##### 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 1934
 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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
    
    22-2677298(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer
Identification No.)
 1386 Beulah Road, Building 801
Pittsburgh, Pennsylvania
(Address of principal executive offices)
    
    15235
(Zip Code)
 412-243-3200
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### Table of Contents



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 October 31, 2006 (unaudited) and January 31, 2006
    
    
    3(b) Consolidated Statements of Operations for the Three Months Ended October 31, 2006 and 2005 (unaudited)
    
    
    4(c) Consolidated Statements of Operations for the Nine Months Ended October 31, 2006 and 2005 (unaudited)
    
    
    5(d) Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2006 and 2005 (unaudited)
    
    
    6(e) Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24Part II. Other InformationItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    25Signature and Certification
    
    
    26EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 October 31,
    
    
    January 31,2006
    
    
    2006(unaudited)
    
    
    (Restated)AssetsCurrent AssetsCash and cash equivalents
    
    $
    135,000
    
    
    $
    230,000Contracts receivable
    
    
    23,381,000
    
    
    
    23,903,000Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    5,546,000
    
    
    
    5,174,000Inventories
    
    
    631,000
    
    
    
    596,000Prepaid income taxes
    
    
    225,000
    
    
    
    734,000Deferred income tax asset
    
    
    1,156,000
    
    
    
    470,000Other current assets
    
    
    419,000
    
    
    
    131,000Total Current Assets
    
    
    31,493,000
    
    
    
    31,238,000Property, Plant and Equipment
    
    
    10,601,000
    
    
    
    10,137,000Less: accumulated depreciation
    
    
    (8,258,000
    )
    
    
    (7,838,000
    )2,343,000
    
    
    
    2,299,000Goodwill
    
    
    2,770,000
    
    
    
    2,316,000Deferred Income Tax Asset
    
    
    425,000
    
    
    
    216,000Intangible and Other Assets
    
    
    5,876,000
    
    
    
    6,423,000Total Assets
    
    $
    42,907,000
    
    
    $
    42,492,000Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    7,022,000
    
    
    $
    6,488,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    1,981,000
    
    
    
    2,044,000Current portion of long-term debt
    
    
    181,000
    
    
    
    513,000Accrued liabilities
    
    
    4,715,000
    
    
    
    4,494,000Total Current Liabilities
    
    
    13,899,000
    
    
    
    13,539,000Long-Term Debt
    
    
    11,570,000
    
    
    
    9,059,000Series C Redeemable Convertible Preferred Stock
    
    
    2,347,000
    
    
    
    2,803,000Total Liabilities
    
    
    27,816,000
    
    
    
    25,401,000Stockholders EquityCommon stock
    
    
    410,000
    
    
    
    345,000Common stock warrants
    
    
    1,628,000
    
    
    
    1,881,000Additional paid-in capital
    
    
    19,160,000
    
    
    
    15,582,000Retained earnings (deficit)
    
    
    (6,069,000
    )
    
    
    (679,000
    )Less treasury stock, at cost
    
    
    (38,000
    )
    
    
    (38,000
    )Total Stockholders Equity
    
    
    15,091,000
    
    
    
    17,091,000Total Liabilities and Stockholders Equity
    
    $
    42,907,000
    
    
    $
    42,492,000
 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 October 31,2006
    
    
    2005Contract revenues
    
    $
    19,783,000
    
    
    $
    26,186,000Contract costs
    
    
    17,772,000
    
    
    
    22,071,000Gross margin
    
    
    2,011,000
    
    
    
    4,115,000Selling, general and administrative expenses
    
    
    2,932,000
    
    
    
    2,436,000(Gain) loss on Sale of Fixed Assets
    
    
    12,000
    
    
    
    (10,000
    )Income (loss) from operations
    
    
    (933,000
    )
    
    
    1,689,000Other income (expense):Interest expense
    
    
    (246,000
    )
    
    
    (114,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (195,000
    )
    
    
    (242,000
    )Non-recurring charge for employee fraud
    
    
    (150,000
    )
    
    
    Non-cash impairment charge for goodwill
    
    
    (111,000
    )
    
    
    Interest and other income
    
    
    3,000
    
    
    
    3,000(699,000
    )
    
    
    (353,000
    )Income (loss) before income taxes
    
    
    (1,632,000
    )
    
    
    1,336,000Income tax provision
    
    
    365,000
    
    
    
    331,000Net income (loss)
    
    $
    (1,997,000
    )
    
    $
    1,005,000Per share of common stock:Basic
    
    $
    (0.10
    )
    
    $
    0.07Dilutive
    
    $
    (0.10
    )
    
    $
    0.05Average common share equivalents outstanding
    
    
    20,445,000
    
    
    
    15,100,000Average dilutive common share equivalents
outstanding
    
    
    
    
    
    
    8,836,000Average common shares and dilutive common equivalents
outstanding for earnings per
share calculation
    
    
    20,445,000
    
    
    
    23,936,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED OPERATIONS
 (UNAUDITED)
 For the Nine MonthsEnded October 31,2006
    
    
    2005Contract revenues
    
    $
    58,579,000
    
    
    $
    56,457,000Contract costs
    
    
    52,128,000
    
    
    
    47,558,000Gross margin
    
    
    6,451,000
    
    
    
    8,899,000Selling, general and administrative expenses
    
    
    9,188,000
    
    
    
    5,837,000(Gain) Loss on Sale of Fixed Assets
    
    
    17,000
    
    
    
    (10,000
    )Income (loss) from operations
    
    
    (2,754,000
    )
    
    
    3,072,000Other income (expense):Interest expense
    
    
    (716,000
    )
    
    
    (310,000
    )Non-cash interest expense for preferred dividends and accretion of discount
    
    
    (1,870,000
    )
    
    
    (322,000
    )Gain on sale of equity investment
    
    
    
    
    
    
    48,000Equity in income of equity investment
    
    
    
    
    
    
    4,000Non-recurring charge for employee fraud
    
    
    (748,000
    )
    
    
    Non-cash impairment charge for goodwill
    
    
    (111,000
    )
    
    
    Interest and other income
    
    
    16,000
    
    
    
    22,000(3,429,000
    )
    
    
    (558,000
    )Income (loss) before income taxes
    
    
    (6,183,000
    )
    
    
    2,514,000Income tax provision (benefit)
    
    
    (793,000
    )
    
    
    809,000Net income (loss)
    
    $
    (5,390,000
    )
    
    $
    1,705,000Per share of common stock:Basic
    
    $
    (0.28
    )
    
    $
    0.12Dilutive
    
    $
    (0.28
    )
    
    $
    0.10Average common share equivalents outstanding
    
    
    19,543,000
    
    
    
    13,911,000Average dilutive common share equivalents
outstanding
    
    
    
    
    
    
    5,734,000Average common shares and dilutive common equivalents
outstanding for earnings per
share calculation
    
    
    19,543,000
    
    
    
    19,645,000
 See accompanying notes to consolidated financial statements.
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PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
 
 STATEMENTS OF CONSOLIDATED CASH FLOWS
 (UNAUDITED)
 For the Nine MonthsEnded October 31,2006
    
    
    2005Cash Flows from Operating Activities:Net income (loss)
    
    $
    (5,390,000
    )
    
    $
    1,705,000Adjustments to Reconcile Net Income to Cash:Depreciation and amortization
    
    
    1,284,000
    
    
    
    666,000Deferred income taxes
    
    
    (895,000
    )
    
    
    Interest expense for preferred dividends and accretion of discount
    
    
    1,870,000
    
    
    
    322,000Provision for uncollectible accounts
    
    
    140,000
    
    
    
    Impairment charge for goodwill
    
    
    111,000
    
    
    
    (Gain) loss on sale of equity investment and fixed assets
    
    
    17,000
    
    
    
    (58,000
    )Stock based compensation
    
    
    209,000
    
    
    
    Equity in (income) of equity investment
    
    
    
    
    
    
    (4,000
    )Changes in Assets and Liabilities
Other than Cash:Contracts receivable
    
    
    382,000
    
    
    
    (6,606,000
    )Costs and estimated earnings in excess of billings
on uncompleted contracts
    
    
    (372,000
    )
    
    
    (3,102,000
    )Inventories
    
    
    (35,000
    )
    
    
    (204,000
    )Prepaid income taxes
    
    
    509,000
    
    
    
    (45,000
    )Other current assets
    
    
    869,000
    
    
    
    633,000Accounts payable
    
    
    534,000
    
    
    
    3,123,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    (63,000
    )
    
    
    11,000Current income tax liabilities
    
    
    
    
    
    
    (305,000
    )Accrued liabilities
    
    
    (458,000
    )
    
    
    1,840,000Total Changes in Assets and Liabilities Other than Cash
    
    
    1,366,000
    
    
    
    (4,655,000
    )Net Cash Used by Operating Activities
    
    
    (1,288,000
    )
    
    
    (2,024,000
    )Cash Flows from Investing Activities:Purchase of property, plant and equipment
    
    
    (775,000
    )
    
    
    (1,004,000
    )Proceeds from sale of equity investment and fixed assets
    
    
    24,000
    
    
    
    60,000Additional investment in joint venture
    
    
    
    
    
    
    (18,000
    )Acquisition of businesses
    
    
    
    
    
    
    (5,339,000
    )Increase in other assets
    
    
    (57,000
    )
    
    
    (62,000
    )Net Cash Used by Investing Activities
    
    
    (808,000
    )
    
    
    (6,363,000
    )Cash Flows from Financing Activities:Proceeds from private placement of common and preferred stock
    
    
    
    
    
    
    7,160,000Proceeds from debt
    
    
    2,664,000
    
    
    
    2,373,000Proceeds from exercise of stock options and warrants
    
    
    861,000
    
    
    
    272,000Payment of accrued earnout liability
    
    
    
    
    
    
    (294,000
    )Payment of insurance premium financing
    
    
    (1,039,000
    )
    
    
    (959,000
    )Principal payments on debt
    
    
    (485,000
    )
    
    
    (215,000
    )Net Cash Provided by Financing Activities
    
    
    2,001,000
    
    
    
    8,337,000Change in Cash and Cash Equivalents
    
    
    (95,000
    )
    
    
    (50,000
    )Cash and Cash Equivalents, Beginning of Period
    
    
    230,000
    
    
    
    333,000Cash and Cash Equivalents, End of Period
    
    $
    135,000
    
    
    $
    283,000Supplementary disclosure of non-cash Investing and Financing Activity:Increase in goodwill and accrued liabilities for contingent payment
    
    $
    561,000
    
    
    $
    387,000Financing 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 NINE MONTHS ENDED OCTOBER 31, 2006
 (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
    NOTE 2  FEDERAL INCOME TAXES
        NOTE 3  TERM DEBT
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1 4
 1 4
       NOTE 4  NET EARNINGS PER SHARE
  For the Three MonthsEnded October 31,2006
    
    
    2005Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    (1,997,000
    )
    
    $
    1,005,000Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    242,000Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    (1,997,000
    )
    
    $
    1,247,000Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    20,445,000
    
    
    
    15,100,000Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    5,610,000Warrants
    
    
    
    
    
    
    2,117,000Employee Stock Options
    
    
    
    
    
    
    1,109,000
    
    
    
    8,836,000Denominator for diluted earnings per shareadjusted
weighted-average shares and assumed conversions
    
    
    20,445,000
    
    
    
    23,936,000Basic earnings per share
    
    $
    (0.10
    )
    
    $
    0.07Diluted earnings per share
    
    $
    (0.10
    )
    
    $
    0.05
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For the Nine MonthsEnded October 31,2006
    
    
    2005Numerator:Net Income (loss)- Numerator for basic earnings per shareincome
available to common stockholders
    
    $
    (5,390,000
    )
    
    $
    1,705,000Effect of dilutive securities:Preferred stock dividends and accretion of discount
    
    
    
    
    
    
    322,000Numerator for diluted earnings per shareincome available to
common stock after assumed conversions
    
    $
    (5,390,000
    )
    
    $
    2,027,000Denominator:Denominator for basic earnings per shareweighted average
shares
    
    
    19,543,000
    
    
    
    13,911,000Effect of dilutive securities:Convertible Preferred Stock and related accrued dividends
    
    
    
    
    
    
    3,814,000Warrants
    
    
    
    
    
    
    936,000Employee Stock Options
    
    
    
    
    
    
    984,000
    
    
    
    5,734,000Denominator for diluted shareadjusted
weighted-average shares and assumed conversions
    
    
    19,543,000
    
    
    
    19,645,000Basic earnings per share
    
    $
    (0.28
    )
    
    $
    0.12Diluted earnings per share
    
    $
    (0.28
    )
    
    $
    0.10
  9




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NOTE 5  STOCK OPTIONS
   For Three Months
    
    
    For the Nine MonthsEnded October 31,
    
    
    Ended October 31,2005
    
    
    2005Net income, as reported
    
    $
    1,005,000
    
    
    $
    1,705,000Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects of a $43,000 and $322,000 benefit, respectively
    
    
    (52,000
    )
    
    
    (389,000
    )Pro forma net income
    
    $
    953,000
    
    
    $
    1,316,000Earnings per share:Basic-as reported
    
    $
    0.07
    
    
    $
    0.12Basic-pro forma
    
    $
    0.06
    
    
    $
    0.09Diluted-as reported
    
    $
    0.05
    
    
    $
    0.10Diluted-pro forma
    
    $
    0.05
    
    
    $
    0.08
      10




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NOTE 6  PRIVATE PLACEMENT OF SECURITIES  JULY 2005
 Common Private Placement
 Securities Purchase Agreement
  Common Warrants
    11




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Preferred Private Placement
 Securities Purchase Agreement
  Preferred Warrants
    12




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Terms of the Preferred Stock
    Over-Allotment Warrants
    13




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Warrant Derivative Liability
  Conversion of Preferred Stock to Common Stock
   Exercise of Warrants for Common Stock
   NOTE 7  ACQUISITION
  14




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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 ended
    
    
    Nine months endedOctober 31, 2005
    
    
    October 31, 2005Sales
    
    $
    30,033,000
    
    
    $
    73,770,000Net Income
    
    $
    1,299,000
    
    
    $
    2,852,000Net income per common shares:Basic
    
    $
    0.09
    
    
    $
    0.19Dilutive
    
    $
    0.06
    
    
    $
    0.15Weighted average shares outstanding:Basic
    
    
    15,218,000
    
    
    
    15,020,000Dilutive
    
    
    24,172,000
    
    
    
    22,605,000
 NOTE 8  GOODWILL
   NOTE 9  EMPLOYEE FRAUD
  15




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NOTE 10  NEW ACCOUNTING PRONOUNCEMENTS
 Interpretation of FASB Statement No.
109,
   16




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NOTE 11  SUBSEQUENT EVENT
  17




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
    18




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CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS
 Three Months Ended October 31, 2006
      19




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Nine Months Ended October 31, 2006
   20




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21




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FINANCIAL CONDITION
 Liquidity and Capital Resources
           22




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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  23




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ITEM 4. CONTROLS AND PROCEDURES
      24




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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  ExhibitsNumber
    
    DescriptionEXHIBIT 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
  26