PDG Environmental, Inc. 10-Q

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, 2007


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.

(Exact name of registrant as specified in its charter)


Delaware		22-2677298
(State or other jurisdiction of incorporation		(I.R.S. Employer
or organization)		Identification No.)

1386 Beulah Road, Building 801
Pittsburgh, Pennsylvania		15235
(Address of principal executive offices)		(Zip Code)

412-243-3200
(Registrant’s telephone number, including area code)

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 filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

As of December 10, 2007, there were 20,789,276 shares of the registrant’s common stock, par value $0.02 per share, outstanding.

PART I. FINANCIAL INFORMATION

PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	October 31,			January 31,
	2007			2007
	(unaudited)
Assets

Current Assets
Cash and cash equivalents	$	143,000		$	158,000
Contracts receivable, net		25,250,000			21,257,000
Costs and estimated earnings in excess of billings on uncompleted contracts		6,753,000			5,607,000
Inventories		660,000			553,000
Prepaid income taxes		21,000			271,000
Deferred income tax asset		1,109,000			915,000
Other current assets		404,000			534,000


Total Current Assets		34,340,000			29,295,000

Property, Plant and Equipment		12,066,000			11,352,000
Less: accumulated depreciation		9,614,000			8,795,000

		2,452,000			2,557,000

Goodwill		2,619,000			2,651,000
Deferred Income Tax Asset		2,548,000			2,565,000
Contracts Receivable, Non Current		500,000			500,000
Intangible and Other Assets		5,174,000			5,686,000


Total Assets	$	47,633,000		$	43,254,000


Liabilities and Stockholders’ Equity

Current Liabilities
Accounts payable	$	10,079,000		$	7,403,000
Billings in excess of costs and estimated earnings on uncompleted contracts		1,835,000			3,421,000
Accrued Income Taxes		123,000			—
Current portion of long-term debt		414,000			322,000
Accrued liabilities		5,688,000			4,007,000


Total Current Liabilities		18,139,000			15,153,000

Long-Term Debt		12,709,000			12,161,000

Series C Redeemable Convertible Preferred Stock		3,207,000			2,550,000

Total Liabilities		34,055,000			29,864,000

Stockholders’ Equity
Common stock		416,000			411,000
Common stock warrants		1,628,000			1,628,000
Additional paid-in capital		19,609,000			19,245,000
Retained earnings (deficit)		(8,037,000	)		(7,856,000	)
Less treasury stock, at cost		(38,000	)		(38,000	)


Total Stockholders’ Equity		13,578,000			13,390,000

Total Liabilities and Stockholders’ Equity	$	47,633,000		$	43,254,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

(UNAUDITED)


	For the Three Months
	Ended October 31,
	2007			2006
Contract revenues	$	26,616,000		$	19,783,000
Contract costs		23,874,000			17,772,000


Gross margin		2,742,000			2,011,000

Selling, general and administrative expenses		3,594,000			2,932,000
(Gain) loss on Sale of Fixed Assets		—			12,000


Income (loss) from operations		(852,000	)		(933,000	)

Other income (expense):
Interest expense		(303,000	)		(246,000	)
Non-cash interest expense for preferred dividends and accretion of discount		(229,000	)		(195,000	)
Non-recurring charge for employee fraud		—			(150,000	)
Non-cash impairment charge for goodwill		—			(111,000	)
Interest and other income, net		163,000			3,000


		(369,000	)		(699,000	)


Income (loss) before income taxes		(1,221,000	)		(1,632,000	)

Income tax provision (benefit)		(221,000	)		365,000


Net income (loss)	$	(1,000,000	)	$	(1,997,000	)


Per share of common stock:

Basic	$	(0.05	)	$	(0.10	)


Dilutive	$	(0.05	)	$	(0.10	)


Average common share equivalents outstanding		20,749,000			20,445,000

Average dilutive common share equivalents outstanding		—			—


Average common shares and dilutive common equivalents outstanding for earnings per share calculation		20,749,000			20,445,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

(UNAUDITED)


	For the Nine Months
	Ended October 31,
	2007			2006
Contract revenues	$	74,954,000		$	58,579,000
Contract costs		64,478,000			52,128,000


Gross margin		10,476,000			6,451,000

Selling, general and administrative expenses		9,399,000			9,188,000
(Gain) Loss on Sale of Fixed Assets		—			17,000

Income (loss) from operations		1,077,000			(2,754,000	)

Other income (expense):
Interest expense		(883,000	)		(716,000	)
Non-cash interest expense for preferred dividends and accretion of discount		(658,000	)		(1,870,000	)
Non-recurring charge for employee fraud		—			(748,000	)
Non-cash impairment charge for goodwill		—			(111,000	)
Interest and other income, net		315,000			16,000


		(1,226,000	)		(3,429,000	)


Income (loss) before income taxes		(149,000	)		(6,183,000	)

Income tax provision (benefit)		32,000			(793,000	)


Net income (loss)	$	(181,000	)	$	(5,390,000	)


Per share of common stock:

Basic	$	(0.01	)	$	(0.28	)


Dilutive	$	(0.01	)	$	(0.28	)


Average common share equivalents outstanding		20,614,000			19,543,000

Average dilutive common share equivalents outstanding		—			—


Average common shares and dilutive common equivalents outstanding for earnings per share calculation		20,614,000			19,543,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(UNAUDITED)


	For the Nine Months
	Ended October 31,
	2007			2006
Cash Flows from Operating Activities:
Net income (loss)	$	(181,000	)	$	(5,390,000	)
Adjustments to Reconcile Net Income to Cash:
Depreciation and amortization		1,403,000			1,284,000
Provision for deferred income taxes		(177,000	)		(895,000	)
Interest expense for preferred dividends and accretion of discount		657,000			1,870,000
Impairment charge for goodwill		—			111,000
Loss on sale of equity investment and fixed assets		—			17,000
Stock based compensation		224,000			209,000
Provision for uncollectible accounts		11,000			140,000
Changes in Assets and Liabilities Other than Cash
Contracts receivable		(4,004,000	)		382,000
Costs and estimated earnings in excess of billings on uncompleted contracts		(1,146,000	)		(372,000	)
Inventories		(107,000	)		(35,000	)
Prepaid/accrued income taxes		373,000			509,000
Other current assets		1,113,000			869,000
Accounts payable		2,676,000			534,000
Billings in excess of costs and estimated earnings on uncompleted contracts		(1,586,000	)		(63,000	)
Accrued liabilities		1,612,000			(458,000	)

Total Changes in Assets and Liabilities Other than Cash		(1,069,000	)		1,366,000

Net Cash Provided by (Used in) Operating Activities		868,000			(1,288,000	)

Cash Flows from Investing Activities:
Purchase of property, plant and equipment		(528,000	)		(775,000	)
Proceeds from sale of equity investment and fixed assets		—			24,000
Increase in other assets		(66,000	)		(57,000	)

Net Cash Used in Investing Activities		(594,000	)		(808,000	)

Cash Flows from Financing Activities:
Proceeds from debt		730,000			2,664,000
Proceeds from exercise of stock options and warrants		145,000			861,000
Payment of insurance premium financing		(882,000	)		(1,039,000	)

Principal payments on debt		(282,000	)		(485,000	)

Net Cash (Used in) Provided by Financing Activities		(289,000	)		2,001,000


Change in Cash and Cash Equivalents		(15,000	)		(95,000	)
Cash and Cash Equivalents, Beginning of Period		158,000			230,000

Cash and Cash Equivalents, End of Period	$	143,000		$	135,000


Supplementary disclosure of non-cash Investing and Financing Activity:
Increase (Decrease) in goodwill and accrued liabilities for contingent payment	$	(32,000	)	$	561,000

Financing of annual insurance premium	$	983,000		$	1,157,000

Non-cash purchase of fixed assets financed through capital lease	$	197,000		$	—

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2007

(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial statements include PDG Environmental, Inc. and its wholly-owned subsidiaries (the “Corporation” or “Company”).

The condensed consolidated financial statements as of and for the three and nine-month periods ended October 31, 2007 and 2006 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended by Amendment No. 1, for the year ended January 31, 2007 (as so amended, the 2007 Form 10-K) and the Company’s Quarterly Reports for the quarters ended April 30, 2007 and July 31, 2007. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which are of a recurring nature) necessary for the fair statement of the results for the interim periods.

Due to variations in the environmental and specialty contracting industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.

NOTE 2 — CONTRACTS RECEIVABLE

At October 31, 2007 and January 31, 2007, contract receivables consist of the following:


	October 31, 2007			January 31, 2007
Billed completed contracts	$	15,908,000		$	13,989,000
Contracts in Progress		11,142,000			9,058,000


		27,050,000			23,047,000

Less allowance for Uncollectible Accounts		(1,300,000	)		(1,290,000	)


Net Contracts Receivables	$	25,750,000		$	21,757,000

Contracts receivable at October 31, 2007 and January 31, 2007, include $2,743,000 and $1,603,000, respectively, of retainage receivables. At October 31, 2007 and January 31, 2007, a portion of the receivable balance, $500,000, has been classified as non-current because the Corporation does not anticipate realizing the amount within the normal operating cycle.

At October 31, 2007, the Corporation had approximately $6.8 million of costs and estimated earnings in excess of billings on uncompleted contracts. Included in this amount is approximately $3.1 million of costs related to contract claims and unapproved change orders. Of the $25.7 million in contracts receivable, approximately $2.6 million of contracts receivable represent disputed or litigated items. The Corporation expects to process change orders or pursue contract claims for at least the full amount of these costs relative to the aforementioned contracts.

NOTE 3 — INCOME TAXES

No current federal income taxes were provided for the nine month period ended October 31, 2007. A current federal income tax expense of $95,000 was provided for the nine month period ended October 31, 2006.

A state income tax provision of $209,000 and $8,000 were made in the nine months ended October 31, 2007 and 2006, respectively. A deferred tax benefit of $177,000 was recorded for the nine months ended October 31, 2007.

At January 31, 2006 the Corporation assessed its recent operating history and concluded that recognition of the valuation allowance against deferred income tax assets was not required, therefore the entire valuation allowance was recognized as a deferred tax benefit at January 31, 2006. In making the evaluation at January 31, 2006, the Corporation concluded that it was more likely than not that the deferred income tax assets would be realized. At October 31, 2006 it was determined that the recognition of deferred income tax assets for all of the net operating loss carryforwards for both federal and state purposes and the federal Research & Development Tax Credit would not be appropriate. Therefore, at October 31, 2006 a $1.0 million valuation allowance against deferred income tax assets was provided.

The deferred benefit of $0.89 million for federal and state income taxes reflects the effect of carrying back the fiscal 2007 loss to fiscal years ended January 31, 2005 and 2006 thereby generating a refund of federal income taxes previously paid and the realization of a portion of the net operating loss carryforwards for both federal and state purposes and the federal Research & Development Tax Credit.

At October 31, 2007, the Corporation has approximately $4.4 million of net operating loss carryforwards for federal income tax purposes expiring in 2027 and approximately $500,000 of federal credit carryforwards, primarily Research and Development Tax Credits, expiring from 2022 to 2028.

Income taxes paid by the Corporation for the nine months ended October 31, 2007 and 2006 totaled approximately $58,000 and $11,000, respectively. Also, during the nine months ended October 31, 2006, the Corporation received a $400,000 refund of federal income tax payments made in fiscal year 2006.

NOTE 4 – TERM DEBT

The Corporation maintains a $15 million line of credit with Huntington Bank (formerly Sky Bank). The current interest rate on the line of credit is prime plus 1%.

On October 31, 2007, the balance on the line of credit was $12,000,000 with an unused availability, based upon the asset based lending formula, of $1,023,000. The majority of the Corporation’s property and equipment are pledged as security for the above obligations. Effective July 31, 2007, the Company and Huntington Bank agreed upon an extension of the maturity date to June 6, 2009.

On October 31, 2007 the Company was not in compliance with two of the financial covenants of the line of credit agreement but subsequently received a waiver from Huntington Bank of such covenants for the period ended October 31, 2007.

The Corporation paid interest costs totaling approximately $877,000 and $687,000 during the nine months ended October 31, 2007 and 2006, respectively.

The Corporation’s mortgage on its Pittsburgh operating location is at an interest rate of 7.75% fixed until July 31, 2009 and is then adjusted to 2.75% above the 3-year Treasury Index every three years.

NOTE 5 — NET EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:


	For the Three Months
	Ended October 31,
	2007			2006
Numerator:

Net Income (loss)- Numerator for basic earnings per share—income available to common stockholders	$	(1,000,000	)	$	(1,997,000	)

Effect of dilutive securities:


	For the Three Months
	Ended October 31,
	2007			2006
Preferred stock dividends and accretion of discount		—			—


Numerator for diluted earnings per share—income available to common stock after assumed conversions	$	(1,000,000	)	$	(1,997,000	)


Denominator:

Denominator for basic earnings per share—weighted average shares		20,749,000			20,445,000

Effect of dilutive securities:

Convertible Preferred Stock and related accrued dividends		—			—
Warrants		—			—
Employee Stock Options		—			—


		—			—


Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		20,749,000			20,445,000


Basic earnings per share	$	(0.05	)	$	(0.10	)

Diluted earnings per share	$	(0.05	)	$	(0.10	)

At October 31, 2007 and 2006; 1,111,000 and 2,657,000 options, and 5,689,000 and 5,689,000 warrants, respectively, were not included in the calculation of diluted earnings per share as their inclusion would have been antidilutive. The conversion of the Series C Redeemable Convertible Preferred Stock was not included in the calculation of diluted earnings per share as of October 31, 2007 and 2006 as their inclusion would have been antidilutive.


	For the Nine Months
	Ended October 31,
	2007			2006
				(Restated)
Numerator:

Net Income (loss)- Numerator for basic earnings per share—income available to common stockholders	$	(181,000	)	$	(5,390,000	)

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	$	(181,000	)	$	(5,390,000	)


Denominator:

Denominator for basic earnings per share—weighted average shares		20,614,000			19,543,000

Effect of dilutive securities:

Convertible Preferred Stock and related accrued dividends		—			—
Warrants		—			—
Employee Stock Options		—			—

		—			—


Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		20,614,000			19,543,000


Basic earnings per share	$	(0.01	)	$	(0.28	)

Diluted earnings per share	$	(0.01	)	$	(0.28	)

At October 31, 2007 and 2006; 1,121,000 and 2,657,000 options, and 5,689,000 and 5,689,000 warrants, respectively, were not included in the calculation of diluted earnings per share as their inclusion would have been antidilutive. The conversion of the Series C Redeemable Convertible Preferred Stock was not included in the calculation of diluted earnings per share as of October 31, 2007 and 2006 as their inclusion would have been antidilutive.

NOTE 6 – STOCK OPTIONS

On February 1, 2006, the Corporation changed its accounting method for its stock-based compensation plans and adopted the recognition and measurement principles of FASB Statement No. 123R, “Accounting for Stock-Based Compensation”. In adopting FASB 123R, the Corporation utilized the modified prospective approach where by only the effect of granted but unvested options was recognized on a prospective basis. Prior to fiscal year 2007, the Corporation accounted for its stock-based compensation plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. During the three and nine month periods ended October 31, 2007, the Company recognized $76,000 and $224,000 of stock-based employee compensation cost. During the three and nine month periods ended October 31, 2006, the Company recognized $34,000 and $209,000 of stock-based employee compensation cost.

At October 31, 2007, the Corporation had 1.0 million stock options subject to time vesting. The average volatility of the expected market price of the Corporation’s common stock is 0.63, the weighted average dividend yield is 0%, the weighted average expected life of the options is 10 years and the weighted average forfeiture rate is 3%.

During the nine months ended October 31, 2007 and 2006, 505,000 and 40,000 stock options were issued by the Corporation.

During the nine months ended October 31, 2007 and 2006, 232,000 and 311,000 shares, respectively, of the Corporation’s common stock were issued due to the exercise of stock options.

NOTE 7 – PRIVATE PLACEMENT OF SECURITIES – JULY 2005

Common Private Placement

Securities Purchase Agreement

On July 1, 2005, the Company executed a securities purchase agreement (the “Common Purchase Agreement”) with various institutional and accredited investors (the “Common Investors”) pursuant to which it agreed to sell in a private placement transaction (the “Common Private Placement”) for an aggregate purchase price of $1,500,000 (a) 1,666,667 shares of the Company’s Common Stock, par value $0.02 per share (the “Common Shares”), (b) warrants to purchase 416,667 shares of the Company’s Common Stock at an exercise price of $1.11 per share (“First Common Offering Warrants”) and (c) warrants to purchase 416,667 shares of the Company’s Common Stock at an exercise price of $1.33 per share (“Second Common Offering Warrants” and, together with the First Common Offering Warrants, the “Common Offering Warrants”). The $0.90 purchase price per share for the Common Shares approximately represents 80% of the average of the daily volume weighted average price of the Common Stock for the 20 day period prior to the execution of the Common Purchase Agreement. The Company closed the Common Private Placement on July 6, 2005. On November 21, 2005 the Company’s registration statement covering the common stock, the common stock to be received upon the conversion of the preferred stock and the common stock to be received upon the exercise of the warrants for common stock was declared effective by the U.S. Securities and Exchange Commission.

Common Warrants

The First Common Offering Warrants issued to each Common Investor provide such Common Investor the right to purchase shares of the Company’s Common Stock, in aggregate, up to an additional 25% of the total number of

Common Shares purchased by such Common Investor in the Common Private Placement at an exercise price of $1.11 per share. The First Common Offering Warrants contain a cashless exercise provision, whereby if at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Warrant Holder, then the Warrant may also be exercised at such time by means of a “cashless exercise” in which the Warrant Holder shall be entitled to receive common shares for the number of Warrant Shares equal to the appreciation in the warrant above the exercise price at the time of the exercise. The First Common Offering Warrants expire five years from the date of issuance and contain adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassifications or similar events of the Company’s capital stock, issuances of the Company’s securities for consideration below the exercise price and pro rata distributions of cash, property, assets or securities to holders of the Company’s Common Stock. If the First Common Offering Warrants are exercised in full in cash, the Company would receive upon such exercise aggregate proceeds of $462,500.

The Second Common Offering Warrant issued to each Common Investors provides such Common Investor the right to purchase shares of the Company’s Common Stock, in aggregate, up to an additional 25% of the total number of Common Shares purchased by such Common Investor in the Common Private Placement at an exercise price of $1.33 per share. The Second Common Offering Warrants contain a cashless exercise provision, whereby if at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Warrant Holder, then the Warrant may also be exercised at such time by means of a “cashless exercise” in which the Warrant Holder shall be entitled to receive common shares for the number of Warrant Shares equal to the appreciation in the warrant above the exercise price at the time of the exercise. The Second Common Offering Warrants expire five years from the date of issuance and contain adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassifications or similar events of the Company’s capital stock, issuances of Company’s securities for consideration below the exercise price and pro rata distributions of cash, property, assets or securities to holders of the Company’s common stock. If the Second Common Offering Warrants are exercised in full in cash, the Company would receive upon such exercise aggregate proceeds of $554,167.

The net proceeds to the Corporation from the offering, after costs associated with the Common Stock portion of the offering, of $1,349,000 have been allocated among common stock and warrants based upon their relative fair values. The Corporation used the Black-Scholes pricing model to determine the fair value of the warrants to be $360,000.

Preferred Private Placement

Securities Purchase Agreement

On July 1, 2005, the Company executed a securities purchase agreement (“Preferred Purchase Agreement”) with various institutional and accredited investors (the “Preferred Investors”) pursuant to which it agreed to sell in a private placement transaction (the “Preferred Private Placement”) for an aggregate purchase price of $5,500,000 (a) 5,500 shares of the Company’s Series C Convertible Preferred Stock, stated value $1,000 per share (the “Preferred Shares”), (b) warrants to purchase 1,375,000 shares of the Company’s Common Stock at an exercise price of $1.11 per share (“First Preferred Offering Warrants”), (c) warrants to purchase 1,375,000 shares of the Company’s Common Stock at an exercise price of $1.33 per share (“Second Preferred Offering Warrants” and, together with the First Preferred Offering Warrants,” the “Preferred Offering Warrants”) and (d) warrants (“Over-Allotment Warrants”) to purchase (1) up to 1,375 shares of Series C Preferred Stock (the “Additional Preferred Shares”), (2) warrants to purchase up to 343,750 shares of Common Stock at $1.11 per share (“First Additional Warrants”) and (3) warrants to purchase up to 343,750 shares of Common Stock at $1.33 per share (“Second Additional Warrants” and, together with the First Additional Warrants, the “Additional Warrants”). The Preferred Private Placement closed on July 6, 2005.

Preferred Warrants

The First Preferred Offering Warrants issued to each Preferred Investor provide such Preferred Investor the right to purchase shares of the Company’s Common Stock, in aggregate, up to an additional 25% of the total number of shares of Common Stock issuable upon the conversion of the Preferred Stock purchased by such Preferred

Investor in the Preferred Private Placement at an exercise price of $1.11 per share. The First Preferred Offering Warrants contain a cashless exercise provision, whereby at any time the Warrant may also be exercised at such time by means of a “cashless exercise” in which the Warrant Holder shall be entitled to receive common shares for the number of Warrant Shares equal to the appreciation in the warrant above the exercise price at the time of the exercise. The First Preferred Offering Warrants expire five years from the date of issuance and contain adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassifications or similar events of the Company’s capital stock, issuances of Common Stock for consideration below the exercise price and pro rata distributions of cash, property, assets or securities to holders of the Company’s common stock. If the First Preferred Offering Warrants are exercised in full in cash, the Company would receive upon such exercise aggregate proceeds of $1,526,250.

The Second Preferred Offering Warrants issued to each Preferred Investor provide such Preferred Investor the right to purchase shares of the Company’s Common Stock, in aggregate, up to an additional 25% of the total number of shares of Common Stock issuable upon the conversion of the Preferred Stock purchased by such Preferred Investor in the Preferred Private Placement at an exercise price of $1.33 per share. The Second Preferred Offering Warrants contain a cashless exercise provision, whereby at any time the Warrant may also be exercised at such time by means of a “cashless exercise” in which the Warrant Holder shall be entitled to receive common shares for the number of Warrant Shares equal to the appreciation in the warrant above the exercise price at the time of the exercise. The Second Preferred Offering Warrants expire five years from the date of issuance and contain adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassifications or similar events of the Company’s capital stock, issuances of the Company’s securities for consideration below the exercise price as well as pro rata distributions of cash, property, assets or securities to holders of the Company’s common stock. If the Second Preferred Offering Warrants are exercised in full in cash, the Company would receive upon such exercise aggregate proceeds of $1,828,750.

The net proceeds to the Corporation from the offering, after costs associated with the Preferred Stock portion of the offering, of $4,877,000 have been allocated among common stock and warrants based upon their relative fair values. The Corporation used the Black-Scholes pricing model to determine the fair value of the warrants to be $1,204,000.

Terms of the Preferred Stock

The rights and preferences of the Preferred Shares are set forth in the Certificate of Designation, Preferences and Rights of Series C Preferred Stock (the “Certificate of Designation”). The Preferred Shares have a face value of $1,000 per share and are convertible at any time at the option of the holder into shares of Common Stock (“Conversion Shares”) at the initial conversion price of $1.00 per share (the “Conversion Price”), subject to certain adjustments including (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, sales or transfers of the assets of the Company, share exchanges or other similar events, (b) certain anti-dilution adjustments. For a complete description of the terms of the Preferred Shares please see the Certificate of Designation.

After valuing the warrants for the purchase of the Corporation’s common stock issued with the convertible Preferred Shares ($1,204,000), the beneficial conversion contained in the Preferred Shares ($1,645,000) and the costs associated with the Preferred Stock portion of the financing ($623,000) the convertible preferred stock was valued at $2,028,000. The difference between this initial value and the face value of the Preferred Stock of $3,429,000 will be accreted back to the Preferred Stock as preferred dividends utilizing an effective interest rate of 25.2%. The accretion period is the shorter of the four-year term of the preferred or until the conversion of the preferred stock. For the three month periods ended October 31, 2007 and 2006 the accretion of the aforementioned discount was $123,000 and $95,000, respectively. For the nine month periods ended October 31, 2007 and 2006, the accretion of the aforementioned discount was $344,000 and $303,000, respectively. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the accretion of the discount on the preferred stock is classified as interest expense in the Statement of Consolidated Operations.

A cumulative premium (dividend) accrues and is payable with respect to each of the Preferred Shares equal to 8% of the stated value per annum. The premium is payable upon the earlier of: (a) the time of conversion in such number of shares of Common Stock determined by dividing the accrued premium by the Conversion Price

or (b) the time of redemption in cash by wire transfer of immediately available funds. For the three month periods ended October 31, 2007 and 2006 the accrued dividend was $76,000 and $76,000, respectively. For the nine month periods ended October 31, 2007 and 2006, the accrued dividend was $228,000 and $268,000, respectively. At October 31, 2007 dividends of $691,000 are accrued. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the accretion of the preferred stock dividend is classified as interest expense in the Statement of Consolidated Operations.

Over-Allotment Warrants

The Over-Allotment Warrants issued to each Preferred Investor provides such Preferred Investor the right to purchase at an exercise price of $1,000 per share (a) Additional Preferred Shares, in aggregate, up to 25% of the total number of shares of Series C Preferred Stock purchased by such Preferred Investor in the Preferred Private Placement, (b) First Additional Warrants exercisable for a number of shares of Common Stock in an amount, in aggregate, up to 6.25% of the total number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock purchased by such Preferred Investor in the Preferred Private Placement at an exercise price of $1.11 per share and (c) Second Additional Warrants exercisable for a number of shares of Common Stock in an amount, in aggregate, up to 6.25% of the total number of shares of the Common Stock issuable upon conversion of the Series C Preferred purchased by such Purchaser in the Preferred Private Placement at an exercise price of $1.33 per share. The Over-Allotment Warrants expire upon the later of (x) 90 days after the effectiveness of the Preferred Registration Statement (as defined below) and (y) the date upon which the Company obtains stockholder approval of the Certificate of Amendment.

From late October 2005 through mid December 2005, all holders of shares of our Series C Preferred Stock exercised their over-allotment warrants resulting in the issuance of (i) 1,375 shares of Series C Preferred, (ii) warrants to purchase 343,750 shares of the Company’s Common Stock at an exercise price of $1.11 per shares and (iii) warrants to purchase 343,750 shares of the Company’s Common Stock at an exercise price of $1.33 per share. The warrants expire five years from the date of issuance. The exercise of the over-allotment warrants resulted in proceeds of $1,375,000 to the Company.

After valuing the warrants for the purchase of the Corporation’s common stock issued with the convertible Preferred Shares ($322,000), the beneficial conversion contained in the Preferred Shares ($432,000) and the costs associated with the exercise of the over-allotment ($69,000) the convertible preferred stock, issued in October 2005 from the exercise of the over-allotment option, will initially be valued at $552,000. The difference between this initial value and the face value of the Preferred Stock of $1,375,000 will be accreted back to the Preferred Stock as preferred dividends utilizing an effective interest rate of 25%. The accretion of the discount related to the over-allotment option was $30,000 and $24,000 for the three months ended October 31, 2007 and 2006 respectively. The accretion of the discount related to the over-allotment option was $86,000 and $85,000 for the nine months ended October 31, 2007 and 2006 respectively.

Warrant Derivative Liability

Both the preferred and Common Stock portions of the July 2005 private placement included registration rights agreements that imposed liquidating damages in the form of a monetary remuneration should the holders be subject to blackout days (i.e. days when the holders of the Corporation’s Common Stock may not trade the stock) in excess of the number permitted in the registration rights agreements. On November 21, 2005 the Corporation’s Registration Statement on Form S-2 was declared effective by the Securities & Exchange Commission. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event. After assessing the provisions of the registration rights agreements and the related authoritive guidance a $20,000 warrant derivative liability was provided. No gain or loss on the derivative was recorded in the quarter ended July 31, 2006 and the liability was recorded in accrued liabilities.

Conversion of Preferred Stock to Common Stock

During the nine-months ended October 31, 2006, seven holders converted 2,202.5 shares of Series C Preferred Stock and received 2,325,631 shares of Common Stock. The conversion resulted in 123,131 shares of Common Stock being issued relative to accrued dividends on the Series C Preferred Stock. The aforementioned conversion

resulted in a charge against income in the three and nine-month periods ending October 31, 2006 of approximately $0 and $1,214,000, respectively, for the related unamortized discount relative to the converted shares.

Exercise of Warrants for Common Stock

During the nine-months ended October 31, 2006 two warrant holders of the $1.11 and $1.33 per share exercise price warrants exercised for 618,055 shares of the Company’s Common stock with proceeds of $692,000 to the Company.

In connection with the private placements in July 2005, the Company entered into registration rights agreements with the Common Stockholders and Preferred Stockholders. Under these registration rights agreements, the Company agreed to file a registration statement for the purpose of registering the resale of the common stock and the shares of common stock underlying the convertible securities we issued in the private placements. The registration rights agreements require the Company to keep the registration statement effective for a specified period of time. In the event that the registration statement is not filed or declared effective within the specified deadlines or is not effective for any period exceeding a permitted Black-Out Period (45 consecutive Trading Days but no more than an aggregate of 75 Trading Days during any 12-month period), then the Company will be obligated to pay the Preferred and Common Stockholders up to 12% of their purchase price per annum. On November 21, 2005 the Company Registration Statement was declared effective by the Securities & Exchange Commission. As of December 13, 2007, the Company has utilized fifty-seven of permitted aggregate Black-Out days. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event.

NOTE 8 – ACQUISITION

On August 25, 2005, the Company, pursuant to an Asset Purchase Agreement, (the “Agreement”), completed its acquisition of certain assets of Flagship Services, Group, Inc., Flagship Reconstruction Partners, Ltd., Flagship Reconstruction Associates – Commercial, Ltd., and Flagship Reconstruction Associates – Residential, Ltd. (“Flagship”), for $5,250,000 in cash paid at closing, a promissory note for $750,000 at an interest rate of 6% due one-year from the closing, 236,027 shares of the Company’s restricted common stock valued at $250,000 ($1.06 per share), a warrant to purchase up to 250,000 shares of the Company’s restricted common stock at an exercise price of $1.00 and a warrant to purchase up to 150,000 shares of the Company’s restricted common stock at an exercise price of $1.06. The warrants were valued at $186,000 in the aggregate. The warrants were exercised during fiscal 2006. The Agreement also includes contingent payment provisions over the first eighteen-month period commencing on the closing date, pursuant to which the Company is required to pay 35% of the net earnings of the former Flagship operation in excess of $500,000. At October 31, 2007, $901,000 had been earned relative to the earn-out agreement all of which was paid in fiscal 2007. The owner of Flagship entered into an eighteen-month employment and non-competition agreement with the Company. The acquisition of Flagship greatly enhances the Company’s disaster response and restoration capabilities. The operations of the former Flagship operation were included in the Company’s operations subsequent to August 19, 2005.

An independent valuation was performed in fiscal 2006. The valuation resulted in the allocation of the purchase price as follows:


	Allocated Value		Amortization Period
Fixed assets	$	50,000		3 to 7 years
Covenant-not-to-compete		78,000	4 ¹/2 years
Customer relationships		5,766,000	10 years
Subcontractor relationships		530,000	5 years
Goodwill		160,000		N/A

For the three month periods ended October 31, 2007 and 2006, amortization expense of the aforementioned intangibles was $175,000 for both periods. For the nine month periods ended October 31, 2007 and 2006, amortization expense of the aforementioned intangibles was $525,000 for both periods.

NOTE 9 – GOODWILL

At October 31, 2007 and January 31, 2007, the Corporation’s goodwill was $2,619,000 and $2,651,000, respectively. The decrease in goodwill during the current fiscal period was due to the contingent earnout obligation related to the acquisition of Flagship in fiscal 2006.

SFAS No. 142 “Goodwill and Other Intangible Assets” prescribes a two-phase process for impairment testing of goodwill, which is performed annually, absent any indicators of impairment. The first phase screens for impairment, while the second phase (if necessary) measures impairment. The Corporation has elected to perform its annual analysis during the fourth quarter of each year based upon goodwill balances as of the end of the year. Although no indicators of impairment have been identified during fiscal 2008, there can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

NOTE 10 – EMPLOYEE FRAUD

For the three and nine months ended October 31, 2006, the Company recorded a $150,000 and $748,000 non-recurring charge, respectively, relative to employee fraud at its Seattle office. This charge arises following an internal investigation commenced in October 2006 into operations at the Company’s Seattle office, which indicated fraudulent activities undertaken by one or more former employees. The Company took immediate action including retaining legal counsel, fraud investigators, and forensic accountants to assist in determining the actual amount of the loss, appropriate legal action, and pursuit of insurance payments and other means of recovery for such losses. The Company was able to discover this incident through its internal control procedures, which alerted the Company to the issues, and the Company is confident that the fraudulent activities, while serious, were isolated.

As a result of the investigation, previously filed Quarterly Reports on Form 10-Q for the quarters ended April 30, 2006 and July 31, 2006 were amended and restated to correct the error caused by the employee fraud, which increased the net loss by $421,000 for the six-months ended July 31, 2006. Additionally the previously filed Annual Report on Form 10-K for the year ended January 31, 2006 was restated and the previously reported net income was reduced by $388,000. The Forms 10-K/A and 10-Q/A were filed as amendments on January 18, 2007.

The Company filed a claim against the Company’s employee theft insurance policy. The insurance claim amount is $500,000. The Corporation received approximately $400,000 associated with this claim in fiscal 2008 and recorded the benefit as a component of Other Income.

The Company has evaluated the impact of the employee fraud on its internal control over financial reporting and has undertaken corrective measures (see “Item 4 – Controls and Procedures” below).

NOTE 11 – NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN No. 48”), which prescribes measurement attributes and a recognition threshold, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial reporting purposes. FIN No. 48 also requires additional disclosure concerning uncertainty related to deferred income tax assets and liabilities. Any adjustments resulting from implementation of FIN No. 48 are required to be recognized as changes in accounting principles with a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Implementation of FIN No. 48 is required for the first annual period beginning after December 15, 2006. The Company adopted FIN No. 48 beginning February 1, 2007. The Company reviewed its previously recognized tax benefits and determined that no material uncertainty was indicated as of the implementation of the new standard.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose

the fair value of its financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. SFAS 157 is effective for the Company’s fiscal year beginning February 1, 2008. The adoption of SFAS No. 157 is not expected to have a material effect on the Company’s results of operations, cash flows, or financial condition.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans- an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize the over-funded or under-funded status of a benefit plan in its statement of financial position, recognize as a component of other comprehensive income, net of tax, gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit costs pursuant to SFAS No. 87, “Employers Accounting for Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. The recognition and disclosure provisions required by SFAS No. 158 are effective for the Company’s fiscal year ending January 31, 2007. The measurement date provisions are effective for fiscal years ending after December 15, 2008. The adoption of SFAS No. 158 will not have a material effect on the Company’s results of operations, cash flows, or financial condition.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”), which permits entities to choose fair value measurement for many financial instruments and certain other items as of specified election dates. Business entities will thereafter report in earnings the unrealized gains and losses on items for which the fair value option has been chosen. The fair value option may be applied instrument by instrument, may not be applied to portions of instruments and is irrevocable unless a new election date occurs. SFAS No. 159 is effective for an entity’s first fiscal year beginning after November 15, 2007. The Company plans to adopt SFAS No. 159 beginning February 1, 2008. The Company is currently evaluating the potential impact of adoption of SFAS No. 159.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both the balance sheet and income statement approach when quantifying a misstatement. SAB 108 was effective for the Company’s fiscal year ending January 31, 2007. The adoption of SAB 108 did not have a material effect on the Company’s results of operations, cash flows, or financial condition.

On December 4, 2007, the FASB issued FASB Statement No. 141 (Revised 2007), Business Combinations. Statement 141R will significantly change the accounting for business combinations. Under Statement 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R also includes a substantial number of new disclosure requirements. Statement 141 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited.

On December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51. Statement 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. Statement 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. Statement 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Like Statement 141R discussed above, earlier adoption is prohibited. The adoption of SFAS No. 160 will not have a material effect on the Company’s results of operations, cash flows, or financial condition.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Management’s Discussion and Analysis of the Consolidated Condensed Financial Statements and other sections of this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Corporation’s or Corporation management’s expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on the Corporation’s current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” and similar expressions are intended to identify forward-looking statements. There can be no assurance that future developments and actual actions or results affecting the Corporation will be those that the Corporation has anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the Corporation’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the continuing validity of the underlying assumptions and estimates of total forecasted project revenues, costs and profits and project schedules; the outcomes of pending or future litigation, arbitration or other dispute resolution proceedings; the availability of borrowed funds on terms acceptable to the Corporation; the ability to retain certain members of management; the ability to obtain surety bonds to secure the Corporation’s performance under certain construction contracts; possible labor disputes or work stoppages within the construction industry; changes in federal and state appropriations for infrastructure projects; possible changes or developments in worldwide or domestic political, social, economic, business, industry, market and regulatory conditions or circumstances; and actions taken or not taken by third parties including the Corporation’s customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials; and other risks and uncertainties discussed under the heading “Risk Factors” in the Corporation’s 2007 Form 10-K filed with the Securities and Exchange Commission. The Corporation undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

OVERVIEW

We provide environmental and specialty contracting services including asbestos and lead abatement, microbial remediation, disaster response, loss mitigation and reconstruction, demolition and related services throughout the United States. During the nine months ended October 31, 2007, revenues from disaster response, loss mitigation and reconstruction were 40.3% of total revenues vs. 59.7% of revenues from abatement of asbestos. The Company has broadened its offering of services in recent years to include a number of complementary services which utilize its existing infrastructure and personnel. Cash flows from contracting services are primarily generated from periodic progress billings on large contracts under which the Corporation performs services and single project billings on small short duration projects.

The Corporation operates in a complex environment due to the nature of our customers and our projects. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Depending on the contract, this poses challenges to the Corporation’s executive management team in overseeing contract performance and in evaluating the timing of the recognition of revenues and project costs, both initially and when there is a change in project status. Thus, the Corporation’s management team spends considerable time in evaluating and structuring key contracts, in monitoring project performance, and in assessing the financial status of our major contracts. Due to the complexity in the revenue recognition for the Corporation’s projects, executive financial management is attentive to developments in individual contracts that may affect the timing and measurement of contract costs and related revenues.

The Corporation continues to manage its projects to minimize risk and the negative financial impact upon the Corporation. More information on risks and the Corporation’s efforts to manage risks is available in Item 1A under the caption “Risk Factors” in the Corporation’s 2007 Form 10-K and supplemented elsewhere in this report. Additionally, please refer to the Corporation’s 2007 Form 10-K for a discussion of the components of the significant categories in the Corporation’s consolidated Statement of Operations.

CRITICAL ACCOUNTING POLICIES

In general, there have been no significant changes in the Corporation’s critical accounting policies since January 31, 2007. For a detailed discussion of these policies, please see Item 7 of the Corporation’s 2007 Form 10-K.

RESULTS OF OPERATIONS

Three Months Ended October 31, 2007

During the three months ended October 31, 2007, the Corporation’s contract revenues increased by 34.5% to $26.6 million compared to $19.8 million in the three months ended October 31, 2006. The increase was primarily due to significant awards which resulted in record backlog at January 31, 2007 and continued backlog of approximately $50 million at October 31, 2007. Our sales and marketing initiatives, which consisted of adding more sales people and providing better tools for them to monitor potential awards, enhanced our bid and proposal activity resulting in significant new awards in addition to recurring business from existing customers.

The Corporation’s gross margin increased to $2.7 million in the third quarter of fiscal 2008 as compared to $2.0 million in the third quarter of fiscal 2007. Gross margin as a percentage of revenue increased to 10.3% for the current quarter from 10.2% for the prior year quarter. Field margins, which are defined as the difference between contract revenues and direct field costs, decreased to 20.3% for the current quarter, from 25.2% in the prior year fiscal quarter due to two items: a loss of approximately $800,000 on an asbestos abatement contract and the downward adjustment of the margin on another large abatement contract with a $1 million margin adjustment occurring all in this quarter. Other direct costs decreased to $2.7 million or 10.0% of revenue for the current quarter as compared to $3.0 million or 15.1% of revenue for the prior year quarter as a result of cost reduction measures, largely office closures, taken at the end of fiscal 2007.

Selling, general and administrative expenses increased to $3.6 million in the current fiscal quarter as compared to $2.9 million in the three months ended October 31, 2006. The increase is principally due to higher sales costs due to higher volumes, implementation costs for Sarbanes Oxley, and higher legal costs. As a percentage of contract revenues, selling, general and administrative expense decreased by 1.4% to 13.5% vs. 14.9% for the prior year fiscal quarter as a result of the above and a higher revenue base.

The Corporation reported a loss from operations of ($852,000) for the three months ended October 31, 2007 compared to a loss from operations of ($933,000) for the three months ended October 31, 2006, as a direct result of the factors discussed above.

Interest expense increased to $303,000 in the current quarter as compared to $246,000 in the same quarter of a year ago as a result of an increased rate of interest to which a majority of the Corporation’s borrowings are tied and increased borrowings to fund operations.

Non-cash interest expense for preferred dividends and accretion of the discount relates to the private placement in July 2005 of $5.5 million of redeemable convertible preferred stock and the subsequent issuance of $1.375 million of redeemable convertible preferred stock from the exercise of the over-allotment option. As the preferred shares are mandatorily redeemable, the actual dividend and the accretion of the discount associated with the preferred stock are required to be reflected as interest expense. The current fiscal period had a $229,000 expense, which includes the actual dividend of $76,000 and the accretion of the discount associated with the preferred stock of $153,000. The prior fiscal period had a $195,000 expense, which included the actual dividend of $76,000, and the accretion of the discount associated with the preferred stock of $119,000.

For the three months ended October 31, 2006, the Company recorded a $150,000 non-recurring charge relative to employee fraud at its Seattle office. This charge arises following an internal investigation commenced in October 2006 into operations at the Company’s Seattle office, which indicated fraudulent activities undertaken by one or more former employees. In October 2007 the Company received approximately $150,000 from its insurance carrier related to a claim for this fraud incident. This amount was reflected as other income during the three months ended October 31, 2007.

During the quarter ended October 31, 2006, the Company determined that the goodwill related to its Northwestern operation was impaired due to the issues raised relative to the aforementioned suspected employee fraud, the Company’s intention to close the Seattle operation and the operating issues that the Company’s Northwest operations continue to experience.. Therefore, a non-cash provision of $111,000 was made to reduce the goodwill related to that operation to zero.

During the quarter ended October 31, 2007, the Corporation recorded an $18,000 current federal tax provision, a $49,000 state income tax provision and $288,000 deferred tax benefit.

During the quarter ended October 31, 2006, the Corporation recorded a $0.51 million current federal income provision, a $0.22 million state income tax provision and $0.36 million deferred tax benefit. At October 31, 2006 the Corporation provided a $1.0 million valuation reserve to reduce the deferred income tax assets generated by the net operating loss carryforwards for both federal and state purposes and the federal Research & Development Tax Credit to an appropriate level.

Nine Months Ended October 31, 2007

During the nine months ended October 31, 2007, the Corporation’s contract revenues increased by 28.0% to $75.0 million compared to $58.6 million in the nine months ended October 31, 2006. The increase was primarily due to significant awards which resulted in record backlog at January 31, 2007 and continued backlog in excess of $50 million at October 31, 2007. Our sales and marketing initiatives, which consisted of adding more sales people and providing better tools for them to monitor potential awards, enhanced our bid and proposal activity resulting in significant new awards in addition to recurring business from existing customers.

The Corporation’s gross margin increased to $10.5 million in the first nine months of fiscal 2008 as compared to $6.5 million in the first nine months of fiscal 2007. Gross margin as a percentage of revenue increased to 14.0% for the current period from 11.0% for the prior year nine month period. Field margins, which are defined as the difference between contract revenues and direct field costs, decreased to 25.0% for the current nine month period, and from 26.5% in the prior year fiscal nine month period. The decrease is a result of two items: a loss of approximately $800,000 on an asbestos abatement contract and the downward adjustment of the margin on another large abatement contract with the $1 million margin adjustment occurring all in the quarter ended October 31, 2007. Other direct costs decreased to $8.2 million or 11.0% of revenue for the current nine-month period as compared to $9.1 million or 15.7% of revenue for the prior year nine month period as a result of a higher revenue base and cost reduction measures taken at the end of fiscal 2007.

Selling, general and administrative expenses increased to $9.4 million in the current fiscal period as compared to $9.2 million in the prior fiscal period due to higher selling expenses, implementation costs for Sarbanes Oxley, and higher legal costs. As a percentage of contract revenues, selling, general and administrative expense decreased by 3.2% to 12.5% vs. 15.7% for the prior year fiscal period as a result of the above and a higher revenue base.

The Corporation reported income from operations of $1.1 million for the nine months ended October 31, 2007 compared to a loss from operations of ($2.8) million for the nine months ended October 31, 2006, a result of the factors discussed above.

Interest expense increased to $883,000 in the nine month period as compared to $716,000 in the same nine month period of a year ago as a result of an increased rate of interest to which a majority of the Corporation’s borrowings are tied and increased borrowings to fund operations.

Non-cash interest expense for preferred dividends and accretion of the discount relates to the private placement in July 2005 of $5.5 million of redeemable convertible preferred stock and the subsequent issuance of $1.375 million of redeemable convertible preferred stock from the exercise of the over-allotment option. As the preferred shares are mandatorily redeemable, the actual dividend and the accretion of the discount associated with the preferred stock are required to be reflected as interest expense. The current fiscal period had a $658,000 expense, which includes the actual dividend of $228,000 and the accretion of the discount associated with the preferred stock of $430,000. The prior fiscal period had a $1.9 million expense, which included the actual dividend of $268,000, and

the accretion of the discount associated with the preferred stock of $1,602,000. The accretion of the discount included a $1,214,000 charge due to the conversion of 2,203 shares of preferred stock into 2,203,000 shares of our common stock. The remaining unamortized discount is required to be expensed at the time of conversion. There were no conversions in the current fiscal period.

For the nine months ended October 31, 2006, the Company recorded a $748,000 non-recurring charge relative to employee fraud at its Seattle office. This charge arises following an internal investigation commenced in October 2006 into operations at the Company’s Seattle office, which indicated fraudulent activities undertaken by one or more former employees. In fiscal 2008 the Company received approximately $400,000 from its insurance carrier related to a claim for this fraud incident. This amount was offset by a $100,000 charge related to a former insurance carriers’ bankruptcy and the net impact of approximately $300,000 was reflected as other income during the nine months ended October 31, 2007.

During the nine-months ended October 31, 2006, the Company determined that the goodwill related to its Northwestern operation was impaired. Therefore, a non-cash provision of $111,000 was made to reduce the goodwill related to that operation to zero.

During the nine months ended October 31, 2007, the Corporation recorded no current federal taxes, a $209,000 state income tax provision and $177,000 deferred tax benefit.

During the nine-month period, 2006, the Corporation had a $95,000 provision for current federal income taxes and an $8,000 provision for current state income.

At January 31, 2006 the Corporation assessed its recent operating history and concluded that recognition of the valuation allowance against deferred income tax assets was not required, therefore the entire valuation allowance was recognized as a deferred tax benefit at January 31, 2006. In making the evaluation at January 31, 2006, the Corporation concluded that it was more likely than not that the deferred income tax assets would be realized. The deferred benefit for federal income taxes reflects the effect of carrying back the current year’s loss to fiscal years ended January 31, 2005 and 2006 thereby generating a refund of federal income taxes previously paid and the realization of a portion of a portion of the net operating loss carryforwards for both federal and state purposes and the federal Research & Development Tax Credit. At October 31, 2006 the Corporation provided a $1.0 million valuation reserve to reduce the deferred income tax assets generated by the net operating loss carryforwards for both federal and state purposes and the federal Research & Development Tax Credit to an appropriate level.

For the nine months October 31, 2006, the Corporation had a deferred income tax benefit of $0.89 million as a result of carrying back of the current period’s loss to fiscal years ended January 31, 2005 and 2006 thereby generating a refund of federal and state income taxes previously paid.

FINANCIAL CONDITION

Liquidity and Capital Resources

During the nine months ended October 31, 2007, the Corporation’s cash decreased by $15,000 to $143,000.

The decrease in cash and short-term investments during the first nine months of fiscal 2008 is attributable to inflows from operating activities of $868,000 offset by outflows from financing activities of $289,000, and outflows of $594,000 from investing activities.

Cash generated by operating activities totaled $868,000 in the nine months ended October 31, 2007. The bulk of the inflow was due to non-cash expenses of $2.1 million offset by the net loss of $(181,000), offset by the change in current assets and liabilities of $1.1 million.

Investing activities cash outflows included $528,000 for the purchase of property, plant and equipment.

Financing activities cash inflows consisted largely of $730,000 net borrowing on the line of credit, offset by payment for the insurance premium financing of $882,000 and principal repayments of $282,000.

At October 31, 2007, the Corporation’s backlog totaled $50.0 million ($38.3 million on fixed fee contracts and $11.7 million on time and materials or unit price contracts). At October 31, 2007, our backlog consisted of $38.1 million of booked orders and an additional $11.9 million of open ended purchase orders or orders in final negotiation stage which will likely become booked orders in the fourth quarter of fiscal 2008.

During the nine months ended October 31, 2006, the Corporation’s cash decreased by $95,000 to $135,000.

The decrease in cash and short-term investments during the first nine months of fiscal 2007 is attributable to inflows from financing activities of $2.0 million, offset by cash outflows of $1.3 million form operating activities and $808,000 from investing activities.

Cash used by operating activities totaled $1.3 million in the nine months ended October 31, 2006. The bulk of the outflow was due to the net loss of $5.4 million offset by non-cash charges of $2.7 million and changes in assets and liabilities of 1.4 million.

Investing activities cash outflows included $775,000 for the purchase of property, plant and equipment and a $57,000 increase in other assets.

Financing activities cash inflows consisted of $2.4 million net borrowing on the line of credit, $260,000 of borrowing from new term loans and $861,000 from the exercise of employee stock options and stock warrants. These cash inflows were partially offset by $1.5 million for the repayment of debt and insurance premium financing.

At October 31, 2006, the Corporation’s backlog totaled $40.3 million ($25.6 million on fixed fee contracts and $14.7 million on time and materials or unit price contracts).

At October 31, 2006, the Corporation had approximately $2.74 million of costs and estimated earnings in excess of billings on uncompleted contracts and approximately $500,000 of accounts receivable that represented contract claims. The Corporation is pursuing claims of approximately $4.0 million relative to the aforementioned contracts.

In connection with the private placements in July 2005, the Company entered into registration rights agreements with the Common Stockholders and Preferred Stockholders. Under these registration rights agreements, the Company agreed to file a registration statement for the purpose of registering the resale of the common stock and the shares of common stock underlying the convertible securities we issued in the private placements. The registration rights agreements require the Company to keep the registration statement effective for a specified period of time. In the event that the registration statement is not filed or declared effective within the specified deadlines or is not effective for any period exceeding a permitted Black-Out Period (45 consecutive Trading Days but no more than an aggregate of 75 Trading Days during any 12-month period), then the Company will be obligated to pay the Preferred and Common Stockholders up to 12% of their purchase price per annum. On November 21, 2005 the Company Registration Statement was declared effective by the Securities & Exchange Commission. On May 10, 2006 the Post Effective Amendment #1 was declared effective by the Securities & Exchange Commission. As of December 13, 2007, the Company has utilized fifty-seven of permitted aggregate Black-Out days. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event.

The Corporation believes funds generated by operations, amounts available under existing credit facilities and external sources of liquidity, such as the issuance of debt and equity instruments will be sufficient to finance capital expenditures, the settlement of earnout obligations, the settlement of commitments and contingencies and working capital needs for the foreseeable future. However, there can be no assurance that such funding will be available, as our ability to generate cash flows from operations and our ability to access funding under the revolving credit facilities may be impacted by a variety of business, economic, legislative, financial and other factors which may be

outside the Corporation’s control. Additionally, while the Corporation currently has significant, uncommitted bonding facilities, primarily to support various commercial provisions in the Corporation’s contracts, a termination or reduction of these bonding facilities could result in the utilization of letters of credit in lieu of performance bonds, thereby reducing the Corporation’s available capacity under the revolving credit facilities. There can be no assurance that such facilities will be available at reasonable terms to service the Corporation’s ordinary course obligations.

ITEM 3. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk associated with interest rate sensitivity. The interest rate on the equipment notes and revolving line of credit described above fluctuate based upon changes in our lender’s (Huntington Bank) prime rate. Each 1% change in the prime rate will result in a $120,000 change in annual borrowing costs based upon the balance outstanding at October 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES

During the review of our consolidated financial statements as of October 31, 2007 and for the three and nine month periods then ended, our external auditors notified our management and Audit Committee of the existence of a “material weakness” in our internal controls related to the monitoring of remote locations. The Corporation’s internal control system was designed such that general managers of remote locations had responsibility for authorizing and approving payroll charges for field employees, invoicing of customers, and collection of receivables for jobs originating in their office. This situation provided the opportunity for remote managers to engage in fraudulent activities, including fraudulent billing to customers for work never performed, payment to employees where no actual work was performed, payments received directly by former employees which were deposited in their bank accounts and preparation of supporting documentation and customer invoices submitted to the Corporate office for work that was not performed in order to substantially delay management from identifying the fraud. During the fourth quarter of fiscal 2007, we determined that it was necessary to restate our previously issued financial statements for the year ended January 31, 2006 and the quarters ended April 30, 2006 and July 31, 2006 to account for errors in the financial statements related to an employee fraud at our Seattle office. Our internal investigation identified a number of fraudulent activities undertaken by one or more former employees which included fraudulent billing to customers.

Our Chief Executive Officer and our then Principal Financial Officer concluded that the material weaknesses cited did compromise the financial reporting process resulting in the restatement of our consolidated financial statements as of January 31, 2006 and for the year then ended. To account for errors in the financial statements related to the employee’s fraud at our Seattle office, we restated our previously issued financial statements for the year ended January 31, 2006 and for the quarters ended April 30, 2006 and July 31, 2006.

Our management has discussed this material weakness with the Audit Committee. Our management took certain actions to remediate these control deficiencies and has enhanced the monitoring and communication process with each remote location to better monitor branch operations. Specifically, management required that all customer billings be sent to the customer from the corporate office. Additionally, management enhanced the monitoring and communication process with each remote location to better monitor branch operations and we are in the process of making improvements to the payroll process relative to the tracking of time worked by our hourly employees.

In addition, during their audit of our consolidated financial statements as of January 31, 2007 and for the year then ended, our external auditors notified our management and Audit Committee of the existence of certain “material weaknesses” in our internal controls. The material weaknesses related to the lack of effective monitoring controls over financial reporting. Specifically they noted a general lack of internal review and approval regarding mechanical calculations, journal entries, and disclosure-related schedules resulting in significant adjustments to the financial statements. They also specifically stated the combination of a limited staff with adequate technical expertise and the transitional status of an interim Chief Financial Officer resulted in ineffective oversight and monitoring over the year end financial reporting process. Our prior Chief Financial Officer resigned suddenly on April 2, 2007, due to health reasons. They also notified us that there was a material weakness in the effective monitoring of remote locations. They stated that the decentralized structure

of the Corporation creates internal control difficulties specifically within the monitoring function. The Corporation has not been able to identify or effectively manage commitments, contingencies and other significant matters.

In response to the identified material weaknesses, management, with oversight from our Audit Committee, is working to improve our control environment and to review, remediate and implement controls and procedures to satisfy the Corporation’s requirement to be compliant with the internal control over financial reporting requirements of Section 404 of the Sarbanes Oxley Act of 2002 by January 31, 2008. In addition, we have recently hired a new Chief Financial Officer with 18 years of experience in the areas of accounting and finance. We intend to continue our efforts to implement process changes to strengthen our internal controls and monitoring activities.

As a consequence of the monitoring of remote locations material weakness noted above, we are applying other procedures designed to improve the reliability of our financial reporting. While our efforts to remediate this material weakness are ongoing, management believes that the financial statements included in this report are fairly stated in all material respects. We will continue to monitor the effectiveness of our internal control over financial reporting, particularly as it relates to the monitoring of remote locations, and will take further actions as deemed appropriate.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Based on their evaluation, as of the end of the period covered by this report, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective for the reasons stated above as of October 31, 2007 with regards to the material weakness related to the monitoring of remote locations and the material weaknesses related to the monitoring controls over financial reporting.

Changes in Internal Control over Financial Reporting. Except as noted above, there were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter ended October 31, 2007 that have materially affected or are reasonably likely to materially affect these controls.

PART II— OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to dispute and litigation in the ordinary course of business. None of these matters, in the opinion of management, is likely to result in a material effect on the Registrant based upon information available at this time.

ITEM 1A. RISK FACTORS

There were no material changes from the Corporation’s risk factors disclosed in Item 1A of the Corporation’s 2007 Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 6, 2007, the Annual Meeting of the Stockholders of PDG Environmental, Inc was held in Pittsburgh, PA. There were 20,765,276 shares of common stock issued and outstanding as of September 24, 2007, the record date for the meeting.

At the meeting, all of the management’s nominees were elected to the Board of Directors for 1-year terms expiring at the Annual Meeting of the Stockholders in 2008. The results of the voting were as follows:


	Total Votes Cast		For		Against		Withheld
John C. Regan		19,409,981		17,726,565		0		1,683,416
Richard A. Bendis		19,409,981		17,531,265		0		1,878,716
Edgar Berkey		19,409,981		17,531,370		0		1,878,611
James D. Chiafullo		19,409,981		17,362,107		0		2,047,874
Edwin J. Kilpela		19,409,981		17,531,890		0		1,878,091

In addition, the stockholders of the Company approved the proposal to increase the authorized number of shares issuable under the Company’s Incentive Stock Option Plan from 5,000,000 shares to 5,500,000 shares. On this matter, the results of the voting were as follows:


Votes For			6,754,987
Votes Against			1,976,388
Abstained			23,735
Broker Non-Votes			10,654,871

The final matter presented at the meeting was the ratification of the selection of Malin Bergquist & Company, LLP as the Corporation’s independent registered public accounting firm for fiscal year 2008. On this matter, the results of the voting were as follows:


Votes For			18,839,968
Votes Against			260,148
Abstained			309,865

ITEM 6. EXHIBITS

(a) The following exhibits are being filed with this report:


Exhibits
Number		Description

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 2002

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 2002

32		Certification Pursuant To 18 U.S.C. Section 1350, As Amended Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002


	Page
Part I. Financial Information

Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements

(a) Condensed Consolidated Balance Sheets as of October 31, 2007 (unaudited) and January 31, 2007		3

(b) Consolidated Statements of Operations for the Three Months Ended October 31, 2007 and 2006 (unaudited)		4

(c) Consolidated Statements of Operations for the Nine Months Ended October 31, 2007 and 2006 (unaudited)		5

(d) Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2007 and 2006 (unaudited)		6

(e) Notes to Consolidated Financial Statements (unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

Part II. Other Information

Item 1. Legal Proceedings		23

Item 1A. Risk Factors		23

Item 4. Submission of Matters to a Vote of Security Holders		23

Item 6. Exhibits		24

Signature and Certification		25
EX-31.1
EX-31.2
EX-32


	PDG ENVIRONMENTAL, INC.
	By	/s/John C. Regan
	John C. Regan
	Chairman and Chief Executive Officer


	By	/s/Nicola Battaglia
	Nicola Battaglia
	Chief Financial Officer

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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 2002


Exhibit 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 2002


Exhibit 32		Certification Pursuant To 18 U.S.C. Section 1350, As Amended Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002