanged amounted to $47,600, which amount was charged to
compensation expense.
Fiscal 2010
Cancellations: On January 21, 2010, 1,825,000 exercisable options were
redeemed and cancelled in connection with the separation of an officer and an
employee of the Company. None of our stock options are contractually redeemable
for cash or other assets; rather, in the case of our former CEO, we agreed to
redeem 1,800,000 stock options for a price of $50,000 pursuant to a separation
agreement. The payment was charged to employment cost on the date of the
officer’s separation. The remaining 25,000 stock options associated with the
separation of another employee were cancelled.
Fiscal 2009 Awards:
On January 15, 2009, we issued 1,845,000 stock options to employees and related
parties 1,520,000 to employees and 325,000 to affiliates classified as
non-employees. The options have strike prices of $0.50 and expire in five years;
the grant date fair market value per common share was $1.00. The awards vest to
the benefit of each recipient upon grant. Total grant date fair value of these
options amounted to $344,339, using the Black-Scholes-Merton valuation
technique, and was recorded as compensation in the period of grant. This amount
is included in other operating expenses in the accompanying statements of
operations. We used the remaining contractual term for the expected term,
volatility ranging from 45.73% to 49.17% and risk-free rates ranging from 0.73%
to 1.36%.
86
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 14 –
Non-controlling interests:
A
non-controlling interest, formerly called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
Non-controlling interests arise from the consolidation of subsidiaries as a
result of voting control or based upon benefits of an entity’s variable
interests. We consolidate two entities that have non-controlling interests. Our
subsidiary, OmniComm Studios LLC (“OmniComm”) is consolidated because we own the
majority of the voting control. Our subsidiary, RPS is consolidated because we
own a 50% voting interest and it meets the definition of a variable interest
entity of which we are the primary beneficiary. Our subsidiary, Wineharvest is
consolidated because we own a 40% voting interest, guarantee the investees
lease, and we are the primary beneficiary.
Effective
July 1, 2009, we adopted the amended requirements of ASC 810 Consolidations that
require (i) presentation of non-controlling interests as a component of equity
and (ii) presentation of income (loss) associated with OmniReliant separately
from income (loss) associated with non-controlling interests. These standards
required retrospective adoption and, accordingly, the comparable amounts in
prior periods have been reclassified to conform to the new standard. The
following table summarizes the contribution to our consolidated results of
operations and financial condition of consolidated subsidiaries with
non-controlling interests:
2010:
|
Parent and
Wholly-
Owned
Subsidiaries
|
OmniComm
Studios
|
RPS
|
Wine
Harvest
|
Consolidated
|
|||||||||||||||
Operations
|
||||||||||||||||||||
Revenues
|
$ | 20,533,569 | $ | 1,074,629 | $ | 4,262,137 | $ | 32,711 | $ | 25,903,046 | ||||||||||
Loss
from operations
|
(29,056,684 | ) | (279,176 | ) | (2,058,165 | ) | (89,335 | ) | (31,481,360 | ) | ||||||||||
Net
loss
|
(28,716,003 | ) | (281,609 | ) | (2,064,030 | ) | (87,336 | ) | (31,148,978 | ) | ||||||||||
Non-controlling
interests
|
— | 121,404 | 163,450 | 52,402 | 337,256 | |||||||||||||||
Net
loss applicable to Omni
|
(28,716,004 | ) | (160,205 | ) | (1,900,580 | ) | (34,934 | ) | (30,811,723 | ) | ||||||||||
Balance
Sheet
|
||||||||||||||||||||
Total
assets
|
$ | 10,490,041 | $ | 2,495,802 | $ | 1,582,580 | $ | 132,092 | $ | 14,700,515 | ||||||||||
Total
liabilities
|
(3,682,291 | ) | (2,101,083 | ) | (3,296,035 | ) | (397,596 | ) | (9,477,005 | ) | ||||||||||
Redeemable
preferred
|
(7,816,910 | ) | — | — | — | (7,816,910 | ) | |||||||||||||
Equity
of Omni
|
(1,009,160 | ) | 394,719 | (1,713,455 | ) | (265,504 | ) | (2,593,400 | ) | |||||||||||
Non-controlling
interests
|
— | 75,710 | — | 40,664 | 116,374 | |||||||||||||||
Equity
of Omni
|
$ | (1,009,160 | ) | $ | 319,009 | $ | (1,713,455 | ) | $ | (306,168 | ) | $ | (2,709,774 | ) |
87
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 15 –
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, 2010 and 2009:
2010
|
2009
|
|||||||
Benefit
at federal statutory rate
|
(34.00 | )% | (34.00 | )% | ||||
State,
net of federal deduction
|
(3.30 | )% | (3.30 | )% | ||||
Fair
value adjustments to our derivatives
|
(35.84 | )% | (28.05 | )% | ||||
Impairment
of goodwill
|
15.56 | % | — | % | ||||
Extinguishment
and inducement
|
28.81 | % | — | % | ||||
Other
items
|
5.22 | % | (1.75 | )% | ||||
Change
in valuation allowance
|
23.55 | % | 67.09 | % | ||||
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. The approximate tax
effects of significant temporary differences which comprise the deferred tax
assets and liabilities are as follows at June 30, 2010 and 2009:
2010
|
2009
|
|||||||
Net
operating losses
|
$ | 8,797,367 | $ | 2,898,060 | ||||
Investment
impairments
|
2,921,096 | 3,087,929 | ||||||
Unconsolidated
investee
|
732,836 | 34,592 | ||||||
Impairment
charges
|
1,447,971 | 74,024 | ||||||
Bad
debts and other reserves
|
433,711 | 51,790 | ||||||
Share-based
payment
|
226,865 | 1,490,114 | ||||||
Inventory
reserves
|
— | 35,972 | ||||||
Intangible
assets
|
— | (368,286 | ) | |||||
Net
deferred tax assets, before allowances
|
14,559,845 | 7,304,195 | ||||||
Less:
Valuation allowances
|
(14,559,845 | ) | (7,304,195 | ) | ||||
$ | — | $ | — |
Changes
in our valuation allowance arise from (i) originating and reversing temporary
differences and (ii) reductions associated with deferred tax credits resulting
from acquisition accounting. Reductions in valuation allowances arising from
acquisition accounting are recorded as a component of paid-in
capital.
2010
|
2009
|
|||||||
Originating
and reversing temporary differences
|
$ | (9,766,464 | ) | $ | (1,761,848 | ) | ||
Acquisition
accounting:
|
||||||||
Acquisition:
Abazias
|
2,449,848 | — | ||||||
Acquisition:
Designer
|
60,967 | — | ||||||
2,510,815 | — | |||||||
Change
in valuation allowance
|
$ | (7,255,649 | ) | $ | (1,761,848 | ) |
As of
June 30, 2010, we have $23,133,000 in net operating loss carry forward and
$5,777,000 in long term capital loss carry forward that, subject to limitation,
may be available in future tax years to offset taxable income.
88
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 15 –
Income taxes (continued):
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, 2010, the Company’s
most recently filed income tax return dates are as of June 30, 2009, 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 16 –
Segment information:
We
operate in three distinct industry segments, as determined by our Chief
Executive Officer. Certain changes in our business direction and operating
structure have been made or are planned by our recently appointed Chief
Executive Officer. These changes are discussed below.
Consumer
Products Segment: Our Consumer Products Segment has historically been engaged in
the creation, design, distribution and sale of affordable retail products, made
principally to domestic customers through direct response infomercials, live
shopping networks, ecommerce, direct mail and traditional retail channels.
Commencing in the fourth quarter of our current fiscal year, our new executive
management team has commenced the strategic redirection of the Consumer Products
Segment away from a retailer or reseller to becoming more focused on product
development, product enhancement and, ultimately, ownership and branding of
specific products that will be strategically distributed through third party
providers. In our current state, this new direction of the Consumer Products
Segment is evident in our Dual Saw Product, which contributed $12,325,884 (or
47.6% of our consolidated revenue during the year ended June 30, 2010). In the
case of Dual Saw, we own the property rights to the product for purposes of
distribution within North America. We also possess the rights to develop and own
next generation versions of the Dual Saw, as well as related types of products.
As such, our new management believes that the shift in focus from solely
reseller status to one of product ownership, branding and wholesale positioning
will result in overall better performance for the Consumer Products
Segment.
eCommerce
Segment: Our newly formed eCommerce Segment is engaged in retail and wholesale
distribution of specific products and types or categories of products that do
not fit into our Consumer Products Segment, service businesses and general
investment assets. The eCommerce Segment combines the existing operations of our
wholly owned subsidiary, OmniReliant Acquisition Sub, Inc. (“Abazias”), which is
an Internet retailer of diamonds and jewelry, Wineharvest LLC, which is an
Internet retailer of fine wines, and several equity method available-for-sale
method and cost method investees. As more fully discussed in Note 2 Going
Concern, the companies within the eCommerce Segment, while revenue producing,
have been largely dependent upon the holding company to fund their individual
ongoing operations and development. In light of the continuing depressed
economy, among other reasons, our new management team has determined that funds
are not available to continue to fund these operations for the foreseeable
future; rather, funding sources that are available will be directed toward the
development of the Consumer Products Segment.
89
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 16 –
Segment information (continued):
Accordingly,
substantial operational restructuring activities have been initiated and are
ongoing to curtail costs of the companies within this segment giving rise to
substantial doubt surrounding their ability to continue.
Fashion
Goods Segment: Our newly formed Fashion Goods Segment is engaged in the
manufacture of apparel and as a retail product liquidator. Fashion Safari, under
which this segment will be known in the marketplace, combines the existing
operations of our wholly owned subsidiary Designer Liquidator Inc., which is a
liquidator of principally consumer goods, and RPS, which is a wholesale
manufacture of consumer apparel. Similar to the eCommerce Segment, while also
revenue producing, these companies have been largely dependent upon the holding
company to fund their individual ongoing operations and development. For reasons
similar to those discussed in the previous section related to eCommerce Segment,
our new management team has determined that funds are not available to continue
to fund these operations for the foreseeable future. Accordingly, substantial
operational restructuring activities have been initiated and are ongoing to
curtail costs of the companies within this segment giving rise to substantial
doubt surrounding their ability to continue.
In prior
periods we reported two operating segments: Response and Real Estate. The
changes to our segments is the direct result of decisions related to our
structure and direction that have been made by our newly appointed executive
management during the fourth fiscal quarter of our year ended June 30, 2010. We
continue to own and operate the real estate that underlined our former Real
Estate Segment. However, management has determined that the level of company use
of the commercial property and future plans for its expanded use indicate that
it is better represented as a component of the Consumer Products
Segment.
Consumer
Products
|
eCommerce
|
Fashion
Goods
|
Consolidated
|
|||||||||||||
Operations
|
||||||||||||||||
Revenues
|
$ | 17,804,389 | $ | 3,836,520 | $ | 4,262,137 | $ | 25,903,046 | ||||||||
Depreciation
and amortization
|
(1,187,547 | ) | (670,472 | ) | (148,221 | ) | (2,006,240 | ) | ||||||||
Impairment
changes
|
(3,881,461 | ) | (18,495,981 | ) | (595,412 | ) | (22,972,854 | ) | ||||||||
Operating
loss
|
(8,649,843 | ) | (20,272,039 | ) | (2,559,478 | ) | (31,481,360 | ) | ||||||||
Extinguishment
and inducement
|
(23,802,371 | ) | — | — | (23,802,371 | ) | ||||||||||
Equity
in investee losses
|
— | (1,975,846 | ) | — | (1,975,846 | ) | ||||||||||
Impairment
of investments
|
— | (3,590,196 | ) | — | (3,590,196 | ) | ||||||||||
Interest
expense
|
(208,597 | ) | — | (15,400 | ) | (223,997 | ) | |||||||||
Net
loss
|
(6,204,811 | ) | (22,195,484 | ) | (2,411,428 | ) | (30,811,723 | ) | ||||||||
Balance
Sheet
|
||||||||||||||||
Total
assets
|
10,713,902 | 1,957,952 | 2,028,661 | 14,700,515 | ||||||||||||
Equity
investments
|
— | 1,340,583 | — | 1,340,583 | ||||||||||||
Capital
expenditures
|
56,086 | 63,399 | 61,372 | 180,857 |
90
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 17 –
Commitments and contingencies:
Leases:
We lease
certain office and warehouse space under non-cancellable operating leases.
Future non-cancellable minimum lease payments for each year ending June 30 are
as follows:
Year
ending June 30:
|
||||
2011
|
$ | 96,650 | ||
2012
|
75,972 | |||
2013
|
60,734 | |||
2014
|
51,850 | |||
2015
|
— | |||
Thereafter
|
— | |||
$ | 285,226 |
Rent
expense for the year ended June 30, 2010 amounted to $118,339. This amount
included $26,500 that is paid to the former principal officer of Abazias and who
is now that subsidiary’s president. We pay $2,650 to this officer on a
month-to-month basis (also see Note 18). Rent expense also included $43,872
related to our RPS operation. This facility was closed and, accordingly, we do
not anticipate incurring any additional rent expense for RPS. We incurred no
rent expense for the year ended June 30, 2009.
Consulting
Agreements:
On June
30, 2010, we entered into consulting agreements with two former members of our
Board of Directors. One agreement provides for a one year term and the other a
two year term. Each provides for annual compensation of $125,000 and a one-time
stock option for 1.5% of our fully-diluted common ownership as calculated on the
date of the agreement to each former member. The agreements provide for
extension solely for cash compensation. The aggregate number of common shares
linked to both stock options was 12,097,468 and the aggregate grant date fair
value amounted to $689,556 using the Trinomial Lattice Technique. The stock
options have a strike price of $0.01, vest over two years and expire in ten
years. However, exercise of the stock options is restricted to periods following
the payment of the special dividends on our Series G Preferred Stock (see Note
12). We will record the annual compensation as the services are earned, which is
expected to be ratably over the term of the agreements. We will record the
compensation expense associated with the stock options over the vesting
period.
Litigation,
claims and assessments:
We are
involved in the following matters:
Mediaxposure
Limited (Cayman) v. Omnireliant Holdings, Inc., Kevin Harrington, Timothy
Harrington, Chris Philips, Richard Diamond, Paul Morrison, Vicis Capital Master
Fund and Vicis Capital LLC
Supreme Court of the State
of New York, County of New York, Index No. 09603325
On
October 30, 2009, Mediaxposure Limited filed a complaint against the named
defendants alleging certain causes of actions, including aiding and abetting a
breach of fiduciary duty. In January 2010, all defendants moved to
dismiss the complaint. The Company’s motion has been fully briefed
and is scheduled for oral argument. We are awaiting a decision on the Company’s
motion.
91
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 17 –
Commitments and contingencies (continued):
OmniReliant
Holdings, Inc v. ResponzeTV, et al.
Supreme Court of the State
of New York, County of New York, Index No. 600646/2009
The
Company commenced this action on March 2, 2009 in the Supreme Court of the State
of New York, County of New York against ResponzeTV, PLC, and two of its
directors, Grahame Farquhar and Steven Goodman to recover $2,000,000, due and
owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in
favor of the Company, and also asserts causes of action for fraud and unjust
enrichment.
Defendants
have moved to dismiss the Complaint, and the Company has opposed this motion The
court denied the motion as against D. Grahame Farguhar. The Company moved to
amend the complaint in July 2010 to add Mediaxposure (Cayman) as a
defendant.
Based
upon ResponzeTV’s dissolution, the Company stipulated to dismiss the action
against it, without prejudice.
Local
Ad Link, Inc., et al. v. AdzZoo, LLC, et al. v. OmniReliant Holdings, Inc., et
ano
United States District
Court, District of Nevada, Case No. 2:08-cv-00457-LRH-PAL
On or
about February 19, 2010, AdzZoo, LLC (“AdzZoo”) and the other defendants in the
above-referenced action commenced a third-party action against the
Company and Zurtvita Holdings, Inc. In the Third-Party Complaint,
AdzZoo alleges a cause of action for fraud against the Company, in which it seek
unspecified monetary damages. Defendants also allege a claim for a
declaratory judgment in which they seek a judgment declaring the rights with
respect to certain representative agreements entered into between certain
individual Defendants and Plaintiff.
On April
13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted
against it. By Order, dated September 9, 2010, the Court granted the
Company’s motion and dismissed the Third-Party Complaint.
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. This case is in the discovery stage. Management believes the
lawsuit is without merit and intends to vigorously defend this
action.
92
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 17 –
Commitments and contingencies (continued):
OmniResponse,
Inc. v. Global TV Concepts, Ltd., Laurie Braden and Lee Smith, case number
0-10:61029
in the Southern District Court of Florida (SDFL).
United
States District Court, Southern District of Florida, Case No.
10-CV-61029
On June
17, 2010, OmniResponse, Inc. filed a complaint against Global Concepts Limited,
Inc., d/b/a Global TV Concepts, LTD, Laurie Braden and Lee Smith alleging
trademark infringement, unfair competition, violations of Florida’s Deceptive
and Unfair Trade Practices Act and breach of contract. OmniResponse,
Inc. is seeking monetary damages and injunctive relief.
On July
17, 2010, the United States District Court for the Southern District of Florida
entered an order preliminarily enjoining Defendants from the use of infringing
trademarks. The matter is presently scheduled for trial at
the end of June, 2011.
Global
TV Products, Ltd. v. Omni Reliant Holdings, Inc., Trademark Opposition No.
91195187 before
the Trademark Trial and Appeal Board (TTAB).
Global TV
Concepts, Ltd. objected to OmniReliant Holdings, Inc.’s DualSaw trademark
application serial number 77721489. Omni filed a motion to stay this Trademark
Office proceeding in favor of the federal litigation. There are no damages, fees
or costs to be assessed. The only relevant issue is OmniReliant’s entitlement to
federally register its DualSaw trademark. The proceeding shall be resolved based
upon final judgment in the federal litigation.
OmniReliant
Holdings, Inc. v. Professor Amos’s Wonder Products and Network 1,000,000 Inc.
(d/b/a/ PA Wonder Products and Professor Amos Wonder Products, Inc.) et al.
Index No. 651635/2010
On
October 4, 2010, the Company, the exclusive licensee of the “Professor Amos”
brand commenced this action against Professor Amos Wonder Products, the
licensor, and certain of its officers and employees for
certain wrongful and tortious conduct of defendants.
Plaintiff alleges claims for breach of an amended license
agreement, tortious interference with contract tortious interference with
business relationships trade libel, fraud and seeks permanent injunctive
relief. No answer has been filed as of the date of this Annual
Report.
Omnicomm Studios, LLC v. Vince
Vellardita, D/B/A Valcom Studios, Inc., Valcom Studios, Inc., and Valcom,
Inc. (collectively, the "Defendants"), in Circuit Court, Pinellas County,
Florida (Case No: 10 7111 CI 15).
Omnicomm Studios, LLC filed this
lawsuit asserting a claim for breach of a real estate lease agreement by the
Defendants. Omnicomm Studios, LLC demands judgment against the
Defendants for payment of past due rent in excess of $85,000, plus
subsequent accruing rent, reasonable attorney’s fees and
costs.
93
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 17 –
Commitments and contingencies (continued):
Revenue Frontier, LLC v. OmniReliant
Holdings, Inc., in the Superior Court of California for Los Angeles
County, Western District (Case No. SC106265).
Revenue
Frontier, LLC filed this claim asserting a breach of contract related to
delivery of media services. OmniReliant denied Revenue Frontier’s
assertions. In order to avoid the cost and risk of
litigation, the parties entered into a Settlement Agreement dated January
19, 2010, pursuant to which Omnireliant paid $16,785 to Revenue Frontier, LLC,
and Revenue Frontier; LLC provided a full release of Omnireliant.
Although
there is a reasonable possibility that certain of the above legal matters could
have an unfavorable outcome, no cases rise to the level of probable of an
unfavorable outcome. Accordingly, we have no accrued expenses associated with
these cases other than the defense costs, which are recorded as they are
incurred.
License
Agreement
On
October 9, 2009, we entered into a License and Marketing Agreement (the “License
Agreement”) with Zurvita Holdings, Inc. (“Zurvita”) whereby we granted a
perpetual right and license, under all intellectual property rights applicable
to the Software, to access, use, execute, display, market, and sell the Software
to Zurvita in consideration for a royalty fee of $2.00 per user for a period of
twenty four (24) months, commencing ninety (90) days from the date Zurvita runs
its first advertisement. Compensation for the license represented a 6%
promissory note in the principal amount of $2,000,000, payable three (3) years
from the date of issuance and convertible at any time at our option at a
conversion price of $0.25 per share. We deferred the revenue for
which we received the convertible debenture. However, current accounting
standards provide that any extended payment terms in revenue arrangements, and
in particular terms that extend beyond twelve months, indicate that the
compensation is not fixed and determinable, a requisite criteria for revenue
recognition as noted above. Accordingly, this revenue will not be recognized
until all requisite criteria for revenue recognition are met.
Other
contingencies:
In
connection with our business, we enter into other arrangements from time to time
that are routine and customary for the operation of our business that include
commitments, typically of a short duration. These arrangements include, among
other things, infomercial development and production arrangements and royalty or
contingent consideration to product manufacturers or infomercial hosts. As of
June 30, 2010, we do not believe that our routine and customary business
arrangements are material for reporting purposes.
94
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 18 –
Related party transactions:
Production Agreement: On May
31, 2009, we entered into a production agreement with the minority shareholder
of Omnicom Studios. The agreement provides for the production of commercials.
Compensation under the arrangement was $58,000, plus royalties ranging from 0.5%
to 1.0% of gross sales receipts from the associated product sales, capped at
$250,000.
Placement Agent and Related Services
- Midtown Partner & Co. LLC and Apogee Financial Investments, serve
as our placement agents and merchant banker, respectively, in connection with
certain of our financing and other strategic transactions. These companies are
owned by certain shareholders and Board Members. We compensated these companies
in warrants with fair values of $382,761 during the year ended June 30, 2010,
related to financing arrangements. See Note 13 for information about the
financing transactions and the broker-dealer warrants issued. Further, these
companies are entitled to receive commissions from us upon the exercise by
investors of warrants that were issued in connection with financings that they
arranged for us. These companies also received a commission of $240,000 in cash
related to our investment in Beyond Commerce, Inc. (see Note 6).
Financial Consulting Agreement
– We have engaged TotalCFO to provide financial services. TotalCFO is
owned by certain shareholders and former Board members’ relatives. We recognized
$470,600 and $345,000 of expense related to this arrangement for years ended
June 30, 2010 and 2009.
Investments– As more fully
discussed in Note 4, we acquired Designer which had a 50% interest in RPS on
July 31, 2009. Designer was owned by a relative of a former member of
our Board of Directors. Prior to our purchase of Designer, we invested
approximately $1,857,000 in notes receivable. We invested cash and our common
stock with an aggregate value of $251,000 to purchase this company. Our purchase
of Designer included a provision that requires us to pay 10% of the net profits
before income taxes derived from a specific customer of RPS for a period of two
years following the purchase. No net profits were earned from this customer
during the year ended June 30, 2010 and management does not currently project
net profits during the remaining term of this provision. Also, as more fully
discussed in Note 4, we acquired Abazias on August 27, 2009 and, as discussed in
Note 6 made pre-acquisition investments in Abazias amounting to $1,042,789. At
the time of the acquisition and investments, a former Board Member had a minor,
non-controlling investment in the outstanding common stock of Abazias. We also
made investments in Wineharvest in the aggregate amount of $315,050, which
company was owned by the same relatives of the former Board Member and Apogee.
We continue to fund Wineharvest operations and guarantee its lease, which has
non-cancellable future payments due of approximately $228,000. As a result, we
have consolidated Wineharvest because it meets the definition of a Variable
Interest Entity and we are the primary beneficiary because our equity in
Wineharvest is the only equity at risk.
Advertising and Marketing
Agreement – On July 30, 2009, we entered into an Advertising and
Marketing Agreement with Zurvita, more fully described in Note 17, above.
Certain of our Board Members also serve as Directors of Zurvita. On January 21,
2010, we separated with our President and Chief Executive Officer. The separated
officer also served as a Zurvita Director. Two of our current Board Members also
serve on the Board of Directors of Zurvita.
Redemption of Shares – During
the fourth quarter of our year ended June 30, 2010, we redeemed 1,000,000 shares
of our common stock for $100,000 (an amount equal to the trading market of the
shares) from a company that is owned by a family member of a former
director.
95
OmniReliant
Holdings, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Note 18 –
Related party transactions (continued):
Leasing Arrangement – Our
subsidiary, OmniReliant Acquisition Sub, Inc., leases its business premises from
the subsidiary President. The arrangement is cancellable but provides for
monthly lease payments of $2,650 and cost reimbursements of up to $1,170. We
recorded $26,500 in rent expense during the year ended June 30,
2010.
Separation of Officer—On
January 21, 2010, we entered into a Severance, Release and Confidentiality
Agreement with our former President and Chief Executive Officer. The agreement
provided for, among other things, severance as follows:
|
1.
|
Cash
severance of $225,000, payable $75,000 within 10 days of the agreement and
$12,500 monthly for a period of twelve
months.
|
|
2.
|
Cash
of $50,000 to redeem 1,500,000 stock options and 300,000 shares of the
Company’s common stock. Our stock options do not provide for such
redemption; rather, this provision was negotiated between the parties in
the settlement. The payment was recorded in employment
costs.
|
|
3.
|
Cash
of $49,000 for the former officer’s
expenses.
|
|
4.
|
A
company-owned automobile with a carrying and estimated fair value of
$13,509.
|
|
5.
|
An
exchange of investments, wherein we will deliver 50 common shares in
Strathmore Investments and 625,000 preferred shares in Nested Media
(collectively, our Cellular Blowout investment) for 1,000,000 shares in
Wineharvest owned by the separated officer. The aggregate carrying value
and fair value of investments transferred to the former officer amounted
to $62,500. See Note 6.
|
Termination
benefits amounting to $400,009 were recorded as a component of employment costs
in the current period on the basis that such benefits were formally established
and communicated with the separated employee.
Majority Shareholder –
Vicis, which has provided significant funding, is the beneficial owner of 93.7%
of our fully-diluted equity. Vicis also has significant financial interests
in Net Talk.com, Inc., Zurvita and Beyond Commerce. The Beyond
Commerce interest is an indirect beneficial interest related to its investments
in the Company and Zurvita (see Note 6, 12, and 13 for details on investments
and financings).
Consulting Agreements— As
more fully disclosed in Note 17, On June 30, 2010, we entered into consulting
agreements with two former members of our Board of Directors.
Note 19 –
Subsequent events:
We have
evaluated subsequent events arising following the balance sheet date of June 30,
2010 through the date of October 13, 2010, 2010. There have been no material
subsequent events not provided elsewhere herein or in filings on Form
8-K.
96
ITEM 9 –
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On April
27, 2010, the Company’s board of directors approved the dismissal of KBL, LLC
(“KBL”) as the Company’s independent registered public accounting
firm. KBL’s dismissal was effective immediately.
On April
27, 2010, the Company engaged Meeks International (“Meeks”) as its independent
registered public accounting firm for the Company’s fiscal year ended June 30,
2010. The change in the Company’s independent registered public accounting firm
was approved by the Company’s Board of Directors on April 27, 2010.
ITEM 9A –
CONTROLS AND PROCEDURES COMPANY CONFIRM INEFFECTIVENESS OF
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, 2010, as further described
below.
(b)
Management’s Annual Report on Internal Control over Financial
Reporting
97
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.
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 our
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,
2010.
Management’s
Assessment
Management
has determined that, as of the June 30, 2010 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
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, 2010, management has concluded that our internal control over
financial reporting was not effective as of June 30, 2010. 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, 2010 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 19 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.
98
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 rules of the Securities and Exchange
Commission
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.
|
·
|
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.
99
(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.
ITEM 9B -
Other Information
None.
100
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
|
||
Current:
|
||||
Robert
DeCecco*
|
42
|
Chief
Executive Officer, Chief Financial Officer, President, Secretary,
Treasurer, and Chairman of the Board of Directors
|
||
Shadron
Stastney**
|
41
|
Director
|
||
Keith
Hughes**
|
54
|
Director
|
*Appointed
as Chief Executive Officer, President, Secretary on January 21,
2010
**Appointed
on September 7, 2010
Background
of Executive Officers and Directors
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 and on January 21, 2010 approved his appointment as Chief Executive
Officer, President, Secretary and Treasurer. Prior to his current
role as CEO and CFO of OmniReliant, Mr. DeCecco has spent the past 3 years as
President and CEO of 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 and 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 $20 million, 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. Mr. DeCecco is a Certified Public Accountant 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. Mr.
DeCecco is also a director of OmniReliant Acquisition Sub, Inc, Designer
Liquidator, Inc., OmniResponse, Inc., OminResponse Cleaning Solutions, Inc.,
Dual Saw, Inc., OminResponse Safety Solutions, Inc., and OmniReliant
Corp. Mr. DeCecco was chosen to be a director of the Company based on
his general knowledge of the industry.
101
Shadron
Stastney. On September 7, 2010, the Company appointed Mr. Stastney as
a member of its board of directors. Mr. Stastney is a founding
partner of Vicis Capital LLC (”Vicis”). He graduated from the University
of North Dakota in 1990 with a B.A. in Political Theory and History, and from
Yale Law School in 1994 with a J.D. focusing on corporate and tax law.
From 1994 to 1997, he worked as an associate at Cravath, Swaine and Moore in New
York, where he worked in the tax group and in the corporate group, focusing on
derivatives. In 1997, he joined CSFB’s then-combined convertible/equity
derivative origination desk. From 1998 through 2001, he worked in CSFB’s
corporate equity derivatives origination group, eventually becoming a Director
and Head of the Hedging and Monetization Group, a joint venture between
derivatives and equity capital markets. In 2001, he jointly founded Victus
Capital Management, LP, and in 2004, he jointly founded Vicis. Mr.
Stastney also jointly founded Vicis Capital Management LLC in
2001. Mr. Stastney has been a director of Quality Health Plans since
February 2010, China Hydro since January 2010, Master Silicone Carbide since
September 2008, Amacore Holdings, Inc. since August 2008, Care Media since April
2007, China New Energy since August 2008, Zurvita Holdings, Inc. since March
2010, Age of Learning since March 2010 and OptimizeRX Corporation since July
2010. Mr. Stastney was a director of Medical Solutions Management
from October 2007 to January 2009 and MDWerks from May 2008 to August 2009. Mr.
Stastney was chosen to be a director of the Company based on his general
knowledge of the industry.
Keith
Hughes On September 7, 2010, the Company appointed Mr. Stastney as a member of
its board of directors. Mr. Hughes has served as the Chief Financial
Officer and Chief Compliance Officer of Vicis since 2006. Mr. Hughes
is a Certified Public Accountant and graduated from St. John’s University in
1978 with a B.A. in Accounting. He joined Vicis in January 2006 from
International Fund Services, the fund’s administrator, where he was a Managing
Director of Operations since 2001. From 1998 to 2001, he has held various
financial roles with hedge funds including Treasurer, Controller and Chief
Financial Officer. From 1986 to 1998 he worked at UBS where he was a Managing
Director and the Equity Controller for North America. Previous to UBS he worked
at Dean Witter, Merrill Lynch and McGladery & Pullen, C.P.A.s. Mr. Hughes
has been a director of Quality Health Plans since February 2009, Amacore
Holdings, Inc. since February 2010 and Zurvita Holdings, Inc. since March 2010.
Mr. Hughes was chosen to be a director of the Company based on his general
knowledge of the industry.
Family
Relationships
None.
Conflicts
of Interest
Certain
potential conflicts of interest are inherent in the relationships between the
Company’s officers and directors and the Company.
From time
to time, one or more of the Company’s affiliates may form or hold an ownership
interest in and/or manage other businesses both related and unrelated to the
type of business that the Company own and operate. These persons expect to
continue to form, hold an ownership interest in and/or manage additional other
businesses which may compete with the Company’s business with respect to
operations, including financing and marketing, management time and services and
potential customers. These activities may give rise to conflicts between or
among the interests of us and other businesses with which the Company’s
affiliates are associated. The Company’s affiliates are in no way prohibited
from undertaking such activities, and neither the Company nor the Company’s
shareholders will have any right to require participation in such other
activities.
Further,
because The Company intend to transact business with some of the Company’s
officers, directors and affiliates, as well as with firms in which some of the
Company’s officers, directors or affiliates have a material interest, potential
conflicts may arise between the respective interests of us and these related
persons or entities. The Company believes that such transactions will be
effected on terms at least as favorable to us as those available from unrelated
third parties.
102
With
respect to transactions involving real or apparent conflicts of interest, The
Company have adopted policies and procedures which require that: (i) the fact of
the relationship or interest giving rise to the potential conflict be disclosed
or known to the directors who authorize or approve the transaction prior to such
authorization or approval, (ii) the transaction be approved by a majority of the
Company’s disinterested outside directors, and (iii) the transaction be fair and
reasonable to us at the time it is authorized or approved by the Company’s
directors.
The
Company’s policies and procedures regarding transactions involving potential
conflicts of interest are not in writing. The Company understands
that it will be difficult to enforce the Company’s policies and procedures and
will rely and trust the Company’s officers and directors to follow the Company’s
policies and procedures. The Company will implement the Company’s
policies and procedures by requiring the officer or director who is not in
compliance with the Company’s policies and procedures to remove himself and the
other officers and directors will decide how to implement the policies and
procedures, accordingly.
Involvement
in Certain Legal Proceedings
To the
Company’s knowledge, during the past ten (10) years, none of the Company’s
directors, executive officers, promoters, control persons, or nominees has
been:
¨
|
the
subject of 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;
|
¨
|
convicted
in a criminal proceeding or is subject to a pending criminal proceeding
(excluding traffic violations and other minor
offenses);
|
¨
|
subject
to any order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
¨
|
found
by a court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law
|
Employment
Agreements
On June
30, 2010, we entered into an employment agreement with Robert DeCecco, our Chief
Executive Officer and Chief Financial Officer, pursuant to which Mr. DeCecco
will serve as Chief Executive Officer, President and Chief Financial Officer for
the Company for a period of three years, subject to renewal. In
consideration for his services, Mr. DeCecco will receive an annual base salary
of $225,000 and options to purchase (i) that number of shares of common stock of
the Company equal to 4.5% of the issued and outstanding common stock of the
Company on a fully diluted basis; (ii) that number of shares
of Designer qual to 4.5% of the issued and outstanding shares of
Designer Liquidator’s common stock on a fully diluted basis and (iii) that
number of shares of OmniResponse, Inc. , the Company’s wholly owned subsidiary
(“OmniResponse”) equal to 4.5% of the issued and outstanding shares of
OmniResponse’s common stock on a fully diluted basis (collectively, the “Stock
Options”). The Stock Options of the Company are calculated and issued
as of the date of the Employment Agreement. The Stock Options of
OmniResponse and Designer, will be calculated and issued upon the
consummation of a Spin-Off Transaction whereby the Company will spin-out certain
subsidiaries, assets, brands, and/or lines of business of the Company into a
separate company. Notwithstanding the foregoing, none of the Stock
Options shall become exercisable, whether or not vested, until the Company has
paid in full to holders of its Series G Convertible Preferred Stock the Special
Preferred Distribution, as described in the Series G Preferred Stock Certificate
of Designation.
103
Director
Independence
Our board
of directors has determined that currently none of it members qualify
as “independent” as the term is used in Item 407 of Regulation S-K as
promulgated by the SEC and in the listing standards of The Nasdaq Stock Market,
Inc. - Marketplace Rule 4200.
Board
Leadership Structure and Role in Risk Oversight
Although
we have not adopted a formal policy on whether the Chairman and Chief Executive
Officer positions should be separate or combined, we have traditionally
determined that it is in the best interests of the Company and its shareholders
to partially combine these roles. Due to the small size of the Company, we
believe it is currently most effective to have the Chairman and Chief Executive
Officer positions partially combined.
The
Company currently has three full directors, including Robert DeCecco, its
Chairman, who also serves as the company's Chief Executive Officer. The Chairman
and the Board are actively involved in oversight of the company's day to day
activities.
Meetings
and Committees of the Board of Directors
Our board
of directors held no formal meetings during the most recently completed fiscal
year. All proceedings of the board of directors were conducted by resolutions
consented to in writing by all the directors and filed with the minutes of the
proceedings of the directors. Such resolutions consented to in writing by the
directors entitled to vote on that resolution at a meeting of the directors are,
according to the corporate laws of the State of Nevada and our bylaws, as valid
and effective as if they had been passed at a meeting of the directors duly
called and held.
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.
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, 2010, and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended June 30, 2010, we believe that during the year
ended June 30, 2010, 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 that our CEO
and one of our former directors failed to file a Form 4. Our CEO will file a
Form 4 subsequent to the filing of this Annual Report.
104
Code of
Ethics
We have
not yet adopted a code of business conduct and ethics that applied to all
directors, officers and employers.
105
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, 2010 who earned compensation exceeding $100,000 during 2010 (the
“named executive officers”), for services as executive officers for the last two
fiscal years.
Summary
Compensation Table
Name &
Principal
Position
|
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in Pension Value and
Non-Qualified Deferred
Compensation Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||
Robert
DeCecco, CEO, CFO, Director
|
2010
|
225,000
|
—
|
—
|
1,034,334
|
(1) |
—
|
—
|
—
|
1,259,334
|
|||||||||||||
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||
Paul
Morrison, CEO, Director*
|
2010
|
120,000
|
—
|
—
|
—
|
—
|
—
|
120,000
|
|||||||||||||||
2009
|
120,000
|
—
|
—
|
283,683
|
(2) |
—
|
—
|
—
|
403,683
|
*Resigned
from all positions on January 21, 2010
(1) The
Company awarded options to purchase 18,146,203 shares of common stock on June
30, 2010 with a strike price of $0.01 per share. Compensation was calculated as
fair value using the Trinomial Lattice Technique. These stock options vest to
the benefit of the officer through March 2012.
(2) The
Company awarded options to purchase 1,500,000 shares of common stock with a
strike price of $0.50 per share. Compensation was calculated as fair value using
the Black-Scholes-Merton Technique.
106
Outstanding
Equity Awards at Fiscal Year-End Table
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
|
Option
Exercise
Price
($)
|
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
($)
|
Equity Incentive
Plan Awards:
Number Of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
(#)
|
Equity Incentive
Plan Awards: Market
or Payout Value Of
Unearned Shares,
Units or Other Rights
That Have Not
Vested
($)
|
|||||||||||||||||||||||||||
Robert
DeCecco, CEO, CFO, Director
|
— | — | 18,146,203 | $ | 0.01 | 6-30-2020 | — | — | — | — |
107
Directors’
Compensation
For the
fiscal year ended June 30, 2010, three directors were compensated an aggregate
of $59,067.
Audit
Committee
We do not
have an audit committee at this time.
Certain
Relationships and Related Transactions
The
Company will present all possible transactions between us and the Company’s
officers, directors or 5% shareholders, and the Company’s affiliates to the
Board of Directors for their consideration and approval. Any such transaction
will require approval by a majority of the disinterested directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information, as of October 13, 2010 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)
|
CommonStock
Beneficially
Owned
|
Percentage of Common
Stock
Beneficially Owned (2)
|
||||||
Robert
DeCecco
|
0
|
(3)
|
0
|
%
|
||||
Vicis
Capital Master Fund (5)
|
308,502,441
|
(6)
|
93.7
|
%
|
||||
Keith
Hughes (4)
|
—
|
—
|
|
|||||
Shadron
Stastney (5)(7)
|
—
|
—
|
|
|||||
All
officers and directors as a group (3 persons)
|
0
|
0
|
%
|
(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 has been calculated by dividing
the common stock beneficially owned as reflected in the table above, by the sum
of the number of common shares outstanding at October 13, 2010, which amount to
158,073,323 and the common stock beneficially owned.
(3) Does
not include stock options granted on June 30, 2010 with an exercise price
of $0.01, which vest to the officer’s benefit in two years and expire in
ten years.
(4) Mr.
Hughes is a director of the Company.
(5) Vicis
Capital LLC serves as the investment advisor to Vicis Capital Master Fund, For
purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
Vicis Capital LLC may be deemed to beneficially own, but has disclaimed
ownership of, all shares owned by Vicis Capital Master Fund. The voting and
dispositive power granted to Vicis Capital LLC by Vicis Capital Master Fund may
be revoked at any time. Shad Stastney, a member of Vicis Capital LLC and its
chief operating officer, together with John Succo and Sky Lucas, have voting and
dispositive control over these securities. No single natural person can exercise
voting or investment power with respect to the securities owned by Vicis Capital
Master Fund, and investment decisions with respect to these securities are made
by a majority of these persons. The address of Vicis Capital Master Fund is 445
Park Avenue, Suite 1901, New York, New York 10022.
108
(6)
Includes (i) 138,502,441 shares of Omni’s common stock, (ii) warrants to
purchases 120,000,000 shares of Omni’s common stock with an exercise price of
$0.10 per share and, (iii) 50,000,000 common shares that are linked to the
Series G Preferred Stock Conversion Feature.
(7) Mr.
Statsney is a director of the Company.
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:
On June
30, 2010, we issued and sold 5,000,000 shares of our Series G Convertible
Preferred Stock and Series G Warrants to purchase an aggregate of 50,000,000
shares of our common stock at a per share exercise price of $0.10 for an
aggregate purchase price value of $5,000,000 consisting of (1) $3,500,000 in
cash and (2) the return and cancellation of the note in the principal amount of
$1,500,000 issued to Vicis Capital Master Fund pursuant to a Note Purchase
Agreement dated June 4, 2010 between Vicis and the Company. Vicis is
a beneficial owner of 93.7% of our outstanding capital stock.
On June
4, 2010, we entered into a Note Purchase Agreement with Vicis Capital Master
Fund pursuant to which we sold an 8% convertible promissory note in the
principal amount of $1,500,000 for an aggregate purchase price of $1,500,000
(the “Note”). The Note is due on demand in the holder’s
discretion. The Note is convertible into securities offered by the
Company in a future financing pursuant to the terms of the Note Purchase
Agreement. Vicis is a beneficial owner of 93.7% of our outstanding
capital stock.
On July
20, 2009, the Company entered into a securities purchase agreement with Vicis
Capital Master Fundwhereby Vicis purchased from the Company a warrant to
purchase 97,606,276 shares of the Company’s common stock for a purchase price of
five million dollars ($5,000,000). The warrant has an exercise price of $0.25
per share and is exercisable for ten years from the date of
issuance. The warrant is exercisable on a cashless basis at any time
after 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. Vicis is a beneficial owner of 93.7% of our outstanding
capital stock.
Production Agreement: On May
31, 2009, we entered into a production agreement with the minority shareholder
of Omnicom Studios. The agreement provides for the production of commercials.
Compensation under the arrangement was $58,000, plus royalties ranging from 0.5%
to 1.0% of gross sales receipts from the associated product sales, capped at
$250,000.
Placement Agent and Related Services
- Midtown Partner & Co. LLC and Apogee Financial Investments, serve
as our placement agents and merchant banker, respectively, in connection with
certain of our financing and other strategic transactions. These companies are
owned by certain shareholders and Board Members. We compensated these companies
in warrants with fair values of $382,761 during the year ended June 30, 2010,
related to financing arrangements. Further, these companies are entitled to
receive commissions from us upon the exercise by investors of warrants that were
issued in connection with financings that they arranged for us. These companies
also received a commission of $240,000 in cash related to our investment in
Beyond Commerce, Inc.
109
Financial Consulting Agreement
– We have engaged TotalCFO to provide financial services. TotalCFO is
owned by certain shareholders and former Board members’ relatives. We recognized
$470,600 and $345,000 of expense related to this arrangement for years ended
June 30, 2010 and 2009.
Investments– We acquired
Designer which had a 50% interest in RPS on July 31, 2009. Designer
was owned by a relative of a former member of our Board of Directors. Prior to
our purchase of Designer, we invested approximately $1,857,000 in notes
receivable. We invested cash and our common stock with an aggregate value of
$251,000 to purchase this company. We also acquired Abazias on August 27, 2009
and, as discussed in Note 6 made pre-acquisition investments in Abazias
amounting to $1,042,789. At the time of the acquisition and investments, a
former Board Member had a minor, non-controlling investment in the outstanding
common stock of Abazias.We also made investments in Wineharvest in the aggregate
amount of $315,050, which company was owned by the same relatives of the former
Board Member and Apogee. We continue to fund Wineharvest operations and
guarantee its lease, which has non-cancellable future payments due of
approximately $228,000. As a result, we have consolidated Wineharvest because it
meets the definition of a Variable Interest Entity and we are the primary
beneficiary because our equity in Wineharvest is the only equity at
risk.
Advertising and Marketing
Agreement – On July 30, 2009, we entered into an Advertising and
Marketing Agreement with Zurvita Holdings, Inc. (“Zurvita”). Certain of our
Board Members also serve as Directors of Zurvita. On January 21, 2010, we
separated with our President and Chief Executive Officer. The separated officer
also served as a Zurvita. Director. Two of our current Board Members, Mr.
Stastey and Mr. Hughes, also serve on the board of Zurvita.
Redemption of Shares – During
the fourth quarter of our year ended June 30, 2010, we redeemed 1,000,000 shares
of our common stock for $100,000 (an amount equal to the trading market of the
shares) from a company that is owned by a family member of a former
director.
Leasing Arrangement – Our
subsidiary, OmniReliant Acquisition Sub, Inc., (“Abazias”) leases its business
premises from the subsidiary President. The arrangement is cancellable but
provides for monthly lease payments of $2,650 and cost reimbursements of up to
$1,170. We recorded $26,500 in rent expense during the year ended June 30,
2010.
Separation of Officer—On
January 21, 2010, we entered into a Severance, Release and Confidentiality
Agreement with our former President and Chief Executive Officer. The agreement
provided for, among other things, severance as follows:
|
1.
|
Cash
severance of $225,000, payable $75,000 within 10 days of the agreement and
$12,500 monthly for a period of twelve
months.
|
|
2.
|
Cash
of $50,000 to redeem 1,500,000 stock options and 300,000 shares of the
Company’s common stock. Our stock options do not provide for such
redemption; rather, this provision was negotiated between the parties in
the settlement. The payment was recorded in employment
costs.
|
|
3.
|
Cash
of $49,000 for the former officer’s
expenses.
|
|
4.
|
A
company-owned automobile with a carrying and estimated fair value of
$13,509.
|
|
5.
|
An
exchange of investments, wherein we will deliver 50 common shares in
Strathmore Investments and 625,000 preferred shares in Nested Media
(collectively, our Cellular Blowout investment) for 1,000,000 shares in
Wineharvest owned by the separated officer. The aggregate carrying value
and fair value of investments transferred to the former officer amounted
to $62,500.
|
110
Termination
benefits amounting to $400,009 were recorded as a component of employment costs
in the current period on the basis that such benefits were formally established
and communicated with the separated employee.
Consulting
Agreements:
On June
30, 2010, we entered into consulting agreements with two former members of our
Board of Directors. One agreement provides for a one year term and the other a
two year term. Each provides for annual compensation of $125,000 and a one-time
stock option for 1.5% of our fully-diluted common ownership as calculated on the
date of the agreement to each former member. The agreements provide for
extension solely for cash compensation. The aggregate number of common shares
linked to both stock options was 12,097,468 and the aggregate grant date fair
value amounted to $689,556 using the Trinomial Lattice Technique. The stock
options have a strike price of $0.01, vest over two years and expire in ten
years. However, exercise of the stock options is restricted to periods following
the payment of the special dividends on our Series G Preferred Stock (see Note
12). We will record the annual compensation as the services are earned, which is
expected to be ratably over the term of the agreements. We will record the
compensation expense associated with the stock options over the vesting
period.
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. Meeks International was engaged as our auditor April
27, 2010 and KBL LLP was our auditor prior to April 27, 2010. In its review of
non-audit service fees and its appointment of Meeks International 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 Meeks International LLC and KLB LLP
were approved by the board of directors.
Fees are as
follows:
Meeks
International LLC 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 2010 and 2009 were
$50,000 and $0, respectively, net of expenses.
Other
Securities Exchange Commission services for registration and related services
were $7,400 in 2010 and $0 in 2009.
Tax Fees
Tax fees
for tax filings were $2,000 in 2010 and $0 in 2009.
KBL
LLP
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 2010 and 2009 were
$195,000 and $163,000 respectively, net of expenses.
Other
Securities Exchange Commission services for registration and related services
$19.000 in 2010 and $45,000 in 2009.
Tax Fees
Tax fees
for tax filings were $0 in 2010 and 2009.
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.
All Other
Fees
There
were no other fees billed during the last two fiscal years for products and
services provided.
111
Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
We do not
currently have an Audit Committee. The policy of our Board of
Directors, which acts as our Audit Committee, is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to our Board of Directors
regarding the extent of services provided by the independent auditors in
accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis.
112
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.
(a)(3)
Exhibits
3.1
|
Certificate
of Incorporation of Willowtree Advisors (Incorporated by reference to the
Form SB-2 Registration Statement filed with the Securities and Exchange
Commission on August 2, 2004 (File No. 333-117840)
|
3.2
|
Bylaws
of Willowtree Advisors(Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission
on August 2, 2004 (File No. 333-117840)
|
4.1
|
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)
|
4.2
|
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)
|
4.3
|
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)
|
4.4
|
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)
|
4.5
|
Form
of Series E Preferred Stock Certificate of Designation (Incorporated by
reference to the Current Report on Form 8-K filed with the SEC on
September 24, 2009)
|
4.6
|
Form
of Vicis Capital Master Fund Warrant (Incorporated by reference to the
Current Report on Form 8-K filed with the SEC on October 13,
2009)
|
4.7
|
Form
of Midtown Partners & Co, LLC Warrant (Incorporated by reference to
the Current Report on Form 8-K filed with the SEC on October 13,
2009)
|
10.1
|
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,
2009)
|
113
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,
2009)
|
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,
2009)
|
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,
2009)
|
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)
|
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)
|
10.15
|
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)
|
10.16
|
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)
|
10.17
|
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)
|
10.18
|
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)
|
10.19
|
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)
|
114
10.20
|
Form
of Kathy Hilton Agreement (Incorporated by reference to the Current Report
on Form 8-K filed with the SEC on August 13, 2009)
|
10.21
|
Securities
Purchase Agreement (Incorporated by reference to the Current Report on
Form 8-K filed with the SEC on September 11, 2009)
|
10.22
|
Form
of Debenture (Incorporated by reference to the Current Report on Form 8-K
filed with the SEC on September 11, 2009)
|
10.23
|
Form
of Warrant (Incorporated by reference to the Current Report on Form 8-K
filed with the SEC on September 11, 2009)
|
10.24
|
Security
Interest and Pledge Agreement (Incorporated by reference to the Current
Report on Form 8-K filed with the SEC on September 11,
2009)
|
10.25
|
Form
of Merger Agreement (Incorporated by reference to the Current Report on
Form 8-K filed with the SEC on September 24, 2009)
|
10.26
|
Form
of Employment Agreement (Incorporated by reference to the Current Report
on Form 8-K filed with the SEC on September 24, 2009)
|
10.27
|
Asset
Purchase Agreement, dated October 9, 2009 (Incorporated by reference to
the Company's Current Report on Form 8-K filed with the SEC on October 16,
2009)
|
10.28
|
License
Agreement, dated October 9, 2009 (Incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on October 16,
2009)
|
10.29
|
Promissory
Note, dated October 9, 2009 (Incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC on October 16,
2009)
|
10.30
|
Note
Purchase agreement dated June 4, 2010 (Incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on June 7,
2010)
|
10.31
|
Securities
Purchase Agreement dated June 30, 2010 (Incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on July 6,
2010)
|
10.32
|
Series
G Convertible Preferred Stock Certificate of Designations (Incorporated by
reference to the Company's Current Report on Form 8-K filed with the SEC
on July 6, 2010)
|
10.33
|
Series
G Warrant (Incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on July 6, 2010)
|
10.34
|
Registration
Rights Agreement (Incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on July 6, 2010)
|
10.35
|
Security
Agreement (Incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on July 6, 2010)
|
10.36
|
Subsidiary
Agreement (Incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on July 6, 2010)
|
10.37
|
Guarantor
Security Agreement (Incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on July 6, 2010)
|
10.38
|
Employment Agreement
with Robert DeCecco (Incorporated
by reference to the Companies Current Report on Form 8-K filed with the
SEC on July 6, 2010)
|
23.1 | Consent of Meeks International LLC. |
31.1 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
115
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 13, 2010
|
By:
|
/s/Robert DeCecco
|
Robert
DeCecco
|
||
Chief
Executive Officer and Chief Financial Officer (Principal
Executive Officer and Principal Financial and 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/
Robert DeCecco III
|
Chief
Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
and Chairman of the Board of Directors
|
October
13, 2010
|
||
Robert
DeCecco
|
||||
/s/
Shadron Statsney
|
Director
|
October
13, 2010
|
||
Shadron
Statsney
|
||||
/s/
Keith
Hughes
|
Director
|
October
13, 2010
|
||
Keith
Hughes
|
116