Aduddell Industries 10Q 2007 Q2 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 June 30, 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: 000-24684

ADUDDELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


Oklahoma		73-1587867
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1601 N.W. Expressway
Oklahoma City, Oklahoma		73118
(Address of principal executive offices)		(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 August 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 SIX MONTHS ENDED JUNE 30, 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		4
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
Part II – Other Information		28
Item 1. Legal Proceedings		28
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		29
Item 4. Submission of Matters to a Vote of Security Holders		29
Item 5. Other Information		30
Item 6. Exhibits		30
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

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 Operations” 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 10-K.”

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.

ADUDDELL INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

PART I FINANCIAL INFORMATION

Item 1. Financial Statements


	June 30,			December 31,
	2007			2006
	(Unaudited)
Assets

Current Assets
Cash	$	—		$	—
Contracts receivable, net of allowance for doubtful accounts		13,150,504			13,662,030
Costs and estimated earnings in excess of billings on uncompleted contracts		5,094,107			2,298,191
Inventory		556,724			472,588
Income tax receivable		376,469			2,254,469
Prepaid expenses		132,828			268,108
Related party receivable		—			60,088
Deposits		731,164			252,710
Employee and other receivables, net of allowance for doubtful accounts		28,247			31,484


		20,070,043			19,299,668


Property and Equipment
Field and shop equipment		4,341,948			4,023,879
Office furniture and equipment		1,139,475			1,263,131
Transportation equipment		4,000,677			3,931,118
Land		138,239			—
Leasehold improvements		227,413			203,896


		9,847,752			9,422,024

Less: accumulated depreciation		(2,410,333	)		(1,584,170	)


		7,437,419			7,837,854


Other
Intangible asset customer lists, net		5,664,213			6,112,054
Deferred tax asset		724,985			66,000
Investments		25,757			25,156


		6,414,955			6,203,210


	$	33,922,417		$	33,340,732

The accompanying notes are an integral part of these financial statements

ADUDDELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,
	2007		2006
	(Unaudited)
Liabilities and Shareholders’ Equity

Current portion of long term debt		269,174		214,343
Current portion of long-term acquisition payable		162,166		816,667
Advances on line of credit		9,349,824		9,407,272
Bank overdraft		85,513		732,778
Accounts and subcontract payables		12,012,801		7,122,863
Accrued liabilities		718,420		812,779
Income tax payable		—		—
Billings in excess of costs and estimated earnings on uncompleted contracts		885,132		1,058,168


		23,483,030		20,164,870


Long-Term Debt (Net of Current Portion)		506,125		539,975


Long-Term Acquisition Payable (Net of Current Portion)		816,667		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 June 30, 2007 and December 31, 2006)		52,966		52,799
Paid-in capital		5,515,730		4,699,230
Unrealized gain (loss) on available-for-sale securities		2,786		703
Retained earnings		3,545,112		6,904,322


		9,116,594		11,657,054


	$	33,922,417	$	33,340,732

The accompanying notes are an integral part of these financial statements

ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)

Revenues	$	14,434,376		$	8,637,728	$	24,386,618		$	12,372,306

Operating Expenses
Cost of sales		11,937,500			7,902,525		20,910,887			10,750,521
Selling, general and administrative		3,343,658			575,898		7,445,057			1,888,463
Warranty expense		166,190			36,228		190,402			86,783


		15,447,348			8,514,651		28,546,346			12,725,767


Operating Income (Loss)		(1,012,971	)		123,077		(4,159,727	)		(353,461	)

Other Income
Interest and dividend income		83,506			79,925		84,627			281,956
Gain(loss) on sale of equipment		(5,340	)		22,739		(5,555	)		26,239
Other income		36,163			39,211		64,541			47,300


		113,899			141,875		143,613			355,495


Net Income (Loss) from Operations Before Income Taxes		(899,072	)		264,952		(4,016,114	)		2,034

Provision (benefit) for income taxes:

Current		(351,450	)		45,800		(1,567,096	)		5,800
Deferred		193,614			58,000		908,111			(22,000	)


		(157,836	)		103,800		(658,985	)		(16,200	)


Net Income (Loss)		(741,236	)		161,152		(3,357,129	)		18,234

Other Comprehensive Income
Unrealized holding gains (losses)		(2,082	)		25,830		(2,082	)		54,235
Reclassification adjustment		—			—		—			—


Comprehensive Income (Loss)	$	(743,318	)	$	186,982	$	(3,359,211	)	$	72,469


Basic Net Income (Loss) per Common Share	$	(.01	)	$	—	$	(.06	)	$	—


Diluted Net Income (Loss) per Common Share	$	N/A		$	—	$	N/A		$	—


Weighted Average Common Shares Basic		53,965,854			50,187,921		53,965,854			50,187,921


Weighted Average Common Shares Assuming Dilution		N/A			83,666,739		N/A			83,666,739

The accompanying notes are an integral part of these financial statements

ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,			June 30,
	2007			2006
	(Unaudited)			(Unaudited)

Cash Flows from Operating Activities

Net income (loss)	$	(3,357,129	)	$	18,234
Reconciliation of net income (loss) to net cash
Provided (used) by operating activities:
Depreciation and amortization		1,471,851			272,154
Bad Debt Expense		—			87,000
Issuance of debt for interest expense		—			—
(Gain) Loss on sale of property and equip		5,555			(26,238	)
(Increase) Decrease from changes in:
Accounts receivable		511,526			(4,317,879	)
Costs and estimated earnings in excess of billings on uncompleted contracts		(2,795,916	)		247,316
Inventory		(84,136	)		—
Income tax receivable		1,878,000			(159,017	)
Related party receivable		60,088			(40,787	)
Deposits		(478,454	)		—
Deferred taxes		(658,985	)		—
Prepaid expenses		135,279			(261,959	)

Employee and other receivables		3,237			(10,477	)
Intangible asset customer list		(167,174	)		(392,537	)
Increase (Decrease) from changes in:
Bank overdraft		(647,265	)		—
Accounts payable		4,889,938			(8,630,049	)
Insurance payable		(39,504	)		70,678
Accrued liabilities		(54,855	)		507,864
Income tax payable		—			(5,349,105	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(173,036	)		155,426
Deferred taxes		—			(22,000	)


Net adjustments to net income (loss)		3,856,150			(17,869,610	)


Net cash provided (used) by operating activities		499,022			(17,851,376	)

The accompanying notes are an integral part of these financial statements

ADUDDELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,			June 30,
	2007			2006
	(Unaudited)			(Unaudited)

Cash Flows from Investing Activities
Purchase of Investments		(601	)
Proceeds from sale of property and equipment		7,000			35,363
Purchase of property and equipment		(468,954	)		(2,633,033	)


Net cash used by investing activities		(462,555	)		(2,597,670	)


Cash Flows from Financing Activities
Proceeds from long-term debt		20,981			—
Net change in line of credit		(57,448	)
Retirement of long-term debt		(816,667	)		(298,671	)
Proceeds from issuance of stock		816,667			120,000


Net cash provided (used) by financing activities		(36,467	)		(178,671	)


Net Increase (Decrease) in Cash		—			(20,627,717	)

Cash at Beginning of Period		—			22,330,751


Cash at End of Period	$	—		$	1,703,034


Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest	$	478,968		$	30,902
Taxes		—			—

Supplemental Schedule of Non-Cash Investing and Financing Activities

Fixed asset additions	$	468,954		$	135,220

Liabilities assumed or incurred	$	468,954		$	135,220


Common stock issued for services	$	—		$	205,000

The accompanying notes are an integral part of these financial statements

ADUDDELL INDUSTRIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 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.

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.

Basis of Presentation

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 accompanying financial statements of the Company have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s year end audited financial statements and related footnotes included in the annual 10-K filing. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2007, and the statements of its operations and accumulated deficit and cash flows for the six month periods ended June 30, 2007 and 2006 have been included. All significant inter-company accounts and transactions have been eliminated in the consolidation. The results of operations for interim periods may not be indicative of the results which may be realized for the full year.

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 June 30, 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 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 June 30, 2007. Accumulated amortization expense for the quarter ended June 30, 2006 and June 30, 2007 was $29,877 and $585,140 respectively. Amortization expense for the quarter ended June 30, 2006 and June 30, 2007 was $29,877 and $262,694 respectively. 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 awards that are granted in accordance withStatement of Financial Accounting Standards No. 123R, Share-Based Payments. The fair value of common 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 stock options that have no vesting restrictions and are fully transferable, and takes into consideration several criteria, including volatility, expected term, dividend yield, and risk-free rate of return. Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility. The 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 six months ended June 30, 2007 and 2006 was $886,711 and $242,277 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 reporting purposes are as follows:


Classification			Estimated Useful Life
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 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 discreet 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 Common 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 U.S. 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 on the immediately preceding day of closing. 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, (“EyeOpener”) an integrated marketing company, to help develop and brand Aduddell’s operating business units. EyeOpener will provide the Company 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. 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) and 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.

At 2006 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 have extended the deadline for this closing at the latest until December 31, 2007 and continue to seek acceptable financing for this acquisition currently under agreement. We remain hopeful that we will proceed with the acquisition at a future date.

NOTE 3 — CONTRACTS RECEIVABLE

Contracts receivable consist of the following:


	June 30,		December 31,
	2007		2006
Completed contracts	$	7,632,157	$	2,465,564
Contracts in progress		3,788,351		9,139,408
Retainage		1,729,996		2,057,058

		13,150,504		13,662,030
Less allowance for doubtful amounts		—		—

	$	13,150,504	$	13,662,030

NOTE 4 — UNCOMPLETED CONTRACTS

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


	June 30,		December 31,
	2007		2006
Costs incurred on uncompleted contracts	$	26,139,272	$	29,126,527
Estimated earnings		4,631,947		145,508

		30,771,219		29,272,035
Billings to date		26,562,244		28,032,012

	$	4,208,975	$	1,240,023

Included in the accompanying balance sheets under the following captions:


	June 30,			December 31,
	2007			2006
Costs and estimated earnings in excess of billings on uncompleted contracts	$	5,094,107		$	2,298,191
Billings in excess of costs and estimated earnings on uncompleted contracts		(885,132	)		(1,058,168	)

	$	4,208,975		$	1,240,023

NOTE 5 — LETTER OF CREDIT

At June 30, 2007, the Company had a $175,000 letter of credit issued to its insurance carrier that matures on February 24, 2008.

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 December 15, 2007. The outstanding balance at June 30, 2007 and December 31, 2006 was $9,349,824 and $9,407,272 respectively.

NOTE 7 — LONG-TERM DEBT

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


	June 30		December 31,
	2007		2006
6.63% to 21% notes payable secured by equipment, due in varying monthly installments through May 2010	$	57,529	$	68,124

6% to 8.25% notes payable secured by transportation equipment, due in varying monthly installments through January 2012		717,770		686,194


		775,299		754,318

Less: current portion of long-term debt		269,174		214,343


	$	506,125	$	539,975

Maturities of long-term debt as of June 30, 2007, are as follows:


Year	Amount
2008	$	269,174
2009		407,374
2010		56,846
2011		39,411
2012		2,494

	$	755,299

Interest expense was $478,968 and $30,902 for the six months ended June 30, 2007 and 2006, respectively.

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 vest immediately. Company contributions for the six months ended June 30, 2007 and 2006 totaled $60,380 and $19,010, respectively.

NOTE 9 — STOCK OPTIONS

Common Stock Options and Other Warrants

The following table summarizes the Company’s stock option activity for the quarters ended June 30, 2007 and 2006:


			Weighted				Weighted
			Average				Average
	June 30,		Exercise		June 30,		Exercise
	2007		Price		2006		Price
Options outstanding beginning of quarter		32,353,818	$	.12		34,850,000	$	.12

Options issued during the quarter		—				525,000		.83

Options exercised during the quarter		—				—		—

Options cancelled during the quarter		20,000				1,971,182		.23

Options expired during the quarter		—				—		—


Options outstanding end of quarter		32,333,818	$	.12		33,403,818	$	.13

Options Issued Under 2005 Stock Incentive Plan

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 17, 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 five 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.

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 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.

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.

Options Issued Prior to the 2005 Stock Incentive Plan

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 his note receivable, leaving 28,528,818 options outstanding.

Following is a summary of stock options outstanding and exercisable at June 30, 2007:

Options Outstanding

Options Exercisable

Weighted-

Average

Weighted-

Range of

Number

Remaining

Average

Number

Average

Exercise

Outstanding

Contractual

Exercise

Exercisable

Exercise

Prices

at 6/30/07

Life

Price

at 6/30/07

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

3,605,000

10 year

.78

1,255,000

.78

32,333,818

.12

29,983,818

.12

NOTE 10 — INCOME TAXES

The income tax provision (benefit) consists of the following:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
Current tax provision (benefit)	$	(351,450	)	$	45,800	$	(1,567,096	)	$	5,800

Deferred tax provision (benefit)		193,614			58,000		908,111			(22,000	)


Total provision (benefit) for income taxes	$	(157,836	)	$	103,800	$	(658,985	)	$	(16,200	)

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:


	June 30, 2007			June 30, 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		(23.0	%)		(47.0	%)

Other		—			—


		16.0	%		(8.0	%)

At June 30, 2007 the Company had net operating loss carry forwards of approximately $4.4 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:


	June 30,			December 31,
	2007			2006
Deferred tax liability on depreciation	$	(727,000	)	$	(150,000	)
Deferred tax asset for loss carry forward and share-based compensation		1,654,985			419,000


Deferred tax asset		927,985			269,000

Less: valuation allowance		203,000			203,000


Net deferred tax asset (liability)	$	724,985		$	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 stock options in an amount sufficient to satisfy the outstanding note principal, which included unpaid accrued interest. 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 to $97,500, and $97,500 for the six months ended June 30, 2007 and 2006, respectively.

NOTE 12 — BACKLOG

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 June 30, 2007, and June 30 2006, was approximately $22,956,000 and $18,237,000 respectively.

NOTE 13 — SHARE BASED COMPENSATION

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 and 2006, 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.

The total compensation cost that has been charged against income for all such options and warrants granted was $167,162 for the six months ended June 30, 2007.

NOTE 14 — EARNINGS PER SHARE


	June 30,		June 30,
	2007		2006
Basic net income (loss) per share:
Common shares outstanding		53,965,854		50,187,921

Weighted average shares outstanding		53,965,854		50,187,921

Net Income (Loss) per share	$	0.00	$	0.00


Diluted net income (loss) per common share:
Common shares outstanding		N/A		83,666,739

Weighted average shares outstanding		N/A		83,666,739

Net Income (Loss) per share	$	N/A	$	0.00

At June 30, 2006 all options to purchase shares of common stock were included in the computation of income per common share-assuming dilution because all options were dilutive.

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 $60,918 for the six months ended June 30, 2007 and $ 14,789 for the six months ended June 30, 2006.

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 $9,450 for the six months ended June 30, 2007.

As of June 30, 2007, the future minimum lease commitments under all noncancellable operating leases were as follows:


Year	Amount
2007 (6 months)	$	76,768
2008		147,136
2009		121,836
2010		5,428

	$	351,168

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 to $97,500 for each of the six month periods ended June 30, 2007 and 2006, respectively.

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

The Company lease offices facilities in Florida on a month-to-month basis 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 at June 30, 2007,

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 $172,572 at June 30, 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. Since the mediation, we have engaged in significant efforts to memorialize the settlement agreement. On August 1, 2007, we filed a motion to enforce the settlement agreement asking the judge to compel the plaintiff to cooperate in finalizing the settlement agreement.

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. 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.

NOTE 17 — CONCENTRATIONS

In connection with providing service to customers, Aduddell Industries 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 period ended June 30, 2007 with one customer accounting for 10% of the revenue. In the period ended June 30, 2006, one customer accounted for 27% of the total revenue.

The Company’s contract receivables at June 30, 2007 and December 31, 2006 are from a small number of companies in various industries which could be subject to business cycle variations. As of June 30, 2007 and December 31, 2006 the Company had one customer that accounted for 10% and 40% of contract receivables, respectively. This concentration subjects the Company to a credit risk if the general economy or the company fails to perform.

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-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. We have extended the deadline for this closing until at the latest December 31, 2007 and continue to seek acceptable financing for this acquisition currently under agreement. We remain hopeful that we will proceed with the acquisition at a future date.

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 and Anheuser Busch 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.

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:


	Three months						Three months			Six months						Six months
	ended			% Increase			ended			ended			% Increase			ended
	June 30, 2007			(Decrease)			June 30, 2006			June 30, 2007			(Decrease)			June 30, 2006

Aduddell Roofing Revenue	$	7,927,299			(8.2	)%	$	8,637,728		$	14,583,845			17.9	%	$	12,372,306
Aduddell Restoration Revenue		6,274,773						—			9,460,244						—
E2MS Revenue								—			—						—
Other Revenue		232,305						—			342,530						—
Total Revenue	$	14,434,376			67.1	%	$	8,637,728		$	24,386,618			97.1	%	$	12,372,306

Aduddell Roofing Gross Margin	$	(209,054	)		(128.4	)%	$	735,203		$	74,981			(95.4	)%	$	1,621,785
Aduddell Restoration Gross Margin		2,056,229						—			3,061,258						—
E2MS Gross Margin		—						—			—						—
Other Gross Margin		232,305						—			342,530						—
Total Gross Margin	$	2,079,480			182.8	%	$	735,203		$	3,475,731			114.3	%	$	1,621,785

Cash Flow from Operations	$	812,398			548.5	%	$	(3,643,326	)	$	499,022			3,680.9	%	$	(17,869,610	)

EBITDA	$	2,572			(99.5	)%	$	533,334		$	(2,146,449	)		(467.5	)%	$	584,140

Net Income (Loss)	$	(743,318	)		(497.5	)%	$	186,982		$	(3,359,211	)		(4,735.4	)%	$	72,469

Free Cash Flow	$	683,418			961.2	%	$	(5,885,876	)	$	30,068			6,828.7	%	$	(20,502,643	)

The following table sets forth the reconciliation of our free cash flow to our cash flow from operations:


Cash Flow from Operations	$	812,398	$	(3,643,326	)	$	499,022	$	(17,869,610	)

Capital Expenditures		128,980		2,242,550			468,954		2,633,033

Free Cash Flow		683,418		(5,885,876	)		30,068		(20,502,643	)

The following table reconciles our EBITDA to our net income:


Net Income	$	(743,318	)	$	186,982		$	(3,359,211	)	$	72,469

Interest (Income)		179,601			79,925			394,341			281,956

(Gain) Loss on Sale of Equipment		5,555			(22,739	)		5,555			(26,239	)

Provision (Benefit) for Income Taxes		(157,836	)		103,800			(658,985	)		(16,200	)

Depreciation		718,570			185,366			1,471,851			272,154

EBITDA		2,572			533,334			(2,146,449	)		584,140

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 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

Basis of Presentation

Revenue Recognition

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

Fair Value of Financial Instruments

Share-Based Compensation

Income Taxes

Net Income (Loss) Per Common Share

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 or assumptions.

Results of Operations

Comparison of 2nd Quarter 2007 and 2006

Revenues. Revenues increased from $8,637,728 for the three months ended June 30, 2006 to $14,434,376 for the three months ended June 30, 2007, which represents and increase of 67.1%. We had no revenues for emergency services in either the of second quarters of 2007 or 2006. Our emergency services revenues are significantly affected by the presence or absence of natural disaster related work such as tornados, hurricanes and other windstorms. Revenues for the three months ended June 30, 2007 were higher as a result of the additional sales of $6,274,773 brought by the new restoration division. We expect revenues to continue to grow significantly in 2007.

Operating Expenses. Operating expenses for the three months ended June 30, 2007, were $15,447,348, or 107% of revenue, compared to $8,514,651, or 98% of revenue, for the three months ended June 30, 2006. Cost of Sales for the three months ended June 30, 2007 as a percentage of revenue decreased from 91% of revenues to 83% of revenues due to cost control initiatives in our operations group and decreased total allocated general and administrative cost as a result of a larger revenue base to which we can allocate our general and administrative expenses. Selling, general and administrative expenses increased to $ 3,343,658 in the second quarter of 2007 compared to $575,898 in the second quarter of 2006 primarily as a result of increased consulting, manpower, operating and travel expense related to implementing our growth strategy. 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 income (loss) before taxes for the quarter ended June 30, 2007, was $(899,072) compared to $264,952 for the quarter ended June 30, 2006. The decrease in our 2007 operating income was attributable to higher selling, general and administrative expenses of $2,767,760 partially offset by our increased sales volume. 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 (Loss).The net loss for the quarter ended June 30, 2007, was $(743,318), compared to net income of $186,982for the quarter ended June 30, 2006. These results were influenced by the factors identified above under Revenues and Operating Expenses.

Comparison of six months ended June 30, 2007 and 2006

Revenues. Revenues increased from $12,372,306 for the six months ended June 30, 2006 to $24,386,618 for the six months ended June 30, 2007, which represents and increase of 97.1%. We had no revenues for emergency services in either the first half of 2007 or 2006. Our emergency services revenues are significantly affected by the presence or absence of natural disaster related work such as tornados, hurricanes and other windstorms. Revenues for the six months ended June 30, 2007 were higher as a result of the additional sales of $ 9,460,244 brought by the new restoration division We expect revenues to continue to grow significantly in 2007.

Operating Expenses. Operating expenses for the six months ended June 30, 2007, were $28,546,346, or 117% of revenue, compared to $12,725,767, or 103% of revenue, for the six months ended June 30, 2006. Cost of Sales for the six months ended June 30, 2007 as a percentage of revenue decreased from 87% of revenues to 86% of revenues due to cost control initiatives in our operations group and decreased total allocated general and administrative cost as a result of a larger revenue base to which we can allocate our general and administrative expenses. Selling, general and administrative expenses increased to $7,445,057 in the first six months of 2007 compared to $1,888,463 in the first six months of 2006 primarily as a result of consulting, manpower, operating and travel expense related to implementing our growth strategy. 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 income (loss) before taxes for the six months ended June 30, 2007, was $(4,016,114) compared to $2,034 for the six months ended June 30, 2006. The decrease in our 2007 operating income was attributable to higher selling, general and administrative expenses of $5,556,594 partially offset by our increased sales volume. 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 (Loss).The net loss for the six months ended June 30, 2007, was $(3,359,211), compared to net income of $72,469 for the six months ended June 30, 2006. These results were influenced by the factors identified above under Revenues and 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 June 30, 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 $172,572 at June 30, 2007, with approximately $6,353 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.

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 $32,946,100 to $33,922,417, liabilities increased from $21,683,678 to $24,805,823 and shareholders’ equity decreased from $11,657,054 to $9,116,594 from December 31, 2006, to June 30, 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 accounts and subcontract payables.

Our net cash at June 30, 2007 is $0. 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 six months ended June 03, 2007, net cash provided by operating activities was $499,022 compared to $17,851,376 used for the quarter ended June 30, 2006. Net cash used by investing activities during this period was $462,555 compared to $2,597,670 used by investing activities for the six months ended June 30, 2006. Net cash used by financing activities during this period was $36,467 compared to net cash used of $178,671for financing activities for the six months ended June 30, 2006. At June 30, 2007, we had negative working capital of $3,412,988 compared to a negative working capital at March 31, 2007 of $3,672,671 and a positive working capital at June 30, 2006, of $8,718,878. 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 December 15, 2007. There were no outstanding advances at June 30, 2006 and the outstanding advance at June 30, 2007 was $9,349,824.

At June 30, 2007, we had $1,591,966 of long-term debt as compared to $185,478 of long-term debt at June 30, 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 June 30, 2007, we had $9.3 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 $102,300.

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 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 June 30, 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

memorialize the settlement agreement. On August 1, 2007, we filed a motion to enforce the settlement agreement asking the judge to compel the plaintiff to cooperate in finalizing the settlement agreement.

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.

Item 3. Defaults Upon Senior Securities

None.

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

On June 12, 2007, we held an annual meeting of our shareholders. The business of the meeting included the election of the following individuals as directors for one year terms or until their successors have been elected and qualified:


			Votes		Votes				Broker Non-
Director	Votes For		Against		Withheld		Abstentions		Votes

David Aduddell		51,224,839		—		468,728		—		—

Tim Aduddell		51,224,839		—		468,728		—		—

Ron Carte		51,193,789		—		499,778		—		—

Stan Genega		51,211,039		—		482,528		—		—

Thomas Parrish		51,223,239		—		470,328		—		—

Jerry Whitlock		51,223,239		—		470,328		—		—

At the meeting our shareholders also voted to ratify the appointment of Sutton Robinson Freeman & Co., P.C. as our independent auditors for fiscal year 2007. The table below sets forth the voting for such proposal:


Votes	Votes		Broker
For	Against	Abstentions	Non-Votes
51,009,285	33,069	651,213	—

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description of Exhibit

	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

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.
August 14, 2007	By:	/s/ Stan Genega
		Stan Genega, President



August 14, 2007	By:	/s/ Reggie Cook
		Reggie Cook, Chief Financial Officer
		(Principal Accounting Officer)

EXHIBIT INDEX


EXHIBIT
NO.	DESCRIPTION	METHOD OF FILING

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Aduddell Industries (ZENX) Inactive 10-Q2007 Q2 Quarterly report

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