##### Table of Contents



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 1934FOR THE QUARTERLY PERIOD ENDED July 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM
 TO
 COMMISSION FILE NUMBER 0-13667
 PDG Environmental, Inc.
  Delaware
    
    22-2677298(State or other jurisdiction of incorporation
    
    (I.R.S. Employeror organization)
    
    Identification No.)1386 Beulah Road, Building 801Pittsburgh, Pennsylvania
    
    15235(Address of principal executive offices)
    
    (Zip Code)
 412-243-3200
 þ o
  o o þ
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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 July 31, 2007 (unaudited) and January 31, 2007
    
    
    3(b) Consolidated Statements of Operations for the Three Months Ended July 31, 2007 and 2006 (unaudited)
    
    
    4(c) Consolidated Statements of Operations for the Six Months Ended July 31, 2007 and 2006 (unaudited)
    
    
    5(d) Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2007 and 2006 (unaudited)
    
    
    6(e) Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 6. Exhibits
    
    
    23Signature and Certification
    
    
    24EX-31.1EX-31.2EX-32.1
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PART I. FINANCIAL INFORMATION
 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 July 31,
    
    
    January 31,2007
    
    
    2007(unaudited)AssetsCurrent AssetsCash and cash equivalents
    
    $
    267,000
    
    
    $
    158,000Contracts receivable, net
    
    
    28,108,000
    
    
    
    21,257,000Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    5,462,000
    
    
    
    5,607,000Inventories
    
    
    669,000
    
    
    
    553,000Prepaid income taxes
    
    
    
    
    
    
    271,000Deferred income tax asset
    
    
    915,000
    
    
    
    915,000Other current assets
    
    
    639,000
    
    
    
    534,000Total Current Assets
    
    
    36,060,000
    
    
    
    29,295,000Property, Plant and Equipment
    
    
    11,883,000
    
    
    
    11,352,000Less: accumulated depreciation
    
    
    9,340,000
    
    
    
    8,795,0002,543,000
    
    
    
    2,557,000Goodwill
    
    
    2,619,000
    
    
    
    2,651,000Deferred Income Tax Asset
    
    
    2,454,000
    
    
    
    2,565,000Contracts Receivable, Non Current
    
    
    500,000
    
    
    
    500,000Intangible and Other Assets
    
    
    5,360,000
    
    
    
    5,686,000Total Assets
    
    $
    49,536,000
    
    
    $
    43,254,000Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    9,092,000
    
    
    $
    7,403,000Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    4,393,000
    
    
    
    3,421,000Accrued Income Taxes
    
    
    35,000
    
    
    
    Current portion of long-term debt
    
    
    385,000
    
    
    
    322,000Accrued liabilities
    
    
    5,181,000
    
    
    
    4,007,000Total Current Liabilities
    
    
    19,086,000
    
    
    
    15,153,000Long-Term Debt
    
    
    13,044,000
    
    
    
    12,161,000Series C Redeemable Convertible Preferred Stock
    
    
    2,979,000
    
    
    
    2,550,000Total Liabilities
    
    
    35,109,000
    
    
    
    29,864,000Stockholders EquityCommon stock
    
    
    414,000
    
    
    
    411,000Common stock warrants
    
    
    1,628,000
    
    
    
    1,628,000Additional paid-in capital
    
    
    19,460,000
    
    
    
    19,245,000Retained earnings (deficit)
    
    
    (7,037,000
    )
    
    
    (7,856,000
    )Less treasury stock, at cost
    
    
    (38,000
    )
    
    
    (38,000
    )Total Stockholders Equity
    
    
    14,427,000
    
    
    
    13,390,000Total Liabilities and Stockholders Equity
    
    $
    49,536,000
    
    
    $
    43,254,000
 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 July 31,2007
    
    
    2006(Restated)Contract revenues
    
    $
    26,638,000
    
    
    $
    22,428,000Contract costs
    
    
    22,597,000
    
    
    
    19,134,000Gross margin
    
    
    4,041,000
    
    
    
    3,294,000Selling, general and administrative expenses
    
    
    2,991,000
    
    
    
    3,324,000Income (loss) from operations
    
    
    1,050,000
    
    
    
    (30,000
    )Other income (expense):Interest expense
    
    
    (309,000
    )
    
    
    (251,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (219,000
    )
    
    
    (891,000
    )Non-recurring charge for employee fraud
    
    
    
    
    
    
    (251,000
    )Interest and other income
    
    
    147,000
    
    
    
    8,000(381,000
    )
    
    
    (1,385,000
    )Income (loss) before income taxes
    
    
    669,000
    
    
    
    (1,415,000
    )Income tax provision (benefit)
    
    
    164,000
    
    
    
    (182,000
    )Net income (loss)
    
    $
    505,000
    
    
    $
    (1,233,000
    )Per share of common stock:Basic
    
    $
    0.02
    
    
    $
    (0.06
    )Dilutive
    
    $
    0.02
    
    
    $
    (0.06
    )Average common share equivalents outstanding
    
    
    20,588,000
    
    
    
    19,875,000Average dilutive common share equivalents
outstanding
    
    
    759,000
    
    
    
    Average common shares and dilutive common equivalents
outstanding for earnings per share calculation
    
    
    21,347,000
    
    
    
    19,875,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED OPERATIONS
 (UNAUDITED)
 For the Six MonthsEnded July 31,2007
    
    
    2006(Restated)Contract revenues
    
    $
    48,338,000
    
    
    $
    38,796,000Contract costs
    
    
    40,604,000
    
    
    
    34,356,000Gross margin
    
    
    7,734,000
    
    
    
    4,440,000Selling, general and administrative expenses
    
    
    5,805,000
    
    
    
    6,256,000Income (loss) from operations
    
    
    1,929,000
    
    
    
    (1,816,000
    )Other income (expense):Interest expense
    
    
    (580,000
    )
    
    
    (470,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (429,000
    )
    
    
    (1,675,000
    )Non-recurring charge for employee fraud
    
    
    
    
    
    
    (598,000
    )Interest and other income
    
    
    152,000
    
    
    
    8,000(857,000
    )
    
    
    (2,735,000
    )Income (loss) before income taxes
    
    
    1,072,000
    
    
    
    (4,551,000
    )Income tax provision (benefit)
    
    
    253,000
    
    
    
    (1,158,000
    )Net income (loss)
    
    $
    819,000
    
    
    $
    (3,393,000
    )Per share of common stock:Basic
    
    $
    0.04
    
    
    $
    (0.18
    )Dilutive
    
    $
    0.04
    
    
    $
    (0.18
    )Average common share equivalents outstanding
    
    
    20,546,000
    
    
    
    19,085,000Average dilutive common share equivalents
outstanding
    
    
    585,000
    
    
    
    Average common shares and dilutive common equivalents
outstanding for earnings per share calculation
    
    
    21,131,000
    
    
    
    19,085,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED CASH FLOWS
 (UNAUDITED)
 For the Six MonthsEnded July 31,2007
    
    
    2006(Restated)Cash Flows from Operating Activities:Net income (loss)
    
    $
    819,000
    
    
    $
    (3,393,000
    )Adjustments to Reconcile Net Income to Cash:Depreciation and amortization
    
    
    934,000
    
    
    
    854,000Deferred income taxes
    
    
111,000
    
    
    
(532,000

    )Interest expense for preferred dividends and accretion of discount
    
    
    429,000
    
    
    
    1,675,000Loss on sale of equity investment and fixed assets
    
    
    
    
    
    
    5,000Stock based compensation
    
    
    149,000
    
    
    
    163,000Provision for uncollectible accounts
    
    
    (39,000
    )
    
    
    40,000Changes in Assets and Liabilities Other than CashContracts receivable
    
    
    (6,812,000
    )
    
    
    (55,000
    )Costs and estimated earnings in excess of billings
on uncompleted contracts
    
    
    145,000
    
    
    
    (1,910,000
    )Inventories
    
    
    (116,000
    )
    
    
    (29,000
    )Prepaid/accrued income taxes
    
    
    306,000
    
    
    
    (231,000
    )Other current assets
    
    
    878,000
    
    
    
    160,000Accounts payable
    
    
    1,689,000
    
    
    
    460,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    972,000
    
    
    
    634,000Accrued liabilities
    
    
    795,000
    
    
    
    749,000Total Changes in Assets and Liabilities Other than Cash
    
    
    (2,143,000
    )
    
    
    (222,000
    )Net Cash Provided by (Used in) Operating Activities
    
    
    260,000
    
    
    
    (1,410,000
    )Cash Flows from Investing Activities:Purchase of property, plant and equipment
    
    
    (365,000
    )
    
    
    (403,000
    )Proceeds from sale of equity investment and fixed assets
    
    
    
    
    
    
    34,000Increase in other assets
    
    
    (58,000
    )
    
    
    (50,000
    )Net Cash Used by Investing Activities
    
    
    (423,000
    )
    
    
    (419,000
    )Cash Flows from Financing Activities:Proceeds from debt
    
    
    960,000
    
    
    
    2,514,000Proceeds from exercise of stock options and warrants
    
    
    69,000
    
    
    
    792,000Payment of insurance premium financing
    
    
    (572,000
    )
    
    
    (687,000
    )Principal payments on debt
    
    
    (185,000
    )
    
    
    (73,000
    )Net Cash Provided by Financing Activities
    
    
    272,000
    
    
    
    2,546,000Change in Cash and Cash Equivalents
    
    
    109,000
    
    
    
    717,000Cash and Cash Equivalents, Beginning of Period
    
    
    158,000
    
    
    
    230,000Cash and Cash Equivalents, End of Period
    
    $
    267,000
    
    
    $
    947,000Supplementary disclosure of non-cash Investing and
Financing Activity:Increase (Decrease) in goodwill and accrued liabilities
for contingent payment
    
    $
    (32,000
    )
    
    $
    301,000Financing of annual insurance premium
    
    $
    983,000
    
    
    $
    1,157,000Non-cash purchase of fixed assets financed through capital lease
    
    $
    176,000
    
    
    $
    
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF AND FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2007
 (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
    NOTE 2  CONTRACTS RECEIVABLE
  July 31, 2007
    
    
    January 31, 2007Billed completed contracts
    
    $
    14,977,000
    
    
    $
    13,989,000Contracts in Progress
    
    
    14,881,000
    
    
    
    9,058,00029,858,000
    
    
    
    23,047,000Less allowance for Uncollectible Accounts
    
    
    (1,250,000
    )
    
    
    (1,290,000
    )Net Contracts Receivables
    
    $
    28,608,000
    
    
    $
    21,757,000
   NOTE 3  INCOME TAXES
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NOTE 4
 TERM DEBT
     NOTE 5  NET EARNINGS PER SHARE
  For the Three MonthsEnded July 31,2007
    
    
    2006(Restated)Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    505,000
    
    
    $
    (1,233,000
    )Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    505,000
    
    
    $
    (1,233,000
    )Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    20,588,000
    
    
    
    19,875,000
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For the Three MonthsEnded July 31,2007
    
    
    2006(Restated)Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Employee Stock Options
    
    
    759,000
    
    
    
    
    
    
    
    Denominator for diluted earnings per shareadjusted
weighted-average shares and assumed conversions
    
    
    21,347,000
    
    
    
    19,875,000Basic earnings per share
    
    $
    0.02
    
    
    $
    (.06
    )Diluted earnings per share
    
    $
    0.02
    
    
    $
    (.06
    )
  For the Six MonthsEnded July 31,2007
    
    
    2006(Restated)Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    819,000
    
    
    $
    (3,393,000
    )Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    819,000
    
    
    $
    (3,393,000
    )Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    20,546,000
    
    
    
    19,085,000Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Employee Stock Options
    
    
    585,000
    
    
    
    
    
    
    
    Denominator for diluted earnings per shareadjusted
weighted-average shares and assumed conversions
    
    
    21,131,000
    
    
    
    19,085,000Basic earnings per share
    
    $
    0.04
    
    
    $
    (0.18
    )Diluted earnings per share
    
    $
    0.04
    
    
    $
    (0.18
    )
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NOTE 6
 STOCK OPTIONS
     NOTE 7
 PRIVATE PLACEMENT OF SECURITIES  JULY 2005
 Common Private Placement
 Securities Purchase Agreement
  Common Warrants
  10




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Preferred Private Placement
 Securities Purchase Agreement
  Preferred Warrants
   11




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Terms of the Preferred Stock
    Over-Allotment Warrants
  12




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Warrant Derivative Liability
  Conversion of Preferred Stock to Common Stock
  Exercise of Warrants for Common Stock
   13




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NOTE 8
 ACQUISITION
   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
  NOTE 9
 GOODWILL
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NOTE
10  EMPLOYEE FRAUD
     NOTE
11  NEW ACCOUNTING PRONOUNCEMENTS
 Accounting for Uncertainty in Income Taxes 
an interpretation of FASB Statement No. 109
   15




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The Fair
Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB
Statement No. 115
  16




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
    17




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CRITICAL ACCOUNTING POLICIES
  RESULTS OF OPERATIONS
 Three Months Ended July 31, 2007
        18




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Six Months Ended July 31, 2007
       19




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FINANCIAL CONDITION
 Liquidity and Capital Resources
          20




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ITEM 3. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  21




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ITEM 4. CONTROLS AND PROCEDURES
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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
 (a)
    
    The following exhibits are being filed with this report:
 ExhibitsNumber
    
    Description31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended, and Section 302 Of
The Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended, and Section 302 Of
The Sarbanes-Oxley Act of 200232.1
    
    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/ Nicola BattagliaNicola BattagliaChief Financial Officer  24




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EXHIBIT INDEX
Exhibit No. and Description
 Exhibit 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 2002
 25