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 October 31, 2010





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 December 15, 2010.





Table of Contents





TABLEOF CONTENTS





PagePART I  Financial InformationItem 1.
Financial Statements (Unaudited)
3Condensed Consolidated Unaudited  Balance Sheets: October 31, 2010 and April 30, 2010
3Condensed Consolidated Unaudited  Statements of Operations: For the Three and Six Months Ended October  31, 2010 and 2009
5Condensed Consolidated Unaudited  Statements of Cash Flows: For the Six Months Ended October 31, 2010  and 2009
6Notes to Unaudited Consolidated Financial Information
7Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
24Item 3.
Quantitative and Qualitative Disclosures About Market Risk
34Item 4.
Controls and Procedures
34PART II  Other InformationItem 1.
Legal Proceedings
35Item 2.
Changes in Securities
35Item 3.
Defaults Upon Senior Securities
35Item 4.
Submission of Matters to Vote of Security Holders
35Item 5.
Other Information
35Item 6.
Exhibits, Including Certifications
35





Table of Contents


ITEMI.  FINANCIAL STATEMENTS (UNAUDITED)





GLOBALDIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





October 31, 2010


April 30, 2010ASSETSCurrent assets:Cash and cash equivalents

$
1,369,042


$
2,892,086Accounts receivable, net of allowance for doubtful accounts of $119,127 and $114,038 at October 31, 2010 and April 30, 2010 respectively


1,584,303



279,667Inventories-current portion


4,739,119



4,784,064Restricted cash account


1,000,740



500,000Cost in excess of billings


290,499



20,537Other current assets


302,328



105,277Prepaid expenses


220,056



29,623Total current assets


9,506,087



8,611,254Property, plant and equipment:Property, plant and equipment, at cost


5,175,035



5,175,035Less: Accumulated depreciation


(2,284,846
)


(2,047,677
)Total property, plant and equipment, net


2,890,189



3,127,358Other assets:

Inventories-long term


474,558



474,558Deferred financing costs, net of accumulated amortization of $827,363  and $603,000 at October 31, 2010 and April 30, 2010, respectively


701,395



925,758Deposit


38,375



37,375Prepaid expenses-long term


57,051



-Intangible assets,  net of accumulated amortization of  $802,704  and $747,198 at October  31, 2010 and April 30, 2010, respectively


534,540



509,000Total other assets


1,805,919



1,946,691Total assets

$
14,202,195


$
13,685,303





See accompanying notes to the unaudited condensed consolidated financial information





3
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)


(UNAUDITED)





October 31, 2010


April 30, 2010LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable and accrued liabilities

$
1,700,984


$
1,325,128Billings in excess of cost


16,562



13,811Derivative liability


1,976,993



1,853,384Preferred Stock Manditorily Redeemable


-



442,472Notes payable,current portion


1,515,673



1,398,461Deferred revenue


106,583



-Dividends payable


873,029



654,305Convertible notes payable, net of discount


50,380



61,261Total current liabilities


6,240,204



5,748,822Long-term liabilities:Notes payable, long term portion, net of debt discount (Note C)


4,068,162



4,136,567Total  liabilities


10,308,366



9,885,389Commitment and contingencies


-



-Convertible Redeemable Preferred Stock, Series D, par value $.001 per share, 10,000,000 shares authorized, 9,696,512

and 8,456,512 shares issued and outstanding at October 31, 2010 and April 30, 2010, respectively


9,696,512



8,456,512Discount on Preferred Stock Series D


(2,186,767
)


(2,515,535
)Net Preferred Stock Series D


7,509,745



5,940,977Convertible Redeemable Preferred Stock, Series C, par value $.001 per share, 2,750,000 shares authorized, 1,750,000  shares issued

and outstanding at October 31, 2010 and April 30, 2010, respectively


1,750,000



1,750,000Discount on Preferred Stock Series C


-



(974,286
)Net Preferred Stock Series C


1,750,000



775,714Convertible Redeemable Preferred Stock, Series B, par value $.001 per share, 3,500,000 shares authorized, 3,041,822 shares issued

and outstanding at October 31, 2010 and April 30, 2010, respectively


3,041,822



3,041,822Discount on Preferred Stock Series B


-



-Net Preferred Stock Series B


3,041,822



3,041,822Stockholders' deficit:Common stock, par value $.001 per share, 2,700,000,000 shares authorized, 15,369,885 shares issued

and 15,319,885 outstanding at October 31, 2010 and April 30, 2010, respectively (Note D)


15,370



15,370Additional paid-in capital


1,017,410



2,526,214Treasury stock


(50
)


(50
)Accumulated deficit


(9,440,468
)


(8,500,133
)Total stockholders' deficit


(8,407,738
)


(5,958,599
)Total liabilities and stockholders' deficit

$
14,202,195


$
13,685,303





See accompanying notes to the unaudited condensed consolidated financial information





4
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GLOBALDIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





For The Three Months Ended

October 31,


For the Six Months Ended

October 31,2010


2009


2010


2009Revenues

$
2,013,017


$
193,366


$
4,193,202


$
205,807Depreciation and amortization


146,484



142,768



292,675



277,923Cost of goods sold


1,461,231



683,582



2,869,912



1,085,651Gross profit


405,302



(632,984
)


1,030,615



(1,157,767
)Operating expenses:Selling, general and administrative expenses


742,143



919,434



1,274,805



1,377,828Total operating expense


742,143



919,434



1,274,805



1,377,828Income (loss) from operations


(336,841
)


( 1,552,418
)


(244,190
)


(2,535,595
)Interest expense, net


(270,026
)


(251,418
)


(538,533
)


(471,642
)Change in fair value-derivatives


(479,668
)


1,354,592



(130,281
)


3,646,532Guaranty Expense


(13,666
)


( 13,665
)


(27,331
)


(27,330
)Net loss


(1,100,201
)


(462,909
)


(940,335
)


611,965Preferred Dividends, accrued


143,755



157,029



295,740



314,058Accretion of discount on preferred stock


346,088



570,020



1,647,092



711,076Net loss attributable to common stockholders


(1,590,044
)


(1,189,958
)


(2,883,167
)


(413,169
)Earnings per common share:Basic

$
(0.10
)

$
(0.08
)

$
(0.19
)

$
(0.03
)Diluted


(0.10
)


(0.08
)


(0.19
)


(0.03
)Weighted average shares outstanding:Basic


15,319,885



15,319,885



15,319,885



15,319,885Diluted


15,319,885



15,319,885



15,319,885



15,319,885,








See accompanying notes to the unaudited condensed consolidated financial information





5
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GLOBALDIVERSIFIED INDUSTRIES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





For the Six Months Ended

October 31,2010


2009Cash flows from operating activities:Net income (loss)

$
(940,335
)

$
611,965Adjustment to reconcile net income (loss) to net cash used for operating activitiesDepreciation and amortization


292,675



277,923Amortization of deferred revenue on sub lease


(21,317
)


-Change in fair value of derivative liabilities


130,281



(3,646,532
)Amortization of debt discount


58,497



50,936Amortization of deferred financing cost


224,363



170,365Change in A/R provision


5,089



133,431Amortization of guaranty expense


27,331



27,330Change in assets and liabilities:(Increase)/decrease in accounts receivable


(1,181,825
)


1,146,635(Increase)/decrease in inventory


519,503



(310,534
)(Increase) / decrease in prepaid expense and other


(1,690,795
)


145,507(Increase)/decrease in employee advances


12,479



9,835Increase/(decrease) in accounts payable and accrued liabilities


378,606



337,727Net cash (used in) continuing operations


(2,197,927
)


(1,045,412
)Cash flows from investing activities:Intangible assets


(81,046
)


(38,836
)Capital expenditure-purchase of fixed assets


-



(306,039
)Net cash (used in) investing activities


(81,046
)


( 344,875
)Cash flows from financing activities:Proceeds from sale of Series D Preferred Stock (9/22/10)


1,000,000



1,335,447Cash paid to redeem preferred stock and warrants


(223,500
)


-Preferred dividends paid


-



(31,255
)Repayments of notes payable


(20,571
)


(28,045
)Net cash provided by financing activities


755,929



1,276,147Net decrease in cash and cash equivalents

$
(1,523,044
)

$
(114,140
)Cash and cash equivalents at beginning of period


2,892,086



335,799Cash and cash equivalents at end of period

$
1,369,042


$
221,659Supplemental Disclosures of Cash Flow Information:Cash paid during the period for interest

$
43,540


$
33,451Preferred dividends accrued


295,740



340,247Derivative liability relieved due to redemption of preferred stock and warrants


329,680



-Revenue deferred on lease receivable


127,900



-Initial derivative liability


104,038



5,625,933Accretion of preferred stock discounts charged to paid-in-capital


1,647,092



711,076





See accompanying notes to the unaudited condensed consolidated financial information





6
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GLOBALDIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION - (Unaudited)


OCTOBER 31, 2010





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 six month period ended October 31, 2010, are not necessarily indicative of the results that may be expected for the year ending April 30, 2011. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated April 30, 2010 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 condensed 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 Accounting Pronouncement





On May 1, 2009, we adopted the standard issued by the FASB which 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 the standard 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 a derivative liability on May 1, 2009 as a result of this standard.  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 2010 and 2011, 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 the provisions of the FASB standard  on the basis of the estimated percentage of completion.





7
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION-(Unaudited)


OCTOBER 31, 2010





NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)





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. Assets or liabilities are recorded for each job based on billings compared to revenue recognized. When billings exceed revenue the excess is recorded as a liability and when revenue earned exceeds billings it is recorded as an asset. 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, such costs will be accrued to reflect anticipated warranty costs.





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.





8
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)





New Accounting Pronouncements


In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force.  The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  Earlier application is permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.





In April 2010, the FASB issued ASU 2010-17, Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition.  This ASU codifies the consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue Recognition.” The amendments to the Codification provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive.





ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply 2010-17 retrospectively from the beginning of the year of adoption. Vendors may also elect to adopt the amendments in this ASU retrospectively for all prior periods. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company





In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.





ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Company does not expect the provisions of ASU 2010-18 to have a material effect on the financial position, results of operations or cash flows of the Company





In May 2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates.  The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.




9
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)





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 October 31, 2010 or April 30, 2010, respectively.





Derivative Instruments and Fair Value of Financial Instruments





Derivative Instruments





We have evaluated the application of FASB standards to certain freestanding warrants and preferred stock that contain exercise price adjustment features known as down round provisions.  Based on the guidance in the standards, 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 the FASB standards.





Lattice Valuation Model





Beginning on May 1, 2009, we  have valued all subsequent freestanding warrants and 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 October 31, 2010.





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, November 18, 2009, March 29, 2010, April 15, 2010 and September 22, 2010, the Company issued Preferred D shares and related warrants as detailed in Note G.  This preferred stock and associated warrants are also derivative instruments under FASB standards.





The fair value of the remaining derivatives as of October 31, 2010 was estimated by management to be $1,976,993 using the binomial lattice model.





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.





10
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)





Fair Value of Financial Instruments





FASB standards define 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. The standard 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. The standard 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.





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 October 31, 2010:





Carrying


Fair Value Measurements UsingValue


Level 1


Level 2


Level 3


TotalDerivative liabilities

$
1,976,993


$
-


$
-


$
1,976,993


$
1,976,993Totals





$
-


$
-


$
1,976,993


$
1,976,993





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.





11
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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)





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 October 31, 2010:





DerivativeLiabilitiesBalance, April 30, 2010

$
1,853,384Total realized/unrealized (gains) or losses:Included in other (income) expense


130,281Included in stockholders' equityPurchases, issuances and settlements


(6,672
)Balance, October 31, 2010

$
1,976,993





NOTE B- GOING CONCERN





These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business.  The Company has reoccurring losses and has generated negative cash flows from operations which raises substantial doubts about the Company’s ability to continue as a going concern.  The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders and creditors and the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations.  The Company plans to implement the following policies to help alleviate the going concern issue during the year ended April 30, 2011.





·
Raise additional money through the sale of equity securities and convertible instruments through our funding sources which provided the Company with over $6,000,000 of funding during the year ended April 30, 2010.·
Some of our preferred shareholders have redeemed their preferred stock and warrants prior to October 31, 2010.





·
Focus on revenue generation, during the current year the Company spent a great deal of time acquiring discounted inventory and planning for possible acquisitions, during the year ended April 30, 2011 we plan to focus on revenue generation.·
We believe our backlog at October 31, 2010 will be recognizable and will provide a substantial improvement to earnings during the year ended April 30, 2011 and should decrease our dependence on the sale of equity and other instruments





There can be no assurance that we will be successful at implementing the above plans, failure to implement these plans could have a material impact on the Company.





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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010


NOTE C - NOTES PAYABLE





A summary of notes payable at October 31, 2010 and April 30, 2010 is as follows:





October 31, 2010


April 30, 2010Note payable in five annual payments beginning December 31, 2006, with interest payable monthly at 10% per annum with the principal due December 31,2011.  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.  As of October 31, 2010 and April 30,2010, the principal amount of the note was $55,225 and $75,791 with a discount of $4,845 and $14,530 respectively (c)


50,380



61,261Note 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 the initial  accrued interest shall be deferred and payable in one lump sum payment on January 1, 2011. As of October 31, 2010 and April 30, 2010 the principal amount of the note was $6,000,000 with a discount of $416,165 and $464,972 respectively(d)


5,583,835



5,535,028Total notes payable


5,634,215



5,596,289Less: current portion


(1,566,053
)


(1,459,722
)Total – notes payable – long term

$
4,068,162


$
4,136,567





(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 conversion feature in accordance with FASB standards, 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 using the effective interest method. On October 31, 2006, the note-holder agreed to convert $200,000 of principal into 2,353,356 shares of the Company's common stock. These shares were issued in September 2007. The Company wrote off the proportionate unamortized debt discount applicable to the converted amount 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 ended October 31, 2010 and 2009, respectively.





(d) On December 19, 2008, the Company entered into a Loan and Securities Purchase Agreement with Debt Opportunity Fund, LLLP (the "Fund") and issued a Senior Secured Promissory Note (the "Senior Note" for the principal amount of $6,000,000, which was funded in four tranches of $1,500,000 each on the following dates of December 19, 2008, January 14, 2009, January 21, 2009 and January 29, 2009.   Interest on the Senior Note accrues at the rate of 13% per annum. and is payable monthly in arrears. However, during the first twelve months the accrued interest will be deferred and payable in one lump sum on December 19, 2010.  The principal amount is payable in four equal payments of $1,500,000 with the first payment due on December 14, 2010, second payment due on December 14, 2011, third payment due on December 14, 2012 and final payment on December 14, 2013. The SeniorNote is secured by a lien on all the personal property and assets of the Company pursuant to a security agreement from the Company.The obligations under theNote are guaranteed pursuant to a guaranty agreement by the Company's wholly ownedsubsidiaries, Lutrex Enterprises, Inc., and Global Modular, Inc. All of the obligations of each Subsidiary under its guaranty agreement are secured by a lien on all the personal property and assets of the subsidiaries. On December 30, 2008, the note was assigned by Debt Opportunity Fund LLP to Vicis Capital Master Fund. An agreement was executed on December 19, 2010, to defer each of the annual principal payments of $1,500,000 for one year.





13
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE D – 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 $0.001. The Company also created a Series A Preferred class of stock, $0.001 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 Company 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 Company 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 October 31, 2010 and April 30, 2010, 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 month period ended July 31, 2010.  The Company has 50,000 shares of treasury stock at October 31, 2010 and April 30, 2010.





NOTE E – 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.





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.





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 October 31, 2010 was $3,041,822 plus accrued dividends of $557,759





In June 2010, the Company redeemed Series B stock with a stated value of $442,472 and related Series B warrants totaling 12,355,570 and accrued dividends of $77,017 for $205,500.  The difference in the stated value of the preferred stock and cash paid was charged to additional paid in capital.  Also, $110,708 of the derivative liability was settled with redemption.




14
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





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





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 dividends 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 include 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 FASB standards. In accordance with the standard, the fair value allocated to the Preferred Stock at the date of issuance was recorded outside of 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 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 the FASB standard, no penalty accrual has been made as management has concluded that none will be payable.  This treatment is consistent with the guidance in FASB standards.





The Company and the Series B Preferred Stock shareholders entered into an “Agreement to Defer Payment of Dividends” effective June 25, 2010 that deferred the scheduled payment dates for the dividends of June 30, 2009, September 15, 2009, December 31, 2009, March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011 to become due, in one lump sum payment, on June 30, 2011.





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 Series B Convertible 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 them 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 them 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 them 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 them 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 them 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.  In June 2010, the Company redeemed the 6,000,000 Series B warrants issued to broker/dealers for $3,240, which was recorded as an increase to additional paid in capital and a reduction to derivative liabilities.





After the accretion of the discount, the Series B Preferred Stock had a carrying value of $3,041,822 at October 31, 2010 and April 30, 2010, respectively.





15
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE F – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES C





On June 26, 2008, the  Company entered into 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 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  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 $0.07 per share at any time into a total of 25,000,000 Series C Preferred Stock shares, 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 Company’s subsidiaries.  Payment thereof is secured by a blanket lien encumbering the assets of the Company 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 $0.10 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 does 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, b) a Series BD-4 Warrant to purchase 2,500,000 shares of common stock at an exercise price of $0.07 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 $0.10 per share exercisable for 7 years from the date of issuance.  In June 2010, the Company redeemed the 6,000,000 warrants issued to Midtown Partners & Co. Inc for $3,279, which was recorded as an increase to additional paid in capital and a reduction to derivative liabilities.





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 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 Stock and related warrants as disclosed in Note A. The relative fair values of the preferred stock 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 stock of $563,939.  Accordingly, the initial carrying value of the preferred stock was zero. Accretion of the discount amounted to $1,750,000 and $775,714 at October 31, 2010 and April 30, 2010, respectively, which is the carrying value at each date, respectively.





16
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





NOTE G – CONVERTIBLE REDEEMABLE PREFERRED STOCK – SERIES D





On July 26, 2009, 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 financing, agreed to release the remaining funds held in the escrow account of $25,000 to the Company.





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,b) is convertible at the option of the holder at a price of $0.04 per share at any time (total of 48,662,791 shares of common stock, c)  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 Company’s subsidiaries.  Payment of the Redemption Amount is secured by a blanket lien encumbering the assets of the Company.





The Series 5 Warrants have an exercise price of $0.04 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 does 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 $0.04 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 BD-8 Warrants have "cashless exercise" provisions and certain anti-dilution rights.




17
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





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





The issuance of the Series D Preferred Stock, the Series 5 Warrants, and  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.





On November 18, 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, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, pursuant to which the Company issued additional shares of Series D Convertible Preferred Stock and sold (a) additional shares of its Series D Convertible Preferred Stock (the “Series D Preferred Stock”) having an aggregate original stated value of $1,550,000 (total of 1,550,000 shares of Series D Preferred Stock), (b) its Series 5 Common Stock Purchase Warrants exercisable, in the aggregate, for 25,000,000 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 $1,250,000 with $500,000 being deposited into an escrow account for guaranteeing performance of one or more manufacturing contracts.





On March 29, 2010, 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, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, pursuant to which the Company issued additional shares of Series D Convertible Preferred Stock and sold (a) additional shares of its Series D Convertible Preferred Stock (the “Series D Preferred Stock”) having an aggregate original stated value of $2,480,000 (total of 2,480,000 shares of Series D Preferred Stock), (b) its Series 6 Common Stock Purchase Warrants exercisable, in the aggregate, for 40,000,000 shares of Common Stock (individually, a “Series 5 Warrant” and collectively, the “Series 6 Warrants”).  The total cash paid for the Series D Preferred Stock and Series 6 Warrants was $2,000,000.





On April 15, 2010, 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, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, pursuant to which the Company issued additional shares of Series D Convertible Preferred Stock and sold (a) additional shares of its Series D Convertible Preferred Stock (the “Series D Preferred Stock”) having an aggregate original stated value of $2,480,000 (total of 2,480,000 shares of Series D Preferred Stock), (b) its Series 7 Common Stock Purchase Warrants exercisable, in the aggregate, for 40,000,000 shares of Common Stock (individually, a “Series 5 Warrant” and collectively, the “Series 7 Warrants”).  The total cash paid for the Series D Preferred Stock and Series 7 Warrants was $2,000,000.








On September 22, 2010, 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, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, pursuant to which the Company issued additional shares of Series D Convertible Preferred Stock and sold (a) additional shares of its Series D Convertible Preferred Stock (the “Series D Preferred Stock”) having an aggregate original stated value of $1,240,000 (total of 1,240,000 shares of Series D Preferred Stock), (b) its Series 8 Common Stock Purchase Warrants exercisable, in the aggregate, for 20,000,000 shares of Common Stock (individually, a “Series 5 Warrant”


and collectively, the “Series 8 Warrants”).  The total cash paid for the Series D Preferred Stock and Series 7 Warrants was $1,000,000.








The Company paid $15,000 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 ($100,000), b) Series BD-9 Warrant to purchase 3,875,000 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-10 Warrant to purchase 2,500,000 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-9 and Series BD-10 Warrants have "cashless exercise" provisions and certain anti-dilution rights.





In June 2010, the Company redeemed the Series D warrants BD-7, BD-8, BD-9 and BD-10 issued to Midtown Partners & Co Inc totaling 14,125,000 warrants for $11,481, which was recorded as an increase to additional paid in capital and a reduction to derivative liabilities.





The issuance of the Series D Preferred Stock, the Series 5 Warrants, the Series BD-9 and Series BD-10 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.





18
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010








NOTE H- ACQUISITION OF INTANGIBLE ASSETS





The trade name acquired is considered to have an indeterminable 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 was less than its recorded book value at April 30, 2010. This caused the impairment charge disclosed in the subsequent paragraph. The building engineering and architectural plans acquired have estimated useful lives of ten years.





The Company has adopted  the FASB standard whereby the Company  periodically tests 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 an impairment of $444,157 for the acquired intangibles as of April 30, 2010.





Total identifiable intangible assets acquired and their carrying values at October 31, 2010 are:





Gross Carrying Amount


Accumulated Amortization

Accumulated Impairment

Net

Residual Value

Weighted Average

Amortization

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

$
1,159,244


$
(530,547
)
(272,157)

$
356,540

$
-

10.0Total Amortized Identifiable Intangible Assets


1,159,244



(530,547
)
(272,157)


356,540


-

10.0Unamortized Identifiable Intangible Assets:Trade Name


350,000



-

(172,000)


178,000


178,000

-Total Non-Amortized Identifiable Intangible Assets


350,000



-

(172,000)


178,000


178,000

-Total

$
1,509,244


$
(530,547
)
(444,157)

$
534,540

$
178,000

10.0





Total amortization expense charged to operations for the six month periods ended October 31, 2010 and 2009 were $55,506 and $48,718, respectively.   Estimated amortization expense remaining as of October 31, 2010 is as follows:





2011

$
111,0122012


111,0122013


111,0122014


23,504Total

$
356,540




19
 Table of Contents





GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION


OCTOBER 31, 2010





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 $0.10 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 guarantee, the Company is recognizing the related expense proportionately over five years. For the six months ended October 31, 2010 and October 31, 2009, the Company recorded expense of $27,331 and $27,330 respectively, 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


$
0.04Outstanding at October 31, 2010


68,168,164


$
0.04





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 Opportunity 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 October 31, 2010 and 2009. All previously granted stock options expired as of April 30, 2007.





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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER 31, 2010





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





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)


Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price$
0.04


28,665,155


2.33


$
0.04

28,665,155

$
0.04$
0.04


28,665,155


4.33


$
0.04

28,665,155

$
0.04$
0.04


70,000,000


4.67


$
0.04

70,000,000

$
0.04$
0.04


68,168,164


5.07


$
0.04

68,168,164

$
0.04$
0.04


28,837,209


5.63


$
0.04

28,837,209

$
0.04$
0.04


25,000,000


6.03


$
0.04

25,000,000

$
0.04$
0.04


40,000,000


6.42


$
0.04

40,000,000

$
0.04$
0.04


40,000,000


6.50


$
0.04

40,000,000

$
0.04$
0.04


20,000,000


6.75


$
0.04

20,000,000

$
0.04Total


349,335,683






0.04

349,335,683


0.04





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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER 31, 2010





NOTE K – 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


$
0.04Granted


147,962,209



0.04Exercised


-Canceled or expired


-Outstanding at April 30, 2010


374,633,069


$
0.04Granted


20,000,000


$
0.04Exercised


-Canceled


45,297,386Outstanding at October 31, 2010


349,335,683


$
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 connection with two fundings 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 on June 24, 2008 and the 35,000,000 warrants granted on 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 with 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 on July 23, 2009 in connection with a funding by Vicis Capital Master Fund.  The warrants granted will expire on July 23, 2016.





The Company granted 31,375,000 warrants on November 18, 2009 in connection with a funding by Vicis Capital Master Fund.  The warrants granted will expire on November 18, 2016.





The Company redeemed 45,297,386 warrants in June 2010 which represented a portion of the warrants granted for the Vicis Master Fund funding for February 2008, June 2008, July 2009, November 2009 and for the issuance of a promissory note by Debt Opportunity Fund LLP in December 2008.  The redemption of the warrants was recorded as an increase to additional paid in capital and a reduction to derivative liabilities.





The Company granted 20,000,000 warrants on September 22, 2010 in connection with a funding by Vicis Capital Master Fund.  The warrants granted will expire on September 22, 2017.





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GLOBAL DIVERSIFIED INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER 31, 2010





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





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.





There are no employee stock options pursuant to the 2001 Stock Option Plan outstanding at October 31, 2010.





NOTE L – 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. The value of these warrants was recorded as deferred financing cost. Using the effective interest method of amortization, the deferred financing cost was $41,086 as of October 31, 2010, and is being amortized to interest expense.  For the quarter ended October 31, 2010, the total non-cash interest charged to operations amounted to $40,464 and $1,996 for the quarter ended October 31, 2009.  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 and the Promissory Note for $6,000,000 totaled $1,035,076, of which $333,681 had been amortized as of October 31, 2010 with a remaining balance of $701,395.  The remaining net deferred financing costs per the balance sheet at April 30, 2010 was $43,583 for the December 2008 funding and $770,239 for the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock fundings.  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 M –RESTRICTED CASH ACCOUNT





The Company deposited funds into a escrow accounts to be used as collateral for construction projects which will be released back to the Company on completion of the projects. As of  October 31, 2010 and April 30, 2010, the Company had a balance in the restricted cash account of $1,000,740 and $500,000 respectively.


NOTE N- COST IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF COST- ASSET AND LIABILITY
 
 Assets or liabilities are recorded for each job based on billings compared to revenue recognized. When billings exceed revenue the excess is recorded as a liability and when revenue earned exceeds billings it is recorded as an asset.  As of October 31, 2010 and April 30,2010, the Company recorded an asset due to cost in excess of billings of $290,499 and $20,537 respectively and recorded a liability due to billings in excess of cost of $16,562 and $13,811 respectively.


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2010





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 Company, and Global Modular, Inc., an entity which provides 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' 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.





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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 handicapped 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.





During the remainder of 2011, 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 2011.





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 Accounting Pronouncement





On May 1, 2009, we adopted FASB standards which provide 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 the standard 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 liabilities on May 1, 2009 as a result of this standard.  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.





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 Stock as well as Part II, Item 2 of this Form 10-Q





COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2010 TO THE THREE MONTHS ENDED OCTOBER 31, 2009





The Company’s total revenues were $2,013,017 for the quarter ended October 31, 2010 as compared to $193,366 for the same period in 2009, an increase of $1,819,651.  The Company is maintaining the production level of the prior quarter ending July 31, 2010 and is continuing to increase its backlog.





The Company had a gross profit of $405,302 for the quarter ended October 31, 2010 as compared to a negative gross profit of $632,984 for the quarter ended October 31, 2009.  Cost of Goods sold were 72% of gross revenue and a negative percentage of revenue for the three months ended October 31, 2010 and 2009 respectively.





Total operating expenses were $742,143 for the quarter ended October 31, 2010 as compared to $913,434 for the same time period in 2009, a decrease of $171,291.


The Company realized a reduction of $479,668 in the change of the fair value of derivatives for the quarter ended October 31, 2010 as compared to a reduction of $1,354,592 for the quarter ended October 31, 2009.





COMPARISON OF THE SIX MONTHS ENDED OCTOBER 31, 2010 TO THE SIX MONTHS ENDED OCTOBER 31, 2009





The Company’s total revenues were $4,193,202 for the six months ended October 31, 2010 compared to $205,807 for the same time period in 2009, an increase of $3,987,395.  The Company ramped up production with seven projects on the production lines the six months ended October 31, 2010.





The Company had a gross profit of $1,030,615 for the six months ended October 31, 2010 and a negative gross profit of $1,157,767 for the six months ended October 31, 2009. Cost of goods sold were 68% and a negative percentage of revenue  respectively for the six months ended October 31, 2010 and 2009.





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 Table of Contents





Total operating expenses were $1,274,805 for the six months ended October 31, 2010 compared to $1,377,828 for the same time period in 2010.  The Company’s legal fees were $498,445 for the quarter ended October 31, 2010 as compared to $573,447 for the six months ended October 31, 2009.  This decrease was the result of the Company reducing the legal fees in connection with the fundings for operations in the six months ended October 31, 2010.




Liquidity and Capital Resources





As of October 31, 2010, the Company had a working capital surplus of $3,265,883. The net loss for the six months ended October 31, 2010 was $940,335. The Company generated a negative cash flow from operations of $2,197,927 for the six month period ended October 31, 2010. The negative cash flow from operating activities for the period is primarily attributable to the Company's loss from continuing operations of $940,335 adjusted for depreciation and amortization of $292,675, amortization of debt discount of $58,497, an increase in the fair value of derivatives of $130,281, a increase in accounts receivable of $1,181,825, an increase in inventory of $519,503, a decrease in other assets of $1,690,795and an increase in accounts payable and accrued expenses of $378,606.





Cash flows used in investing activities for the six month period ended October 31, 2010 consisted of the acquisition of $81,046 of architectural plans used in operations.





The Company funded operations during the six months ended October 31, 2010 from the sale of Series D Preferred Stock for $1,000,000. The Company reduced notes payable by $20,571 and redeemed preferred stock and warrants for $223,500.





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 FASB standards.  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.





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 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.





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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.





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 Table of Contents




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 FASB standards.





In fiscal years 2007, 2008, 2009, 2010 and 2011, 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 FASB standards, 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.





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.





Derivative Instruments and Fair Value of Financial Instruments





Derivative Instruments





We have evaluated the application of FASB standards to certain freestanding warrants and preferred stock that contain exercise price adjustment features known as down round provisions.  Based on the guidance in these standards, 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 the standard.





Lattice Valuation Model





Beginning on August 1, 2008, 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 October 31, 2010.





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.





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On July 23, 2009, November 12, 2009, March 29,2010, April 30, 2010 and September 22, 2010, the Company issued Preferred D shares and related warrants as detailed in Note G.  This preferred stock and associated warrants are also derivative instruments under FASB standards.





The fair value of the remaining derivatives as of October 31, 2010 was estimated by management to be $1,976,993





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





FASB standards 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. The standard 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. The standard 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.





29
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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 six months ended October 31, 2010:





Carrying


Fair Value Measurements UsingValue


Level 1


Level 2


Level 3


TotalDerivative liabilities

$
1,976,993


$
-


$
-


$
1,976,993


$
1,976,993Totals





$
-


$
-


$
1,976,993


$
1,976,993





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 October 31, 2010:





DerivativeLiabilitiesBalance, April 30, 2010

$
1,853,384Total realized/unrealized (gains) or losses:Included in other income (expense)


130,281Included in stockholders' equityPurchases, issuances and settlements


(6,672
)Transfers in and/or out of Level 3


-Balance, October 31, 2010

$
1,976,993





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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 to expense proportionately over such five year term.





Inventories





We value our inventories, which consist of raw materials, work in progress and 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 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 October 31, 2010, we determined a reserve of $119,127 was required against our accounts receivable.





Employees





As of October 31, 2010, the Company had 75 employees. The Company anticipates the number of employees will increase over the next nine 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 remainder 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.





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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 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 for the year ended April 30, 2010 and Form 10-K 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





There were no material subsequent events to report through the date of filing.





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 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.





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 October 31, 2010, 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.





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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 to 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.




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ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.





ITEM4. CONTROLS AND 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 not 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.





Management’s assessment of the effectiveness of the registrant’s internal control over financial reporting is as of the quarter ended October 31, 2010. Based on that evaluation, our management concluded that our control over financial reporting and related disclosure controls and procedures were not effective primarily because our accounting processes lack appropriate segregation of responsibilities for an effective system of internal control. Management’s assessment showed the following material weaknesses as of the quarter ended October 31, 2010:





1.        We do not have appropriate segregation of duties assuring that the primary accounting functions of authorization, custody, and recording are segregated by employee. We do not have the accounting personnel required to maintain segregation of duties at this time. Accordingly, management has determined that this control deficiency constitutes a material weakness.





2.        As of October 31, 2010, we did not maintain effective controls over financial statement disclosures. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.





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PART II. OTHER INFORMATION





ITEM1. LEGAL PROCEEDINGS





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.  The trial date has been set for March 2011. The Company can make no assurances with respect to the outcome of this matter.





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.





ITEM2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS





ITEM3. DEFAULTS UPON SENIOR SECURITIES





None during this reporting period.





ITEM4. REMOVED AND RESERVED





ITEM5. OTHER INFORMATION





None during this reporting period.





ITEM6. 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:  December 20, 2010
By:
/s/ Phillip HamiltonChairman and Chief Executive Officer

(Principal Executive Officer)





Date:  December 20, 2010
By:
/s/ Adam DeBardChief Operating Officer

(Principal Accounting and Financial Officer)





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