UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549











FORM 10-Q








QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the Quarterly period ended July 31, 2009





Commission file number:333-83231





GLOBAL DIVERSIFIED INDUSTRIES, INC.


(Exact Name of Registrant as specified in its charter)





NEVADA
95-4741485(State of incorporation)
(IRS Employer Identification No.)





1200 Airport Drive, Chowchilla, CA
93610(Address of principal executive offices)
(Zip Code)





(559) 665-5800


(Registrant's telephone number, including area code)





None


(Former name, former address and former fiscal year, if changed since last report)








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 filings requirements for the past
90 days.    Yes x No o





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





Large Accelerated Filer o
Accelerated Filer                      oNon-Accelerated Filer   o
Smaller Reporting Company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x





State the number of shares outstanding of each of the issuer's classes of common equity, 15,369,885 shares of Common Stock ($.001 par value) as of September 18, 2009.





Table of Contents





TABLE OF CONTENTS





PagePART I  Financial InformationItem 1.
Financial Statements (Unaudited)
3Condensed Consolidated Balance Sheets:  July 31, 2009 (Unaudited) and April 30, 2009
3Condensed Consolidated Statements of Operations: For the Three Months Ended July  31, 2009 and 2008 (Unaudited)
5Condensed Consolidated Statements of Cash Flows: For the Three Months Ended July 31, 2009 and 2008 (Unaudited)
6Notes to Unaudited Consolidated Financial Information
7Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
20Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27Item 4.
Controls and Procedures
27PART II  Other InformationItem 1.
Legal Proceedings
27Item 2.
Changes in Securities
27Item 3.
Defaults Upon Senior Securities
28Item 4.
Submission of Matters to Vote of Security Holders
28Item 5.
Other Information
28Item 6.
Exhibits, Including Certifications
28








Table of Contents





ITEM I.  FINANCIAL STATEMENTS (UNAUDITED)





GLOBAL DIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





July 31, 2009


April 30, 2009ASSETS:Current assets:Cash and cash equivalents

$
1,203,614


$
335,799Accounts receivable, net of allowance for doubtful accounts of $203,810 at July 31, 2009
and $154,945 at April 30, 2009, respectively


861,918



1,563,830Inventories


4,651,634



4,583,275Advances to employees


26,459



15,815Other current assets


148,000



91,667Prepaid expenses


48,884



40,554Total current assets


6,940,509



6,630,940Property, plant and equipment:Property, plant and equipment, at cost


5,107,096



4,845,445Less: Accumulated depreciation


(1,697,186
)


(1,587,861
)Total property, plant and equipment, net


3,409,910



3,257,584Other assets:Inventories-long term


643,738



661,738Deferred Financing Cost, net of accumulated amortization of $289,012
and $213,589 at July 31, 2009 and April 30, 2009, respectively (Note K)


1,109,736



994,522Deposit


37,375



37,375Intangible assets  net of accumulated amortization of  $399,071  and $375,280 at July  31, 2009
and April 30, 2009, respectively (Note G)


904,994



920,662Total other assets


2,695,843



2,614,297Total Assets

$
13,046,262


$
12,502,821




See accompanying notes to the unaudited condensed consolidated financial information






3
 Table of Contents




GLOBAL DIVERSIFIED INDUSTRIES, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
 (UNAUDITED)






July 31, 2009


April 30, 2009


LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
964,389


$
787,913Derivative Liability


3,760,437



-Dividend payable


183,218



57,444Notes payable, current portion (Note B)


100,000



100,000Total current liabilities


5,008,044



945,357Long-term liabilities:Notes payable, long term portion, net of debt discount (Note B)


5,502,012



5,499,476Total long-term liabilities


5,502,012



5,499,476Commitment and contingencies


-



-Convertible Redeemable Preferred Stock, Series D, par value $.001 per share, 2,750,000 shares authorized, 1,946,512
and 0 shares issued and outstanding at July 31, 2009 and April 30, 2009, respectively (Note F)


1,946,512



-Discount on Preferred Stock Series D


(767,149
)


-Net Preferred Stock Series D


1,179,363



-Convertible Redeemable Preferred Stock, Series C par value $.001 per share, 2,750,000 shares authorized,
1,750,000 shares issued and outstanding at July 31, 2009 and April 30, 2009, respectively (Note E)


1,750,000



1,750,000Discount on Preferred Stock Series C


(1,730,125
)


(1,744,140
)Net Preferred Stock Series C


19,875



5,860Convertible Redeemable Preferred Stock, Series B, par value $.001 per share; 3,500,000 shares authorized;
3,484,294 shares issued and outstanding at July 31, 2009 and April 30, 2009, respectively (Note D )


3,484,294



3,484,294Discount on Preferred Stock Series B


(3,319,352
)


(3,439,670
)Net Preferred Stock Series B


164,942



44,624Stockholders' equity:Common stock, par value $.001 per share; 2,750,000,000 shares authorized; 15,369,885 and 15,369,885 shares
issued and outstanding at July 31, 2009 and April 30, 2009, respectively (Note C)


15,370



15,370Additional paid-in capital


7,423,906



13,334,258Treasury stock (Note C)


(50
)


(50
)Accumulated deficit


(6,267,200
)


(7,342,074
)Total stockholders' equity


1,172,026



6,007,504Total liabilities and stockholders' equity

$
13,046,262


$
12,502,821


See accompanying notes to the unaudited condensed consolidated financial information








4
 Table of Contents








GLOBAL DIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)








For the Three Months Ended July 31,2009


2008Revenues

$
12,441


$
499,061Cost of goods sold


402,069



327,457Gross profit


(389,628
)


171,604Operating expenses:Selling, general and administrative expenses


458,394



500,770Depreciation and amortization


135,155



86,691Total operating expense


593,549



587,461Loss from operations


(983,177
)


(415,857
)Other income (expense)Interest expense, net


(220,224
)


(33,419
)Change in fair value-derivatives


2,291,940Guaranty Expense


(13,665
)


(25,622
)Net income  (loss)


1,074,874



(474,898
)Preferred Dividends, paid or accrued


157,029



124,090Accretion of discount on preferred stock


141,056



1,974Net income ( loss) attributable to common stockholders

$
776,789


$
(600,962
)Earnings per common share:Basic

$
0.05


$
(0.04
)Diluted

$
0.05



N/AWeighted average shares outstanding:Basic


15,369,885



15,369,885Diluted


15,369,885



N/A




See accompanying notes to the unaudited condensed consolidated financial information





5
 Table of Contents





GLOBALDIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(UNAUDITED)





For the Three Months ended
July 31,2009


2008Cash flows from operating activities:Net income/(loss) from operations

$
1,074,874


$
(474,898
)Adjustment to reconcile net income (loss) to net cash used in continuing operationsDepreciation and amortization


135,155



86,691Bad Debt Expense


48,865



-Change in derivative liability


(2,291,940
)


-Amortization of debt discount


22,056



4,845Amortization of deferred financing cost


75,423



-Amortization of guaranty expense


13,665



25,622Change in assets and liabilities:(Increase) in accounts receivable


653,047



(179,118
)(Increase) in other current assets


14,628(Increase) in inventory


(50,359
)


(419,584
)Decrease / (increase) in prepaid expense and others


(8,330
)


(22,183
)(Increase)/decrease in employee advances


(10,644
)


(12,694
)Increase in accounts payable and accrued liabilities


176,476



14,226Net cash (used in) continuing operations


(147,084
)


(977,093
)Cash flows from investing activities:Intangible assets


(8,123
)


-Capital expenditure


(261,650
)


( 70,331
)Net cash (used in) investing activities


(269,773
)


( 70,331
)Cash flows from financing activities:Proceeds from sale of Series D Preferred Stock


1,335,447



1,500,000Preferred Dividends paid


(31,255
)


(146,913
)Proceeds from (repayments of) notes payable, net


(19,520
)


213,638Repayments of payable to related parties, net


-



(5,500
)Net cash provided by financing activities


1,284,672



1,561,225Net increase in cash and cash equivalents


867,815



513,801Cash and cash equivalents at beginning of period


335,799



53,193Cash and cash equivalents at end of period

$
1,203,614


$
566,994Supplemental Disclosures of Cash Flow Information:Cash paid during the period for interest

$
6,002


$
14,637Change in fair value-derivatives


(2,291,940
)


-Accretion of preferred stock discounts charged to paid-in-capital


141,056



1,974Preferred dividends accrued


157,028



-Initial EITF 07-5 derivative liability


5,625,933



-Amortization of beneficial conversion feature of convertible notes & debt discount


22,056



4,845





See accompanying notes to the unaudited condensed consolidated financial information





6
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION - (Unaudited)


JULY 31, 2009





NOTE A - SUMMARY OF ACCOUNTING POLICIES





General





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.





In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results of operations for the three month period ended July 31, 2009, are not necessarily indicative of the results that may be expected for the year ending April 30, 2010.
The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated April 30, 2009 financial statements and footnotes thereto included in the Company's SEC Form 10-K.





Business and Basis of Presentation





Global Diversified Industries, Inc. (the "Company"), is incorporated under the laws of the State of Nevada, and is in the business of designing, manufacturing and marketing re-locatable modular structures such as classrooms and office buildings to end users as well as to third party leasing agents for use primarily within the state of California
and other Western States.





The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Lutrex Enterprises, Inc. ("Lutrex") and Global Modular, Inc. ("Global Modular ").  All significant intercompany balances and transactions have been eliminated in consolidation.





Effect of Related Prospective Accounting Pronouncement





On May 1, 2009, we adopted EITF No. 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock ("EITF 07-05").  EITF 07-05 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement provisions.   The adoption of EITF 07-05 has affected the accounting for certain freestanding warrants and preferred stock that contain exercise price adjustment features (“down round provisions”).  Our preferred stock and warrants with such provisions are no longer deemed to be indexed to the company’s own stock and are no longer classified in equity.  Instead, these were reclassified
as derivative liability on May 1, 2009 as a result of this EITF.  The fair value of the derivative liability as of May 1, 2009 was approximately $5,625,933 and was recorded as a cumulative adjustment to additional paid in capital. See Note A, Derivative Instruments and Fair Value of Financial Instruments.




Revenue Recognition





The Company recognizes revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectability is reasonably assured and title and risk of ownership is passed to the customer, which is usually upon delivery.





In fiscal 2009 and 2010, the Company entered into several fixed-price arrangements whereby the Company is to construct and install several modular units for customers. Revenue from these construction-type fixed-price contracts is recognized in accordance with SOP No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type
Contracts", on the basis of the estimated percentage of completion.





Under the percentage-of-completion method, progress toward completion is measured by the ratio of costs incurred to total estimated costs. Revenue and gross profit may be adjusted prospectively for revisions in estimated total contract costs. If the current estimates of total contract revenue and contract cost indicate a loss, a provision
for the entire loss on the contract is recorded in the period in which it becomes evident. The total estimated loss includes all costs allocable to the specific contract. Each construction contract is reviewed individually to determine the appropriate basis of recognizing revenue. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management.





Currently, there are no warranties provided with the purchase of the Company’s products. The cost of replacing defective products and product returns have been immaterial and within management’s expectations.  In the future, when the company deems warranty reserves are appropriate that such costs will be accrued to
reflect anticipated warranty costs.




7
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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009




NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)




Reclassifications
 
 Certain reclassifications have been made to conform prior periods' data to the current presentation. These reclassifications had no effect on results of operations.




Use of Estimates





The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
The Company evaluates, on an on-going basis, its estimates and judgments, including those related to revenue recognition, bad debts, excess inventory, impairment of intangible assets, income taxes, contingencies and litigation. Its estimates are based on historical experience and assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.





New Accounting Pronouncements





In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“Statement 160”). Statements 141(R) and 160 require
most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require non-controlling interests (previously referred to as minority interests) to be reported as a component of equity.  Both statements are effective for fiscal years beginning after December 15, 2008.  Statement 141(R) will be applied to business combinations occurring after the effective date.  Statement 160 will
be applied prospectively to all non-controlling interests, including any that arose before the effective date.  The Company has not determined the effect, if any, the adoption of Statements 141(R) and 160 will have on the Company’s financial position or results of operations.





In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”


(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company has adopted SFAS 157 in these financial statements.





In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158), which amends SFAS No. 87, “Employers’ Accounting for Pensions”; SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits”; SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”; and SFAS No. 132®, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)”. As of July 31, 2009, the Company does not have a pension plan, nor does it have any plans for a pension program in the near future.  As such, SFAS 158 is not expected to have a material impact on the Company’s
financial statements.





In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of SFAS 115,” (“SFAS 159”). SFAS 159 establishes a fair value option that permits entities to choose to measure eligible financial instruments and certain other items at fair
value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value options have been elected in earnings at each subsequent reporting date. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, provided the entity elects to apply the provisions of SFAS 157. The Company has adopted SFAS 159 in these financial statements.





In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and has been adopted in the company’s financial statements.




8




GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009
 NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)


In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 requires: (i) the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement
of financial position within equity, but separate from the parent's equity; (ii) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; (iii) changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; (iv) when a subsidiary is deconsolidated, any retained noncontrolling equity investment
in the former subsidiary and any gain or loss on the deconsolidation be initially measured at fair value; and (v), entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 is not expected to have a material impact on the Company's financial
statements.





In May 2008, the FASB issued SFAS No. 163 Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 . SFAS 163 resolves existing inconsistencies in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, “Accounting and Reporting
by Insurance Enterprises”.  SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation and clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee
insurance contracts. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS 163 is not expected to have a significant impact on our consolidated financial statements.





In May 2009, the FASB issued SFAS 165 (“SFAS 165”), “Subsequent Events.” This pronouncement establishes standards for accounting for and disclosing subsequent events (events which occur after the balance sheet date but before financial statements are issued or are available to be issued). SFAS 165 requires an entity
to disclose the date subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. It is effective for interim and annual periods ending after June 15, 2009.  The company has adopted this pronouncement in the current period.





In June 2009, the FASB issued SFAS 168 (“SFAS 168”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non grandfathered non-SEC accounting literature not included in the Codification will become non authoritative. This statement is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of FAS 168 to have an impact on the Company’s results of operations, financial condition or cash flows.




Cash and Cash Equivalents
 
 The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  There were no cash equivalents at July 31, 2009 or April 30, 2009, respectively.
 
 Derivative Instruments and Fair Value of Financial Instruments
 
 Derivative Instruments
 
 We have evaluated the application of SFAS 133 Accounting for Derivative Instruments and Hedging Activities, and EITF No. 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock, to certain freestanding warrants and preferred stock that contain exercise price adjustment features known as
down round provisions.  Based on the guidance in SFAS 133 and EITF 07-05, we have concluded these instruments are required to be accounted for as derivatives effective May 1, 2009.





9
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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009


NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)




We have recorded the fair value of the warrants and preferred stock that are classified as derivative liabilities in our balance sheet at fair value with changes in the value of these derivatives reflected in the consolidated statements of operations as gain or loss on derivative liabilities.  These derivative instruments
are not designated as hedging instruments under SFAS 133.





Lattice Valuation Model





Beginning in the quarter ended October 31, 208, we  have valued the freestanding warrants and the conversion features in the preferred stock that contain down round provisions using a lattice model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction
details such as the company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of May 1, 2009 and July 31, 2009.





The primary assumptions include projected annual volatility of 240-250% and holder exercise targets at 150-200% of the exercise/conversion price for the warrants and preferred stock, decreasing as the instruments approach maturity.  Based on these assumptions, the fair value of the warrant derivatives as of May 1, 2009 was
estimated by management to be $5,625,933.  This amount was recorded as a cumulative adjustment to additional paid in capital.





On July 23, 2009, the Company issued Preferred D shares and related warrants as detailed in Note F.  This preferred stock and associated warrants are also derivative instruments under SFAS 133 and EITF 07-05.





The fair value of the remaining derivatives as of July 31, 2009 was estimated by management to be $3,760,437.





The foregoing assumptions are reviewed quarterly and are subject to change based primarily on management’s assessment of the probability of the events described occurring.  Accordingly, changes to these assessments could materially affect the valuation.





Fair Value of Financial Instruments





SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157 describes three levels of inputs that may be used to measure fair value:





Level 1 – Quoted prices in active markets for identical assets or liabilities.





Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.





Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or
estimation. Our Level 3 liabilities consist of the derivative liabilities associated with certain freestanding warrants that contain down round provisions and convertible bonds with a strike price denominated in a foreign currency.





If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.





10
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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009




NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)




Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis




The following table summarizes the financial assets and liabilities measured at fair value, on a recurring basis during the three months ended July 31, 2009 (in thousands):





Carrying


Fair Value Measurements UsingValue


Level 1


Level 2


Level 3


TotalDerivative liabilities

$
3,760


$
-


$
-


$
3,760


$
3,760Totals





$
-


$
-


$
3,760


$
3,760





Level 3 Valuation Techniques


Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  Our Level 3 liabilities consist of the derivative liabilities associated with certain
preferred stock issuances and freestanding warrants that contain down round provisions.





The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the quarter ended July 31, 2009 (in thousands):





DerivativeLiabilitiesBalance, May 1, 2009

$
5,626Total realized/unrealized (gains) or losses:Included in other income (expense)


(2,292
)Included in stockholders' equityPurchases, issuances and settlements


426Transfers in and/or out of Level 3


-Balance, July 31, 2009

$
3,760





NOTE B - NOTES PAYABLE





A summary of notes payable at July 31, 2009 and April 30, 2009 is as follows:





July 31, 2009


April 30, 2009Note payable in five annual payments beginning December 31, 2006, with interest payable monthly at 10% per annum.  Lender has an option at the end of each twelve months (“anniversary date”) to receive restricted shares of the Company’s common stock in lieu of the annual cash payment of $100,000. The conversion
price is equal to 75% of the closing price for the day that is twelve months prior to each anniversary date. The minimum conversion price shall be $0.05 per share. (c)


139,299



153,974Note payable secured by receivable and property with principal payments in four equal lump sum payments being due December 19, 2010, second payment due December 19, 2011, third payment due December 19, 2012 and final payment due December 19, 2013. Interest rate is at 13% per annum payable monthly, however during the first twelve months
the accrued interest shall be deferred and payable in one lump sum payment on the first anniversary date of the Original Issuance Date (d)


5,462,713



5,445,502Total Notes Payable


5,602,012



5,599,476Less: current portion


(100,000
)


(100,000
)Total - notes payable – long term


5,502,012


$
5,499,476





11
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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009




NOTE B - NOTES PAYABLE (Continued)




(c) The Company granted the note-holder an option to receive restricted shares of the Company’s common stock in lieu of the annual cash payment of $100,000 at the end of each twelve months (“anniversary date”).  The conversion price is equal to 75% of the closing price for the day that is twelve months prior
to each anniversary date. The minimum conversion price shall be $0.05 per share.  The Company has sufficient authorized and unissued shares available to settle the debt, and has reserved 10 million shares of common stock to settle the debt in the event that the note-holder converts at the minimum conversion price of $0.05 per share.  The Company accounted for the convertible in accordance with Emerging Issues Task Force Issue 98-5, Accounting for Convertible Securities with a Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios ("EITF 98-5"), and recognized an imbedded beneficial conversion feature present in the convertible note. The Company recognized and measured an aggregate of $166,667 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the convertible note. The debt discount attributed to the beneficial conversion feature is amortized over the maturity period (five years)
as interest expense.  In October 31, 2006, the note-holder agreed to convert $200,000 of principal into 2,353,356 shares of the Company's common stock (Note J). These shares were issued in September 2007. The Company wrote off the proportionate unamortized debt discount applicable to the converted of principal, and non-cash interest expense of $54,900 was charged to operations in connection with the conversion of notes. Total non-cash interest expense the Company charged to operations in connection
with amortization and write-off of debt discount attributed to the beneficial conversion feature amounted to $4,845 and $4,845 for the three month periods years ended July 31, 2009 and 2008, respectively.





(d) The Company issued the note-holder 68,168,164 warrants with an exercise price of $0.05 per share expiring by December 11, 2015.  The Company accounted for the warrants in accordance with APB 14. The debt discount of $595,391 is amortized over the maturity period of six years as interest expense.  Total non-cash interest
expense the Company charged to operations in connection with amortization of debt discount amounted to $23,929 and $0 for the periods ended July 31, 2009 and 2008 respectively.  The aggregate fair value of the warrants was determined with the assistance of a valuations consultant using the multinomial lattice formula assuming no dividends, the stock would have no growth with an annual volatility of 80%, reset events projected to occur 5% of the time at $0.04 generating an adjusted warrant exercise price
of $0.0495.




NOTE C – CAPITAL STOCK





On November 7, 2001 the Company's Board of Directors approved an increase in the Company's authorized common stock from 50,000,000 to 400,000,000 with a par value of $.001. The Company also created a Series A Preferred class of stock, $.001 par value, and authorized 10,000,000 shares.  On February 3, 2003, the Company’s
Board of Directors approved to change the conversion right of the Series A Preferred Stock from a ratio of five common for one preferred share to ten common for one preferred share.  Effective February 21, 2008, the Registrant amended its Articles of Incorporation to (a) increase its authorized common stock from four hundred million (400,000,000) to two billion seven hundred thirty six million five hundred thousand (2,736,500,000) shares, (b) increase its authorized preferred stock from ten million
(10,000,000) to thirteen million five hundred thousand (13,500,000) shares, (c) authorize blank check preferred stock and delegate the right to designate preferences and limitations for such preferred stock to the Board of Directors, (d)  establish the designations, rights and preferences of the Series B Preferred Stock.





Effective June 24, 2008, the Registrant amended its Articles of Incorporation to authorize (a) to increase its authorized preferred stock from thirteen million five hundred thousand  (13,500,000) shares to sixteen million two hundred fifty thousand (16,250,000) shares , (b) authorize blank check preferred stock and delegate the
right to designate preferences and limitations for such preferred stock to the Board of Directors, (c) establish the designations, rights and preferences of the Series C Preferred Stock.





As of July 31, 2009 and April 30, 2009, the Company has 15,369,885 and 15,369,885 shares of common stock issued and outstanding, respectively.  The Company did not issue any shares of common stock during the three months period ended July 31, 2009.  The Company has 50,000 shares of treasury stock at July 31, 2009 and
April 30, 2009





On May 21, 2008, the Company affected a one-to-twenty stock split of our common stock.  The Company did not reduce the number of shares we are authorized to issue or change the par value of the common stock.  All references to share value in these consolidated financial statements have been restated to reflect this split.





NOTE D – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES B





In February 2008, the Board of Directors authorized the issuance of up to 3,500,000 shares of Series B 12% convertible voting preferred stock (“Series B”) having a stated value of $1.00 per share. The Series B shares are convertible at any time, at the option of the holder, into the Company’s common stock at an initial
conversion rate determined by dividing the stated value of $1.00 by the initial conversion price of $0.005 (post stock split $0.07) per share. The conversion price is subject to certain anti-dilution provisions in the event the Company issues shares of its common stock or common stock equivalents below the stated conversion price or pays a stock dividend or otherwise makes a distribution payable in shares of common stock, with the exception of any shares issued upon conversion or payment of dividend on this issuance,
or other similar events such as stock splits or common stock reclassifications.  The holders are entitled to receive a cumulative 12% dividend based on the stated value of $1.00 per share, payable on the calendar quarter in cash.





Upon any liquidation, dissolution or winding-up of the Company, the Series B shareholders shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to 100% of the stated value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing thereon, for each Series
B share before any distribution or payment shall be made to the holders of any other securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Series B shareholders shall be ratably distributed among the Series B shareholders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The liquidation value as of July 31, 2009 was $3,319,352 plus accrued dividends
of $104,528.





12
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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009




NOTE D – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES B (Continued)




In February 2008, the Company issued 2,000,000 Series B shares at $1.00 per share to accredited investors in a private placement. The Company received $2,000,000 less issuance costs totaling $202,000. Net cash proceeds at April 30, 2008 were $1,798,000. Additionally, in February 2008, the Company issued 1,484,294 Series B shares at $1.00
per share in exchange for existing convertible debentures.





Under the terms of the Series B Stock Certificate of Designation, the holders have a right, at any time after the second year anniversary and upon providing written notice to the Company (a “Put Notice”), to force the Company to redeem all or part of the


shares of Series B Convertible Preferred Stock held by such Holders at a cash redemption price per share equal to 100% of the then outstanding Stated Value of the Series B Convertible Preferred Stock, plus all accrued and unpaid dividend thereon, plus all other amounts, costs, expenses and liquidated damages due in  respect of
the Series B Convertible Preferred Stock (the “Put Redemption Amount”).





As a result of this obligation, the Company has determined the Series B shares includes redemption features that have the potential to be outside the control of the Company, and accordingly, the Company has classified the Series B shares outside of shareholders’ equity in accordance with Emerging Issues Task Force (“EITF”)
Topic D-98, Classification and Measurement of Redeemable Securities (“EITF Topic D-98”). In accordance with EITF Topic D-98, the fair value allocated to the Preferred Stock at the date of issuance was recorded outside of common shareholders’ equity in the accompanying consolidated balance sheet.





In connection with the February 22, 2008 issuance of the Series B Preferred Stock, the Company entered into a registration rights agreement with the purchasers of the Series B shares, which requires the Company to obtain an effective registration statement with the SEC covering the sale of the common stock issuable upon conversion
of the Series B shares on or before 150 calendar days. If the Company is unable to do so, the Company will have to pay liquidated damages in cash to the holders of the Series B shares.  The amount of damages that may be due is one and a one-half percent of the stated value of 12% Preferred Stock per month; provided, however, that in no event shall the aggregate amount paid exceed nine percent of the stated value. The Company is in default of this requirement but has obtained a waiver on this provision
from the holders.  In accordance with SFAS 5, “Accounting for Contingencies,” no penalty accrual has been made as management has concluded that none will be payable.  This treatment is consistent with the guidance in EITF 00-19-2.





The Company, after the effective date of the registration, and with certain market conditions, can force redemption of the Series B 12% Convertible Preferred Stock.





In connection with the Convertible Redeemable Series B Preferred Stock issuance dated February 22, 2008, the Company entered into a Security Agreement whereby the holder or holders of the Company’s Series B Convertible Preferred Stock have a security interest in substantially all of the Company’s tangible and intangible assets.





As additional consideration for the purchase of the Series B shares, the Company granted to the holders of the Series B shares a) warrants entitling it to purchase 34,842,940 common shares of the Company’s common stock at the price of $0.07 per share expiring five years from issuance and b) warrants entitling it to purchase 34,842,940
common shares of the Company at a price of $0.07 per share expiring seven years from issuance.  The warrants are covered under the registration rights agreement. As discussed in Note A to these condensed consolidated financial statements, the Company’s original accounting for the warrants and the related preferred stock classified the warrants as liabilities and recorded their estimated fair value at date of issue to be $7,760,305 using the Black-Scholes formula assuming no dividends, a risk-free
interest rate of 2.81% to 3.26 %, expected volatility of 115.06%, and expected warrant life of five to seven years.





In addition, the Company issued to broker/dealers a) warrants entitling it to purchase 2,000,000 common shares of the Company’s common stock at the price of $0.07 per share expiring five years from issuance; b) warrants entitling it to purchase 2,000,000 common shares of the Company at a price of $0.07 per share expiring
five years from issuance and c) warrants entitling it to purchase 2,000,000 common shares of the Company’s common stock at the price of $0.07 per share expiring seven years from issuance.  The warrants are covered under the registration rights agreement. The Company estimated the fair value at date of issue of the stock purchase warrants issued in connection with the issuance of the Series B preferred stock to be $682,133 using the Black-Scholes formula assuming no dividends, a risk-free interest
rate of 2.81% to 3.26 %, expected volatility of 115.06%, and expected warrant life of five to seven years.   These warrants were initially accounted for in the same manner as the warrants issued to the purchasers of the Series B Preferred Stock.





Under the original accounting, the Company recorded the fair value of the warrants as a derivative liability. The net value of the warrants at the date of issuance was recorded as a warrant liability on the balance sheet in the amount of $8,442,438 and a charge to financing expense for the value attributable to financing activities of $7,760,305
and a charge the additional paid in capital as cost relating to obtaining financing of $682,133.  Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date.





After the accretion of the discount, the Series B Preferred Stock had a carrying value of $164,942 and $44,624 at July 31, 2009 and April 30, 2009, respectively.




13
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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009


NOTE E – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES C





On June 26, 2008 the  Company entered into a an Amended and Restated Securities Agreement with Babirak Carr, P.C., solely as administrative agent for Vicis Capital Master Fund ("Vicis"), and the holders of the Company's Series B Convertible Preferred Stock, pursuant to which the Company issued and sold (a) a series of its Series
C Convertible Preferred Stock having an aggregate original stated value of $1,750,000 (total of 1,750,000 shares of Series C Preferred Stock), and (b) its Series 3 Common Stock Purchase Warrants exercisable, in the aggregate, for 35,000,000 shares of Common Stock.  The total cash paid to the Company for the Series C Preferred Stock and Series 3 Warrants was $1,750,000.  The Company paid $75,000 in expenses to Vicis, which included legal fees of Vicis.





The Series C Preferred Stock: a) has a stated amount of $1.00 per share; (b) is convertible at the option of the holder at a price of $.07 per share at any time into a total of 25,000,000 Series C Preferred Stock; c)  is subject to redemption in one lump sum payment on the date two years from the date of issuance, unless earlier
converted; d) accrues dividends on any balance outstanding at an annual rate of twelve percent, due and payable quarterly in arrears in cash.  Redemption of the outstanding principal and any accrued but unpaid dividends is guaranteed by the Registrant’s subsidiaries.  Payment thereof is secured by a blanket lien encumbering the assets of the Registrant and its subsidiaries subject only to a lien by State Financial Corporation or other asset-backed lender in an amount not to exceed $2,000,000.





The Series 3 Warrants for a total of 35,000,000 shares of Common Stock have an exercise price of $.10 per share and have a term of 7 years from the date of issuance.





Under the terms of the Series C Preferred Stock and the Series 3 Warrants, Vicis may convert the Series C Preferred Stock and exercise the Series 3 Warrants, provided that such Conversion and/or exercise do not result in Vicis beneficially owning more that 4.99% of our outstanding shares of Common Stock after giving effect to the issuance
of shares of Common Stock issuable upon conversion of the Series C Preferred Stock and/or exercise of the Series 3 Warrants. This limitation may be changed from 4.99% to 9.99% upon not less than 61 days notice to the Company by Vicis.





Midtown Partners & Co. Inc. acted as Placement Agent for the Company and was paid: a) a 10% cash commission of $175,000; a Series BD-4 Warrant to purchase 2,500,000 shares of Common Stock at an exercise price of $.07 per share exercisable for 5 years from the date of issuance; and c) a Series BD-5 Warrant to purchase 3,500,000 shares
of Common Stock at an exercise price of $.10 per share exercisable for 7 years from the date of issuance.





The Series 3 Warrants, the Series BD-4 and Series BD-5 Warrants have "cashless exercise" provisions and certain anti-dilution rights.  The Company agreed to register the Common Stock underlying the Series C Preferred Stock, the Series 3 Warrants, the Series BD-4 Warrants and the Series BD-5 Warrants pursuant to a Registration
Rights Agreement.





The issuance of the Series C Preferred Stock, the Series 3 Warrants, the Series BD-4 Warrants and the issuance of the Series BD-5 Warrants were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506 of Regulation
D.





The Company used the same basis of accounting to record the Series C Preferred Stock and each of the warrant series issued therewith as it used when it corrected the accounting for the Series B Preferred and related warrants as disclosed in Note A. The relative fair values of the preferred and the warrants were apportioned and then
the effective beneficial conversion feature of the relative fair value of the preferred was calculated. The initial step of the calculation was the determination of the Black-Scholes value assuming no dividends, a risk-free interest rate of 3.50% to 3.74 %, expected volatility of 233.64%, and expected warrant life of five or seven years.  The relative fair values derived were as follows: Series C Preferred: $563,939; Series C Warrants: $1,012,835; Broker Warrants: $173,226.  The effective
beneficial conversion feature was $1,186,061, which was limited to the remaining undiscounted value of the preferred of $563,939.  Accordingly the initial carrying value of the preferred was zero. Accretion of the discount amounted to $19,875 and $5,860 at July 31, 2009 and April 30, 2009 respectively, which is the carrying value at each date, respectively.





NOTE F – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES D





On July 26, 2009 Global Diversified Industries, Inc. (the  "Company") entered into a Securities Purchase Agreement with Vicis Capital Master Fund ("Vicis"), and the holders of the Company's Series B Convertible Preferred Stock and Series C Convertible Preferred Stock, pursuant to which the Company issued and sold (a) a series
of its Series D Convertible Preferred Stock (the “Series D Preferred Stock”) having an aggregate original stated value of $1,946,512 (total of 1,946,512 shares of Series D Preferred Stock), (b) its Series 5 Common Stock Purchase Warrants exercisable, in the aggregate, for 28,837,209 shares of Common Stock (individually, a “Series 5 Warrant” and collectively, the “Series 5 Warrants”).  The total cash paid for the Series D Preferred Stock and Series 5 Warrants was $1,335,447
plus a receivable of $73,000.





On September 4, 2009, the Company returned $600,000 to Vicis Capital Master Fund which was held in escrow as a part of the  funding from Vicis Capital Master Fund on July 23, 2009.  These funds were held in an escrow account for the purpose of the Company purchasing an ownership interest in another company.  The
Company made the decision to not purchase the ownership interest in the company and returned the funds pursuant to a Letter of Agreement dated July 23, 2009.  Pursuant to the terms of the Letter of Agreement, Midtown agreed to refund the Company $48,000 of the cash commissions that it previously received in connection with the July 23, 2009 financing.  In addition, the law firm preparing the documents for the July 23, 2009, agreed to release the remaining funds held in the escrow account of
$25,000 to the Company.




14
 Table of Contents


GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 JULY 31, 2009
  NOTE F – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES D (Continued)




The Conversion Price of the Series D Preferred Stock and the Exercise Price of the Series 5 Warrants shall be subject to adjustment for issuances of equity or equity linked financing at a purchase price of less than the Conversion Price or Exercise Price, such that the conversion price or exercise price shall be adjusted using full ratchet
price based price protection on such new issuances subject to customary adjustments such that the Conversion Price of the Preferred Stock and the Exercise Price of the Series D Warrants shall be fully adjusted down to that future common stock or conversion price as price-based anti-dilution.  The Series B and Series C Preferred Stock and related warrants will be adjusted to $0.04 per share.





The Series D Preferred Stock: a) has a stated amount of $1.00 per share; is convertible at the option of the holder at a price of $.04 per share at any time (total of 48,662,791 shares of common stock); b)  is subject to redemption in one lump sum payment (the “Redemption Amount”) on the date two years from the date
of issuance, unless earlier converted.  Payment of the Redemption Amount is guaranteed by the Registrant’s subsidiaries.  Payment of the Redemption Amount is secured by a blanket lien encumbering the assets of the Registrant.





The Series 5 Warrants have an exercise price of $.04 per share (total of 28,837,209 shares of Common Stock and have a term of 7 years from the date of issuance.





Under the terms of the Series D Preferred Stock and the Series 5 Warrants, Vicis may convert the Series D Preferred Stock and exercise the Series 5 Warrants, provided that such Conversion and/or exercise do not result in Vicis beneficially owning more that 4.99% of our outstanding shares of Common Stock after giving effect to the issuance
of shares of Common Stock issuable upon conversion of the Series D Preferred Stock and/or exercise of the Series 5 Warrants. This limitation may be changed from 4.99% to 9.99% upon not less than 61 days notice to the Company by Vicis.





The Company paid $27,701 in expenses to Vicis, which included legal fees of Vicis.





Midtown Partners & Co. Inc. acted as Placement Agent for the Company and was paid: a) a 8% commission ($124,000), b) Series BD-7 Warrant to purchase 2,883,721 shares of Common Stock at an exercise price of $.04 per share exercisable for 7 years from the date of issuance and c) Series BD-8 Warrant to purchase 4,000,000 shares of
Common Stock at an exercise price of $.0.04 per share exercisable for 7 years from the date of issuance.





The Series 5 Warrants, Series BD-7 and Series BD8 Warrants have "cashless exercise" provisions and certain anti-dilution rights.





The issuance of the Series D Preferred Stock, the Series 5 Warrants,  the Series BD-7 and Series BD-8 Warrants were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506 promulgated by the United
States Securities and Exchange Commission under the Securities Act of 1933.





NOTE G- ACQUISITION OF INTANGIBLE ASSETS





The trade name acquired is considered to have an undeterminable life, and as such will not be amortized. Instead, the trade name is tested annually for impairment, with any impairment charged against earnings in the Company’s consolidated statement of earnings. An independent appraiser assessed the value of the trade name acquired
and determined that the fair value of the trade name exceeded its recorded book value at April 30, 2009. The building engineering and architectural plans acquired have estimated useful lives of ten years.





The Company has adopted  SFAS No. 142,  Goodwill  and Other  Intangible  Assets, whereby the Company  periodically test its intangible assets for impairment.  On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these
assets are tested for impairment,  and write-downs will be included in results from operations.  There was no impairment of acquired intangibles as of July 31, 2009.





Total identifiable intangible assets acquired and their carrying values at July 31, 2009 are:





Gross Carrying Amount


Accumulated Amortization


Net


Residual Value

Weighted Average
Amortization
Period (Years)Amortized Identifiable Intangible Assets:Building engineering and architectural plans

$
954,065


$
(399,071
)

$
554,994


$
-

10.0Total Amortized Identifiable Intangible Assets


954,065



(399,071
)


554,994



-

10.0Unamortized Identifiable Intangible Assets:Trade Name


350,000



-



350,000



350,000

-Total Amortized Identifiable Intangible Assets


350,000



-



350,000



350,000

-Total

$
1,304,065


$
(399,071
)

$
904,994


$
350,000

10.0





15
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JULY 31, 2009





NOTE G- ACQUISITION OF INTANGIBLE ASSETS – (Continued)





Total amortization expense charged to operations for the three months period ended July 31, 2009 and 2008 were $25,830 and $22,191, respectively.   Estimated amortization expense as of January 31, 2009 is as follows:





2010

$
103,3202011


103,3202012


103,3202013


103,3202014 and after


141,714Total

$
554,994




NOTE H- INCOME TAXES





Deferred income taxes result from the temporary differences arising from the use of accelerated depreciation methods for income tax purposes and the straight-line method for financial statement purposes, from differences in the timing of recognition of the state income tax provision for book and tax reporting purposes, and an accumulation
of Net Operating Loss carry-forwards for income tax purposes with a valuation allowance against the carry-forwards for book purposes.





In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carry-forwards of approximately $6,500,000, which will expire beginning in 2028.  The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses through July 31, 2009, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at July
31, 2009.  The amount of the deferred tax asset considered realizable could change in the near term if projected future taxable income is realized.  Due to significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.





There was no income tax provision or benefit for the three months ended July 31, 2009 and 2008.





A reconciliation between the actual income tax expense and income taxes computed by applying the statutory federal and state income tax rates to income from continuing operations before income taxes is as follows:





Three Months Ended July 31, 2009


Three Months Ended July 31, 2008Computed “expected” income tax expense (benefit) at approximately 34%

$
264,000


$
(157,000
)Change in valuation allowance


(257,000
)


157,000Losses not producing benefits


(7,000
)


--$
--


$
--







16
 Table of Contents








GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


JULY 31, 2009




NOTE I – GUARANTEE FEE AGREEMENT
 
 On July 29, 2008, the Company entered into a Guarantee Fee, Indemnification, and Security Agreement with two individuals,  collectively, the “Guarantors” pursuant to which in consideration for the continuing guarantee by the Guarantors of various surety bonds issued to the Company, the Company: a) issued a "Blanket-Lien",
in favor of the Guarantors, on all of the Company's and the Company's subsidiaries' assets, b) issued the Guarantors warrants to purchase 26,950,000 and 8,050,000 shares, respectively,   of the Company’s common stock, all at an exercise price of $.10 per share, exercisable for the seven year period from the date of issuance.  The warrants have certain anti-dilution rights.
 
 The warrants have an aggregate fair value of $273,288, as determined by the multinomial lattice formula assuming no dividends, the stock would have no growth with an annual volatility of 80%, reset events projected to occur 10% of the time at $0.07 generating an adjusted warrant exercise price of $0.097 and expected warrant life of seven
years.  The agreement has been modified to specify a minimum term of five years.  Since the warrant holders have agreed to forfeit the percentage of warrants unearned should they not fulfill their five year guaranty, the Company is recognizing the related expense proportionately over five years. For three months ended July 31, 2009, the Company recorded expense of $13,665 with an equivalent offset to additional paid-in capital.
 
 The issuance of the above warrants were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933.


NOTE J – NON-EMPLOYEE STOCK OPTIONS AND WARRANTS





Non-Compensatory Stock Options





Transactions involving options are summarized as follows:





Number of Shares


Weighted Average Price
Per ShareOutstanding at April 30, 2008


-


$
-Outstanding at April 30, 2009


68,168,164


$
0.05Outstanding at July 31, 2009


68,168,164


$
$0.05





During the quarter ended January 31, 2009, the Company granted a stock option to the CEO of the Company to purchase all or any part of an aggregate of 68,168,164 shares. The exercise price for each share is $0.05 with a maximum option term of seven years. The option shall vest and become exercisable upon the satisfaction in full (inclusive
of all principal, interest and penalties) of the six million loan made to the Company by Debt Opportunity Fund, LLP. The Company accounted for the options as contingent, since the holder does not earn the right to the award until the Debt Opp. Fund, LLP is repaid in full.  All other previously granted stock options were fully vested at the time the stock options were granted. Accordingly, no compensation costs were charged to operations during the quarters ended July 31, 2009 and 2008. All previously
granted stock options expired as of April 30, 2007.





Non-Compensatory Warrants





The following table summarizes the changes in non-compensatory warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company.





Warrants Outstanding


Warrants ExercisableExercise Prices


Number Outstanding


Weighted Average Remaining Contractual Life (Years)


Weighed Average Exercise Price


Number Exercisable


Weighted Average Exercise Price$
0.04


38,842,940



3.58


$
0.04


38,842,940


$
0.04$
0.04


36,842,940



5.58


$
0.04


36,842,940


$
0.04$
0.04


2,500,000



4.00


$
0.04


2,500,000


$
0.04$
0.04


73,500,000



6.00


$
0.04


73,500,000


$
0.04$
0.04


74,984,980



6.42


$
0.04


74,984,980


$
0.04$
0.04


36,587,209



6.92


$
0.04


36,587,209


$
0.04Total


263,258,069






$
0.04


263,258,069


$
0.04








17
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


JULY 31, 2009





NOTE J – NON-EMPLOYEE STOCK OPTIONS AND WARRANTS (Continued)




Transactions involving warrants are summarized as follows:
 
 Number of Shares


Weighted Average Price
Per ShareOutstanding at April 30, 2008


75,685,880


$
0.04Granted


150,984,980



0.04Exercised


-



-Canceled or expiredOutstanding at April 30, 2009


226,670,860


$
0.08Granted


36,587,209


$
0.04Exercised


-Canceled or expired


-Outstanding at July 31, 2009


263,258,069


$
0.04


The Company granted 75,685,880 warrants during the year ended April 30, 2008 and granted 76,000,000 in June 2008 in with two funding by Vicis Capital Master Funds.  Of the 75,685,880 warrants granted during the year ended April 30, 2008, 40,842,940 will expire on February 21, 2013 and the remaining 34,842,940 warrants expire on
February 21, 2015. The 41,000,000 warrants granted in June 24, 2008 and the 35,000,000 warrants granted in July 27, 2008 will expire on June 25, 2015 and July 28, 2015 respectively.





The Company granted 74,984,980 warrants in December 2008 in connection the issuance of a promissory note by Debt Opportunity Fund LLP.  The warrants granted will expire on December 11, 2015.





The Company granted 36,587,209 warrants in July 23, 2009 in connection with a funding by Vicis Capital Master Fund.  The warrants granted will expire on July 23, 2016.





In September 2001, the Board of Directors of the Company implemented an Employee Stock Incentive Plan (“2001 Stock Option Plan”) for officers, employees and certain non-employees (collectively referred to as "Employees") in an amount equal to 15,000,000 shares of common stock. The 2001 Stock Option Plan provides for the issuance
of stock options exercisable at fifty percent (50%) of the fair market value of the common stock on the date of exercise. For an employee holding greater than ten percent (10%) of the total voting power of all stock of the Company, the exercise price of an incentive stock option shall be at least one hundred and ten percent (110%) of the fair market value of the common stock on the date of the grant of the option. The maximum life of the options is ten years from the date the stock options are granted.





In February 2004, the Board of Directors of the Company implemented another Employee Stock Incentive Plan (“2004 Stock Option Plan”) for officers, employees and certain non-employees (collectively referred to as "Employees") in an amount equal to 2,000,000 shares of common stock. The 2004 Stock Option Plan provides for the issuance
of stock options at an exercise price of $0.05 per share (or 110% of the fair market value of the common stock on the date of the grant of the option, for employees holding greater than ten percent (10%) of the total voting power of all stock of the Company). The maximum life of the options is ten years from the date the stock options are granted.





During the year ended April 30, 2005, the Company granted an aggregate of 986,840 options to Employees pursuant to 2001 Stock Option Plan, and all options were exercised on the grant date (Note J). There are no employee stock options pursuant to the 2001 Stock Option Plan outstanding at July 31, 2009.






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GLOBAL DIVERSIFIED INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JULY 31, 2009





NOTE K – DEFERRED FINANCING COST





On December 19, 2008, the Company issued 6,816,816 warrants with an exercise price of $0.05 per share by December 11, 2015, as part of the fees to secure a $6,000,000 funding through the issuance of a promissory note.  Using the effective interest method, the deferred financing cost was $59,538 as of December 31, 2008 and is being
amortized to interest expense.  As of July 31, 2009, the total non-cash interest charged to operations amount to $1,923 and $0 for the period year ended July 31, 2009 and 2008 respectively.  The aggregate fair value of the warrants was determined with the assistance of a valuations consultant using the multinomial lattice formula assuming no dividends, the stock would have no growth with an annual volatility of 80%, reset events projected to occur 5% of the time at $0.04 generating an adjusted
warrant exercise price of $0.0495.





Prepaid financing expenses relating to issuance of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the Promissory Note for $6,000,000 totaled $1,396,758 of which $73,500 and $100,092 had been amortized as of July 31, 2009 and April 30, 2009, respectively.  The remaining net deferred financing costs
per the balance sheet at July 31, 2009 was $53,475 for the December 2008 funding and $1,056,261  for the Series B Preferred Stock, Series C and Series D Preferred Stock funding.  For deferred financing costs, the Company amortizes the amount using the straight line method. Since the term is only two years, the difference from using the effective interest method is immaterial.  The fees were paid for legal, placement agent, due diligence and financial consultants fees.





NOTE L – EARNINGS PER SHARE





The following shares of common stock were  not included in the calculation of weighted-average fully-diluted shares outstanding or fully-diluted earnings per share for the three month ended July 31, 2009 because the exercise or conversion prices of the securities were in excess of the average closing market price of the Company’s
common stock for the period of $0.0375:





For the exercise of warrants t $0.04 per share


36,587,209For the exercise of warrants at $0.05 per share


74,984,980For the exercise of warrants at $0.10 per share


78,000,000For the exercise of warrants at $0.20 per share


36,842,940For the exercise of warrants at $0.40 per share


36,842,940For the exercise of stock options at $0.05 per share


68,168,164For the conversion of Series B preferred stock at $0.10 per share


49,775,629For the conversion of Series C preferred stock at $0.07 per share


25,000,000For the conversion of Series C preferred stock at $1.00 per share


156,653Total shares issuable


406,358,515




The Company did not present fully-diluted shares outstanding or earnings per share for the three months ended July 31, 2008 because the effect would have been anti-dilutive.




NOTE M – SUBSEQUENT EVENTS
 
 On September 4, 2009, the Company returned $600,000 to Vicis Capital Master Fund which was held in escrow as a part of the $2,150,000 funding from Vicis Capital Master Fund on July 23, 2009.  These funds were held in an escrow account for the purpose of the Company purchasing an ownership interest in another company.  The
Company made the decision to not purchase the ownership interest in the company and returned the funds pursuant to a Letter of Agreement dated July 23, 2009.  Pursuant to the terms of the Letter of Agreement, Midtown agreed to refund the Company $48,000 of the cash commissions that it previously received in connection with the July 23, 2009 financing, reduce the number of shares issuable upon the exercise of the Series BD-7 Common Stock Purchase Warrant for 6,750,000 to 4,866,279 and reduce the number
of shares issuable upon the exercise of the Series BD-8 Common Stock Purchase Warrant from 4,000,000 to 2,883,721.  On September 14, 2009, the Company received the remaining funds in the escrow account of $25,000, less $10,148 of legal fees incurred.
 
 Since the transaction above was primarily a modification of an agreement signed prior to July 31, 2009, it was treated as a Type I subsequent event and adjusted for in the financials as of July 31, 2009 presented in this 10-Q.




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ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2009





This report on Form 10-Q contains forward-looking statements within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as amended, that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations,
estimates and projections about our industry, our beliefs and our assumptions. Words such as "anticipate", "expects", "intends", "plans", "believes", "seeks" and "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Investors should carefully consider all of such risks before making an investment decision with respect to the Company's stock. The following discussion and analysis should be read in conjunction with our financial statements and summary of selected financial data for Global Diversified Industries, Inc. Such discussion represents
only the best present assessment from our Management.





Introduction





The Company is a Nevada company with a limited operating history. On December 11, 2001, Global Diversified Industries, Inc., formerly Global Foods Online, Inc. (the "Company") acquired two wholly-owned subsidiaries, Majestic Modular Buildings, Ltd. ("Modular"), and, Lutrex Enterprises, Inc. "Lutrex", an entity controlled by the Company's
President and Chief Executive Officer.





Modular was engaged in the business of designing, manufacturing and marketing re-locatable modular structures such as classrooms and office buildings and was under contract to build multiple single story classrooms for two school districts in southern California.





The Company is a holding company for two wholly owned subsidiaries, Lutrex Enterprises, Inc., an entity, which holds equipment and inventory for the registrant, and Global Modular, Inc., a sales, marketing, manufacturing and construction site work of modular type structures.





Overview





The Company's subsidiary, Global Modular, Inc. ("Global Modular") is in the business of designing, manufacturing and marketing pre-fabricated, modular type structures. Global Modular's 100,000 square foot factory is located on sixteen acres adjacent to the municipal airport at Chowchilla, California. The manufacturing facility has the capacity
to produce approximately $50,000,000 of revenue per year. Its principal customer base during the current fiscal year will be educational (public and private schools, universities, etc.), child-care and municipality sectors. Its product lines consist of a variety of relocatable (portable) classroom designs, and designs used specifically for permanent modular construction, i.e., complete schools, wing additions, etc. Global Modular's capabilities include single-story "slab-on-grade" construction, where a concrete
slab is poured on site, which also serves as the floor. The structures are built in our factory and shipped to the site for installation on the concrete slab. The modular division has recently secured rights to state-of-the-art two-story designs recently owned by Aurora Modular Industries, Inc. All of Global Modulars' portable/modular structures are engineered and constructed in accordance with pre-approved building plans, commonly referred to as "P.C.'s" or "pre-checked" plans that conform to structural and
seismic safety specifications administered by the California Department of State Architects (DSA). The DSA regulates all California school construction on public real estate and the DSA's standards are considered to be more rigorous than the standards that typically regulate other classes of commercial portable structures.





In the quarter ending October 31, 2006, Global Modular was awarded a five year contract with Victor Valley School District that contained a "piggyback clause. This allows Global Modular to provide educational customers with product contracted under a "piggyback clause". The State of California allows school districts to canvass
proposals from modular classroom vendors under a bidding process where the successful bidder can provide other public school districts and municipalities portable classrooms under a "piggyback contract" issued by the originating school district. This process saves school districts valuable time and resources from the necessity of soliciting bids. A modular vendor who possesses a "piggybackable contract" containing competitive pricing and a variety of design options may have access to future business for up to
five years, depending on the term of the piggyback contract. This piggyback contract includes all appropriate pricing parameters pertinent to Global's "permanent modular construction" designs. Global Modulars' new piggyback contract provides them the flexibility to offer California public schools and municipalities an expanded variety of design and pricing alternatives to meet virtually any design request by the school district and/or architect.





Among Global Modular’s asset base is its integrated, state-of-the-art, automated manufacturing process which includes equipment, raw material and marketing collateral that are specifically designed for the high capacity fabrication of modular structures. Future revenue generation and growth partially depends on the success of marketing
efforts to the educational sector for single-story and two-story designs.





The Company’s subsidiary Global Modular, Inc. has secured necessary architectural and engineering approvals from the State of California (Division of the State Architect) for their single story and two-story designs. The two-story design is desirable by school districts since individual two-story buildings can be installed side-by-side
to form a cluster of buildings, occupying hundreds of students. The two-story design is fully equipped with easy access to the second story by stairs and balcony along with a hydraulic elevator to accommodate handicap students, teachers and visitors. School districts continue to turn to two-story portable classrooms to satisfy their space dilemma since they have little real estate to surrender. Since the recent acquisition of Aurora Modular Industries intellectual property; the promotion of single-story slab-on-grade
and two-story designs will be the main focus of our sales team during the next several years. Global Modular now possesses adequate DSA approved designs that can meet virtually any type configuration and aesthetic alternatives a school district may desire.




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During the remainder of 2009, the Global Modular will continue to focus its attention on the sales and marketing of portable classrooms and modular buildings to the California public and private school sectors including California municipalities. Since the state of California has been experiencing an influx in student enrollment over the
past several years, and the forecast for the next ten years is for continual increasing enrollments, the portable classroom manufacturing industry has become more successful. In an effort to keep up with demand for additional classroom space, modular manufactures are expecting increased production backlogs throughout the remainder of 2009 and into 2010.





The following Management Discussion and Analysis should be read in conjunction with the financial statements and accompanying notes included in this Form 10-Q.





Effect of Related Prospective Accounting Pronouncement





On May 1, 2009, we adopted EITF No. 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock  ("EITF 07-05").  EITF 07-05 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions.   The adoption of EITF 07-05 has affected the accounting for certain freestanding warrants and preferred stock that contain exercise price adjustment features (“down round provisions”).  Our preferred stock and warrants with such provisions are no longer deemed to be indexed to the company’s own stock and are no longer classified
in equity.  Instead, these were reclassified as derivative liability on May 1, 2009 as a result of this EITF.  The fair value of the derivative liability as of May 1, 2009 was approximately $5,625,933 and was recorded as a cumulative adjustment to retained earnings. See Note A, Derivative Instruments and Fair Value of Financial Instruments.





See Critical Accounting Policies, Notes D, E and F to the condensed consolidated financial statements for a further discussion of the Series B, C and D Preferred as well as Part II, Item 2 this Form 10-Q





COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2009 TO THE THREE MONTHS ENDED JULY 31, 2008





The Company’s total revenues were $12,441 for the quarter ended July 31, 2009 compared to $499,061 for the same time period in 2008, a decrease of $486,620.  The Company did not put any new projects in production during quarter ended July 31, 2009.  Management made the decision to focus on dismantling and transporting
the equipment and raw materials purchased from one of the largest modular manufacturers in the country back to the Company’s Chowchilla plant.  The sale was handled by a bankruptcy court and involved multiple locations.





The Company had a negative gross profit of $389,628 for the quarter ended July 31, 2009 and a gross profit of $171,604 for the quarter ended July 31, 2008.  There was no new production for the quarter ended July 31, 2009.  As part of agreement with the bankrupt company that sold Global the majority of its assets, Global
took over some of their projects and experienced cost overruns on a couple of their projects that were underbid.





Total operating expenses were $593,549 for the three months ended July 31, 2009 compared to $587,461 for the same time period in 2008.  Due to the Company’s acquisitions the depreciation expense increased by $48,464 when comparing the first quarter of 2009 and 2008. Also, the Company’s interest expense increased
by $186,805 due to the debt service on the long term promissory note executed in December 2008, when comparing the first quarter of 2009 and 2008.  The Company realized a reduction of $2,291,940 in the change in the fair value of the derivatives for the quarter ended July 31, 2009 as compared to the quarter ended July 31, 2008.





Liquidity and Capital Resources





As of July 31, 2009, the Company had a working capital surplus of $1,932,465. The net profit for the three months ended July 31, 2009 was $1,074,874. The Company generated a negative cash flow from operations of $147,084 for the three-month period ended January 31, 2009. The negative cash flow from operating activities for the period is
primarily attributable to the Company's net gain from continuing operations of $1,074,874 adjusted for depreciation and amortization of $135,155, amortization of debt discount of $22,056, change in the fair value of derivatives of $2,291,940, a decrease in accounts receivable of $653,047, an increase in inventory of $50,359, a decrease in other assets of $14,628 and an increase in accounts payable of $176,476.





Cash flows used in investing activities for the three-month period ended July31, 2009 consisted of the acquisition of $8,123 of architectural plans used in operations and $261,651 for equipment.





The Company funded operations during the three months ended July 31, 2009 from proceeds from the sale of Series D Preferred Stock for $1,335,477. The Company paid preferred stock dividends of $31,255 to the preferred stockholders and reduced notes payable by $19,520.





As a result of limited capital resources and revenues from operations, the Company has relied on the issuance of equity securities to non-employees in exchange for services. The Company's management enters into equity compensation agreements with non-employees if it is in the best interest of the Company under terms and conditions consistent
with the requirements of Financial Accounting Standards No. 123 (R), "Share Based Payment" In order to conserve its limited operating capital resources, the Company anticipates continuing to compensate non-employees for services during the next twelve months. This policy may have a material effect on the Company's results of operations during the next twelve months.





While the Company has raised capital to meet its working capital and financing needs in the past, additional financing is required in order to meet the Company's current and projected cash flow needs for operations and development. The Company is presently seeking financing in the form of debt or equity in order to provide the necessary
working capital. Such financing may be upon terms that are dilutive or potentially dilutive to our stockholders. The Company currently has no commitments for financing. There are no assurances the Company will be successful in raising the funds required.




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By adjusting its operations and development to the level of capitalization, management believes it has sufficient capital resources to meet projected cash flow needs through the next twelve months. However, if thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources,
on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.





The effect of inflation on the Company's revenue and operating results was not significant. The Company's operations are located in North America and there are no seasonal aspects that would have a material effect on the Company's financial condition or results of operations.





Inflation





The effect of inflation on the Company's revenue and operating results was not significant.





Off-Balance Sheet Arrangements





The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment.





Critical Accounting Policies





The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical
experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:





·
Revenue Recognition·
Hybrid equity instruments·
Derivative instruments and fair value of financial instruments·
Warrants issued for certain services·
Inventories





Revenue Recognition





The Company recognizes revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectibility is reasonably assured and title and risk of ownership is passed to the customer, which is usually upon delivery.  However, in limited circumstances, certain customers traditionally have requested to take
title and risk of ownership prior to shipment.  Revenue for these transactions is recognized only when:





(1) Title and risk of ownership have passed to the customer;


(2) The Company has obtained a written fixed purchase commitment;


(3) The customer has requested in writing the transaction be on a bill and hold basis;


(4) The customer has provided a delivery schedule;


(5) All performance obligations related to the sale have been completed;


(6) The modular unit has been processed to the customer’s specifications, accepted by the customer and made ready for shipment; and


(7) The modular unit is segregated and is not available to fill other orders.








In the event that the Company’s arrangements with its customers include more than one product or service, the Company determines whether the individual revenue elements can be recognized separately in accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 (EITF 00-21), Revenue
Arrangements with Multiple Deliverables, EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.





In fiscal years 2007, 2008, 2009 and 2010, the Company entered into several fixed-price arrangements whereby the Company is to construct and install several modular units for customers. Revenue from these construction-type fixed-price contracts is recognized in accordance with SOP No. 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts", on the basis of the estimated percentage of completion.





Under the percentage-of-completion method, progress toward completion is measured by the ratio of costs incurred to total estimated costs. Revenue and gross profit may be adjusted prospectively for revisions in estimated total contract costs. If the current estimates of total contract revenue and contract cost indicate a loss, a provision
for the entire loss on the contract is recorded in the period in which it becomes evident. The total estimated loss includes all costs allocable to the specific contract. Each construction contract is reviewed individually to determine the appropriate basis of recognizing revenue. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management.





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Hybrid Equity Instruments





Redeemable convertible preferred stock issued with common stock purchase warrants present one of the most difficult areas in today’s accounting environment. The correct treatment of these instruments requires careful analysis and the choice and application of the proper rules encompassed by several accounting pronouncements as
discussed in the above-referenced notes.  Moreover these accounting rules continue to evolve





Derivative Instruments and Fair Value of Financial Instruments





Derivative Instruments





We have evaluated the application of SFAS 133 Accounting for Derivative Instruments and Hedging Activities, and EITF No. 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock, to certain freestanding warrants and preferred stock that contain exercise price adjustment features known as
down round provisions.  Based on the guidance in SFAS 133 and EITF 07-05, we have concluded these instruments are required to be accounted for as derivatives effective May 1, 2009.





We have recorded the fair value of the warrants and preferred stock that are classified as derivative liabilities in our balance sheet at fair value with changes in the value of these derivatives reflected in the consolidated statements of operations as gain or loss on derivative liabilities.  These derivative instruments
are not designated as hedging instruments under SFAS 133.





Lattice Valuation Model





Beginning in the quarter ended October 31, 208, we  have valued the freestanding warrants and the conversion features in the preferred stock that contain down round provisions using a lattice model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction
details such as the company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of May 1, 2009 and July 31, 2009.





The primary assumptions include projected annual volatility of 240-250% and holder exercise targets at 150-200% of the exercise/conversion price for the warrants and preferred stock, decreasing as the instruments approach maturity.  Based on these assumptions, the fair value of the warrant derivatives as of May 1, 2009 was
estimated by management to be $5,625,933.  This amount was recorded as a cumulative adjustment to additional paid in capital.





On July 23, 2009, the Company issued Preferred D shares and related warrants as detailed in Note F.  This preferred stock and associated warrants are also derivative instruments under SFAS 133 and EITF 07-05.





The fair value of the remaining derivatives as of July 31, 2009 was estimated by management to be $3,760,437.





The foregoing assumptions are reviewed quarterly and are subject to change based primarily on management’s assessment of the probability of the events described occurring.  Accordingly, changes to these assessments could materially affect the valuation.




Fair Value of Financial Instruments





SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157 describes three levels of inputs that may be used to measure fair value:





Level 1 – Quoted prices in active markets for identical assets or liabilities.





Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.





Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or
estimation. Our Level 3 liabilities consist of the derivative liabilities associated with certain freestanding warrants that contain down round provisions and convertible bonds with a strike price denominated in a foreign currency.





If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.





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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis




The following table summarizes the financial assets and liabilities measured at fair value, on a recurring basis during the three months ended July31, 2009 (in thousands):





Carrying


Fair Value Measurements UsingValue


Level 1


Level 2


Level 3


TotalDerivative liabilities

$
3,760


$
-


$
-


$
3,760


$
3,760Totals





$
-


$
-


$
3,760


$
3,760





Level 3 Valuation Techniques


Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  Our Level 3 liabilities consist of the derivative liabilities associated with certain
preferred stock issuances and freestanding warrants that contain down round provisions.





The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the quarter ended July 31, 2009 (in thousands):





DerivativeLiabilitiesBalance, May 1, 2009

$
5,626Total realized/unrealized (gains) or losses:Included in other income (expense)


(2,292
)Included in stockholders' equityPurchases, issuances and settlements


426Transfers in and/or out of Level 3


-Balance, July 31, 2009

$
3,760





Warrants issued for certain services





The Company has issued certain warrants in exchange for a continuing guarantee of its surety bonds.  As the period of service is prospective for the five year term of the agreement the Company is charging the fair value of these warrants proportionately over such five year term.





Inventories





We value our inventories, which consists of raw materials, work in progress, finished goods, at the lower of cost or market. Cost is determined on the first-in, first-out method (FIFO) and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly
positioned at the lower of cost or market. Factors related to current inventories such as future consumer demand and trends in the Company's core business, current aging, current and anticipated wholesale discounts, and class or type of inventory is analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on
the value of our inventories and our reported operating results.





Allowance for Uncollectible Accounts





We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectibility of these receivables, we perform
ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable
categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are
ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience. As of July 31, 2009, we determined a reserve of $203,810 was required against our account receivables.





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Employees





As of July 31, 2009, the company had 30 employees. The Company anticipates the number of employees will increase over the next six months. The Company does not expect to have any collective bargaining agreements covering its employees.





Properties





The Company's principal executive offices are located at 1200 Airport Drive, Chowchilla California. The property consists of sixteen acres of real estate including a 100,000 square foot structure of usable space. The structure will be utilized by the Company's executive management team, as well as housing the operating entities of
Lutrex and Global Modular. The Company has entered into a three-year lease (including options for renewals) for the property at a rate of $24,021 per month for the remaining of the current fiscal year with moderate increases for each year thereafter. The Company believes that the current facilities are suitable for its current needs.





Trends, Risks and Uncertainties





We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment
decision with respect to our Common Stock.





Cautionary Factors that May Affect Future Results and Market Price of Stock





Our annual report on April 30, 2009 Form 10-KSB includes a detailed list of cautionary factors that may affect future results. Management believes that there have been no material changes to those factors listed, however other factors besides those listed could adversely affect us. That annual report can be accessed on EDGAR.





Subsequent Events





On September 4, 2009, the Company returned $600,000 to Vicis Capital Master Fund which was held in escrow as a part of the $2,150,000 funding from Vicis Capital Master Fund on July 23, 2009.  These funds were held in an escrow account for the purpose of the Company purchasing an ownership interest in another company.  The
Company made the decision to not purchase the ownership interest in the company and returned the funds pursuant to a Letter of Agreement dated July 23, 2009.  Pursuant to the terms of the Letter of Agreement, Midtown agreed to refund the Company $48,000 of the cash commissions that it previously received in connection with the July 23, 2009 financing, reduce the number of shares issuable upon the exercise of the Series BD-7 Common Stock Purchase Warrant for 6,750,000 to 4,866,279 and reduce the number
of shares issuable upon the exercise of the Series BD-8 Common Stock Purchase Warrant from 4,000,000 to 2,883,721.  On September 14, 2009, the Company received the remaining funds in the escrow account of $25,000, less $10,148 of legal fees incurred.





LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE RESULTS





The Company has only a limited operating history upon which an evaluation of its operations and its prospects can be based. The Company's prospects must be evaluated with a view to the risks encountered by a company in an early stage of development, particularly in light of the uncertainties relating to the new and evolving manufacturing
methods with which the Company intends to operate and the acceptance of the Company's business model. The Company will be incurring costs to develop, introduce and enhance its products, to establish marketing relationships, to acquire and develop product lines that will compliment each other and to build an administrative organization. To the extent that such expenses are not subsequently followed by commensurate revenues, the Company's business, results of operations and financial condition will be materially
adversely affected. There can be no assurance that the Company will be able to generate sufficient revenues from the sale of their modular buildings and related products.. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may be required to sell additional equity or debt securities. The sale of additional equity or convertible debt securities would result in additional dilution to the Company's stockholders.





POTENTIAL FLUCTUATIONS IN ANNUAL OPERATING RESULTS





The Company's annual operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside the Company's control, including: the demand for manufactured modular buildings; seasonal trends; introduction of new government regulations and building standards; local, state and federal government
procurement delays; general economic conditions, and economic conditions specific to the modular building industry. The Company's annual results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at the Company's early stage of development, such accounting treatment can have a material impact on the results for any quarter. Due to the foregoing factors, among others, it is likely that the Company's operating results
will fall below the expectations of the Company or investors in some future quarter.





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LIMITED PUBLIC MARKET, POSSIBLE VOLATILITY OF SHARE PRICE





The Company's common stock is currently quoted on the NASD OTC Electronic Bulletin Board under the ticker symbol GDIV. As of September 15, 2009, there were approximately 15,369,885 shares of common stock outstanding, of which approximately 9,380,104 were tradable without restriction under the Securities Act. There can be no assurance that
a trading market will be sustained in the future. Factors such as, but not limited to, technological innovations, new products, acquisitions or strategic alliances entered into by the Company or its competitors, failure to meet security analysts' expectations, government regulatory action, patent or proprietary rights developments, and market conditions for manufacturing stocks in general could have a material effect on the volatility of the Company's stock price.





MANAGEMENT OF GROWTH





The Company expects to experience significant growth in the number of employees and the scope of its operations. In particular, the Company intends to hire additional engineering, sales, marketing, and administrative personnel. Additionally, acquisitions could result in an increase in the number of employees and business activity. Such
activities could result in increased responsibilities for management. The Company believes that its ability to increase its customer support capability and to attract, train, and retain qualified engineering, sales, marketing, and management personnel, will be a critical factor to its future success. In particular, the availability of qualified sales engineering and management personnel is quite limited, and competition among companies to attract and retain such personnel is intense. During strong business cycles,
the Company may experience difficulty in filling its needs for qualified sales, engineering and other personnel.





The Company's future success will be highly dependent upon its ability to successfully manage the expansion of its operations. The Company's ability to manage and support its growth effectively will be substantially dependent on its ability to implement adequate improvements to financial and management controls, reporting and order entry
systems, and other procedures and hire sufficient numbers of financial, accounting, administrative, and management personnel. The Company's expansion and the resulting growth in the number of its employees have resulted in increased responsibility for both existing and new management personnel. The Company is in the process of establishing and upgrading its financial accounting and procedures. There can be no assurance that the Company will be able to identify, attract, and retain experienced accounting and financial
personnel. The Company's future operating results will depend on the ability of its management and other key employees to implement and improve its systems for operations, financial control, and information management, and to recruit, train, and manage its employee base. There can be no assurance that the Company will be able to achieve or manage any such growth successfully or to implement and maintain adequate financial and management controls and procedures, and any inability to do so would have a material
adverse effect on the Company's business, results of operations, and financial condition.





The Company's future success depends upon its ability to address potential market opportunities while managing its expenses to match its ability to finance its operations. This need to manage its expenses will place a significant strain on the Company's management and operational resources. If the Company is unable to manage its expenses
effectively, the Company's business, results of operations, and financial condition will be materially adversely affected.





RISKS ASSOCIATED WITH ACQUISITIONS





As part of its business strategy, the Company expects to acquire assets and businesses relating to or complementary to its operations. These acquisitions by the Company will involve risks commonly encountered in acquisitions of companies. These risks include, among other things, the following: the Company may be exposed to unknown liabilities
of the acquired companies; the Company may incur acquisition costs and expenses higher than it anticipated; fluctuations in the Company's quarterly and annual operating results may occur due to the costs and expenses of acquiring and integrating new businesses or technologies; the Company may experience difficulties and expenses in assimilating the operations and personnel of the acquired businesses; the Company's ongoing business may be disrupted and its management's time and attention diverted; the Company
may be unable to integrate successfully.





IMPLEMENTATION OF SECTION 404 OF THE SARBANES-OXLEY ACT





We may not be able to implement Section 404 of the Sarbanes-Oxley Act on a timely basis. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally requiring each public company to include a report of management on the company’s internal controls over financial reporting in its annual report on Form
10-K that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. This requirement first applied to our annual report on Form 10-K for the fiscal year ended April 30, 2008. In addition, commencing with our annual report for the fiscal year ending April 30, 2010 our independent registered accounting firm must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting.





We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. How companies should be implementing these new requirements including internal control reforms to comply with Section 404’s requirements and how independent auditors will apply these requirements and test companies’
internal controls, is still reasonably uncertain.





Upon completion of a Section 404 plan, we may not be able to conclude that our internal controls are effective.  Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could negatively affect our operating results or cause us to fail to meet our reporting obligations.





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ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable





ITEM 4. CONTROLSAND PROCEDURES





The Company's management including the President, Chief Executive Officer and Chief Financial Officer, have evaluated as of and within 45 days prior to the filing of this quarterly report, the effectiveness of the design, maintenance and operation of the Company's disclosure controls and procedures. Management determined that the Company's
disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files under the Exchange Act is accurate and is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and regulations.





Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision
making can be fully faulty and that breakdowns in internal control can occur because of human failures such as errors or mistakes or intentional circumvention of the established process.





There have been no changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses.





PART II. OTHER INFORMATION





ITEM 1. LEGALPROCEEDINGS





On December 13, 2007, the company filed a lawsuit against Financial Pacific Insurance Company, Inc and Salmeri Insurance Agency, Inc. for terminating the company’s bonding line of credit during the quarter ended January 31, 2006, without good cause and in contravention of its past dealings. The lawsuit seeks reimbursement for damages
in excess of $10 million.  As this litigation is in its initial stages, the Company can make no assurances with respect to the outcome of this matter.





In February, 2008, the company filed a lawsuit against Santa Rosa City Schools for damages in excess of $600,000.





The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business.  Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position, results of operations
or liquidity.





ITEM 2. UNREGISTEREDSALE OF EQUITY SECURITIES AND USE OF PROCEEDS





On August 12, 2008, the company filed a Form 8-K report to the SEC, which stated that the company completed a private placement on June 26, 2008, and issued (a) its Series C Preferred Stock having an aggregate original principal balance of $1,750,000, (b) its Series 3 Warrants exercisable, in aggregate, for 35,000,000 shares of Common Stock,
(c) Series BD-4 Warrants exercisable, in the aggregate for 2,500,000 shares of Common Stock and (d) Series BD-5 Warrants exercisable, in the aggregate for 3,500,000 shares of Common Stock (the “Series C Offering”). The stated value of the Series C Preferred Stock converts into Common Stock at a conversion price of ten cent ($.10) per share.  The total cash paid for the Securities was $1,750,000 in cash.





The issuance of the Series C Preferred Stock, the Series 3 Warrants, the Series BD-4 Warrants and the issuance of the Series BD-5 Warrants  were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506
promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933.





The Form 8-K  report filed  to the SEC on August 12, 2008,  also stated that on July 29, 2008, the Company entered into a Guarantee Fee, Indemnification, and Security Agreement with Guarantors pursuant to which in consideration for the continuing guarantee by the Guarantors of Surety Bonds issued to the Company,
the Company issued  Warrants exercisable, in aggregate, for 35,000,000 shares of Common Stock of the Company at an exercise price of $.10 per share, exercisable for the 7 year period from the date of issuance.





The issuance of the Warrants to the Guarantors were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933.





On February 5, 2009, the Company filed a Form 8-K report to the SEC, which stated that on December 19, 2008, the Company entered into a Loan and Securities Purchase Agreement and received $6,000,000 in cash and issued (a) its series 4 warrants, in aggregate for 68,198,164 shares of Common Stock and (b) Series BD-6 Warrants exercisable,
in aggregate for 6,816,816 shares of Common Stock.





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The issuance of the Series 4 Warrants and the issuance of the Series BD-6 Warrants were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission
under the Securities Act of 1933





The Form 8-K report filed to the SEC on February 5, 2009, also stated that on December 17, 2008, the Company entered into a Stock Option Agreement with one of its executives, which allows the executive to purchase 68,164,164 shares of Common Stock at an exercise price of $0.05 per share for a period of seven years provided that the Company
completely satisfies in full all principal and interest on a certain promissory note dated on February 5, 2009 for $6,000,000.





The issuance of the Stock Option to the executive was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933.





ITEM 3.DEFAULTS UPON SENIOR SECURITIES





None during this reporting period.





ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS





None during this reporting period.





ITEM 5. OTHERINFORMATION





None during this reporting period.





ITEM 6. EXHIBITS





Exhibit No.

Description31.1

Certification of Phillip Hamilton Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Adam DeBard to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Phillip Hamilton Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Adam DeBard Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.









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SIGNATURES








In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.


GLOBAL DIVERSIFIED INDUSTRIES, INC.Date:  September 21, 2009
By:
/s/ Phillip HamiltonChairman and Chief Executive Officer
(Principal Executive Officer)





Date:  September 21, 2009
By:
/s/ Adam DeBardChief Operating Officer
(PrincipalAccounting and Financial Officer)

















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