Aduddell Industries (ZENX) 10-Q 2007 Q1 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

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: 000-24684

ADUDDELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Oklahoma (State or other jurisdiction of incorporation or organization)	73-1587867 (I.R.S. Employer Identification No.)
1601 N.W. Expressway Oklahoma City, Oklahoma (Address of principal executive offices)	73118 (Zip Code)

(405) 810-2969
(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.

Yesþ Noo

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

Large Accelerated Filero      Accelerated Filero      Non-accelerated Filerþ

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yeso      Noþ

On May 14, 2007, we had outstanding 53,965,854 shares of our common stock, $.001 par value.

ADUDDELL INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2007
Table of Contents

	Page
Part I – Financial Information		1
Item 1. Financial Statements		1
Consolidated Balance Sheets		1
Consolidated Statements of Operations		3
Consolidated Statements of Cash Flows		5
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4. Controls and Procedures		26
Part II – Other Information		27
Item 1. Legal Proceedings		27
Item 1A. Risk Factors		27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3. Defaults Upon Senior Securities		28
Item 4. Submission of Matters to a Vote of Security Holders		28
Item 5. Other Information		28
Item 6. Exhibits		28
Certificate of Incorporation
Bylaws
Stock Purchase Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Section 1350 Certification of CEO
Section 1350 Certification of CFO

Cautionary Statement Regarding Forward Looking Information

     This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be identified by the use of forward-looking terminology such as: “may”, “might”, “could”, “would”, “believe”, “expect”, “intend”, “plan”, “seek”, “anticipate”, “estimate”, “project” or “continue” or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact included in this report on Form 10-Q, including without limitation, the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and located elsewhere herein regarding our financial position and liquidity are forward-looking statements. These forward-looking statements also include, but are not limited to:

•	our ability to expand our markets and maintain or increase profit margins;
•	actions of our competitors;
	statements regarding our anticipated revenues, expense levels, liquidity and capital resources and projections of positive operating cash flow; and
•	the matters described under “Part II – Item 1A – Risk Factors and in our 2006 Form 10K”

     Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to be correct.

     These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in our internal estimates or expectations or otherwise.

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ADUDDELL INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

	March 31,
	2007			December 31,
	(Unaudited)			2006
Assets
Current Assets
Cash	$	242,888		$	—
Accounts receivable, net of allowance for doubtful accounts		10,185,834			13,662,030
Costs and estimated earnings in excess of billings on uncompleted contracts		4,505,764			2,298,191
Inventory		581,567			472,588
Income tax receivable		2,254,469			2,254,469
Prepaid expenses		436,008			268,108
Related party receivable		61,210			60,088
Deposits		306,203			252,710
Employee and other receivables, net of allowance for doubtful accounts		94,729			31,484
		18,668,672			19,299,668
Property and Equipment
Field and shop equipment		4,370,620			4,023,879
Office furniture and equipment		937,901			1,263,131
Transportation equipment		3,983,157			3,931,118
Land		64,265			—
Leasehold improvements		364,920			203,896
		9,720,863			9,422,024
Less: accumulated depreciation		(1,994,606	)		(1,584,170	)
		7,726,257			7,837,854
Other
Intangible asset customer list, net		5,956,782			6,112,054
Deferred tax asset		567,149			66,000
Investments		27,240			25,156
		6,551,171			6,203,210
	$	32,946,100		$	33,340,732

See accompanying notes.

1

ADUDDELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS

	March 31,
	2007		December 31,
	(Unaudited)		2006
Liabilities and Shareholders’ Equity
Current portion of long term debt		268,833		214,343
Current portion of acquisition payable		816,667		816,667
Advances on line of credit		10,352,539		9,407,272
Overdraft				732,778
Accounts and subcontract payables		8,437,938		7,122,863
Accrued liabilities		1,476,886		773,275
Insurance payable		144,444		39,504
Income tax payable		—		—
Billings in excess of costs and estimated earnings on uncompleted contracts		844,036		1,058,168
		22,341,343		20,164,870
Long-Term Debt (Net of Current Portion)		582,681		539,975
Long-Term Acquisition Payable (Net of Current Portion)		978,833		978,833
Shareholders’ Equity
Preferred stock ($0.001 par value, 20,000,000 shares authorized, no shares issued and Outstanding)		—		—
Common stock ($0.001 par value, 100,000,000 shares authorized, 53,965,854 and 52,799,191 shares issued and outstanding at March 31, 2007 and December 31, 2006)		52,799		52,799
Paid-in capital		4,699,230		4,699,230
Unrealized gain (loss) on available-for-sale securities		2,785		703
Retained earnings		4,288,429		6,904,322
		9,043,243		11,657,054
	$	32,946,100	$	33,340,732

See accompanying notes.

2

ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,
	2007			2006
Revenues
Contract revenue	$	9,810,343		$	3,734,577
Other sales		141,899			—
		9,952,242			3,734,577
Operating Expenses
Cost of sales		8,973,387			2,847,996
Selling, general and administrative		4,101,399			1,312,564
Warranty expense		24,212			50,556
		13,098,998			4,211,116
Operating Income (Loss)		(3,146,756	)		(476,539	)
Other Income
Interest and dividend income		1,121			202,032
Gain(loss) on sale of equipment		215			3,500
Other income		28,378			8,089
		29,714			213,621
Net Income (Loss) from Operations Before Income Taxes		(3,117,042	)		(262,918	)
Provision for income taxes:
Current		(1,215,646	)		(40,000	)
Deferred		714,497			(80,000	)
		(501,149	)		(120,000	)
Net Income (Loss)		(2,615,893	)		(142,918	)
Other Comprehensive Income
Unrealized holding gains (losses)		2,082			28,405
Reclassification adjustment		—			—
Comprehensive Income	$	(2,613,811	)	$	(114,513	)

See accompanying notes.

3

	Three Months Ended March 31,
	2007			2006
Basic Net Income (Loss) per Common Share	$	(0.05	)	$	—
Diluted Net Income (Loss) per Common Share	$	—		$	—
Weighted Average Common Shares Basic		53,965,854			49,937,921
Weighted Average Common Shares Assuming Dilution		N/A			N/A

See accompanying notes.

4

ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	Mar 31,			Mar 31,
	2007			2006
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net income	$	(2,615,893	)	$	(142,918	)
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization		753,281			86,788
(Gain) on sale of property and equip		(215	)		(3,500	)
(Increase) Decrease from changes in:
Accounts receivable		3,476,196			895,563
Costs and estimated earnings in excess of Billings on uncompleted contracts		(2,207,573	)		344,906
Inventory		(108,979	)		—
Income tax receivable		(401,191	)		(199,895	)
Related party receivable		(1,122	)		(24,135	)
Deposits		(53,493	)		—
Deferred taxes		(501,149	)		—
Prepaid expenses		(167,900	)		15,634
Employee and other receivables		(63,245	)		(2,647	)
Increase (Decrease) from changes in:
Accounts payable		1,315,075			(9,840,501	)
Overdraft		(732,778	)		—
Insurance payable		104,940			(4,424	)
Accrued liabilities		703,611			87,172
Income tax payable		—			(5,349,105	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(214,132	)		(9,222	)
Deferred taxes		—			(80,000	)
Net adjustments to net income		2,302,517			(14,083,366	)
Net cash used by operating activities		(313,376	)		(14,226,284	)

See accompanying notes.

5

ADUDDELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	Mar 31,			Mar 31,
	2007			2006
	(Unaudited)			(Unaudited)
Cash Flows from Investing Activities
Proceeds from sale of property and equipment		215			3,500
Purchase of property and equipment		(339,974	)		(390,483	)
Net cash used by investing activities		(339,759	)		(386,983	)
Cash Flows from Financing Activities
Net change in line of credit		945,267			—
Retirement of long-term debt		(49,244	)		(295,390	)
Proceeds from issuance of stock		—			120,000
Net cash provided by financing activities		896,023			(175,390	)
Net Increase (Decrease) in Cash		242,888			(14,788,657	)
Cash at Beginning of Period		—			22,330,751
Cash at End of Period	$	242,888		$	7,542,094
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest	$	215,861		$	4,316
Taxes		—			5,509,000
Supplemental Schedule of Non-Cash Investing and Financing Activities
Fixed asset additions	$	339,974		$	390,483
Liabilities assumed or incurred	$	339,974		$	390,483
Common stock issued for acquisition	$	—		$	—

See accompanying notes.

6

ADUDDELL INDUSTRIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2007
(UNAUDITED)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

     Aduddell Industries, Inc. is engaged in the commercial and industrial roofing and re-roofing, specialty roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary Aduddell Enviro & Emergency Management Services, Inc. (“E2MS”). We provide internal corporate transportation services through our subsidiary Aduddell Financial Services, Inc. as well as marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.

     Our revenues are derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, concrete restoration and waterproofing, and emergency pre- and post-event response services. In 2007 we have focused on integration of our acquisitions, cost control and operations. While we have implemented a number of cost reduction initiatives and function consolidations that are in effect in our second quarter, the full effect of these actions will not be evident until the third and fourth quarters. Based on those second quarter changes and other recent initiatives we expect administrative cost to decrease quarterly by over $670,000 during the third and fourth quarters. In addition we expect continued increase in our sales volume and improvement in our divisional gross margins.

     The majority of our 2006 first quarter revenues were derived from re-roofing, restoration and repair services. In the second quarter of 2006, we increased our focus on providing services to the total exterior shell of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In the third quarter of 2006 we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative Communications, LLC, as well as our continued search for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company. This transaction closed effective December 2006 adding significant resources, including below grade waterproofing to our service offerings. While we derived no revenues in 2006 from pre-event planning, event management and post-event recovery services for disaster related activities by E2MS, we have leveraged our relationships to provide growth in the roofing and restoration markets. In addition we have negotiated a number of pre-event contracts as first responders in the event of an emergency. In one of these contracts, E2MS has been named the preferred vendor for emergency planning and response by ASFONA, the Starwood Hotels franchise owners association, and our division president, Randall Oberlag, has been named as an honorary board member of that organization. In the last quarter, we were selected as the primary subcontractor to James Lee Witt Associates for emergency roofing and miscellaneous construction for their contracts with the State of Rhode Island and the State of Virginia. We continue to make progress in the strengthening our relationships in the hospitality areas for Emergency Preparedness Management, including Mitigation and Recovery Operations

     We also offer maintenance services, which provide recurring revenues and ongoing interaction with our customers, including a new online roof asset management service. Revenues from fixed-price construction and renovation contracts are generally accounted for on a percentage-of-completion basis using the cost-to-cost method. The cost-to-cost method measures the percentage completion of a contract based on total costs incurred to date compared to total estimated costs to completion.

     Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit

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percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair. Typically, re-roofing, restoration and repair jobs are more labor intensive and have higher margins than new roof construction.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services. The financial statements include all adjustments that, in the opinion of management, are necessary in order to make the financial statements not misleading. All significant inter-company accounts and transactions have been eliminated in consolidation.

Revenue Recognition

     The Company recognizes fixed-price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Management uses this method because total cost is considered to be the best available measure of progress on the contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.

     Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, interest, depreciation and supplies. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. The asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts��� represents billings in excess of revenues recognized.

Cash and Cash Equivalents

     For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.

Inventory

     Inventories consist of construction materials and are stated at the lower of cost (first-in, first-out) or market (net realizable value).

Investments

     The Company accounts for its investments in marketable securities usingStatement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”).This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders’ equity.

     Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At March 31, 2007 and December 31, 2006, all securities covered bySFAS No. 115were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate

8

component of shareholders’ equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations.

Intangible Assets

     The Company accounts for intangible assets using ofStatement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) which primarily addresses accounting for goodwill and intangible assets subsequent to acquisition. UnderSFAS No. 142, goodwill and separately identified intangible assets with indefinite lives are no longer amortized, but reviewed annually (or more frequently if impairment indicators arise) for impairment. In accordance withSFAS No. 142, intangibles with finite useful lives, which include customer lists, continue to be amortized over their estimated useful life. The Company amortizes customer lists and organization costs using the straight-line method with an estimated useful life of five years. Impairment, if any, is calculated for all intangibles as the excess of the asset carrying value over its fair value and is charged to expense when discovered. No impairment was recorded for the quarter ended March 31, 2007. Amortization expense for the quarter ended March 31, 2007 was $322,446 and none in the first quarter of 2006. The estimated amortization of intangible assets for 2007 and each of the three succeeding years is $1,289,,784 with amortization of $1,120,094 in the fourth year.

Fair Value of Financial Instruments

     The Company’s financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable. The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature. Marketable equity securities’ fair values are estimates based on quoted market prices or approximate fair values. The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.

Share-Based Compensation

     The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton option valuation model which was developed for use in estimating the fair value of exchange traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility. Measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award.

Depreciation

     Depreciation for financial statement purposes is provided on the straight-line method over the estimated useful lives of the various assets. Depreciation expense for the quarter ended March 31, 2007 and 2006 was $430,835 and $86,788 respectively. For income tax purposes, accelerated methods of depreciation are used with recognition of deferred income taxes for the resulting temporary differences. Estimated useful lives for financial statement purposes are as follows:

Field and shop equipment	5 — 7	Years
Office furniture and equipment	5 — 10	Years
Transportation equipment	3 — 7	Years
Leasehold improvements	15 — 39	Years

Income Taxes

     The Company accounts for income taxes in accordance withStatement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”).SFAS No. 109requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition,SFAS No. 109requires the recognition of future tax benefits, such as net operating loss carry-forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that

9

includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

     In determining the quarterly provision for income taxes, the Company uses an annual effective tax rate based on expected annual income and statutory tax rates. Significant discrete items are separately recognized in the income tax provision in the quarter in which they occur.

     The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items.

Net Income (Loss) Per Share

     The Company computes net income (loss) per share in accordance withSFAS No. 128,Earnings per ShareandSEC Staff Accounting Bulletin No. 98 (“SAB 98”).Under the provisions ofSFAS No. 128 andSAB 98,basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.

Use of Estimates

     The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2 — ACQUISITIONS

     On April 1, 2006, Aduddell Roofing acquired certain operating assets of Merit Construction Services, a privately held concrete restoration company. As a result of the acquisition, the Company established its restoration division, eliminated our need to outsource restoration projects, increased restorations market opportunity through our bonding capacity, allowed us to cross sell services to customers and increased the restoration division sales. The company’s sales increased from $4 million in 2005, to over $6 million in 9 months of 2006, and continued to grow with a backlog in excess of $10 million at year end.

     The aggregate purchase price of $1,085,000 consisted of $880,000 in cash and 250,000 shares of Company common stock valued at $205,000. The value of the common shares issued was determined based on the closing market price of the Company’s common shares from the previous day. Based on the fair value of the acquired assets, the Company allocated $487,463 of the purchase price to tangible property and equipment and $597,537 to intangible assets. The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and is considered to have an estimated useful life of five years.

     In September 2006, we purchased the assets of EyeOpener Creative Communications, LLC, an integrated marketing company, to help develop and brand Aduddell’s operating business units. EyeOpener will provide Aduddell with professional and targeted marketing and sales support through strategic advertising, branding, web-based communications, sales tools, and market research. EyeOpener has in house media, photography and video capabilities that will be beneficial to all of our operating units. The aggregate purchase price of $212,550 consisted of $20,000 in cash, $103,800 in repayment of loans and 125,000 shares of Company common stock valued at $88,750. The value of the common shares issued was determined based on the closing market price of the Company’s common shares from the previous day.

     On October 20, 2006 the company signed a non-binding letter of intent to purchase Brent Anderson Associates, Inc., a Minnesota-based restoration, roofing and waterproofing company. This transaction closed effective December 1, 2006, adding significant resources, including below grade waterproofing to our service offerings.

10

     The aggregate purchase price of $9,222,415 consisted of $2,000,000 in cash, with $150,000 subject to an escrow agreement, $4,026,915 repayment of loans, and $2,000,000 of Company common stock with a minimum conversion value of $1.00 per share valued at $1,400,000 (Actual value of the common shares issued was determined based on the closing market price of the Company’s common shares from the day previous to closing.) The right to earn an additional $2,565,000 of shares of the Company’s common stock with a minimum conversion price of $1.00 per share. (Valued at $1,795,500 based on the share price at the day previous to closing.) Based on the fair value of the acquired assets, the Company allocated $3,618,268 of the purchase price to tangible property and equipment and $5,604,147 to intangible assets. The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and is considered to have an estimated useful life of five years.

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At year end we signed a definitive purchase agreement to acquire Hayden Building Maintenance, Inc. as well as Hudson Valley Roofing and Sheet Metal, Inc., privately held commercial roofing companies in New York. Hayden Building Maintenance has an additional office in New Orleans that is currently actively involved in commercial roofing related to disaster response. We continue to seek acceptable financing for the Hayden Building Maintenance and Hudson Valley Roofing acquisitions currently under agreement. We will not close by May 18^th, but remain hopeful that we will proceed with the acquisition at a future date. The 2007 combined revenues of these two companies would add over $4 million in revenues to our pro forma table above.

NOTE 3 — CONTRACT RECEIVABLES

Contracts receivable consist of the following:

	March 31,		December 31,
	2007		2006
Completed contracts	$	3,324,798	$	2,079,945
Contracts in progress		5,437,133		9,139,408
Retainage		1,423,903		2,057058
		10,185,834		13,273,411
Less allowance for doubtful amounts		—		—
	$	10,185,834	$	13,273,411

NOTE 4 — UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts, are as follows:

	March 31,		December 31,
	2007		2006
Costs incurred on uncompleted contracts	$	33,033,206	$	29,126,527
Estimated earnings		2,154,321		145,508
		35,187,527		29,272,035
Billings to date		31,525,799		28,032,012
	$	3,661,728	$	1,240,023

Included in the accompanying balance sheets under the following captions:

	March 31,			December 31,
	2007			2006
Costs and estimated earnings in excess of billings on uncompleted contracts	$	4,505,764		$	2,298,191
Billings in excess of costs and estimated earnings on uncompleted contracts		(844,036	)		(1,058,168	)
	$	3,661,728		$	1,240,168

NOTE 5 — LETTER OF CREDIT

     At March 31, 2007, the Company had a $175,000 letter of credit issued to its insurance carrier that matures on February 24, 2008.

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NOTE 6 — LINE OF CREDIT

     The Company has a $10,000,000 revolving line of credit. The line bears interest at 3.375% over the published LIBOR Rate (currently 5.32%) and is secured by all accounts, property and equipment. The line matures on July 30, 2007. There were no outstanding advances at March 31, 2006 and the outstanding amount at December 31, 2006 was $9,407,272.

NOTE 7 — LONG-TERM DEBT

The Company has the following long-term debt as of:

	March 31		December 31,
	2007		2006
6.63% to 21% notes payable secured by equipment, due in varying monthly installments through May 2010		61,672		68,124
6% to 8.25% notes payable secured by transportation equipment, due in varying monthly installments through January 2012		789,842		686,194
		851,514		754,318
Less: current portion of long-term debt		268,833		214,343
	$	582,681	$	539,975

Maturities of long-term debt as of March 31, 2007, are as follows:

Year	Amount
2009	$	267,340
2010		232,213
2011		51,642
2012		31,486
	$	582,681

Interest expense was $215,861 and $4,316 for the quarters ended March 31, 2007 and 2006, respectively.

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NOTE 8 — PENSION PLAN

     The Company sponsors a defined contribution plan that covers all non-union employees. Employees who are twenty-one years of age and have completed one year of service are eligible to participate. Employees may contribute from one to eighty percent of eligible salary limited to the amount allowed under theInternal Revenue Code. Company profit sharing contributions are discretionary each year. Currently the Company is matching contributions up to 4%. Employees are vested 100% in salary deferral contributions. Company contributions begin vesting after two years and vest 20% a year until fully vested. Company contributions for the quarters ended March 31, 2007 and 2006 totaled $13,745 and $15,957 respectively.

NOTE 9 — SHARE-BASED COMPENSATION PLANS

     The Company’s 2005 Stock Incentive Plan (the “Plan”) was adopted on October 17, 2005. The Plan is administered by the Board of Directors. All officers, employees, directors and individual consultants of the Company are allowed to participate in the Plan. The Plan has a term of ten years. Accordingly, no grants may be made under the Plan after October 27, 2015, but the Plan will continue thereafter while previous grants remain subject to the Plan. The aggregate number of shares of common stock available under the Plan is 5 million shares. The Plan authorizes the Board of Directors to grant options that are incentive stock options within the meaning ofSection 422of theInternal Revenue Code of 1986, as amended, non statutory stock options, and restricted stock. All grants under the Plan will be made at the discretion of the Board of Directors.

Options Issued During the Quarter:

     None

Options Issued Previously:

     On October 17, 2005, the Company granted options exercisable for a total of 1,000,000 shares to Ron Carte in his role as President, and options exercisable for a total of 500,000 shares each to David Aduddell, Ron Carte, Tom Parrish and Jerry Whitlock in their roles as Directors at an exercise price of $0.78 per share. On April 1, 2006 the Company granted options exercisable for a total of 500,000 shares to Stan Genega in his role as a director, with an exercise price of $0.80 per share. Of the 1,000,000 options issued to Ron Carte as President, 500,000 options have vested with 500,000 rescinded with his resignation as President. The 500,000 options granted to each of Messrs. Aduddell, Carte, Parrish, Whitlock and Genega vest in five equal annual installments.

     In connection with the terms of the Agreement and Plan of Split Off and Merger, signed September 27, 2002, Tim Aduddell was granted an option to purchase 30 million shares of common stock for $0.04 per share. On June 7, 2006, 1,471,182 of these options were exercised, and the underlying shares were redeemed in payment of debt, leaving 28,528,818 options outstanding.

     In connection with a consulting agreement dated November 21, 2005, the company granted options to purchase 100,000 shares of common stock for $0.70 per share, vesting in one year.

     On January 1, 2006, the Company granted options to purchase 250,000 shares of common stock for $0.49 per share, vesting in 5 equal annual installments to the Chief Financial Officer.

     In connection with a consulting agreement dated January 15, 2006, the company granted options to purchase 200,000 shares of common stock for $0.66 per share, vesting 100,000 per year.

     In connection with an employment agreement dated May 1, 2006, the company granted options to purchase 25,000 shares of common stock for $1.38 per share, vesting in 5 equal annual installments.

     In connection with an employment agreement dated September 1, 2006, the company granted options to purchase 25,000 shares of common stock for $1.02 per share, vesting in 5 equal annual installments.

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     In connection with an employment agreement dated October 16, 2006, the company granted options to purchase 25,000 shares of common stock for $.74 per share, vesting in 5 equal annual installments

     On July 3, 2002, in connection with the financing of certain equipment, 200,000 options at $0.08 per share were granted.

NOTE 10 — INCOME TAXES

The income tax provision consist of the following:

	March 31,			March 31,
	2007			2006
Current tax provision	$	(1,215,646	)	$	(40,000	)
Deferred tax provision		714,497			(80,000	)
Total provision for income taxes	$	(501,149	)	$	(120,000	)

A reconciliation of the current provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal (34%) and state (5%) income tax rates to income before income taxes is as follows:

	March 31, 2007			March 31,2006
Statutory federal income tax rate		34.0	%		34.0	%
State tax effective rate		5.0			5.0
Permanent differences		—			—
Benefit of graduated tax rates		—			—
Prior year assessments finalized		—			—
Increase in valuation allowance		—			—
Other		—			—
		39.0	%		39.0	%

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     At March 31, 2007 the Company had net operating losses of approximately $3.5 million available to reduce future federal and state taxable income. Unless utilized, the carry forward amounts will begin to expire in 2012. For federal and state tax purposes, the Company’s net operating loss carry forward amounts are subject to an annual limitation due to a greater than 50% change in stock ownership which occurred in 2002, as defined by federal and state tax law.

     Taxable temporary differences result principally from the excess of depreciation for tax purposes over the amount deducted for financial reporting purposes. Deductible temporary differences from the share based compensation deduction and the operating loss carry forward, giving rise to deferred tax assets, are reduced by a valuation allowance. The Company has established a valuation allowance for a portion of its net deferred tax assets due to the ownership change limitation on the use of the loss carry forward.

The net deferred tax asset (liability) consisted of the following components:

	March 31,			December 31,
	2007			2006
Deferred tax liability on depreciation	$	(753,000	)	$	(150,000	)
Deferred tax asset for loss carry forward and share-based compensation		1,523,149			419,000
Deferred tax asset		770,149			269,000
Less: valuation allowance		203,000			203,000
Net deferred tax asset (liability)	$	567,149		$	66,000

NOTE 11 — RELATED PARTY TRANSACTIONS

     The Company engaged in certain transactions with Tim Aduddell, a majority shareholder of the Company, and entities owned by Tim Aduddell.

     The Company had a note receivable from an entity owned by Tim Aduddell. The loan was secured by marketable securities and a personal guaranty. Interest was accrued quarterly based on the federal mid-term rate and added to the note principal. Accrued interest income amounted to $40,787, $ 70,793 and $60,007 for the years ended December 31, 2006, 2005 and 2004, respectively. The balance of the note receivable totaled $1,801,133 at December 31, 2005 and $1,841,920 on June 6, 2006. On June 6, 2006, the Board of Directors voted to collect the receivable by redemption of a certain portion of Tim Aduddell’s options in an amount sufficient to satisfy the outstanding unpaid accrued interest and principle on the receivable. For purposes of determining the redemption value of Mr. Aduddell’s options, the options were valued at the prior twenty day trading average ($1.52) discounted by 15% ($1.292), less the exercise price of the options ($.04) for a total value of $1.252 per option. Based upon this valuation, the Company accepted Tim Aduddell’s surrender of 1,471,182 options in satisfaction of the debt.

     The Company leases its office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell. The lease agreement is for one year and expires on September 30, 2007, with monthly rentals of $16,250. The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises. Rental expense under this lease amounted $48,750, and $48,750 for the quarters ended March 31, 2007 and 2006, respectively.

NOTE 12 — BACKLOG

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     The amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements on which work had not yet begun at March 31, 2007, was approximately $20,065,000 compared to March 31, 2006 of approximately $13,520,00.

NOTE 13 — STOCK OPTIONS

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005, risk-free interest rates of 5.5%, no dividend yield or assumed forfeitures; expected lives of 10.0 years; and volatility of 54%. The amounts above are not likely to be representative of future years because there is no assurance that additional awards will be made each year.

     Common Stock Options and Other Warrants— The following table summarizes the Company’s stock option activity for the quarters ended March 31, 2007 and 2006:

			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	March 31, 2007		Price		March 31, 2006		Price
Options outstanding beginning of quarter		32,353,818	$	.12		35,600,000	$	.12
Options issued during the quarter		—				450,000		.57
Options exercised during the quarter		—				—		—
Options cancelled during the quarter		—				—		—
Options expired during the quarter		—				—		—
Options outstanding end of quarter		32,353,818	$	.12		36,050,000	$	.12

The weighted average grant-date exercise price of options granted during 2006 was $.72 per share.

No options have been granted in 2007

	Options Outstanding
			Weighted-			Options Exercisable
			Average	Weighted-				Weighted-
Range of	Number		Remaining	Average		Number		Average
Exercise	Outstanding		Contractual	Exercise		Exercisable		Exercise
Prices	at 3/31/07		Life	Price		at 3/31/07		Price
.04		28,528,818	No term		.04		28,528,818		.04
.08 – .10		200,000	No term		.10		200,000		.10
.70 – 1.38		3,625,000	10 year		.78		1,150,000		.78
		32,353,818			.12		29,878,818		.12

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     The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation awards. APB No. 25 allows for no recognition of compensation cost if the exercise price of the option is equal to the fair value of the stock at grant date. Accordingly, no compensation cost has been recognized for stock options granted in the accompanying consolidated financial statements.

     In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share Based Payment”, which revised SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) requires entities to measure the fair value of equity share-based payments (stock compensation) at grant date, and recognize the fair value over the period during which an employee is required to provide services in exchange for the equity instrument as a component of the income statement. SFAS No. 123(R) is effective for periods beginning after June 15, 2005. This requires us to adopt FAS 123(R) effective January 1, 2006.

NOTE 14 — EARNINGS PER SHARE

	March 31,			March 31,
	2007			2006
Basic earnings per share: (in thousands)
Common shares outstanding		53,965,854			49,937,921
Weighted average shares outstanding		53,965,854			49,937,921
Earnings per share	$	(.05	)	$	—
Fully diluted earnings per share:
Common shares outstanding		N/A			N/A
Weighted average shares outstanding		N/A			N/A
Earnings per share	$	N/A		$	N/A

NOTE 15 — LEASES

     In March 2006, the Company leased its corporate office facilities under an operating lease which expires April 30, 2010. Under the terms of the lease, the Company is responsible for its share of common area maintenance and operating expenses. Rent expense under the lease totaled $30,459 for the quarter ended March 31, 2007.

     In November 2006, the Company leased office facilities for its EyeOpener Division under an operating lease which expires in November 2008. Rent expense under the lease totaled $4,725 for the quarter ended March 31, 2007.

     As of March 31, 2007, the future minimum lease commitments under these leases were as follows:

Year	Amount
2007	$	147,236
2008		147,136
2009		121,836
2010		5,428
	$	421,636

     The Company leases its office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly owned by Tim Aduddell. The lease agreement is for one year and expires on September 30, 2007, with monthly rentals of $16,250. The Company is responsible for all taxes, insurance, maintenance and utilities on the

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leased premises. Rental expense under this lease amounted to $48,750 and $48,750 for the quarters ended March 31, 2007 and 2006, respectively.

     The restoration division of Aduddell Roofing leases its office and shop space in Minnesota monthly with a lease expiration of October 2007 and a monthly lease payment of $16,250.

     The Company lease offices facilities in Florida on a month-to-month bases with monthly lease payments of $2,000.

NOTE 16 — COMMITMENTS AND CONTINGENCIES

     The Company warrants its work in the normal course of business. In management’s opinion, there were no outstanding claims which would have a material effect on the Company’s operations or financial position.

     The Company maintains cash balances at several financial institutions. Accounts at each institution are insured by theFederal Deposit Insurance Corporationup to $100,000, and any amounts in excess of this would not be insured if the institution should fail. At times, cash in the deposit accounts may exceed the federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk.

     In regard to the sale of assets and liquidation of Zenex Communications in 2002, we were a guarantor to the purchaser on notes with an outstanding balance of $187,074 at March 31, 2007, with approximately $6,353 in monthly principal and interest payments. The purchaser is currently in default on the required payment obligations. The continuance of the default is uncertain at this time and the amount in question is not material in regards to our operations.

Lawsuit

     Eric Beitchman v. Timothy Aduddell, et al., Case No. 5:05-cv-01465-HE, United States District Court for the Western District of Oklahoma. On December 19, 2005, a shareholder’s derivative action was filed, claiming that we entered into certain non-arms length transactions with certain of our officers and/or directors. Among the transactions complained of is one in which we allegedly entered into a Telecommunications Equipment and Software Upgrade Agreement with a company partially owned and controlled by one of our officers/directors. In addition, the plaintiff complains our contracting with and making payments to Oklahoma Development Group, LLC (“ODG”) in connection with our outsourcing of emergency response services to ODG in 2005. Based on these and other allegations in the Complaint, the plaintiff claims that the individual defendants breached their fiduciary duties to us, that they abused control of us, that they engaged in gross mismanagement, and, with respect to certain officers/director defendants, that they engaged in unjust enrichment. Plaintiff seeks damages, imposition of a constructive trust, restitution and attorneys’ fees. We and the individual defendants denied the substantive allegations of the Complaint.

     On February 9, 2007, the parties participated in a mediation that resulted in a settlement of the lawsuit. Final documentation has not yet occurred; however, the settlement terms include payment by us of a nonmaterial amount along with certain non-monetary relief.

     We have been sued by First Bankcentre (the “Bank”) in the Oklahoma District Court of Tulsa County, Oklahoma Case No. CJ-2006-03621. The Petition was filed on June 7, 2006. Plaintiff claims that we must issue 500,000 shares of our common stock at a purchase price of $.01 per share pursuant to a warrant held by the Bank. We believe the warrant is unenforceable. We have filed an Answer setting forth our defenses. Among them are that the warrant was issued without corporate authority, that the warrant violated the anti-tying restrictions of the Bank Holding Company Act and that the warrant represents a clog on our equity of redemption from the Bank under a prior loan that was repaid in full. The lawsuit is in its early stages and discovery has not been undertaken. We intend to vigorously defend this lawsuit.

     In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve claims for personal injury and property damage incurred in connection with our

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operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, are likely to have a material adverse effect on our financial condition or results of operations.

NOTE 17 — CONCENTRATIONS

     In connection with providing service to customers, Aduddell Roofing does not have contractual agreements with suppliers. The material and supplies used in the business are readily available from several vendors.

     Aduddell Industries had a significant number of customers for the quarter ended March 31, 2007 with one customer accounting for 27% of the revenue. In the quarter ended March 31,2006, three customers accounted for 14%, 12% and 11% of the total revenue.

     The Company’s contract receivables at March 31, 2007 and December 31, 2006 are from a small number of companies in various industries which could be subject to business cycles variations. As of March 31, 2007 and December 31, 2006 the Company has one customer that accounted for 26% and 40% of contract receivables, respectively. This concentration subject the Company to a credit risk if the general economy or the companies fail to perform.

Supplementary Data

     The following is a summary of the quarterly results of operations for the current quarter and the previous three quarters. Net income (loss) per share is computed independently for each of the quarters presented.

	2007			2006
	March			December			September
	31			31			30		June 30
Revenues	$	9,952,242		$	7,713,589		$	11,574,763	$	8,637,728
Cost of sales		8,973,387			9,785,528			10,174,307		7,902,525
Gross margin		978,855			(2,071,939	)		1,400,456		735,203
S G & A and other		4,095,897			3,103,076			1,326,113		470,251
Income (Loss) before income taxes		(3,117,042	)		(5,175,015	)		74,343		264,952
Income tax expense (benefit)		(501,149	)		(2,198,047	)		56,210		77,970
Net income (loss)	$	(2,613,811	)	$	(2,976,968	)	$	18,133	$	186,982
Net income (loss) per common share – basic	$	(.05	)	$	(.06	)	$	—	$	—
Net income (loss) per common share – assuming dilution	$	—		$	—		$	—	$	—

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

     The following discussion should be read in conjunction with our financial statements and notes thereto.

Introduction

     Aduddell Industries, Inc. is engaged in the commercial and industrial roofing and re-roofing, specialty roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary Aduddell Enviro & Emergency Management Services, Inc. (“E2MS”), as well as marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.

     Our revenues were historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-

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event response services. In 2007 we have focused on integration of our acquisitions, cost control and operations. While we have implemented a number of cost reduction initiatives and function consolidations that are in effect in our second quarter, the full effect of these actions will not be evident until the third and fourth quarters. Based on those second quarter changes and other recent initiatives we expect administrative cost to decrease quarterly by over $670,000 during the third and fourth quarters. In addition we expect continued increase in our sales volume and improvement in our divisional gross margins.

     In the second quarter of 2006, we increased our focus on providing services to the total exterior shell of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In the third quarter of 2006 we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative Communications, LLC., and continued to execute our business plan by searching for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company. This transaction closed in December 2006 adding significant resources, including below grade waterproofing to our service offerings. At year end we signed a definitive purchase agreement to acquire Hayden Building Maintenance, Inc. as well as Hudson Valley Roofing and Sheet Metal, Inc., privately held commercial roofing companies in New York. Hayden Building Maintenance has an additional office in New Orleans that is currently actively involved in commercial roofing related to disaster response. It is anticipated closing will occur on or before May 18, 2007.

     Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair. Typically, re-roofing, restoration and repair jobs are more labor intensive and have higher margins than new roof construction.

     In the execution of our 2006 business plan we spent $1,410,686 in our roofing subsidiary and $1,286,641 in our corporate office in the pursuit of national accounts and acquisitions. These expenditures resulted in a number of national accounts such as, U.S. Communities, Anheuser Busch, Pepsi, Quaker Oats and others as well as the acquisitions of Merit Construction, EyeOpener Creative Communications, Brent Anderson Associates, and the pending acquisitions of Hayden Building Maintenance and Hudson Valley Roofing. The full value and effect of these accounts and acquisitions should become evident over the next several years as we integrate them into our business model and take advantage of the economies of scale as well as synergistic reduction of cost. In addition we should have increased sales and customer penetration as we cross sell our product offerings.

     In addition to the acquisition and national account expenditures we significantly expanded our corporate, roofing and restoration staff, opened three new operating locations, and expanded our corporate governance and compliance activities. These additional general and administrative costs of approximately $2.9 million were required to support our expanding business from anticipated acquisitions as well as organic growth. The increased infra structure will provide most of the support for our targeted sales revenues for 2007.

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     The following table sets forth information used by management to assess our results of operations of the current quarter over the same quarter in the prior year both in aggregate amounts and the percentage increase or decrease over the prior year:

				%
	1st Qtr			Increase			1st Qtr
	2007			(decrease)			2006
Roofing Revenue	$	6,656,546			78.2	%	$	3,734,577
Restoration Revenue	$	3,185,471			—			—
Other Revenue	$	110,225			—
Emergency Services Revenue	$	0			—		$	—
Total Revenue	$	9,952,242			166.5	%	$	3,734,577
Roofing Margin	$	284,035			(53.8	)%	$	615,204
Restoration Margin	$	1,005,029			—			—
Other Margin	$	(270,961	)		—
Emergency Services Margin	$	(39,248	)		—		$	—
Total Margin	$	978,855			59.1	%	$	615,204
Cash Flow from Operations	$	(313,376	)		1022.0	%	$	(14,226,284	)
EBITDA	$	(2,365,097	)		(569.5	)%	$	(353,257	)
Net Income	$	(2,615,893	)		(2,184.4	)%	$	(114,513	)
Free Cash Flow	$	(653,350	)		955.3	%	$	(14,616,767	)

	2007			2006
Reconciliation of Free Cash Flow:
Cash Flow from Operations	$	(313,376	)	$	(14,226,284	)
Capital Expenditures	$	339,974		$	390,483
Free Cash Flow	$	(653,350	)	$	(14,616,767	)
Reconciliation of EBITDA:
Net Income	$	(2,615,893	)	$	(114,513	)
Interest (Income)	$	(1,121	)	$	(202,032	)
(Gain) Loss on Sale of Equipment	$	(215	)	$	(3,500	)
Provision (Benefit) for Income Taxes	$	(501,149	)	$	(120,000	)
Investment Loss	$	—		$
Depreciation	$	753,281		$	86,788
EBITDA	$	(2,365,097	)	$	(353,257	)

     Our EBITDA is determined by adding the following to net income: net interest income, (gain) loss on sale of equipment, provision (benefit) for income taxes, investment loss and depreciation. We calculate free cash flow by subtracting capital expenditures from cash flow from operations. The table above reconciles EBITDA to net income, and free cash flow to cash flow from operations.

     We present EBITDA and free cash flow because we believe that each provides useful information regarding our continuing operating results. We rely on EBITDA and free cash flow as primary measures to review and assess our operating performance and our management team’s performance in connection with our executive compensation and bonus plans. We also review EBITDA and free cash flow to compare our current operating results with corresponding periods, and as an assessment of our overall liquidity and our ability to meet our debt service obligations.

     We believe that EBITDA and free cash flow are useful to investors to provide disclosures of our operating results on the same basis as that used by our management. We also believe that these measures can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items, which

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do not directly affect our ongoing operating performance or cash flows. EBITDA and free cash flow, which are non-GAAP financial measures, have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flows statement data prepared in accordance with accounting principles generally accepted in the United States. Because of these limitations, EBITDA and free cash flow should neither be considered as measures of discretionary cash available to us to invest in the growth of our business, nor as replacements for net income. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and free cash flow as supplemental information.

Critical Accounting Policies and Estimates

     General

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, the useful lives of fixed assets, impairment of long-lived assets and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Revenue Recognition

     We recognize fixed price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Management uses this method because total cost is considered to be the best available measure of progress on the contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.

     Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, interest, depreciation and supplies. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. The asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized.

     Cash and Cash Equivalents

     For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.

     Investments

     We account for our investments in marketable securities using Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders’ equity.

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     Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 2006 and 2005, all securities covered by SFAS No. 115 were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in our Consolidated Statement of Operations.

     Fair Value of Financial Instruments

     Our financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable. The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature. Marketable equity securities’ fair values are estimates based on quoted market prices. The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.

     Income Taxes

     We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). This standard requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carry -forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years.

     Net Income (Loss) Per Share

     We compute net income (loss) per share in accordance with SFAS No. 128, Earnings per Share (“SFAS No. 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB No. 98”). Under the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.

     Property and Equipment

     Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated using straight-line and accelerated methods over the estimated useful lives of the assets, which range from five to thirty nine years.

     Changes from the Prior Period

     We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates of assumptions.

Corporate Governance Matters

     We continue to evaluate our corporate governance policies and procedures, and after implementing certain new policies, believe they are satisfactory for a controlled company of our size. We are dedicated to further implementing sound corporate governance policies for a company within our demographics. As a growing company, we intend to enhance our corporate governance policies and procedures. We are sensitive to our status as a controlled entity, our related-party transactions with ODG, and our stockholders’ desires for enhanced, cost-effective corporate governance policies and procedures. With the assistance of securities counsel, we will continue to consider enhancements of our corporate governance polices as we grow and our stock is hopefully listed on a national securities exchange or Nasdaq market.

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Results of Operations

Comparison of 1^stQuarter 2007 and 2006

     Revenues. Revenues increased from $3,734,577 for the quarter ended March 31, 2006, to $9,952,242 for the quarter ended March 31, 2007. Revenues for 2007 included a 78.2% growth in our roofing revenues as well as $3,185,471 of revenue in our new business line, restoration services.

     Operating Expenses. Operating expenses for the quarter ended March 31, 2006, were $4,211,116 or 113% of revenue, compared to $13,098,998 or 132% of revenue, for the quarter ended March 31, 2007. While we have implemented a number of cost reduction initiatives and function consolidations that are in effect in our second quarter, the full effect of these actions will not be evident until the third and fourth quarters. Based on those second quarter changes and other recent initiatives we expect administrative cost to decrease quarterly by over $670,000 during the third and fourth quarters.

     Income(Loss) before Provision for Income Taxes. Operating loss before taxes for the quarter ended March 31, 2006, was $476,539 compared to a loss of $3,117,042 for the quarter ended March 31, 2007. The decrease in our 2007 operating income was attributable to higher selling, general and administrative expenses of $2,788,835. Our cost reduction initiatives when fully implemented coupled with higher sales volume and increased margin should support our continuing selling, general and administrative costs and increase our profitability.

     Net Income.The net loss for the quarter ended March 31, 2006, was $114,513, compared to a net loss of $2,613,811 for the quarter ended March 31, 2007. These results were influenced by the factors identified above under Revenues, Operating Expenses.

Off-Balance Sheet Arrangements

     We have operating leases and guaranties that are not accrued on the balance sheet. The payments due under these leases are disclosed in a contingent loan guaranty in footnote 16 of our consolidated financial statements. Other than the lease and note guaranty, we have no contractual commitments that do not appear on the balance sheet as of March 31, 2007.

Seasonality

     The construction industry, including the roofing industry, is influenced by seasonal factors, as construction activities are usually lower during winter months than other periods. We attempt to increase winter productivity by concentrating our business in the southern half of the United States and by expanding our sales and marketing efforts to control project scheduling. Nevertheless, our revenues and operating results potentially will be lower in the first and fourth quarters.

     The roofing industry is also affected by natural disasters, such as tornadoes, hurricanes and other windstorms. Because of the need for immediate repairs and since the costs of repair are typically covered by insurance, the margins are higher on disaster-related work than on discretionary work. Since disaster-related work requires an immediate response, we maintain a capacity that is scalable to respond to these needs. The absence of natural disasters will result in lower revenues and higher relative administrative expenses per revenue dollar.

Commitments and Contingencies

     In regard to the sale of assets and liquidation of Zenex Communications in 2002, we are a guarantor on notes with an outstanding balance of $187,074 at March 31, 2007, with approximately $7,000 in monthly principal and interest payments. The purchaser is currently in default on the required payment obligations.

     We warrant our work in the normal course of business. In management’s opinion, there were no outstanding claims which would have a material effect on our operations or financial position.

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     Information regarding our legal proceedings are discussed later in this document under, “Part II, Item 1. Legal Proceedings”.

Liquidity and Capital Resources

     Total assets increased from $32,703,847 to $33,340,732, liabilities increased from $18,003,086 to $21,683,678 and shareholders’ equity decreased from $14,700,761 to $11,657,054 from December 31, 2006, to March 31, 2007. The increase in assets comes from higher receivables, fixed assets and intangibles with less cash. The increase in liabilities results primarily from an increase in our draw on the line of credit as well as earn out provisions on our acquisition.

     Our net cash at March 31, 2007 is $242,888. We are using our credit line primarily due to the financing of our acquisition and capital expenditures. We are currently in the process of securing long term financing for the Anderson acquisition as well as the Hayden/Hudson Acquisition. For the quarter ended March 31, 2007, net cash used by operating activities was $313,376 compared to $14,226,284 used for the quarter ended March 31, 2006. Net cash used by investing activities during this period was $339,759 compared to $386,983 used by investing activities for the quarter ended March 31, 2006. Net cash provided by financing activities during this period was $896,023 compared to net cash used of $(175,390) for financing activities for the quarter ended March 31, 2006. At March 31, 2007, we had negative working capital of $3,672,671 compared to working capital at March 31, 2006, of $10,999,821. The decrease in working capital resulted from our growth and acquisitions.

     We have a $10,000,000 revolving line of credit. The line bears interest at 3.375% over LIBOR (currently 5.32%) and is secured by all accounts, property and equipment. The line matures on July 30, 2007. There were no outstanding advances at March 31, 2006 and the outstanding advance at March 31, 2007 was $10,352,539.

     At March 31, 2007, we had $582,681 of long-term debt as compared to no long-term debt at March 31, 2006. The increase in the amount of long-term debt outstanding was primarily due to the earn out portion of our Brent Anderson acquisition.

Adequacy of Current Liquidity

     We meet all of our funding needs for ongoing operations with internally generated cash flows from operations, access to our line of credit, with existing cash and short-term investment balances and with additional term debt or equity for our acquisitions. We believe that existing cash, cash equivalents, short-term investments, and our line of credit together with cash generated from operations, will be sufficient to meet our cash requirements for the foreseeable future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our primary market risk relates to changes in interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates, including interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

     At March 31, 2007, we had $10.4 million drawn on revolving line of credit. Interest on the revolving line of credit is variable and is equal to LIBOR plus 3.375%. Amounts drawn of the revolving line of credit are the only variable rate debt we have outstanding. A one-percentage point change in the interest rate for our revolving line of credit would change our cash interest payments on an annual basis by approximately $103,400.

Item 4. Controls and Procedures

     It is the responsibility of our chief executive officer and our chief financial officer to ensure that we maintain controls and other procedures designed to ensure that the information required to be disclosed by us in reports that we file with the Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified by in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information

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required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

     As of March 31, 2007, management, including the chief executive officer and chief financial officer, conducted an evaluation of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer have concluded the disclosure controls and procedures currently in place are effective. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed their evaluation.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

     Eric Beitchman v. Timothy Aduddell, et al., Case No. 5:05-cv-01465-HE, United States District Court for the Western District of Oklahoma. On December 19, 2005, a shareholder’s derivative action was filed, claiming that we entered into certain non-arms length transactions with certain of our officers and/or directors. Among the transactions complained of is one in which we allegedly entered into a Telecommunications Equipment and Software Upgrade Agreement with a company partially owned and controlled by one of our officers/directors. In addition, the plaintiff complains our contracting with and making payments to Oklahoma Development Group, LLC (“ODG”) in connection with our outsourcing of emergency response services to ODG in 2005. Based on these and other allegations in the Complaint, the plaintiff claims that the individual defendants breached their fiduciary duties to us, that they abused control of us, that they engaged in gross mismanagement, and, with respect to certain officers/director defendants, that they engaged in unjust enrichment. Plaintiff seeks damages, imposition of a constructive trust, restitution and attorneys’ fees.

We and the individual defendants have denied the substantive allegations of the Complaint and have instructed our litigation counsel to vigorously defend the action. To date, we have answered the Complaint and discovery is ongoing.

We have been sued by First Bankcentre (the “Bank”) in the Oklahoma District Court of Tulsa County, Oklahoma Case No. CJ-2006-03621. The Petition was filed on June 7, 2006. Plaintiff claims that we must issue 500,000 shares of our common stock at a purchase price of $.01 per share pursuant to a warrant held by the Bank. We believe the warrant is unenforceable. We have filed an Answer setting forth our defenses. Among them are that the warrant was issued without corporate authority, that the warrant violated the anti-tying restrictions of the Bank Holding Company Act and that the warrant represents a clog on our equity of redemption from the Bank under a prior loan that was repaid in full. The lawsuit is in its early stages and discovery has not been undertaken. We intend to vigorously defend this lawsuit.

     In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, is likely to have a material adverse effect on our financial condition or results of operations.

Item 1A. Risk Factors

     There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

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Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Description of Exhibit
3.1	Certificate of Incorporation of Aduddell Industries, Inc.
3.2	By laws of Aduddell Industries, Inc.
10.3	Stock Purchase Agreement dated December 29, 2006 between the company and Greg Hayden.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

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SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ADUDDELL INDUSTRIES, INC.
May 15, 2007	By:	/s/ Stan Genega
		Stan Genega, President
May 15, 2007	By:	/s/ Reggie Cook
		Reggie Cook, Chief
		Financial Officer (Principal Accounting Officer)

EXHIBIT INDEX

EXHIBIT
NO.	DESCRIPTION	METHOD OF FILING
3.1	Certificate of Incorporation of Aduddell Industries, Inc.
3.2	By laws of Aduddell Industries, Inc.
10.3	Stock Purchase Agreement dated December 29, 2006 between the company and Greg Hayden..
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002	Filed herewith electronically
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002	Filed herewith electronically
32.1	Section 1350 Certification of Chief Financial Officer	Filed herewith electronically
32.2	Section 1350 Certification of chief Financial Officer	Filed herewith electronically

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