deervalley424b3-12407.htm
Filed
pursuant to Rule 424(b)(3)
Registration
No. 333-133377
PROSPECTUS
SUPPLEMENT NO. 9
to
prospectus dated July 26, 2006
DEER
VALLEY CORPORATION
Up
to 43,556,851 Shares
Common
Stock
This
prospectus supplement supplements
information contained in the prospectus dated July 26, 2006 relating to the
offer and sale by the selling shareholders identified in the prospectus of
up to
43,556,851 shares of our common stock. This prospectus supplement
includes our attached Quarterly Report on Form 10-QSB, which
was filed with the U.S. Securities and Exchange Commission on
November 6, 2007.
The
information contained in such
report is dated as of the date of such report. This prospectus
supplement should be read in conjunction with the prospectus dated July 26,
2006, which is to be delivered with this prospectus supplement. This
prospectus supplement is qualified by reference to the prospectus except to
the
extent that the information in this prospectus supplement updates and supersedes
the information contained in the prospectus dated July 26, 2006, including
any
supplements or amendments thereto.
Investing
in the shares involves risks
and uncertainties. See “Risk Factors” beginning on page 10 of the
prospectus dated July 26, 2006 and the risk factors included in our Annual
Report on Form 10-KSB for the year ended December 30,
2006.
Neither
the Securities and Exchange
Commission nor any state securities commission has approved or disapproved
of
these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus supplement is December 12, 2007.
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
(Mark
One)
[√]QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 29, 2007
OR
[
]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 114800
DEER
VALLEY CORPORATION
(Exact
name of Registrant as specified in its charter)
Florida
|
20-5256635
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
incorporation
or organization)
|
identification
no.)
|
|
|
4218
W. Linebaugh Avenue, Tampa, FL
|
33624
|
(Address
of principal executive offices)
|
(Zip
code)
|
Registrant's
telephone number, including area code: (813)
885-5998
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements
for
the past 90 days. Yes [√] No [ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes [ ] No [√]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [√]
The
Registrant had 8,592,929 shares of Common Stock, par value $0.001 per share,
outstanding as of September 29, 2007.
TABLE
OF CONTENTS
PART
I
|
FINANCIAL
INFORMATION
|
|
PAGE |
|
|
|
|
|
Item
1
|
Financial
Statements
|
|
F-1 |
|
|
|
|
|
|
Consolidated Balance Sheet |
|
|
As
of
September 29, 2007 (unaudited) |
F-2
|
|
|
|
|
|
|
Consolidated Statements of Operations |
|
|
Three
and Nine Months ended September 29,
2007
(unaudited) |
|
|
Three
and Nine Months ended September 30,
2006
(unaudited) |
F-3
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
Nine
Months ended September
29, 2007
(unaudited) |
|
|
Nine
Months
ended September 30, 2006 (unaudited) |
F-4
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements (unaudited) |
F-5 |
|
|
|
|
|
Item
2
|
Management's
Discussion and Analysis |
3 |
|
|
|
|
|
Item
3
|
Controls
and Procedures
|
|
10 |
PART
II
|
OTHER
INFORMATION
|
11 |
|
|
|
Item
1
|
Legal
Proceedings
|
11
|
|
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
11
|
|
|
|
Item
3
|
Defaults
Upon Senior Securities
|
11
|
|
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
11
|
|
|
|
Item
5
|
Other
Information
|
11
|
|
|
|
Item
6
|
Exhibits
|
12
|
|
|
|
Unless
otherwise indicated or the context otherwise requires, all references below
in
this filing to “we,” “us,” the “Company,” and "Deer Valley" are to Deer
Valley Corporation, a Florida corporation, together with its wholly-owned
subsidiary, Deer Valley Homebuilders, Inc., an Alabama corporation.
PART
I FINANCIAL
INFORMATION
Item
1. Financial Statements
Deer
Valley Corporation & Subsidiary
Consolidated Financial Statements
Contents:
|
|
|
|
|
|
Consolidated
Balance Sheet as of September 29, 2007
(unaudited)
|
|
F-2
|
|
|
|
Consolidated
Statements of Operations for the three and nine month periods
ended
September 29, 2007 and September 30, 2006
(unaudited)
|
F-3
|
|
|
|
Consolidated
Statements of Cash Flows for the nine month periods
ended
September 29, 2007 and September 30, 2006
(unaudited)
|
F-4
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
F-5 |
Deer
Valley Corporation & Subsidiary
Consolidated
Balance Sheet
ASSETS
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash
|
|
$ |
5,521,043
|
|
Accounts
receivable
|
|
|
9,870,432
|
|
Inventory
|
|
|
1,988,054
|
|
Prepaid
expenses and other current assets
|
|
|
960,318
|
|
|
|
|
18,339,846
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
3,133,252
|
|
|
|
|
|
|
Goodwill
|
|
|
6,506,148
|
|
Other
assets
|
|
|
109,206
|
|
|
|
|
6,615,354
|
|
|
|
$ |
28,088,453
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities on long term debt
|
|
$ |
5,019,526
|
|
Accounts
payable & accrued expenses
|
|
|
5,121,818
|
|
Accrued
warranties
|
|
|
2,100,000
|
|
Accrued
preferred dividends
|
|
|
89,578
|
|
|
|
|
12,330,919
|
|
|
|
|
|
|
Accrued
earnout, net of current maturities
|
|
|
2,016,956
|
|
Long-term
debt, net of current maturities
|
|
|
1,888,810
|
|
|
|
|
3,905,767
|
|
|
|
|
16,236,686
|
|
|
|
|
|
|
Series
A Preferred stock, $0.01 par value, 750,000 shares authorized,
637,275
shares issued and outstanding
|
|
|
6,372,745
|
|
|
|
|
|
|
Series
B Preferred stock, $0.01 par value, 49,451 shares authorized,
0 shares
issued and outstanding
|
|
|
-
|
|
|
|
|
|
|
Series
C Preferred stock, $0.01 par value, 26,750 shares authorized,
26,750
shares issued and outstanding
|
|
|
267
|
|
|
|
|
|
|
Series
D Preferred stock, $0.01 par value, 132,081 shares authorized,
0 shares
issued and outstanding
|
|
|
-
|
|
|
|
|
|
|
Series
E Preferred stock, $0.01 par value, 1,000,000 shares authorized,
1,000,000
shares issued and outstanding
|
|
|
10,000
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 8,592,929
shares
issued and outstanding
|
|
|
8,594
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
35,145,189
|
|
|
|
|
|
|
Retained
earnings and accumulated deficit
|
|
|
(29,685,030 |
) |
|
|
|
11,851,765
|
|
|
|
$ |
28,088,453
|
|
|
|
|
|
|
See
notes to consolidated financial statements
Deer
Valley Corporation & Subsidiary
Consolidated
Statements of Operations
|
|
For
the three month period ended
|
|
|
For
the nine month period ended
|
|
|
|
September
29,
|
|
|
September
30,
|
|
|
September
29,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$ |
18,103,462
|
|
|
$ |
16,901,751
|
|
|
$ |
45,803,829
|
|
|
$ |
48,767,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
15,094,281
|
|
|
|
14,688,814
|
|
|
|
38,823,118
|
|
|
|
41,289,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
3,009,181
|
|
|
|
2,212,937
|
|
|
|
6,980,712
|
|
|
|
7,477,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,147
|
|
|
|
8,187
|
|
|
|
30,396
|
|
|
|
24,240
|
|
Selling,
general and administrative
|
|
|
1,881,300
|
|
|
|
1,557,614
|
|
|
|
5,125,723
|
|
|
|
4,520,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
1,891,447
|
|
|
|
1,565,801
|
|
|
|
5,156,119
|
|
|
|
4,544,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
1,117,735
|
|
|
|
647,136
|
|
|
|
1,824,592
|
|
|
|
2,932,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
34,496
|
|
|
|
-
|
|
|
|
65,740
|
|
Interest
income
|
|
|
54,549
|
|
|
|
-
|
|
|
|
169,117
|
|
|
|
-
|
|
Interest
expense
|
|
|
(44,848 |
) |
|
|
(37,077 |
) |
|
|
(122,141 |
) |
|
|
(72,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER INCOME/(EXPENSES)
|
|
|
9,700
|
|
|
|
(2,581 |
) |
|
|
46,976
|
|
|
|
(7,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
1,127,435
|
|
|
|
644,555
|
|
|
|
1,871,568
|
|
|
|
2,925,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(376,563 |
) |
|
|
(240,019 |
) |
|
|
(755,409 |
) |
|
|
(1,064,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
750,872
|
|
|
$ |
404,536
|
|
|
$ |
1,116,159
|
|
|
$ |
1,860,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
to preferred stockholders
|
|
|
(89,577 |
) |
|
|
(114,957 |
) |
|
|
(310,816 |
) |
|
|
(356,739 |
) |
Deemed
dividend to preferred stockholders on beneficial conversion
feature
|
|
|
-
|
|
|
|
(5,206,294 |
) |
|
|
-
|
|
|
|
(8,777,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Available to Common Shareholders
|
|
$ |
661,295
|
|
|
$ |
(4,916,715 |
) |
|
$ |
805,343
|
|
|
$ |
(7,272,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income/(Loss) Per Share (Basic)
|
|
$ |
0.08
|
|
|
$ |
(0.84 |
) |
|
$ |
0.09
|
|
|
$ |
(2.79 |
) |
Net
Income/(Loss) Per Share (Fully Diluted)
|
|
$ |
0.03
|
|
|
$ |
(0.84 |
) |
|
$ |
0.05
|
|
|
$ |
(2.79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
8,513,004
|
|
|
|
5,824,933
|
|
|
|
8,493,349
|
|
|
|
2,608,311
|
|
Weighted
Average Common and Common Equivalent Shares
Outstanding
|
|
|
22,160,943
|
|
|
|
5,824,933
|
|
|
|
22,661,663
|
|
|
|
2,608,311
|
|
See
notes to consolidated financial statements
Deer
Valley Corporation & Subsidiary
Consolidated
Statements of Cash Flows
|
|
For
the nine month period ended
|
|
|
|
September
29,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,116,159
|
|
|
$ |
1,860,840
|
|
Adjustments
to reconcile net income to net cash provided for/used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
205,768
|
|
|
|
137,213
|
|
Stock
based compensation
|
|
|
119,903
|
|
|
|
8,651
|
|
(Gain)
on sale of property and equipment
|
|
|
-
|
|
|
|
(14,624 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
in receivables
|
|
|
(7,695,434 |
) |
|
|
(1,328,448 |
) |
(Increase)
in inventories
|
|
|
(690,410 |
) |
|
|
(1,203,113 |
) |
(Increase)
in prepayments and other assets
|
|
|
(758,142 |
) |
|
|
(93,323 |
) |
Increase
in accounts payable
|
|
|
1,020,402
|
|
|
|
844,480
|
|
Increase
in income taxes payable
|
|
|
687,840
|
|
|
|
1,054,339
|
|
Increase
in estimated warranties
|
|
|
35,000
|
|
|
|
800,000
|
|
Increase/(decrease)
in accrued expenses
|
|
|
(368,040 |
) |
|
|
(1,432,869 |
) |
CASH
FLOW PROVIDED FOR (USED IN) OPERATING ACTIVITIES
|
|
$ |
(6,326,953 |
) |
|
$ |
633,146
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(116,910 |
) |
|
|
(1,042,447 |
) |
Purchase
of Subsidiary, net of cash acquired
|
|
|
-
|
|
|
|
(3,543,738 |
) |
Proceeds
from sales of marketable securities
|
|
|
-
|
|
|
|
151,418
|
|
CASH
FLOW USED IN INVESTING ACTIVITIES
|
|
$ |
(116,910 |
) |
|
$ |
(4,434,767 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from preferred issuances
|
|
|
-
|
|
|
|
7,728,780
|
|
Accrual
of earnout
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from issuance of notes payable
|
|
|
4,495,844
|
|
|
|
476,481
|
|
Proceeds
from the exercise of warrants
|
|
|
37,910
|
|
|
|
-
|
|
Loan
costs
|
|
|
-
|
|
|
|
(98,950 |
) |
CASH
FLOW PROVIDED BY FINANCING ACTIVITIES
|
|
$ |
4,533,755
|
|
|
$ |
8,106,311
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
$ |
(1,910,109 |
) |
|
$ |
4,304,690
|
|
CASH,
Beginning
|
|
$ |
7,431,152
|
|
|
$ |
221
|
|
CASH,
Ending
|
|
$ |
5,521,043
|
|
|
$ |
4,304,911
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
117,303
|
|
|
$ |
42,839
|
|
Taxes
|
|
$ |
750,000
|
|
|
$ |
775,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additional
purchase price accrued under earnout provision
|
|
$ |
-
|
|
|
$ |
1,811,901
|
|
Accrual
of dividends on preferred stock
|
|
$ |
310,816
|
|
|
$ |
356,739
|
|
Deemed
dividend on beneficial conversion feature
|
|
$ |
-
|
|
|
$ |
8,777,025
|
|
See
notes to consolidated financial statements
Notes
to Condensed Consolidated Financial Statements
(unaudited)
1.
BASIS OF PRESENATION
The
accompanying unaudited consolidated financial statements for the three and
nine
month periods ended September 29, 2007 and 2006 have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations
of
the Securities and Exchange Commission for Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements.
The
unaudited financial information included in this report includes all adjustments
which are, in the opinion of management, necessary to reflect a fair statement
of the results for the interim periods. The operations for the three and
nine
month periods ended September 29, 2007 and September 30, 2006 are not
necessarily indicative of the results of the full fiscal year.
The
condensed consolidated financial statements included in this report should
be
read in conjunction with the financial statements and notes thereto included
in
the Registrant's December 31, 2006 Annual Report on Form 10-KSB and subsequent
filings on Form 8-K.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Stock
Based
Compensation - In December 2004, the FASB issued SFAS
No.123 (revised 2004), "Share-Based Payment". SFAS 123(R) will provide investors
and other users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will
be
measured based on the fair value of the equity or liability instruments issued.
SFAS 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights, and employee share purchase plans. SFAS 123(R) replaces
FASB Statement No. 123, "Accounting for Stock-Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS
123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that statement permitted entities the option of continuing to apply
the
guidance in Opinion 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used. Public entities (other than those filing as small business
issuers) were required to apply SFAS 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. For public entities that
file
as small business issuers SFAS 123(R) is applicable as of the beginning of
the
first interim or annual reporting period that begins after December 15,
2005.
Prior
to
January 1, 2006, the Company accounted for Stock Options and Stock Based
Compensation under the recognition and measurement provisions of APB Opinion
No.
25, “Accounting for Stock Issued to Employees”, and related Interpretations, as
permitted by FASB Statement No. 123, “Accounting for Stock-Based
Compensation”. Effective January 1, 2006, the Company adopted the
fair value recognition provisions of SFAS No. 123(R), Share-Based Payment,
using
the modified-prospective-transition method. Under that transition method,
compensation cost for all share-based payments granted prior to, but not
yet
vested as of January 1, 2006 are based on (a) the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and
(b)
compensation cost for all share-based payments granted subsequent to January
1,
2006 are based on the grant-date fair value estimated in accordance with
the
provisions of SFAS No.123(R). Results for prior periods have not been
restated.
2007
Long Term Incentive Plan
On
July
1, 2007 the Company established a Long Term Incentive (the “2007 Incentive
Plan”) plan for the purposes of advancing the interests of the Company and our
shareholders by providing incentives to certain of our employees and other
key
individuals who perform services for us, including those who contribute
significantly to the strategic and long-term performance objectives and growth
of the Company. The 2007 Incentive Plan is administered by a
committee (the “Committee”) appointed by the Board of
Directors. Currently, the Committee is comprised of all members of
the Board of Directors acting as a group. The Committee has the power
to interpret the 2007 Incentive Plan and to prescribe rules, regulations
and
procedures in connection with the operations of the 2007 Incentive
Plan. The Committee may delegate administrative responsibilities
under the 2007 Incentive Plan to any one or more of its members or other
persons, except as may otherwise be required under applicable law or listing
standards for an exchange on which the Company’s common stock may be
listed. The 2007 Incentive Plan provides for the granting of several
types of awards, including stock options, performance grants and other awards
deemed by the Committee to be consistent with the purposes of the 2007 Incentive
Plan. Awards may be granted alone, or in conjunction with one or more
other awards, as determined by the Committee.
The
2007
Incentive Plan was effective as of July 1, 2007, and was approved by the
Company’s board of directors. The Company’s shareholders have not
voted on approval of the 2007 Incentive Plan. A maximum of ONE
MILLION EIGHT HUNDRED THOUSAND (1,800,000) shares of common stock has been
authorized to be issued under the 2007 Incentive Plan in connection with
the
grant of awards, subject to adjustment for corporate transactions, including,
without limitation, any stock dividend, forward stock split, reverse stock
split, merger or recapitalization. Of this amount, no more than ONE
MILLION (1,000,000) shares of common stock may be issued as incentive stock
options. Common stock issued under the 2007 Incentive Plan may be
either newly issued shares, treasury shares, reacquired shares or any
combination thereof. If common stock issued as restricted stock,
restricted stock units or otherwise subject to repurchase or forfeiture rights
is reacquired by us pursuant to such rights, or if any award is cancelled,
terminates, or expires unexercised, the common stock which would otherwise
have
been issuable pursuant to such awards will be available for issuance under
new
awards. All awards under the 2007 Incentive Plan
shall be granted within 10 years of the date the plan was adopted.
The
Committee has exclusive discretion to select to whom awards will be granted;
to
determine the type, size, terms and conditions of each award; to modify or
waive, within certain limits, the terms and conditions of any award; to
determine the time when awards will be granted; to establish performance
objectives; to prescribe the form of documents representing awards under
the
2007 Incentive Plan; and to make all other determinations which it deems
necessary, advisable or desirable in the interpretation and administration
of
the 2007 Incentive Plan. At the discretion of the Committee, awards
may be made under the 2007 Incentive Plan in assumption of, or in substitution
for, outstanding awards previously granted by the Company, any predecessor
or a
company acquired by the Company or with which it combines. The
Committee has the authority to administer and interpret the 2007 Incentive
Plan,
and its decisions are final, conclusive and binding. We anticipate
that all of our employees and directors will be eligible to participate in
the
2007 Incentive Plan.
On
July
1, 2007 pursuant to the Long Term Incentive Plan the Company awarded members
of
the board of directors 350,000 stock options with an exercise price of $1.14
and
a term of 10 years. Additionally, on September 7, 2007 the Company
awarded members of the board of directors 350,000 stock options with an exercise
price of $1.09 and a term of 10 years. All of the options issued were fully
vested on the grant date. The Company has recognized $119,903 of
expense related to issuances in the Consolidated Statement of Operations
for the
three and nine month periods ended September 29, 2007.
Determining
Fair-Value
The
Company estimates the expected term and volatility of options granted based
on
values derived from its industry peer group. Our decision to use these measures
of expected term and volatility was based upon the lack of availability of
actively traded options in the Company’s own common stock and the Company’s
assessment that the measure of volatility used is more representative of
future
stock price trends than the historical volatility of the Company’s common stock.
The Company bases the risk-free interest rate for option valuation on Constant
Maturity Rates provided by the U.S. Treasury with remaining terms similar
to the
expected term of the options. The Company does not anticipate paying any
cash
dividends in the foreseeable future and therefore uses an expected dividend
yield of zero in the option valuation model. In addition, SFAS No. 123(R)
requires forfeitures of share-based awards to be estimated at the time of
grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. As this is the Company’s initial issuance and no
historical data exists to estimate pre-vesting option forfeitures the Company
has recorded stock-based compensation expense for the all the awards
vested. The Company uses the straight-line attribution as its expensing method
of the value of share-based compensation for options and awards.
Under
SFAS No. 123(R) Deer Valley uses the Black-Scholes option valuation model
to estimate the fair value of the Company’s option awards. The key assumptions
used in the model during the three months ended September 29, 2007 are provided
below:
|
|
September
29,
|
|
|
|
2007
|
|
Risk-free
interest rate
|
|
4.69%
|
Expected
volatility of stock
|
|
26.3%
|
Dividend
yield
|
|
0
|
Expected
option life
|
|
2
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price Per
Share
|
Weighted
Average Exercise Price Per
Share
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Options
|
|
|
Warrants
|
|
|
Options
|
|
|
Warrants
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,506,977
|
|
|
|
-
|
|
|
$ |
0.75-3.00
|
|
|
|
-
|
|
|
$ |
1.64
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(25,273 |
) |
|
|
-
|
|
|
$ |
1.50
|
|
|
|
-
|
|
|
$ |
1.50
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
22,481,704
|
|
|
|
-
|
|
|
$ |
0.75-3.00
|
|
|
|
-
|
|
|
$ |
1.64
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
22,481,704
|
|
|
|
-
|
|
|
$ |
0.75-3.00
|
|
|
|
-
|
|
|
$ |
1.64
|
|
|
|
-
|
|
Granted
|
|
|
250,000
|
|
|
|
700,000
|
|
|
$ |
2.25
|
|
|
$ |
1.09-$1.14
|
|
|
$ |
2.25
|
|
|
$ |
1.12
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
22,731,704
|
|
|
|
700,000
|
|
|
$ |
0.75-3.00
|
|
|
$ |
1.09-$1.14
|
|
|
$ |
1.64
|
|
|
$ |
1.12
|
|
The
warrants expire at various dates ranging from January 2011 through November
2016. The stock options expire at various dates ranging from July
2017 to September 2017.
Earning
(Loss) Per Share
-
The Company uses SFAS No. 128, “Earnings Per Share” for calculating the
basic and diluted loss per share. Basic income/(loss) per share is computed
by
dividing net income/(loss) and net income/(loss) attributable to common
shareholders by the weighted average number of common shares outstanding.
Diluted income/(loss) per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential shares had
been
issued and if the additional shares were dilutive. Common equivalent shares
are
excluded from the computation of net loss per share if they would be
anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three month periods ending
|
|
|
For
the nine month periods ending
|
|
|
|
September
29,
|
|
|
September
30,
|
|
|
September
29,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/( loss) available to common shareholders
|
|
$ |
661,295
|
|
|
$ |
(4,916,715 |
) |
|
$ |
805,343
|
|
|
$ |
(7,272,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,513,004
|
|
|
|
5,824,933
|
|
|
|
8,493,349
|
|
|
|
2,608,311
|
|
Diluted
|
|
|
22,160,943
|
|
|
|
5,824,933
|
|
|
|
22,661,663
|
|
|
|
2,608,311
|
|
Income/Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.08
|
|
|
$ |
(0.84 |
) |
|
$ |
0.09
|
|
|
$ |
(2.79 |
) |
Diluted*
|
|
$ |
0.03
|
|
|
$ |
(0.84 |
) |
|
$ |
0.05
|
|
|
$ |
(2.79 |
) |
*Diluted
weighted average shares outstanding for periods ended July 1, 2006 do not
include the effect of the Company’s common stock equivalent shares because to do
so would have been anti-dilutive. Accordingly, basic and diluted net
loss per share for this period is the same.
For
the
periods ended September 29, 2007 diluted weighted average shares
outstanding includes all of the Company’s dilutive common stock equivalent
shares. The Company’s dilutive common stock equivalent shares as of
September 30, 2007 include all of the Convertible Preferred shares and any
incremental shares, as defined by SFAS No. 128, “Earnings Per Share”,
associated with the Company’s Class C and D outstanding warrants and stock
options.
See
the
detailed list of Common Stock Equivalents below.
Common
Stock Equivalents
as
of
|
|
Exercise
|
|
|
September
29,
|
|
|
September
30,
|
|
Securities
|
|
Price
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Preferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred
|
|
|
|
|
|
8,496,993
|
|
|
|
9,400,326
|
|
Series
B Preferred
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Series
C Preferred
|
|
|
|
|
|
2,675,000
|
|
|
|
2,675,000
|
|
Series
D Preferred
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Series
E Preferred
|
|
|
|
|
|
1,000,000
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
12,171,993
|
|
|
|
12,075,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Warrants
|
|
$ |
1.50
|
|
|
|
10,369,351
|
|
|
|
10,545,105
|
|
Class
B Warrants
|
|
$ |
2.25
|
|
|
|
4,970,824
|
|
|
|
4,970,824
|
|
Class
C Warrants
|
|
$ |
0.75
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Class
D Warrants
|
|
$ |
0.75
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Class
E Warrants
|
|
$ |
3.00
|
|
|
|
880,544
|
|
|
|
880,540
|
|
Class
F Warrants
|
|
$ |
2.25
|
|
|
|
1,000,000
|
|
|
|
-
|
|
Class
BD-1 Warrants
|
|
$ |
0.75
|
|
|
|
-
|
|
|
|
-
|
|
Class
BD-2 Warrants
|
|
$ |
1.50
|
|
|
|
919,162
|
|
|
|
919,162
|
|
Class
BD-3 Warrants
|
|
$ |
2.25
|
|
|
|
459,581
|
|
|
|
459,581
|
|
Class
BD-4 Warrants
|
|
$ |
1.50
|
|
|
|
66,121
|
|
|
|
66,121
|
|
Class
BD-5 Warrants
|
|
$ |
3.00
|
|
|
|
66,121
|
|
|
|
66,121
|
|
Total
|
|
|
|
|
|
|
22,731,704
|
|
|
|
21,907,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/07
Issuance
|
|
$ |
1.14
|
|
|
|
350,000
|
|
|
|
-
|
|
9/7/07
Issuance
|
|
$ |
1.09
|
|
|
|
350,000
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
700,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
common stock equivalents
|
|
|
|
|
|
|
35,603,697
|
|
|
|
33,982,780
|
|
FASB
Interpretation No 48, “Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109” (“FIN 48”), was issued in
July 2006. This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entity's financial statements in accordance
with
SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition
threshold and measurement attribute for financial statement disclosure of
tax
positions taken, or expected to be taken, on a tax return. The Company will
be
required to adopt FIN 48 in the first quarter of fiscal 2008. Management
is
currently evaluating the requirements of FIN 48 and has not yet determined
the
impact on the financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
108”), Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 provides
guidance to registrants for assessing materiality. SAB No. 108 states that
registrants should use both a balance sheet approach and income statement
approach when quantifying and evaluating the materiality of a misstatement.
SAB
No. 108 also provides guidance on correcting errors under the dual approach
as
well as transition guidance for correcting previously immaterial errors that
are
now considered material. We adopted SAB No. 108 as of January 1, 2007 without
any impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurement” (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value and expands disclosures about assets and
liabilities measured at fair value. The Company will be required to adopt
SFAS
157 in the first quarter of fiscal 2009. Management is currently evaluating
the
requirements of SFAS 157 and has not yet determined the impact on the financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at
fair
value. SFAS No. 159 will be effective at the beginning of fiscal year
2008. We are presently evaluating the impact of the adoption of SFAS
No. 159 on our results of operations and financial position.
3.
INVENTORY
Inventory
consisted of the following components:
|
|
|
September
29,
|
|
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
Raw
Materials
|
|
|
|
1,295,154
|
|
Work-in-Process
|
|
|
|
494,124
|
|
Finished
Goods
|
|
|
|
198,776
|
|
|
Total
Inventory
|
$ |
1,988,054
|
|
4.
PRODUCT WARRANTIES
The
Company provides the retail home buyer a one-year limited warranty covering
defects in material or workmanship in home structure, plumbing and
electrical systems. The Company estimated warranty costs
are accrued at the time of the sale to the dealer following industry
standards and historical warranty cost incurred. Periodic
adjustments to the estimated warranty accrual are made as events occur
which indicate changes are necessary. As of September 29, 2007, the Company
has provided a liability of $2,100,000 for estimated warranty costs
relating to homes sold, based upon management's assessment of historical
experience factors and current industry trends.
Management
reviews its warranty requirements at the close of each reporting period and
adjusts the reserves accordingly. The following tabular
presentation reflects activity in warranty reserves during the periods
presented:
|
|
September
29,
|
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
$ |
2,065,000
|
|
Warranty
charges
|
|
|
1,413,697
|
|
Warranty
payments
|
|
|
(1,378,697 |
) |
|
|
$ |
2,100,000
|
|
5.
COMMITMENTS AND CONTINGENCIES
Litigation-
The Company in the normal course of business is subject to claims
and
litigation. Management of the Company is of the opinion that,
based on information available, such legal matters will
not ultimately have a material adverse effect on the financial position or
results of operation of the Company.
Reserve
for Repurchase
Commitments
- Deer Valley Homebuilders, Inc. (“DVH”) is
contingently liable under the terms of repurchase agreements with financial
institutions providing inventory financing for retailers of DVH’s
products. These arrangements, which are customary in the industry,
provide for the repurchase of products sold to retailers in the event of
default
by the retailer. The risk of loss under these agreements is spread
over numerous retailers. The price DVH is obligated to pay generally
declines over the period of the agreement (typically 18 to 24 months) and
the
risk of loss is further reduced by the sale value of repurchased
homes. The maximum amount for which the Company is contingently
liable under repurchase agreements is approximately $18,539,000 at September
29,
2007. DVH to date has not experienced significant losses under these
agreements, and management does not expect any future losses to have a material
effect on the accompanying financial statements.
Earnout
Agreement
-On
January 18, 2006, the Company's wholly-owned subsidiary, DeerValley Acquisitions
Corp. (dissolved on July 1, 2006), entered into an Earnout Agreement (the
"Earnout Agreement"), between Deer Valley Homebuilders, Inc., DeerValley
Acquisitions Corp., and the former owners of Deer Valley Homebuilders, Inc.
In connection with the Earnout Agreement additional payments may be paid
to the former owners of Deer Valley Homebuilders, Inc. as an earnout based
upon
the Net Income Before Taxes of Deer Valley Homebuilders, Inc. during the
next
five (5) years, up to a maximum of $6,000,000. In any given year
during the term of the Earnout Agreement, 50% of the pre-tax profit exceeding
$1,000,000 per year will be accrued and become distributable to the prior
shareholders. During the period ending December 31, 2006 the Company’s
wholly owned subsidiary, Deer Valley Homebuilders, Inc., had pre-tax profit
in
the amount of $4,936,287, of which $3,936,287 was above the Company's earnout
threshold of $1,000,000. The Company accrued 50% of the amount in
excess of earnout threshold in the amount of $1,968,143.
On
April
12, 2007 the Company made a payment of $1,232,275 pursuant to the Earnout
Agreement. The payment represented the current portion due under the
Earnout Agreement.
For
the
nine month period ending September 29, 2007, Deer Valley Homebuilders, Inc.
had
a pre-tax profit in the amount of $2,569,362, of which $1,569,362 was above
the
Company’s earnout threshold of $1,000,000. The Company accrued 50%,
or $784,681, of the amount in excess of earnout threshold. The maximum
remaining potential accrual under the Earnout Agreement is
$2,750,769.
Loans
and Letter of Credit
- On May 26, 2006, DVH entered into a Loan Agreement
with
Fifth Third Bank (the “Lender”) providing for a loan of Two Million and No/100
Dollars ($2,000,000) (the "Loan") evidenced by a promissory note and secured
by
a first mortgage on DVH’s properties in Guin, Alabama and Sulligent, Alabama,
including the structures and fixtures located thereon, as well as DVH’s interest
in any lease thereof. The purpose of the loan is to pay off an existing loan
from another bank secured by the Guin property and to reduce the outstanding
balance on DVH’s revolving credit facility with the Lender. The net
effect of the reduction in the revolving credit balance is to increase the
credit available to the Company for working capital under its revolving
facility. The Loan has a term from May 26, 2006 through June 1, 2011
and has a variable interest rate at 2.25% above LIBOR. There is no
prepayment penalty. Future advances are available under the Loan
Agreement, subject to approval by the Lender. Also on May 26, 2006,
the Company and DVA guaranteed the Loan. Should Deer Valley default,
thereby triggering acceleration of the Loan, the Company would become liable
for
payment of the Loan.
On
April
11, 2007, Deer Valley Corporation entered into a new Loan and Security Agreement
providing for a revolving line of credit in an amount not to exceed Two Million
Five Hundred Thousand and No/100 Dollars ($2,500,000) (the "DV Loan Agreement")
evidenced by a revolving credit note and secured by accounts receivable,
inventory, equipment and all other tangible and intangible personal property
of
Deer Valley Corporation and DVH. The purpose of the DV Loan Agreement is
to
provide a standby source of working capital, letters of credit required by
the
terms of certain repurchase agreements and performance bonds entered into
in the
normal course of the Company’s business, and to provide financing for potential
acquisition(s) of new manufacturing facilities or subsidiaries. The DV Loan
Agreement has a one year term and has a variable interest rate at 2.60% above
LIBOR. Upon issuance of a letter of credit, Deer Valley Corporation is charged
a
letter of credit fee equal to 1.00% of the face amount of the letter of credit.
The DV Loan Agreement provides for conditions to meet prior to each advance,
including financial ratios.
In
addition to the above, on April 11, 2007, DVH renewed its existing Loan and
Security Agreement providing for a revolving line of credit in an amount
not to
exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000)
(the
"DVH Loan agreement") evidenced by a revolving credit note and secured by
accounts receivable, inventory, equipment and all other tangible and intangible
personal property of DVH and Deer Valley Corporation. The purpose of the
DVH
Loan is to provide standby working capital and letters of credit required
by the
terms of certain repurchase agreements and performance bonds entered into
in the
normal course of DVH’s business. The DVH Loan Agreement has a one year term and
has a variable interest rate at 2.60% above LIBOR. Upon issuance of a letter
of
credit, DVH is charged a letter of credit fee equal to 1.00% of the face
amount
of the letter of credit. The DVH Loan provides for conditions to meet prior
to
each advance, including financial ratios.
On
August
10, 2007, Deer Valley Homebuilders, Inc. (“DVH”) entered into a Revolving Bridge
Loan and Security Agreement with Fifth Third Bank, providing for a line of
credit in an amount not to exceed Five Million and No/100 Dollars ($5,000,000),
evidenced by a revolving credit note and secured by accounts receivable,
inventory, equipment and all other tangible and intangible personal property
of
DVH. The purpose of the new facility is to provide a standby source of working
capital for fulfillment of one or more contracts with the State of Mississippi
to construct housing units under the “Mississippi Alternative Pilot Program.”
This facility has a six month term and has a variable interest rate at 2.50%
above LIBOR. The Loan and Security Agreement permits acceleration
upon certain payment and covenant defaults.
In
addition to the revolving line of credit described in the preceding paragraph,
DVH, during its normal course of business, is required to issue irrevocable
standby letters of credit in the favor of independent third party beneficiaries
to cover obligations under repurchase agreements. As of September 30, 2007,
no amounts had been drawn on the above irrevocable letters of credit by the
beneficiaries.
Dividends
Payable-As
of
September 29, 2007 the total accrued dividend payable to Series A Preferred
shareholders was $89,578.
6.
EQUITY TRANSACTIONS
Series
A Convertible
Preferred Stock - During
the three month period ending September 29, 2007 certain shareholders converted
1,500 shares of Series A Preferred stock, par value $15,000, into 20,000
shares
of the Company’s common stock.
Common
Stock Dividends
- On August 24, 2007, the Company issued 213,875 shares
of
the Company’s common stock to Series A Preferred shareholders as payment for
$221,239 of dividends.
Stock
Options
- On July 1, 2007 pursuant to the Long Term Incentive Plan the Company
awarded members of the board of directors 350,000 stock options with an exercise
price of $1.14 and a term of 10 years. Additionally, on September 7,
2007 the Company awarded members of the board of directors 350,000 stock
options
with an exercise price of $1.09 and a term of 10 years. All of the options
issued were fully vested on the grant date. The Company has
recognized $119,903 of expense related to issuances in the Consolidated
Statement of Operations for the three and nine month periods ended September
29,
2007.
Item
2. Management’s Discussion and Analysis
Cautionary
Notice Regarding Forward Looking Statements
We
desire to take advantage of the
“safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. This filing contains a number of forward-looking statements
which reflect management’s current views and expectations with respect to our
business, strategies, products, future results and events, and financial
performance. All statements made in this filing other than statements
of historical fact, including statements addressing operating performance,
events, or developments which management expects or anticipates will or may
occur in the future, including statements related to distributor channels,
volume growth, revenues, profitability, new products, adequacy of funds from
operations, statements expressing general optimism about future operating
results, and non-historical information, are forward looking
statements. In particular, the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “may,” variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive
means
of identifying such statements, and their absence does not mean that the
statement is not forward-looking. These forward-looking statements
are subject to certain risks and uncertainties, including those discussed
below. Our actual results, performance or achievements could differ
materially from historical results as well as those expressed in, anticipated,
or implied by these forward-looking statements. We do not undertake
any obligation to revise these forward-looking statements to reflect any future
events or circumstances.
Readers
should not place undue reliance
on these forward-looking statements, which are based on management’s current
expectations and projections about future events, are not guarantees of future
performance, are subject to risks, uncertainties and assumptions (including
those described below), and apply only as of the date of this
filing. Our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. Factors which could cause or contribute to such
differences include, but are not limited to, risks discussed in our Annual
Report on form 10-KSB. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Overview
The
Company, through its wholly-owned
subsidiary, Deer Valley Homebuilders, Inc. (“DVH”), an Alabama corporation with
its business offices located at 205 Carriage Street, P.O. Box 310, Guin, Alabama
35563, is engaged in the production, sale and marketing of factory-built homes
in the southeastern and south central U.S. housing market. As of the
date of this filing, we manufacture all of our factory-built homes in two
manufacturing facilities, one located in Guin, Alabama and one located in
Sulligent, Alabama. We rely upon a team of regional sales directors
and approximately 80 independent dealers to market our factory-built homes
in
over 100 retail locations. As of the date of this filing, we are
selling our factory-built homes in 13 states through our network of independent
dealers and retail centers.
In
recent years, the factory-built
housing industry has suffered a downturn in sales as a result of a tightening
of
credit standards, restricted availability of retail and wholesale financing,
and
excessive inventory levels. This industry decline began in 1999,
approximately five years before we successfully launched and began to rapidly
grow our business in January, 2004. We have excelled in a tough
industry through efficient manufacturing at our production facilities, industry
leading products, experienced and capable relations oriented sales and
management teams, stringent cost controls, and attention to dealer support,
customer satisfaction, and service efforts.
Beginning
in the second quarter of
calendar year 2007, state and federal agencies, and other government sponsored
entities, began distributing Requests for Proposals (RFPs) for housing designed
to test and evaluate future disaster recovery housing units for the Gulf Coast
region. These RFPs have presented an opportunity for a near term
upswing in production for Deer Valley and other companies in the industry
serving the Gulf Coast.
The
Company has aggressively sought to
take advantage of its Alabama location and reputation in the Gulf Coast area
to
become a significant participant in the permanent rebuilding of the Gulf Coast
region and the production of prototypes for future disaster recovery housing
units. As an immediate result of its efforts, in June 2007 the
Company’s plant in Guin, Alabama was selected by the State of Mississippi to
produce 50 two-bedroom and 100 three-bedroom cottages as part of a program
that
is designed to test and evaluate future disaster housing units. The
total combined value of this initial contract pilot phase contract awarded
to
the Company was $7,535,000. All units contracted for with the Company
under this initial contract were produced and delivered before the end of the
third quarter of 2007.
In
October 2007, the Company was
awarded a contract extension by the State of Mississippi for the production
and
delivery of an additional 150 two-bedroom cottages as part of the State of
Mississippi’s pilot program to test and evaluate future disaster housing units.
As with the initial contract, the Company will deliver the units to state
designated staging areas located near the Gulf Coast. Total
anticipated proceeds from this contract extension is $7,185,000 which, when
combined with the completed contract for the manufacture of 50 two-bedroom
and
100 three-bedroom cottages, brings the combined proceeds of the pilot
phase contracts awarded to Deer Valley to a total of $14,720,000. All
of the units to be produced by the Company under the contract extension are
scheduled to be delivered prior to March 31, 2008.
To
provide increased flexibility to
fulfill it government contracts, on August 10, 2007, Deer Valley Homebuilders,
Inc. (“DVH”) entered into a Revolving Bridge Loan and Security Agreement with
Fifth Third Bank, providing for a line of credit of $5,000,000. This
facility has a six month term and has a variable interest rate at 2.50% above
LIBOR. (see paragraph below titled “Liquidity and Capital
Resources”).
In
addition, as part of its strategic plan to continue its growth in a challenging
industry, the Company has increased its involvement in the modular segment
of
the factory built housing industry. As its initial entry into
the modular
segment, the Company is targeting the production of smaller units (less than
3,000 square feet) that are readily produceable, in a cost efficient manner,
using the Company’s existing manufacturing capabilities. The
Company intends to sell these models to large tract developers and independent
dealers. Modular homes are typically built in a factory in sections
and transported to a site to be joined together on a permanent
foundation. Unlike homes constructed in accordance with the Federal
Manufactured Home Construction and Safety Standards (“HUD Code homes”), modular
homes generally do not have integrated steel frames and axles.
Manufacturing
Operations
We
currently produce all of our
factory-built homes at two manufacturing facilities in Guin and Sulligent,
Alabama. Our facilities normally function on a single-shift, five-day
work week basis. Our sales backlog, without including the 150
two-bedroom cottages that we are scheduled to manufacture for the State of
Mississippi during the fourth quarter of 2007 and first quarter of 2008, is
approximately five weeks. Once the cottages for the State of
Mississippi are included, our total sales backlog increases to approximately
eight weeks. During the third quarter of 2007, the Company’s average
production rate was 8.4 “floors” produced per day.
While
our HUD Code and modular homes
are constructed with many of the same components and building materials used
in
site-built homes, we utilize a cost-efficient assembly line manufacturing
process which enables us to produce a quality home at a significantly lower
cost
per square foot than a traditional, site-built home. Our homes are
built with residential features, including 1/2 inch drywall, thermally sealed
double-paned windows from Capitol™, enhanced insulation, oak cabinets, cultured
marble vanities, and two inch by six inch exterior wall construction
standards.
The
extent of customization of our
homes varies to a significant degree with the price of the homes. In
the higher price range of the market, the home buyer is often less sensitive
to
the price increase associated with significant design
modifications. Our experience in producing a customized home on a
cost-effective basis has allowed us to offer customized homes, factory-provided
trim-out services, and walk-through inspections of homes.
Each
of our HUD Code homes is
constructed in accordance with the Federal Manufactured Home Construction and
Safety Standards promulgated by the U.S. Department of Housing and Urban
Development, better known as the “HUD Code.” Our production and
marketing efforts have concentrated on multi-section homes.
Our
modular homes must be constructed
in accordance with the local building codes in effect at the point of
delivery. These codes vary from state to state and also within
states. Such variance in standards is not conducive to standardized
factory construction of a quality home. Accordingly, we build our
modular homes to the standards of the International Residential Code (“IRC”),
which is generally more stringent than local building codes. The IRC
has been adopted wholesale by several states and by selected localities in
many
others.
Our
two and three-bedroom cottages
which we have contracted to manufacture for the State of Mississippi are
designed and manufactured to meet the requirements of both the HUD Code and
the
International Residential Code. As a result, such cottages can either
remain on an integrated steel frame and axle or be joined to a permanent
foundation.
Because
the cost of transporting a
factory-built home is significant, substantially all of our homes are sold
to
dealers within a 500 mile radius of our manufacturing facility. DVH
arranges, at dealers’ expense, for the transportation of finished homes to
dealer locations using independent trucking companies. Customary
sales terms are cash-on-delivery or guaranteed payment from a floor-plan
financing source. Dealers or other independent installers are
responsible for placing the home on site and connecting utilities.
When
evaluating the Company’s operating
performance, the key performance indicators management examines are (1) the
Company’s production rate, in “floors” produced per day, (2) the cost of sales,
and (3) the size of the Company’s sales backlog. For more information
on these performance indicators, please see the attached financial statements
and notes thereto and the section of the Company’s Annual Report on Form 10-KSB
titled “Description of Business.”
Results
of Operations
The
following discussion examines the
results of the Company’s operations for the three and nine month periods ended
September 29, 2007. This discussion of our financial condition and
results of operations should be read in conjunction with our financial
statements and notes to the financial statements, included
herewith. This discussion should not be construed to imply that the
results discussed herein will necessarily continue into the future, or that
any
conclusion reached herein will necessarily be indicative of actual operating
results in the future. Such discussion represents only the best
present assessment by our management. It is also imperative that one
read our December 31, 2006 Annual Report on Form 10-KSB and subsequent filings
on Form 8-K.
HISTORICAL
RESULTS - PERIODS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30,
2006.
Revenues. Overall
gross revenue for the three and nine month periods ended September 29, 2007
were
$18,103,462 and $45,803,829, respectively, compared to $16,901,751 and
$48,767,224, respectively, for the three and nine month periods ended September
30, 2006. Revenue for the three month period ended September 29, 2007
increased over the same three period in 2006, primarily due to the Company’s
fulfillment of its initial contract with the State of Mississippi for the
production of 50 two-bedroom and 100 three-bedroom cottages as part of its
program that is designed to test and evaluate future disaster housing
units. Revenue for the Company’s nine month period ended September
29, 2007 was less than the same nine period in 2006 primarily due to reduced
production schedule during the first quarter reflecting the industry wide
softness in demand for HUD Code housing units.
Our Cost of Revenues as a percentage of revenue
has generally remained the same for the nine month period ending September
29,
2007, when compared to the corresponding period for 2006. For the
three month period ending September 29, 2007, our cost of revenues as a
percentage of revenue increased to 16.62%, as compared to 13.09% for the
corresponding period for 2006.
Selling,
General, and Administrative Expenses. Selling, general
and administrative expenses consisted of payroll and related expenses for
executive, accounting, and administrative personnel, professional fees, and
other general corporate expenses. Selling, general, and
administrative expenses for the three and nine month periods ended September
29,
2007 were $1,881,300 and $5,125,273, respectively, compared to $1,557,614 and
$4,520,552, respectively, for the three and nine month periods ended September
30, 2006. General and administrative costs increased for the nine
month period ending September 29, 2007, in comparison to the corresponding
period for 2006, primarily due to increased production capacity, increased
trade
show participation, increased administration cost associated with the MEMA
project, and increased non-cash compensation to members of the Board of
Directors. During the third quarter of 2007, the Company awarded to
members of the board of directors, in the aggregate, 350,000 stock options
with
an exercise price of $1.14 and 350,000 stock options with an exercise
price of $1.09. In connection with such awards, the Company
recognized $119,903 of expense related to issuances in the Consolidated
Statement of Operations for the three and nine month periods ended September
30,
2007.
Net
Income. The net income for the three and nine month periods
ended September 29, 2007 was $750,872 and $1,116,159, respectively, compared
to
$404,536 and $1,860,840, respectively, for the three and nine month periods
ended September 30, 2006. After accounting for the stock dividend
payable to preferred stockholders and the deemed dividend to preferred
stockholders on beneficial conversion features, the net income to common
stockholders for the three month and nine month periods ended September 29,
2007
was $661,295 and $805,343, respectively, compared to net losses of $4,916,715
and $7,272,925, respectively, for the three and nine month periods ended
September 30, 2006. The significant increases in net income to common
stockholders for the three and nine month periods ended September 29, 2007
versus those same periods ended September 30, 2006 are primarily attributable
to
the elimination of an $8.78 million non-recurring, non-cash, deemed dividend
to
preferred stockholders on beneficial conversion features that burdened the
reported earnings attributable to common shareholders for the first three fiscal
quarters of 2006.
Liquidity
and Capital Resources
Management
believes that the Company
currently has sufficient cash flow from operations, available bank borrowings,
cash, and cash equivalents to meet its short-term working capital
requirements. The Company had $5,521,043 in cash and cash equivalents
as of September 29, 2007, compared to $4,304,911 in cash and cash equivalents
as
of September 30, 2006. Should our costs and expenses prove to be
greater than we currently anticipate, or should we change our current business
plan in a manner which will increase or accelerate our anticipated costs or
capital demand, such as through the acquisition of new products, our working
capital could be depleted at an accelerated rate.
The
net cash used in operating
activities for the nine month period ended September 29, 2007 was
$6,326,953. The net cash provided from operating activities for the
nine month period ended September 30, 2006 was $633,146. The
reduction of cash provided by operating activities for the first nine months
of
2007, in comparison to the same period from the Company’s prior fiscal year, is
attributable primarily to a temporary increase in receivables at the end of
the
third quarter related to the Company’s fulfillment of its initial
contact with the State of Mississippi to produce 50 two-bedroom and 100
three-bedroom cottages. During October 2007, the Company received
payment from the State of Mississippi for a significant portion of such initial
contract, and repaid all borrowings under its Revolving Bridge Loan with Fifth
Third Bank. The Company anticipates receiving all remaining payment from the
State of Mississippi for such initial contract during the fourth quarter of
2007. The Company’s account receivable as of September 29, 2007 was $9,870,432,
as compared to $3,468,853 as of September 30, 2006.
The
net cash used in investing
activities for the nine month period ending September 29, 2007 was $116,910,
which primarily reflects purchases of equipment. The net cash
provided from financing activities for the nine month period ending September
29, 2007 was $4,533,755, which primarily relates to the Company’s borrowings
under its line of credit with its senior lender. The Company
anticipates receiving payments during the fourth quarter of 2007 in connection
with governmental contracts which were completed during the third quarter,
thereby reducing its accounts receivable and its borrowings under its line
of
credit with its senior lender.
On
August 10, 2007, Deer Valley
Homebuilders, Inc. (“DVH”) entered into a Revolving Bridge Loan and Security
Agreement with Fifth Third Bank, providing for a line of credit in an amount
not
to exceed Five Million and No/100 Dollars ($5,000,000), evidenced by a revolving
credit note and secured by accounts receivable, inventory, equipment and all
other tangible and intangible personal property of DVH. The purpose of the
new facility is to provide a standby source of working capital for fulfillment
of one or more contracts with the State of Mississippi to construct housing
units under the “Mississippi Alternative Pilot Program.” This
facility has a six month term and has a variable interest rate at 2.50% above
LIBOR.
On
April 11, 2007, Deer Valley
Corporation entered into a Loan and Security Agreement providing for a revolving
line of credit in an amount not to exceed Two Million Five Hundred Thousand
and
No/100 Dollars ($2,500,000) (the "DV Loan Agreement") evidenced by a revolving
credit note and secured by accounts receivable, inventory, equipment and all
other tangible and intangible personal property of Deer Valley Corporation
and
DVH. The purpose of the DV Loan Agreement is to provide a standby
source of working capital, letters of credit required by the terms of certain
repurchase agreements and performance bonds entered into in the normal course
of
the Company’s business, to provide financing for potential acquisition(s) of new
manufacturing facilities or subsidiaries, and to provide funding for the
Company’s entry into the modular home market. The DV Loan Agreement
has a one year term and has a variable interest rate at 2.60% above
LIBOR. Upon issuance of a letter of credit, Deer Valley Corporation
is charged a letter of credit fee equal to 1.00% of the face amount of the
letter of credit.
In
addition to the above, on April 11,
2007, Deer Valley Homebuilders, Inc. renewed its existing Loan and Security
Agreement providing for a revolving line of credit in an amount not to exceed
Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) (the "DVH
Loan agreement") evidenced by a revolving credit note and secured by accounts
receivable, inventory, equipment and all other tangible and intangible personal
property of DVH and Deer Valley Corporation. The purpose of the DVH
Loan is to provide standby working capital and letters of credit required by
the
terms of certain repurchase agreements and performance bonds entered into in
the
normal course of DVH’s business. The DVH Loan Agreement has a one
year term and has a variable interest rate at 2.60% above LIBOR. Upon
issuance of a letter of credit, DVH is charged a letter of credit fee equal
to
1.00% of the face amount of the letter of credit.
We
are contingently liable under the
terms of repurchase agreements with financial institutions providing inventory
financing for retailers of our products. For more information on the
repurchase agreements, including the Company’s contingent liability thereunder,
please see “Reserve for Repurchase Commitments” below.
Recent
Developments
In
October 2007, the Company was
awarded a contract extension by the State of Mississippi for the production
and
delivery of an additional 150 two-bedroom cottages as part of the State of
Mississippi’s program designed to test and evaluate future disaster housing
units. Total anticipated proceeds from the contract extension is $7,185,000
which would bring the combined proceeds of the pilot phase contracts awarded
to
Deer Valley to a total of $14,720,000. All of the units to be
produced by the Company under the contract extension are scheduled to be
delivered prior to March 31, 2008.
During
October 2007, the Company
received payment from the State of Mississippi for a significant portion of
amounts due in connection with its initial contact with the State of Mississippi
for the production of 50 two-bedroom and 100 three-bedroom cottages, and repaid
all borrowings under its Revolving Bridge Loan with Fifth Third Bank. The total
combined value of this initial pilot phase contract awarded to the Company
was
$7,535,000. The Company expects to receive all remaining payment from the State
of Mississippi for such initial contract during the fourth quarter of
2007.
Critical
Accounting Policies
Our
discussion and analysis of our
financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these consolidated financial statements requires us to make estimates and
judgments which affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosures of contingent assets and
liabilities. For a description of those estimates, see Note 2,
Summary of Significant Accounting Policies, contained in the explanatory notes
to the Company’s financial statements for the quarter ended September 29, 2007,
contained in this filing. On an ongoing basis, we evaluate our
estimates, including those related to reserves, deferred tax assets, valuation
allowances, impairment of long-lived assets, fair value of equity instruments
issued to consultants for services, and estimates of costs to complete
contracts. We base our estimates on historical experience and on
various other assumptions which we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities which are not readily apparent
from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. However, we believe that our
estimates, including those for the above-described items, are
reasonable.
Critical
Accounting Estimates
Management
is aware that certain
changes in accounting estimates employed in generating financial statements
can
have the effect of making the Company look more or less profitable than it
actually is. Management does not believe that either the Company or
its auditors have made any such changes in accounting estimates. A
summary
of the most critical accounting estimates employed by the Company in generating
financial statements follows below.
Warranties
We
provide our retail buyers with a
one-year limited warranty covering defects in material or workmanship, including
plumbing and electrical systems. We record a liability for estimated
future warranty costs relating to homes sold, based upon our assessment of
historical experience and industry trends. In making this estimate,
we evaluate historical sales amounts, warranty costs related to homes sold
and
timing in which any work orders are completed. The Company has
accrued a warranty liability reserve of $2,100,000 on its balance sheet as of
September 29, 2007. Although we maintain reserves for such claims,
there can be no assurance that warranty expense levels will remain at current
levels or that the reserves that we have set aside will continue to be
adequate. A large number of warranty claims which exceed our current
warranty expense levels could have a material adverse affect upon our results
of
operations.
Volume
Incentives Payable
We
have relied upon volume incentive
payments to our independent dealers who retail our products. These
volume incentive payments are accounted for as a reduction to gross sales,
and
are estimated and accrued when sales of our factory-built homes are made to
our
independent dealers. Volume incentive reserves are recorded based
upon the annualized purchases of our independent dealers who purchase a
qualifying amount of home products from us. We accrue a liability to
our dealers, based upon estimates derived from historical payout
rates. Volume incentive costs represent a significant expense to us,
and any significant changes in actual payouts could have an adverse affect
on
our financial performance. We had a reserve for volume incentives
payable of $689,400 as of September 29, 2007, as compared to $685,559 as of
September 30, 2006.
Reserve
for Repurchase Commitments
Most
of our independent dealers finance
their purchases under a wholesale floor plan financing arrangement under which
a
financial institution provides the dealer with a loan for the purchase price
of
the home and maintains a security interest in the home as
collateral. When entering into a floor plan arrangement, the
financial institution routinely requires that we enter into a separate
repurchase agreement with the lender, under which we are obligated, upon default
by the independent dealer, to repurchase the factory-built home at our original
invoice price less the cost of administrative and shipping
expenses. Our potential loss under a repurchase obligation depends
upon the estimated net resale value of the home, as compared to the repurchase
price that we are obligated to pay. This amount generally declines on
a predetermined schedule over a period that usually does not exceed 24
months.
The
risk of loss that we face under
these repurchase agreements is lessened by several factors, including the
following:
(i)
|
the
sales of our products are spread over a number of independent
dealers,
|
(ii)
|
we
have had only isolated instances where we have incurred a repurchase
obligation,
|
|
the
price we are obligated to pay under such repurchase agreements declines
based upon a predetermined amount over a period which usually does
not
exceed 24 months, and |
(iv)
|
we
have been able to resell homes repurchased from lenders at current
market
prices, although there is no guarantee that we will continue to be
able to
do so.
|
The
maximum amount for which the
Company is contingently liable under such agreements amounted to approximately
$18,539,000 as of September 29, 2007, as compared to $15,375,000 as of September
30, 2006. As of September 29, 2007 and September 30, 2006, we had
reserves of $140,000 and $67,325, respectively, established for future
repurchase commitments, based upon our prior experience and evaluation of our
independent dealers’ financial conditions. Because Deer Valley to date has not
experienced any significant losses under these agreements, management does
not
expect any future losses to have a material effect on our accompanying financial
statements.
Revenue Recognition
Revenue
for our products sold to
independent dealers are generally recorded when all of the following conditions
have been met: (i) an order for the home has been received from the
dealer, (ii) an agreement with respect to payment terms has been received,
and
(iii) the home has been shipped and risk of loss has passed to the
dealer.
Recent
Accounting Pronouncements
FASB
Interpretation No 48, “Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement
No. 109” (“FIN 48”), was issued in July 2006. This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entity's financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” It prescribes a
recognition threshold and measurement attribute for financial statement
disclosure of tax positions taken, or expected to be taken, on a tax
return. The Company will be required to adopt FIN 48 in the first
quarter of fiscal 2008. Management is currently evaluating the
requirements of FIN 48 and has not yet determined the impact on the financial
statements.
In
September 2006, the SEC issued Staff
Accounting Bulletin No. 108 (“SAB No. 108”), Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements. SAB No. 108 provides guidance to registrants for
assessing materiality. SAB No. 108 states that registrants should use
both a balance sheet approach and income statement approach when quantifying
and
evaluating the materiality of a misstatement. SAB No. 108 also
provides guidance on correcting errors under the dual approach as well as
transition guidance for correcting previously immaterial errors that are now
considered material. We adopted SAB No. 108 as of January 1, 2007
without any impact on our financial statements.
In
September 2006, the FASB issued
SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about assets and liabilities measured at fair value. The Company will
be required to adopt SFAS 157 in the first quarter of fiscal
2009. Management is currently evaluating the requirements of SFAS 157
and has not yet determined the impact on the financial
statements.
In
February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. SFAS No. 159 will be effective at the beginning of fiscal year
2008. We are presently evaluating the impact of the adoption of SFAS
No. 159 on our results of operations and financial position.
Off-Balance
Sheet Arrangements
In
connection with the Capital Stock
Purchase Agreement, the Company entered into the Earnout Agreement, pursuant
to
which additional payments may be paid to the former owners of DVH, as an
earnout, based upon the Net Income Before Taxes of DVH during the next five
(5)
years, up to a maximum of $6,000,000. The business
purpose of executing the Earnout Agreement was to set the purchase price of
Deer
Valley Homebuilders, Inc. by an objective standard, given that the owners of
DVH
and the Company could not agree on an outright purchase price. The
Company’s obligations under the Earnout Agreement could negatively affect
liquidity, capital resources, market risk, and credit risk.
During
the term of the Earnout
Agreement, 50% of the pre-tax profit exceeding $1,000,000 per year will be
accrued and become distributable to the former owners of DVH. During
the nine month period ending September 29, 2007, Deer Valley Homebuilders,
Inc.
had pre-tax profit in the amount of $2,569,362, of which $1,569,362 was above
the Company’s earnout threshold. The Company accrued 50% of the
amount in excess of the earnout threshold in the amount of
$784,681. The maximum remaining potential accrual under the Earnout
Agreement is $2,750,769.
Item
3. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company’s Chief Executive Officer and acting Chief Financial Officer has
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the
fiscal period ending September 29, 2007 covered by this Quarterly Report on
Form 10-QSB. Based upon such evaluation, the Chief Executive Officer
and acting Chief Financial Officer has concluded that, as of the end of
such period, the Company’s disclosure controls and procedures were effective
as required under Rules 13a-15(e) and 15d-15(e) under the Exchange
Act.
Changes
in Internal Controls over Financial Reporting
Beginning
with the Company’s first
fiscal year ending after December 15, 2007, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include management's report on
our
internal control over financial reporting in our Annual Report on
Form 10-K. The internal control report must contain (1) a
statement of management's responsibility for establishing and maintaining
adequate internal control over our financial reporting, (2) a statement
identifying the framework used by management to conduct the required evaluation
of the effectiveness of our internal control over financial reporting,
(3) management's assessment of the effectiveness of our internal control
over financial reporting as of the end of our most recent fiscal year, including
a statement as to whether or not our internal control over financial reporting
is effective, and (4) a statement that our registered independent public
accounting firm has issued an attestation report on management's assessment
of
our internal control over financial reporting.
In
order to achieve compliance with
Section 404 within the prescribed period, management is planning to
commence a Section 404 compliance project to assess the adequacy of our
internal control over financial reporting, remediate any control deficiencies
that may be identified, validate through testing that controls are functioning
as documented, and implement a continuous reporting and improvement process
for
internal control over financial reporting. At this time, management
is assessing the proper parameters of a Section 404 compliance project in light
of emerging guidance from the SEC on such parameters.
Except
as described above, during the
quarter ended September 29, 2007, there have been no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Inherent
Limitations of the Effectiveness of Internal Control
A
control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the internal control system are met. Because
of the inherent limitations of any internal control system, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected.
PART
II OTHER
INFORMATION
Item
1. Legal Proceedings
Although
the Company in the normal
course of business is subject to claims and litigation, the Company is not
a
party to any material legal proceeding nor is the Company aware of any
circumstance which may reasonably lead a third party to initiate legal
proceeding against the Company.
As
of the date of this filing, there
are no material pending legal or governmental proceedings relating to our
Company or properties to which we are a party, and to our knowledge there are
no
material proceedings to which any of our directors, executive officers, or
affiliates are a party adverse to us or which have a material interest adverse
to us.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Option
Plan; Option
Grants - On September 7, 2007, the Company’s Board of Directors
ratified the Company’s 2007 Long Term Incentive Plan (the “2007 Incentive
Plan”). The 2007 Incentive Plan was effective as of July 1,
2007. A maximum of 1,800,000 shares of common stock has been
authorized to be issued under the 2007 Incentive Plan in connection with the
grant of awards, subject to adjustment for corporate transactions, including,
without limitation, any stock dividend, forward stock split, reverse stock
split, merger or recapitalization. Of this amount, no more than
1,000,000 shares of common stock may be issued as incentive stock
options.
Pursuant
to the 2007 Incentive Plan,
each of the seven members of the Board of Directors were issued an option
exercisable for 50,000 shares of the Company’s common stock, at an exercise
price of $1.14. Such options were approved at a meeting of the Board
of Directors in March 2007 and were effective as of July 1, 2007. In
addition, under the 2007 Incentive Plan, each of the seven members of
the Board of Directors were issued an option exercisable for 50,000 shares
of
the Company’s common stock, at an exercise price of $1.09. Such
options were approved at a meeting of the Board of Directors on September 7,
2007 and were effective as of September 7, 2007. The
issuance of such options were effected in reliance on the exemptions for sales
of securities not involving a public offering, as set forth in Rule 506
promulgated under the Securities Act and in Section 4(2) of the Securities
Act, based on the following: (a) the investors confirmed to us that they
were either “accredited investors,” as defined in Rule 501 of Regulation D
promulgated under the Securities Act; (b) there was no public offering or
general solicitation with respect to the offering; (c) the investors
acknowledged that all securities being purchased were “restricted securities”
for purposes of the Securities Act, and agreed to transfer such securities
only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (d) a legend was placed on the certificates
reflecting such restrictions.
Series
A Convertible
Preferred Stock - During
the three month period ending September 30, 2007 certain shareholders converted
1,500 shares of Series A Preferred stock, par value $15,000, into 20,000 shares
of the Company’s common stock. The securities were issued
to existing
shareholders, and the transaction was exempt under Section 3(a)(9) of the
Securities Act, as amended.
Common
Stock Dividends
- On August 24, 2007, the Company issued 213,875 shares of the
Company’s common stock to Series A Preferred shareholders as payment for
$221,239 of dividends.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None
Item
6. Exhibits
Exhibit
No.
|
Description
|
3.01
|
Articles
of Incorporation of Deer Valley Corporation. (1)
|
3.02
|
Bylaws
of Deer Valley Corporation. (1)
|
4.01
|
Certificate
of Designation, Rights, and Preferences of Series A Convertible Preferred
Stock. (1)
|
4.02
|
Certificate
of Designation, Rights, and Preferences of Series B Convertible Preferred
Stock. (1)
|
4.03
|
Certificate
of Designation, Rights, and Preferences of Series C Convertible Preferred
Stock. (1)
|
4.04
|
Certificate
of Designation, Rights, and Preferences of Series D Convertible Preferred
Stock. (1)
|
4.05
|
Certificate
of Designation, Rights, and Preferences of Series E Convertible Preferred
Stock. (2)
|
10.01
|
Amendment
to Loan Agreement (3)
|
10.02
|
Form
of Renewal Revolving Credit Note (3)
|
10.03
|
Revolving
Credit Loan and Security Agreement (3)
|
10.04
|
Form
of Revolving Credit Note (3)
|
10.05
|
Continuing
Guaranty of Deer Valley Homebuilders, Inc. (3)
|
10.06
|
Continuing
Guaranty of Deer Valley Corporation (3)
|
10.07
|
Form
of Series F Warrant (4)
|
10.08
|
Revolving
Bridge Loan and Security Agreement (4)
|
10.09
|
Revolving
Bridge Note (4)
|
10.10
|
Continuing
Guaranty of Deer Valley Corporation (4)
|
10.11
|
Deer
Valley Corporation 2007 Long Term Incentive Plan effective July 1,
2007
(5)
|
10.12
|
Form
of Stock Option Agreement (5)
|
10.13
|
Employment
Agreement with Charles G. Masters (5)
|
21.1 |
List
of Subsidiaries of Deer Valley Corporation |
31.01
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated
November 5, 2007. (5)
|
31.02
|
Certification
of Acting Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a)
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated November 5, 2007. (5)
|
32.01
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
November
5, 2007. (5)
|
32.02
|
Certification
of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated
November 5, 2007. (5)
|
(1) Previously
filed as an exhibit to the Form 8-K, filed with the SEC on July 28, 2006 and
incorporated herein by reference.
(2) Previously
filed as an exhibit to the Form 10-QSB, filed with the SEC on November 20,
2006
and incorporated herein by reference.
(3) Previously
filed as an exhibit to the Form 8-K filed with the SEC on April 16, 2007 and
incorporated herein by reference.
(4) Previously
filed as an exhibit to the Form 10-QSB, filed with the SEC on August __2007
and
incorporated herein by reference.
(5) Filed
herewith.
SIGNATURE
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to
be signed on its behalf by the undersigned thereunto duly
authorized.
Deer Valley Corporation
(Registrant)
Dated: November
5, 2007
|
By: /s/Charles
G. Masters
|
|
Charles
G. Masters
|
|
President
& Chief Executive Officer
|