Options		Shares			Weighted- Average Exercise Price			Weighted- Average Remaining Contract Term (Years)			Weighted- Average Fair Value
Outstanding, January 31, 2008			426,000		$	6.07
Granted			110,000		$	11.90
Exercised			(6,000	)	$	6.85
Forfeited or expired			(1,000	)	$	7.86
Outstanding, April 30, 2008			529,000		$	7.28			7.3		$	4.23
Exercisable, April 30, 2008			229,000		$	4.09			6.7		$	2.16
Exercisable, January 31, 2008			235,000		$	4.16			6.9		$	2.19

 

The weighted-average grant date fair value amount per share for stock options awarded during the three months ended April 30, 2008 was $6.60.

Compensation expense amounts recorded in the three months ended April 30, 2008 and 2007 were $397,000 and $14,000, respectively. At April 30, 2008, there was $940,000 unrecognized compensation cost related to stock options granted under the Option Plan. The end of the period over which the compensation expense for these awards is expected to be recognized is April 2009. The total intrinsic value of the stock options exercised during the three months ended April 30, 2008 was approximately $25,000. The aggregate intrinsic value amount for exercisable stock options at January 31, 2008 was $1,929,000.

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The fair value of each stock option granted in the three months ended April 30, 2008 was estimated on the date of award using the Black-Scholes option-pricing model based on the following weighted average assumptions. No stock options were granted in the three months ended April 30, 2007.

		Three Months Ended April 30, 2008
Dividend yield		--
Expected volatility		61%
Risk-free interest rate		4.00%
Expected life in years		5

The Company also has outstanding warrants to purchase 222,000 shares of the Company’s common stock, exercisable at a per share price of $7.75 that were issued in connection with the Company’s private placement in April 2003 to three individuals who became the executive officers of the Company upon completion of the offering and to an investment advisory firm. A director of the Company is the chief executive officer of the investment advisory firm. The fair value of the warrants of $849,000 was recognized as offering costs. All warrants are exercisable and expire in April 2013.

 

At April 30, 2008, there were 848,000 shares of the Company’s common stock available for issuance upon the exercise of stock options and warrants, including 96,000 shares of the Company’s common stock available for award under the Option Plan.

 

NOTE 10 - NET INCOME (LOSS) PER SHARE

 

Basic income per share for the three months ended April 30, 2008 was computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted income per share was computed by dividing net income by the weighted average number of common shares outstanding during the quarter plus 311,000 shares representing the total dilutive effect of outstanding stock options and warrants.

Basic loss per share for the three months ended April 30, 2007 was calculated by dividing the net loss for the quarter by the weighted average number of common shares outstanding for the applicable period. Common stock equivalents, including stock options and warrants, were not considered because the effect of their inclusion would be anti-dilutive.

NOTE 11 - INCOME TAXES

 

The Company’s income tax (expense) benefit for the three months ended April 30, 2008 and 2007 differs from the expected income tax (expense) benefit computed by applying the U.S. Federal corporate income tax rate of 34% to the income (loss) from operations before income taxes as shown in the table below. For the three months ended April 30, 2008, the favorable tax benefit of permanent items relates primarily to the domestic manufacturing deduction to be taken for income tax reporting purposes.

		2008			2007
Computed expected income tax (expense) benefit		$	(716,000	)	$	1,004,000
State income taxes, net			95,000			(47,000	)
Permanent differences			70,000			(18,000	)
		$	(551,000	)	$	939,000

As of April 30, 2008 and January 31, 2008, accrued expenses included income tax amounts currently payable of approximately $1,174,000 and $1,003,000, respectively.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109” (“FIN 48”), on February 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no material effect on the Company’s consolidated financial statements as a result of adopting this standard.

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NOTE 12 - LEGAL CONTINGENCIES

In the normal course of business, the Company has pending claims and legal proceedings. It is the opinion of the Company’s management, based on information available at this time, that none of current claims and proceedings will have a material effect on the Company’s consolidated financial statements other than the matters discussed below.

Western Filter Corporation Litigation

On March 22, 2005, WFC filed a civil action against the Company, and its executive officers. The suit was filed in the Superior Court of the State of California for the County of Los Angeles. WFC purchased the capital stock of the Company's wholly owned subsidiary, Puroflow Incorporated, pursuant to the terms of the Stock Purchase Agreement dated October 31, 2003. WFC alleged that the Company and its executive officers breached the Stock Purchase Agreement between WFC and the Company and engaged in misrepresentations and negligent conduct with respect to the Stock Purchase Agreement. WFC sought declaratory relief, compensatory and punitive damages in an amount to be proven at trial as well as the recovery of attorney's fees. This action was removed to the United States District Court for the Central District of California. The Company and its officers deny that any breach of contract or that any misrepresentations or negligence occurred on their part.

 

This case was scheduled for trial on April 10, 2007. On March 15, 2007, the District Court granted the Company and its executive officers' motion for summary judgment, thereby dismissing WFC's lawsuit against the Company and its executive officers in its entirety. WFC appealed the District Court’s decision. The parties filed their appellate briefs with oral arguments scheduled for June 3, 2008. The Company intends to continue vigorously to defend the appeal of this litigation.

 

Although the Company has reviewed WFC’s claims and believes that they are without merit, the Company’s condensed consolidated balance sheet at April 30, 2008 included an amount reflecting the Company’s estimate of the remaining amount of legal fees that it expects to be billed in connection with this matter. It is possible, however, that the ultimate resolution of the WFC litigation could result in a material adverse effect on the results of operations of the Company for a particular future reporting period.

 

Kevin Thomas Litigation

On August 27, 2007, Kevin Thomas, the former owner of VLI, filed a lawsuit against the Company, VLI and the Company’s Chief Executive Officer (the “CEO”) in the Circuit Court of Florida for Collier County. The Company acquired VLI by way of merger on August 31, 2004. Mr. Thomas alleges that the Company, VLI and the CEO breached various agreements regarding his compensation and employment package that arose from the acquisition of VLI. Mr. Thomas has alleged contractual and tort-based claims arising from his compensation and employment agreements and seeks rescission of his covenant not to compete against VLI. The Company, VLI and the CEO deny that any breach of contract or tortious conduct occurred on their part. The Company and VLI have also asserted four counterclaims against Mr. Thomas for breach of the merger agreement, breach of his employment agreement, breach of fiduciary duty and tortious interference with contractual relations because Mr. Thomas violated his non-solicitation, confidentiality and non-compete obligations after he left VLI. The Company intends to vigorously defend this lawsuit and prosecute its counterclaims.

 

Although the Company has reviewed the claims of Mr. Thomas and believes that they are without merit, the Company’s condensed consolidated balance sheet at April 30, 2008 included an amount in accrued expenses reflecting the Company’s estimate of the amount of future legal fees that it expects to be billed in connection with this matter. It is possible however, that the ultimate resolution of the litigation with Mr. Thomas could result in a material adverse effect on the results of operations of the Company for a particular future reporting period.

On March 4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its current president in the Circuit Court of Florida for Collier County. VFI, which is owned by Kevin Thomas, supplied VLI with certain organic raw materials used in the manufacture of VLI products. VFI has asserted a breach of contract claim against VLI and alleges that VLI breached a supply agreement with VFI by acquiring the organic products from a different supplier. VFI also asserted a claim for defamation against VLI’s president alleging that he made false statements regarding VFI’s organic certification to one of VLI's customers. VLI and its president filed their Answer and Affirmative Defenses on May 8, 2008. VLI and its president deny that VLI breached any contract or that its president defamed VFI. The defendants intend to continue to vigorously defend this lawsuit. The Company’s condensed consolidated balance sheet at April 30, 2008 included an amount in accrued expenses reflecting the Company’s estimate of the amount of future legal fees that it expects to be billed in connection with this matter.

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On March 4, 2008, Mr. Thomas filed a lawsuit against VLI's president in the Circuit Court of Florida for Collier County. Mr. Thomas has filed this new lawsuit against VLI’s president for defamation. Mr. Thomas alleges that VLI’s president made false statements to third-parties regarding Mr. Thomas' conduct that is the subject of counterclaims by the Company and VLI in the litigation matter discussed above and that these statements have caused him damage to his business reputation. VLI’s president filed his answer with the court on May 8, 2008. VLI’s president denies that he defamed Mr. Thomas and intends to continue to vigorously defend this lawsuit.

NOTE 13 - RELATED PARTY TRANSACTIONS

 

The Company leased administrative, manufacturing and warehouse facilities for VLI from an individual who was the former officer and shareholder of VLI. The lease costs through March 2007, the date of his employment termination, were considered related party expenses. The total expense amount under this arrangement was approximately $45,000 for the three months ended April 30, 2007.

 

The Company entered into a supply agreement with an entity owned by the former shareholder of VLI whereby the supplier committed to sell to the Company and the Company committed to purchase on an as-needed basis, certain organic products. Last year, VLI made $47,000 in purchases under the supply agreement through March 2007, the date on which the former officer and shareholder of VLI was terminated.

 

The Company also sold its products in the normal course of business to an entity in which the former shareholder of VLI had an ownership interest. VLI had approximately $117,000 in sales to this entity through the aforementioned termination in March 2007; this amount was collected.

NOTE 14 - SEGMENT REPORTING AND MAJOR CUSTOMERS

 

The Company’s three reportable segments are power industry services, nutritional products and telecommunications infrastructure services. The Company conducts these operations through its wholly owned subsidiaries - GPS, VLI and SMC, respectively. The “Other” column includes the Company’s corporate and unallocated expenses. The Company’s operating segments are organized in separate business units with different management, customers, technologies and services. The following business segment information is presented for the three months ended April 30, 2008 and 2007, except for total assets and goodwill which amounts are presented as of those dates:

Three Months Ended April 30, 2008		Power Industry Services			Nutritional Products			Telecom Infrastructure Services			Other			Consolidated
Net sales		$	44,008,000		$	2,399,000		$	1,999,000		$	--		$	48,406,000
Cost of sales			38,576,000			2,323,000			1,774,000			--			42,673,000
Gross profit			5,432,000			76,000			225,000			--			5,733,000
Selling, general and administrative expenses			1,842,000			715,000			343,000			1,111,000			4,011,000
Income (loss) from operations			3,590,000			(639,000	)		(118,000	)		(1,111,000	)		1,722,000
Interest expense			(102,000	)		(18,000	)		--			--			(120,000	)
Interest income			504,000			--			--			--			504,000
Income (loss) before income taxes		$	3,992,000		$	(657,000	)	$	(118,000	)	$	(1,111,000	)		2,106,000
Income tax expense															(551,000	)
Net income														$	1,555,000
Amortization of purchased intangibles		$	724,000		$	22,000		$	26,000		$	--		$	772,000
Depreciation and other amortization		$	48,000		$	148,000		$	142,000		$	1,000		$	339,000
Goodwill		$	18,476,000		$	921,000		$	940,000		$	--		$	20,337,000
Total assets		$	116,926,000		$	7,378,000		$	4,249,000		$	14,211,000		$	142,764,000
Fixed asset additions		$	49,000		$	56,000		$	12,000		$	--		$	117,000

Three Months Ended April 30, 2007		Power Industry Services			Nutritional Products			Telecom Infrastructure Services			Other			Consolidated
Net sales		$	43,354,000		$	4,949,000		$	2,129,000		$	--		$	50,432,000
Cost of sales			43,245,000			4,166,000			1,843,000			--			49,254,000
Gross profit			109,000			783,000			286,000			--			1,178,000
Selling, general and administrative expenses			2,552,000			1,170,000			358,000			481,000			4,561,000
Loss from operations			(2,443,000	)		(387,000	)		(72,000	)		(481,000	)		(3,383,000	)
Interest expense			(167,000	)		(35,000	)		(2,000	)		--			(204,000	)
Interest income			626,000			--			--			7,000			633,000
Loss before income taxes		$	(1,984,000	)	$	(422,000	)	$	(74,000	)	$	(474,000	)		(2,954,000	)
Income tax benefit															939,000
Net loss														$	(2,015,000	)
Amortization of purchased intangibles		$	1,733,000		$	305,000		$	26,000		$	--		$	2,064,000
Depreciation and other amortization		$	53,000		$	144,000		$	123,000		$	4,000		$	324,000
Goodwill		$	16,476,000		$	6,565,000		$	940,000		$	--		$	23,981,000
Total assets		$	97,684,000		$	15,995,000		$	4,246,000		$	1,705,000		$	119,630,000
Fixed asset additions		$	4,000		$	85,000		$	11,000		$	--		$	100,000

During the three months ended April 30, 2008, the majority of the Company’s net sales related to engineering, procurement and construction services provided by GPS to the power industry. Total net sales from power industry services accounted for approximately 91% of consolidated net sales for the period. The Company’s most significant current year customer relationships included two power industry service customers, Renewable Bio-Fuels Port Neches LLC (“RBF”) and Pacific Gas & Electric Company, which accounted for approximately 60% and 31%, respectively, of consolidated net sales for the current quarter. VLI, which provides nutritional and whole-food supplements as well as personal care products to customers in the global nutrition industry, accounted for approximately 5% of consolidated net sales for the three months ended April 30, 2008. SMC, which provides infrastructure services to telecommunications and utility customers as well as to the federal government, accounted for approximately 4% of consolidated net sales for the three months ended April 30, 2008.

For the three months ended April 30, 2007, net sales from power industry services accounted for approximately 86% of consolidated net sales. The Company’s most significant customer relationships during this period included five power industry service customers, Green Earth Fuels of Houston LLC; RBF; Altra Nebraska, LLC; the Connecticut Municipal Electrical Energy Cooperative and Roseville Energy Park, which accounted for approximately 27%, 17%, 17%, 14% and 10%, respectively, of consolidated net sales for the three months ended April 30, 2007. VLI and SMC accounted for approximately 10% and 4%, respectively, of consolidated net sales for the three months ended April 30, 2007.

NOTE 15 - SUBSEQUENT EVENTS

On May 22, 2008, the Company announced that GPS signed an engineering, procurement and construction agreement with Pacific Gas & Electric Company (“PG&E”) in the amount of $340 million for the design and construction of a natural gas-fired power plant in Colusa, California. The Colusa facility will be a 640 megawatt combined cycle facility and construction is expected to be completed during the summer of 2010. GPS commenced activity on this project in the fourth quarter ended January 31, 2008 under an interim notice to proceed that it received from PG&E in December 2007.

 

On June 5, 2008, the Company announced that its wholly-owned subsidiary, Gemma Power Systems, LLC, has entered into a business partnership with Invenergy Wind Management LLC, for the design and construction of wind farms located from the mid-western region of the United States into Canada. The partners will each own 50% of a new company, Gemma Renewable Power, LLC (“GRP”). The Company expects that GRP will annually provide engineering, procurement and construction services for new wind farms generating more than an estimated 300 megawatts of electrical power including the design and construction of roads, foundations, and electrical collection systems, as well as the erection of towers, turbines and blades. The new venture shall also assist with some of the ongoing servicing of the wind farms.

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

 

The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of April 30, 2008, and the results of operations for the three months ended April 30, 2008 and 2007, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 that was filed with the Securities and Exchange Commission on April 24, 2008 (the “2008 Annual Report”).

Cautionary Statement Regarding Forward Looking Statements 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements”. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described in Item 1A of our 2008 Annual Report and Item 1A in Part II of this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Introduction

Argan, Inc. (the “Company,” “we,” “us,” or “our”) conducts operations through our wholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”) that we acquired in December 2006, Vitarich Laboratories, Inc. (“VLI”) that we acquired in August 2004, and Southern Maryland Cable, Inc. (“SMC”) that we acquired in July 2003. Through GPS, we provide a full range of development, consulting, engineering, procurement, construction, commissioning, operations and maintenance services to the power generation market for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through VLI, we develop, manufacture and distribute premium nutritional products. Through SMC, we provide telecommunications infrastructure services including project management, construction and maintenance to the Federal Government, telecommunications and broadband service providers as well as electric utilities. Each of the wholly-owned subsidiaries represents a separate reportable segment - power industry services, nutritional products and telecommunications infrastructure services, respectively.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenue, expenses, and certain financial statement disclosures. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. Estimates are used for, but not limited to, the Company’s accounting for revenue recognition, allowance for doubtful accounts, inventory valuation, long lived assets including goodwill and intangible assets, contingent obligations, and deferred taxes. Actual results could differ from these estimates.

New Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133.” This new standard requires enhanced disclosures about an entity’s derivative and hedging activities with the intent of improving the transparency of financing reporting as the use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Currently, we use interest rate swap agreements to hedge the risks related to the variable interest paid on our term loans. The current effects of our hedging activities are not significant to our consolidated financial statements. However, the new standard will require us to provide an enhanced understanding of 1) how and why we use derivative instruments, 2) how we account for derivative instruments and the related hedged items, and 3) how derivatives and related hedged items affect our financial position, financial performance and cash flows. Adoption of this new accounting standard will first be required for our consolidated financial statements covering the quarter ending April 30, 2009.

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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141 and provides greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, establishes principles and requirements for how an acquirer recognizes and measures any non-controlling interest in the acquiree and the goodwill acquired, and requires the acquirer to disclose the nature and financial effect of the business combination. Among other changes, this statement also requires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred and that any deferred tax benefits resulted in a business combination are recognized in income from continuing operations in the period of the combination. For us, SFAS 141R will be effective for business combinations occurring subsequent to January 31, 2009. The accounting for future acquisitions, if any, may be affected by certain new requirements of this pronouncement that will be evaluated at that time.

In December 2007, the FASB also issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” that establishes accounting and reporting standards for minority interests in consolidated subsidiaries. This standard will be effective for us on February 1, 2009, and its adoption would not affect our current consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This standard permits companies to measure many financial instruments and certain other items at fair value at specified election dates. The provisions of this new standard were effective for us beginning February 1, 2008 and did not have a significant impact on the consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Certain provisions of this standard relating to financial assets and financial liabilities were also effective for us beginning February 1, 2008; they did not have a significant impact on the consolidated financial statements. Adoption of the other provisions of this new standard relating primarily to nonfinancial assets and nonfinancial liabilities will first be required for our consolidated financial statements covering the quarter ending April 30, 2009. The significant nonfinancial items included in our consolidated balance sheet include property and equipment, goodwill and other purchased intangible assets. Adoption of the new provisions is not expected to have a significant impact on our consolidated financial statements.

Recent Events

Construction Projects and Backlog. As a result of construction work performed during the current quarter pursuant to its existing contracts and the termination of the ethanol plant construction project in March 2008 that is discussed below, the construction contract backlog of GPS declined from $122 million at January 31, 2008 to $47 million at April 30, 2008. However, on May 22, 2008, the Company announced that GPS signed an engineering, procurement and construction agreement with Pacific Gas & Electric Company (“PG&E”) in the amount of $340 million for the design and construction of a natural gas-fired power plant in Colusa, California. This energy plant will be a 640 megawatt combined cycle facility and construction is expected to be completed in the summer of 2010. GPS commenced activity on this project in the fourth quarter ended January 31, 2008 under an interim notice to proceed that it received from PG&E in December 2007.

For a substantial portion of the current quarter, SMC operated without a contract renewal with Verizon and continued to perform services for Verizon at a reduced level of activity while it attempted to work with local Verizon management in negotiating a contract renewal. In April 2008, SMC received an extension of the expiring contract until June 30, 2008. Verizon has been a customer of SMC for more than twenty years and SMC continues to negotiate with Verizon to extend the expiring contract beyond June 30, 2008. SMC recognized net sales of $197,000 relating to Verizon during the current quarter, or approximately 10% of its total net sales. This amount represents a decline in net sales of approximately 69% from the corresponding quarter of the prior year. For the quarter ended April 30, 2007, the amount of net sales related to Verizon was $627,000, or 29% of SMC’s total net sales for the quarter.

 

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At January 31, 2008, GPS had a construction project which was in suspension pending the efforts of the customer to obtain financing in order to complete the construction of an ethanol facility. The customer was not successful in securing the necessary financing by the date in the current quarter that was agreed to by the parties. GPS has served notice of contract termination but the customer has not acknowledged the termination or released the construction bond. GPS continues to cooperate with the customer in its efforts to obtain financing. GPS is uncertain as to the ultimate resolution of this matter. As of April 30, 2008 and January 31, 2008, our balance sheets included assets and liabilities related to the terminated construction contract. We have classified these assets and liabilities as current assets and current liabilities in the accompanying condensed consolidated balance sheets due to the expectation that the assets will be realized and the liabilities will be extinguished. Although cash may be required to make payment on accounts payable to project subcontractors that are included in the condensed consolidated balance sheet at April 30, 2008, GPS does not anticipate any losses to arise from the resolution of this agreement. No additional net sales related to this contract were recorded by GPS during the quarter ended April 30, 2008.

Performance of VLI. VLI continues to report operating results that are below expected results. The loss of major customers and the reduction in the amounts of orders received from currently major customers have caused net sales to continue to decline. Despite cost reductions, the operating loss of VLI for the current quarter was $639,000. The EBITDA loss of VLI for the current quarter was approximately $470,000. VLI is actively pursuing opportunities to expand the volume of business related to current customers and secure business from new customers. The revenues for the remainder of the current fiscal year are forecasted to improve slightly over the current quarter run rate. However, there is no assurance that business will actually improve.

Legal Matters. As described in Note 12 to the condensed consolidated financial statements, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its current president in March 2008. VFI, which is owned by Kevin Thomas, the former owner of VLI, supplied VLI with certain organic raw materials used in the manufacture of VLI's products. VFI has asserted a breach of contract claim against VLI and alleges that VLI breached a supply agreement with VFI by acquiring the organic products from a different supplier. VFI also asserted a claim for defamation against VLI’s president alleging that he made false statements regarding VFI’s organic certification to one of VLI's customers. In March 2008, Mr. Thomas filed a lawsuit against VLI's president for defamation. The Company, VLI and VLI’s president deny all of the new allegations and intend to vigorously defend these lawsuits. However, the amount of costs expected to be incurred in connection with VLI legal matters increased during the current quarter. Accordingly, we recorded a charge to operating results of $86,000 in the quarter for the additional legal costs.

Comparison of the Results of Operations for the Three Months Ended April 30, 2008 and 2007

The following schedule compares the results of our operations for the three months ended April 30, 2008 and 2007. Except where noted, the percentage amounts represent the percentage of net sales for the corresponding period.

 

 

		Three Months Ended April 30,
		2008						2007
Net sales
Power industry services		$	44,008,000			90.9	%	$	43,354,000			86.0	%
Nutritional products			2,399,000			5.0	%		4,949,000			9.8	%
Telecommunications infrastructure services			1,999,000			4.1	%		2,129,000			4.2	%
Net sales			48,406,000			100.0	%		50,432,000			100.0	%
Cost of sales **
Power industry services			38,576,000			87.7	%		43,245,000			99.7	%
Nutritional products			2,323,000			96.8	%		4,166,000			84.2	%
Telecommunications infrastructure services			1,774,000			88.7	%		1,843,000			86.6	%
Cost of sales			42,673,000			88.2	%		49,254,000			97.7	%
Gross profit			5,733,000			11.8	%		1,178,000			2.3	%
Selling, general and administrative expenses			4,011,000			8.3	%		4,561,000			9.0	%
Income (loss) from operations			1,722,000			3.5	%		(3,383,000	)		(6.7	)%
Interest expense			(120,000	)		*			(204,000	)		*
Interest income			504,000			1.0	%		633,000			1.3	%
Income (loss) from operations before
income taxes			2,106,000			4.3	%		(2,954,000	)		(5.9	)%
Income tax (expense) benefit			(551,000	)		(1.1	)%		939,000			1.9	%
Net income (loss)		$	1,555,000			3.2	%	$	(2,015,000	)		(4.0	)%

   * Less than 1%.

 

** The cost of sales percentage amounts represent the percentage of net sales of the applicable segment.

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The following analysis provides information as to the results of our operations for the three month periods ended April 30, 2008 and 2007. As analyzed below, we reported net income of $1,555,000 for the three months ended April 30, 2008, or $0.14 per diluted share. For the three months ended April 30, 2007, we incurred a net loss of $2,015,000, or $(0.18) per share.

Net Sales. Net sales decreased by approximately 4.0% in the three months ended April 30, 2008 compared with the three months ended April 30, 2007 due to declines in the net sales of VLI and SMC partially offset by a 1.5% increase in the net sales of GPS.

The business of GPS represented 90.9% of consolidated net sales for the quarter ended April 30, 2008. This business represented 86.0% of consolidated net sales for the quarter ended April 30, 2007. The most significant customers of the power industry services business for the quarter ended April 30, 2008 were Renewable Bio-Fuels Port Neches LLC (“RBF”) and PG&E. The net sales for these two customers represented approximately 66.0% and 33.5% of the net sales of this business segment for the quarter ended April 30, 2008, and represented approximately 60.0% and 30.5% of our consolidated net sales for the current quarter, respectively. GPS is constructing two biofuels production facilities for RBF.

 

The most significant customers of the power industry services business for the quarter ended April 30, 2007 were Green Earth Fuels of Houston LLC, RBF, Altra Nebraska, LLC, the Connecticut Municipal Electrical Energy Cooperative and Roseville Energy Park. These projects represented the construction of an ethanol production facility, biofuels production facilities, a traditional gas-fired power plant and an electricity peaking facility. In total, GPS recognized approximately 84.7% of its net sales for the quarter ended April 30, 2007 under contracts with these customers. The net sales for these five customers represented approximately 26.5%, 17.3%, 16.6%, 14.3% and 10.0% of the Company’s consolidated net sales for the three months ended April 30, 2007, respectively.

Net sales of nutritional products were $2.4 million for the three months ended April 30, 2008, and represented 5.0% of consolidated net sales. Net sales of nutritional products were $4.9 million for the three months ended April 30, 2007. This amount represented 9.8% of consolidated net sales for the prior-year period. The decrease in net sales of nutritional products of $2.5 million, or 52%, primarily was due to the loss of several customers and declines in the sales of products to four of VLI’s five largest current customers.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of April 30, 2008. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of April 30, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in internal controls over financial reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15 or 15d-15 under the Exchange Act) occurred during the fiscal quarter ended April 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

 

1)

On March 22, 2005, WFC filed a civil action against the Company and its executive officers. The suit was filed in the Superior Court of the State of California for the County of Los Angeles. WFC purchased the capital stock of the Company's wholly-owned subsidiary, Puroflow Incorporated, pursuant to the terms of the Stock Purchase Agreement dated October 31, 2003. WFC alleged that the Company and its executive officers breached the Stock Purchase Agreement between WFC and the Company and engaged in misrepresentations and negligent conduct with respect to the Stock Purchase Agreement. WFC sought declaratory relief, compensatory and punitive damages in an amount to be proven at trial as well as the recovery of attorney's fees. This action was removed to the United States District Court for the Central District of California. The Company and its officers deny that any breach of contract or that any misrepresentations or negligence occurred on their part.

This case was scheduled for trial on April 10, 2007. On March 15, 2007, the District Court granted the Company and its executive officers' motion for summary judgment, thereby dismissing WFC's lawsuit against the Company and its executive officers in its entirety. WFC appealed the District Court’s decision. The parties filed their appellate briefs with oral arguments scheduled for June 3, 2008. The Company intends to continue to defend vigorously the appeal of this litigation.

 

2)

On August 27, 2007, Kevin Thomas, the former owner of VLI, filed a lawsuit against the Company, VLI and the Company’s Chief Executive Officer (the “CEO”) in the Circuit Court of Florida for Collier County. The Company acquired VLI by way of merger on August 31, 2004. Mr. Thomas alleges that the Company, VLI and the CEO breached various agreements regarding his compensation and employment package that arose from the acquisition of VLI. Mr. Thomas has alleged contractual and tort-based claims arising from his compensation and employment agreements and seeks rescission of his covenant not to compete against VLI. The Company, VLI and the CEO deny that any breach of contract or tortious conduct occurred on their part. The Company and VLI have also asserted four counterclaims against Mr. Thomas for breach of the merger agreement, breach of his employment contract, breach of fiduciary duty and tortious interference with contractual relations for the violation of his non-solicitation, confidentiality and non-compete obligations after he left VLI (the “VLI Merger Litigation”). The Company intends to vigorously defend this lawsuit and prosecute its counterclaims.

 

3)

On March 4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its current president in the Circuit Court of Florida for Collier County. VFI, which is owned by Kevin Thomas, supplied VLI with certain organic raw materials used in the manufacture of VLI products. VFI has asserted a breach of contract claim against VLI and alleges that VLI breached a supply agreement with VFI by acquiring the organic products from a different supplier. VFI also asserted a claim for defamation against VLI’s president alleging that he made false statements regarding VFI’s organic certification to one of VLI's customers. VLI and its president filed their Answer and Affirmative Defenses on May 8, 2008. VLI and its president deny that VLI breached any contract or that its president defamed VFI. The defendants intend to continue to vigorously defend this lawsuit.

4)

On March 4, 2008, Mr. Thomas filed a lawsuit against VLI's president in the Circuit Court of Florida for Collier County. Mr. Thomas has filed this new lawsuit against VLI’s president for defamation. Mr. Thomas alleges that VLI’s president made false statements to third-parties regarding Mr. Thomas' conduct that is the subject of counterclaims by the Company and VLI in the VLI Merger Litigation discussed above and that these statements have caused damage to his business reputation. VLI’s president filed his answer with the court on May 8, 2008 denying that he defamed Mr. Thomas. He intends to continue to vigorously defend this lawsuit.

In the normal course of business, the Company has pending claims and legal proceedings. It is our opinion, based on information available at this time, that none of the other current claims and proceedings will have a material effect on our condensed consolidated financial statements.

ITEM 1A.  RISK FACTORS

 

Investing in our securities involves a high degree of risk. Our business, financial position and future results of operations may be impacted in a materially adverse manner by risks associated with the execution of our strategic plan and the creation of a profitable and cash-flow positive business, our ability to obtain capital or to obtain capital on terms acceptable to us, the successful integration of acquired companies into our consolidated operations, our ability to successfully manage diverse operations remotely located, our ability to successfully compete in highly competitive industries, the successful resolution of ongoing litigation, our dependence upon key managers and employees and our ability to retain them, and potential fluctuations in quarterly operating results, among other risks. Before investing in our securities, please consider the risks summarized in this paragraph and those risks described in our Annual Report on Form 10-K for the year ended January 31, 2008 (our “2008 Annual Report”). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Our future results may also be impacted by other risk factors listed from time to time in our future filings with the SEC, including, but not limited to, our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-K. These documents are available free of charge from the SEC or from our corporate headquarters. Access to these documents is also available on our website. For more information about us and the announcements we make from time to time, you may visit our website at www.arganinc.com.

Our 2008 Annual Report, under Item 1A entitled “Risk Factors” includes an expanded discussion of our risk factors. There have been no material revisions to the risk factors that are described therein.

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