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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
 TO
 COMMISSION FILE NUMBER 0-13667
 PDG Environmental, Inc.
  Delaware
(State or other jurisdiction of incorporation
or organization)
    
    22-2677298
(I.R.S. Employer
Identification No.)1386 Beulah Road, Building 801
Pittsburgh, Pennsylvania
(Address of principal executive offices)
    
    15235
(Zip Code)
 412-243-3200
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PDG Environmental, Inc. and Subsidiaries
 INDEX
 PagePart I. Financial InformationItem 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements(a) Condensed Consolidated Balance Sheets as of April 30, 2006
(unaudited) and January 31, 2006
    
    
    3(b) Consolidated Statements of Operations for the Three Months Ended
April 30, 2006 and 2005 (unaudited)
    
    
    4(c) Consolidated Statements of Cash Flows for the Three Months Ended
April 30, 2006 and 2005 (unaudited)
    
    
    5(d) Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II. Other InformationItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 6. Exhibits
    
    
    20Signature and Certification
    
    
    21EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL INFORMATION
 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 April 30,
    
    
    January 31,2006
    
    
    2006(unaudited)AssetsCurrent AssetsCash and cash equivalents
    
    $
    421,000
    
    
    $
    230,000Contracts receivable
    
    
    24,546,000
    
    
    
    24,471,000Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    5,868,000
    
    
    
    5,174,000Inventories
    
    
    683,000
    
    
    
    669,000Prepaid income taxes
    
    
    662,000
    
    
    
    560,000Deferred income tax asset
    
    
    457,000
    
    
    
    373,000Other current assets
    
    
    1,074,000
    
    
    
    131,000Total Current Assets
    
    
    33,711,000
    
    
    
    31,608,000Property, Plant and Equipment
    
    
    10,281,000
    
    
    
    10,137,000Less: accumulated depreciation
    
    
    (8,043,000
    )
    
    
    (7,838,000
    )2,238,000
    
    
    
    2,299,000Goodwill
    
    
    2,438,000
    
    
    
    2,316,000Deferred Income Tax Asset
    
    
    449,000
    
    
    
    216,000Intangible and Other Assets
    
    
    6,220,000
    
    
    
    6,423,000Total Assets
    
    $
    45,056,000
    
    
    $
    42,862,000Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    6,715,000
    
    
    $
    6,537,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    2,595,000
    
    
    
    2,012,000Current portion of long-term debt
    
    
    515,000
    
    
    
    513,000Accrued liabilities
    
    
    4,799,000
    
    
    
    4,459,000Total Current Liabilities
    
    
    14,624,000
    
    
    
    13,521,000Long-Term Debt
    
    
    10,521,000
    
    
    
    9,059,000Series C Redeemable Convertible Preferred Stock
    
    
    2,618,000
    
    
    
    2,803,000Total Liabilities
    
    
    27,796,000
    
    
    
    25,383,000Stockholders EquityCommon stock
    
    
    378,000
    
    
    
    345,000Common stock warrants
    
    
    1,628,000
    
    
    
    1,881,000Additional paid-in capital
    
    
    17,547,000
    
    
    
    15,582,000Retained earnings (deficit)
    
    
    (2,222,000
    )
    
    
    (291,000
    )Less treasury stock, at cost
    
    
    (38,000
    )
    
    
    (38,000
    )Total Stockholders Equity
    
    
    17,293,000
    
    
    
    17,479,000Total Liabilities and Stockholders Equity
    
    $
    45,056,000
    
    
    $
    42,862,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
 For the Three MonthsEnded April 30,2006
    
    
    2005Contract revenues
    
    $
    16,744,000
    
    
    $
    13,951,000Contract costs
    
    
    15,556,000
    
    
    
    11,651,000Gross margin
    
    
    1,188,000
    
    
    
    2,300,000Selling, general and administrative expenses
    
    
    2,932,000
    
    
    
    1,737,000Income (loss) from operations
    
    
    (1,744,000
    )
    
    
    563,000Other income (expense):Interest expense
    
    
    (219,000
    )
    
    
    (100,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (784,000
    )
    
    
    Gain on sale of equity investment
    
    
    
    
    
    
    48,000Equity in income of equity investment
    
    
    
    
    
    
    4,000Interest and other income
    
    
    
    
    
    
    14,000(1,003,000
    )
    
    
    (34,000
    )Income (loss) before income taxes
    
    
    (2,747,000
    )
    
    
    529,000Income tax provision (benefit)
    
    
    (816,000
    )
    
    
    203,000Net income (loss)
    
    $
    (1,931,000
    )
    
    $
    326,000Per share of common stock:Basic
    
    $
    (0.11
    )
    
    $
    0.03Dilutive
    
    $
    (0.11
    )
    
    $
    0.02Average common share equivalents outstanding
    
    
    18,268,000
    
    
    
    12,983,000Average dilutive common share equivalents
outstanding
    
    
    
    
    
    
    1,198,000Average common shares and dilutive common equivalents
outstanding for earnings per
share calculation
    
    
    18,268,000
    
    
    
    14,181,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
 For the Three MonthsEnded April 30,2006
    
    
    2005Cash Flows from Operating Activities:Net income (loss)
    
    $
    (1,931,000
    )
    
    $
    326,000Adjustments to Reconcile Net Income to Cash:Depreciation and amortization
    
    
    426,000
    
    
    
    176,000Deferred income taxes
    
    
    (317,000
    )
    
    
    Interest expense for preferred dividends and accretion of discount
    
    
    784,000
    
    
    
    (Gain) loss on sale of equity investment and fixed assets
    
    
    5,000
    
    
    
    (48,000
    )Stock based compensation
    
    
    73,000
    
    
    
    Equity in (income) of equity investment
    
    
    
    
    
    
    (4,000
    )Changes in Assets and LiabilitiesOther than Cash:Contracts receivable
    
    
    (75,000
    )
    
    
    (1,515,000
    )Costs and estimated earnings in excess of billings
on uncompleted contracts
    
    
    (694,000
    )
    
    
    857,000Inventories
    
    
    (14,000
    )
    
    
    (39,000
    )Prepaid income taxes
    
    
    (102,000
    )
    
    
    Other current assets
    
    
    214,000
    
    
    
    42,000Accounts payable
    
    
    178,000
    
    
    
    210,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    583,000
    
    
    
    (307,000
    )Current income tax liabilities
    
    
    
    
    
    
    (172,000
    )Accrued liabilities
    
    
    (595,000
    )
    
    
    (948,000
    )Total Adjustment
    
    
    (505,000
    )
    
    
    (1,872,000
    )Net Cash Used by Operating Activities
    
    
    (1,465,000
    )
    
    
    (1,422,000
    )Cash Flows from Investing Activities:Purchase of property, plant and equipment
    
    
    (179,000
    )
    
    
    (162,000
    )Proceeds from sale of equity investment and fixed assets
    
    
    15,000
    
    
    
    50,000Additional investment in joint venture
    
    
    
    
    
    
    (18,000
    )Increase in other assets
    
    
    (12,000
    )
    
    
    (28,000
    )Net Cash Used by Investing Activities
    
    
    (176,000
    )
    
    
    (158,000
    )Cash Flows from Financing Activities:Proceeds from debt
    
    
    1,500,000
    
    
    
    2,000,000Proceeds from exercise of stock options and warrants
    
    
    708,000
    
    
    
    28,000Payment of accrued earnout liability
    
    
    
    
    
    
    (150,000
    )Payment of insurance premium financing
    
    
    (340,000
    )
    
    
    (300,000
    )Principal payments on debt
    
    
    (36,000
    )
    
    
    (81,000
    )Net Cash Provided by Financing Activities
    
    
    1,832,000
    
    
    
    1,497,000Change in Cash and Cash Equivalents
    
    
    191,000
    
    
    
    (83,000
    )Cash and Cash Equivalents, Beginning of Period
    
    
    230,000
    
    
    
    333,000Cash and Cash Equivalents, End of Period
    
    $
    421,000
    
    
    $
    250,000Supplementary disclosure of non-cash Investing and Financing Activity:Increase in goodwill and accrued liabilities for contingent payment
liability
    
    $
    118,000
    
    
    $
    154,000Financing of annual insurance premium
    
    $
    1,157,000
    
    
    $
    959,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THRE MONTHS ENDED APRIL 30, 2006
(UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
    NOTE 2  FEDERAL INCOME TAXES
     NOTE 3  TERM DEBT
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NOTE 4  NET EARNINGS PER SHARE
  For the Three MonthsEnded April 30,2006
    
    
    2005Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    (1,931,000
    )
    
    $
    326,000Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    (1,931,000
    )
    
    $
    326,000Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    18,268,000
    
    
    
    12,983,000Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Employee Stock Options
    
    
    
    
    
    
    1,198,000
    
    
    
    1,198,000Denominator for diluted earnings per shareadjusted
weighted-average shares and assumed conversions
    
    
    18,268,000
    
    
    
    14,181,000Basic earnings per share
    
    $
    (0.11
    )
    
    $
    0.03Diluted earnings per share
    
    $
    (0.11
    )
    
    $
    0.02
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NOTE 5  STOCK OPTIONS
   For the Three MonthsEnded April 30,2005Net income, as reported
    
    $
    326,000Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects of a $203,000 benefit
    
    
    (407,000
    )Pro forma net income (loss)
    
    $
    (81,000
    )Earnings per share:Basic-as reported
    
    $
    0.03Basic-pro forma
    
    $
    (0.01
    )Diluted-as reported
    
    $
    0.02Diluted-pro forma
    
    $
    (0.01
    )
     NOTE 6  PRIVATE PLACEMENT OF SECURITIES  JULY 2005
 Common Private Placement
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Securities Purchase Agreement
  Common Warrants
    Preferred Private Placement
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Securities Purchase Agreement
  Preferred Warrants
    Terms of the Preferred Stock
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Over-Allotment Warrants
    Warrant Derivative Liability
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Conversion of Preferred Stock to Common Stock
    Exercise of Warrants for Common Stock
   Subsequent Events
  NOTE 7  ACQUISITION
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Allocated Value
    
    
    Amortization PeriodFixed assets
    
    $
    50,000
    
    
    
    3 to 7 yearsCovenant-not-to-compete
    
    
    78,000
    
    
    4 1/2 yearsCustomer relationships
    
    
    5,766,000
    
    
    10 yearsSubcontractor relationships
    
    
    530,000
    
    
    5 yearsGoodwill
    
    
    160,000
    
    
    
    N/A
   Three months endedApril 30, 2005Sales
    
    $
    20,784,000Net Income
    
    $
    664,000Net income per common shares:Basic
    
    $
    0.04Dilutive
    
    $
    0.04Weighted average shares outstanding:Basic
    
    
    14,886,000Dilutive
    
    
    16,084,000
 NOTE 8  GOODWILL
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NOTE 9  NEW ACCOUNTING PRONOUNCEMENTS
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
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CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS
 Three Months Ended April 30, 2006
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FINANCIAL CONDITION
 Liquidity and Capital Resources
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  EXHIBIT INDEX
    
    Pages of SequentialExhibit No. and Description
    
    Numbering SystemExhibit 31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended, and Section 302 Of The
Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended, and Section 302 Of The
Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification Pursuant To 18 U.S.C. Section 1350, As Amended Pursuant To Section 906 Of The Sarbanes-Oxley Act of
2002Exhibit 32.2
    
    Certification Pursuant To 18 U.S.C. Section 1350, As Amended Pursuant To Section 906 Of The Sarbanes-Oxley Act of
2002
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SIGNATURES
  PDG ENVIRONMENTAL, INC.By
    
    /s/ John C. ReganJohn C. ReganChairman and Chief Executive OfficerBy
    
    /s/ Todd B. FortierTodd B. FortierChief Financial Officer
  21