Filed pursuant to Rule 424(b)(3)
Registration No. 333-133377
PROSPECTUS SUPPLEMENT NO. 4
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 20, 2006.
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
31, 2005.
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 November 20, 2006.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
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.)
4902 EISENHOWER BLVD., SUITE 185, TAMPA, FL 33634
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 885-5998
CYTATION CORPORATION
Former name of Registrant, if changed since last report
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The Registrant had 7,928,263 shares of Common Stock, par value $0.001 per share,
outstanding as of November 16, 2006.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets
As of September 30, 2006 (unaudited)
As of December 31, 2005 (audited) F-2
Consolidated Statements of Operations
Three Months ended September 30, 2006 (unaudited)
Three Months ended September 30, 2005 (unaudited)
Nine Months ended September 30, 2006 (unaudited) and
Nine Months ended September 30, 2005 (unaudited) F-3
Consolidated Statements of Cash Flows
Nine Months ended September 30, 2006 (unaudited)
Nine Months ended September 30, 2005 (unaudited) F-4
Notes to Consolidated Financial Statements F-5-F-19
Item 2 Management's Discussion and Analysis or Plan of Operation 3
Item 3 Controls and Procedures 10
PART II OTHER INFORMATION
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
[FORMERLY KNOWN AS CYTATION CORPORATION
THROUGH JULY 24, 2006]
UNAUDITED FINANCIAL STATEMENT
- --------------------------------------------------------------------------------
CONTENT:
BALANCE SHEETS AS OF SEPTEMBER 30, 2006 (UNAUDITED) AND
DECEMBER 31, 2005 (AUDITED) F-2
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDING
SEPTEMBER 30, 2006 (UNAUDITED) AND SEPTEMBER 30, 2005 (UNAUDITED) F-3
STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDING
SEPTEMBER 30, 2006 (UNAUDITED) AND SEPTEMBER 30, 2005 (UNAUDITED) F-4
NOTES TO FINANCIAL STATEMENTS F-5-F-19
- --------------------------------------------------------------------------------
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- -------------
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash $ 4,304,911 $ 221
Accounts Receivable 3,468,852
Notes Receivable, Other 15,715 -
Inventory 2,318,671
Prepaid expenses and other current assets 137,530 -
------------- -------------
Total Current Assets 10,245,679 221
Property and Equipment, Net 2,537,987 -
Loan Cost 92,351
Goodwill 5,523,895 -
------------- -------------
TOTAL ASSETS $ 18,399,911 $ 221
============= =============
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 19,448 $ -
Accounts payable and Accrued Expenses 2,069,842 48,416
Accounts Payable Under Dealer Incentive Programs 685,559
Estimated Warranties 1,550,000
Compensation and Related Accruals 803,033
Other Accruals 11,641
Income Tax Payable 34,940 -
Accrued Preferred Dividends 95,772
Notes payable and Accrued Interest - 5,500
------------- -------------
Total Current Liabilities 5,270,235 53,916
LONG TERM LIABILITIES:
Long-Term Debt, Net of Current Maturities 3,776,798 85,000
------------- -------------
TOTAL LIABILITIES 9,047,031 138,916
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Preferred stock, $0.01 par value, 750,000
shares authorized, 705,025 and 0 shares issued and
outstanding, respectively 7,050,245 -
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 - -
Common stock, $0.001 par value, 2,000,000 shares
authorized, 8,115,298 and 982,622 shares issued and
outstanding, respectively 8,115 982
Additional paid-in capital 42,485,178 32,723,371
Retained Earnings and Accumulated deficit (40,190,925) (32,863,048)
------------- -------------
TOTAL STOCKHOLDERS EQUITY (DEFICIT) 9,352,880 (138,695)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) $ 18,399,911 $ 221
============= =============
F-2
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDING SEPTEMBER 30, 2006 (UNAUDITED) AND
SEPTEMBER 30, 2005 (UNAUDITED).
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUE $16,901,751 $ 49,114 $48,767,224 $ 49,114
COST OF REVENUE 14,688,814 181 41,289,963 1,738
------------ ------------ ------------ ------------
GROSS PROFIT 2,212,937 48,933 7,477,261 47,376
OPERATING EXPENSES:
Depreciation - - - 1,037
Selling, general and administrative 1,565,801 88,548 4,544,792 223,952
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,565,801 88,548 4,544,792 224,989
------------ ------------ ------------ ------------
OPERATING INCOME/(LOSS) 647,136 (39,615) 2,932,469 (177,613)
OTHER INCOME (EXPENSES)
Gain on sale and distribution of investment - 31,902 31,902 31,902
Loss on termination of ARE agreement - - - (5,000)
Loss on sale of property and equipment - - (4,270)
Interest expense, net (37,077) (1,385) (72,742) (4,659)
Other Income 34,496 - 65,740 -
------------ ------------ ------------ ------------
TOTAL OTHER INCOME/(EXPENSES) (2,581) 30,517 (7,002) 17,973
------------ ------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES 644,555 (9,098) 2,925,467 (159,640)
INCOME TAX EXPENSE (240,019) - (1,064,628) -
------------ ------------ ------------ ------------
NET INCOME/(LOSS) $ 404,536 $ (9,098) $ 1,860,840 $ 159,640
Dividends to preferred stockholders (114,957) - (356,739) -
Deemed dividend to preferred stockholders
on beneficial conversion feature (5,206,294) - (8,777,025) -
------------ ------------ ------------ ------------
NET INCOME/(LOSS)AVAILABLE TO
COMMON SHAREHOLDERS $(4,916,715) $ (9,098) $(7,272,925) $ 159,640
NET INCOME/(LOSS) PER SHARE (BASIC) $ (0.84) $ (0.01) $ (2.79) $ (0.18)
NET INCOME/(LOSS) PER SHARE (FULLY DILUTED) $ (0.84) $ (0.01) $ (2.79) $ (0.18)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,824,933 922,662* 2,608,311 898,144
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,824,933 922,662* 2,608,311 898,144
* REFLECTS 2 FOR 1 STOCK SPLIT
F-3
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDING SEPTEMBER 30, 2006 (UNAUDITED) AND SEPTEMBER
30, 2005 (UNAUDITED).
2006 2005
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,860,840 $(159,640)
Adjustments to reconcile net income (loss) to net cash
provided for/used in operating activities:
Depreciation and Amortization 137,213 1,036
Gain on sale and distribution of investment - (31,902)
Accrued interest on note payable - 9,155
Stock based compensation 8,651 49,601
Loss on Termination of ARE Agreement - 5,000
(Gain) or loss on sale of property and equipment (14,624) 4,270
Non-cash consulting income - (49,114)
Non-cash consulting fee - 113,944
Changes in assets and liabilities:
Increase/Decrease in Receivables (1,328,448) -
Increase/Decrease in Other Receivables (8,214) -
Increase/Decrease in Inventories (1,203,113) -
Increase/Decrease in Prepayments and other assets (85,109) 8,706
Increase/Decrease in Accounts Payable 844,480 (38,390)
Increase/Decrease in Accounts Payable under dealer incentives 345,127 -
Increase/Decrease in Income Taxes Payable 1,054,339 -
Increase/Decrease in estimated warranties 800,000 -
Increase/Decrease in Compensation and related accruals 389,038 -
Increase/Decrease in Accrued shareholder distributions (925,000) -
Increase/Decrease in Accrued Expenses (1,242,034) -
------------ ----------
CASH FLOW PROVIDED FOR/USED IN OPERATING ACTIVITIES $ 633,146 $ (87,334)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (1,042,447) (812)
Proceeds from sale of property and equipment - 2
Purchase of Company (6,475,000) -
Proceeds from sales of marketable securities 151,418 -
------------ ----------
CASH FLOW USED IN INVESTING ACTIVITIES $(7,366,029) $ (810)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (Repayment) of Notes Payable 476,481 -
Proceeds from Preferred issuances 7,728,780 -
Loan Costs (98,950) -
Proceeds from issuance of common stock - 23,500
Collections (issuance) of note receivable - 5,000
------------ ----------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES $ 8,106,311 $ 28,500
------------ ----------
NET INCREASE (DECREASE) IN CASH $ 1,373,427 $ (59,644)
CASH, BEGINNING $ 2,931,484 $ 65,644
------------ ----------
CASH, ENDING $ 4,304,911 $ 6,000
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the Quarter for:
Interest $ 42,839 $ 828
Taxes $ 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 $ 356,739 $ -
Deemed dividend on beneficial conversion feature $ 8,777,025 $ -
F-4
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
- ------------------------
The accompanying unaudited consolidated financial statements for the three and
nine month periods ended September 30, 2006 and September 30, 2005 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-Q.
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 30, 2006 and September 30, 2005 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, 2005 Annual Report on Form 10-KSB and
subsequent filings on Form 8-K and Schedule 14C.
2.ORGANIZATIONAL MATTERS
- -------------------------
On July 24, 2006, the Company held a Special Meeting of Stockholders not in lieu
of an annual meeting. At the Meeting the following actions were taken:
1. The approval of an amendment to the Company's Certificate of Incorporation
to increase the authorized preferred stock, par value $0.01 per share, of
the Company from 1,140,000 shares to 10,000,000 shares;
2. The approval of an amendment to the Company's Certificate of Incorporation
to increase the authorized common stock, par value $0.001 per share, of the
Company from 2,000,000 shares to 100,000,000 shares;
3. The approval of an amendment to the Company's Certificate of Incorporation
to change the name of the Company from Cytation Corporation to Deer Valley
Corporation.; and
F-5
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. The approval of a merger with a Florida corporation, solely for purposes of
establishing the Company's domicile in Florida.
The Company's directors proposed increasing the Company's authorized shares of
common stock in order to facilitate the conversion or exercise of derivative
securities which are convertible to common stock, such as the Company's
convertible preferred stock. Until the increase, the Company did not have
sufficient common stock to satisfy the conversion provisions of its outstanding
convertible securities. Upon the increase in authorized shares of common stock,
49,451 shares of Series B Convertible Preferred Stock automatically converted to
4,945,100 shares of common stock, and 132,081 shares of Series D Convertible
Preferred Stock automatically converted to 880,544 shares of common stock.
3. INVENTORIES
- ---------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Work-in-process and finished goods inventories include an allocation for
labor and overhead costs. Inventories at September 30, 2006 and December 31,
2005 are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2006 2005
-------------- -----------
(UNAUDITED)
Raw materials $ 1,065,008 $ -
Work-in-process 452,091 -
Finished goods 801,572 -
-------------- -----------
TOTALS $ 2,318,671 $ -
============== ===========
4. ACCOUNTING FOR STOCK BASED COMPENSATION
- ------------------------------------------
At September 30, 2006, the Company had not yet created a stock incentive plan
which authorizes the issuance of options to purchase common stock. 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".
No stock-based employee compensation cost was recognized in the Statement of
Operations for the three and nine months ended June 30, 2005. Effective January
F-6
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
As a result of adopting SFAS No.123(R) on January 1, 2006, this statement did
not have any effect on the Company's net income and earning per share for the
periods ended September 30, 2006 since no options were granted.
STOCK OPTIONS AND WARRANTS:
The following table summarizes the activity related to all Company stock options
and warrants for the three months ended September 30, 2006 and the year ended
December 31, 2005:
WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
STOCK PER SHARE PER SHARE
WARRANTS OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS
--------------------- ------- ---------- -------- --------- --------
OUTSTANDING AT JANUARY 1, 2005 - - $ - $ - $ - $ -
Granted - - - - - -
Exercised - - - - - -
Cancelled or expired - - - - - -
--------------------- ------- ---------- -------- --------- --------
OUTSTANDING AT DECEMBER 31, 2005 - - - - - -
Granted 21,210,368 - $0.75-2.25 - $ 1.52 -
Exercised - - - - - -
Cancelled or expired - - - - - -
--------------------- ------- ---------- -------- --------- --------
OUTSTANDING AT APRIL 1, 2006 21,210,368 - $0.75-2.25 - $ 1.52 -
Granted 1,609,284 - $0.75-3.00 - $ 2.38 -
Exercised - - - - - -
Cancelled or expired - - - - - -
--------------------- ------- ---------- -------- --------- --------
OUTSTANDING AT JULY 1, 2006 22,819,652 - $0.75-3.00 - $ 1.58 -
Granted 6,968 - $ 1.50 - $ 1.50 -
Exercised (919,162) - $ 0.00 - $ 0.00 -
Cancelled or expired - - - - - -
--------------------- ------- ---------- -------- --------- --------
OUTSTANDING AT SEPTEMBER 30, 2006 21,907,458 - $0.75-3.00 - $ 1.61 -
--------------------- ------- ---------- -------- --------
EXERCISABLE AT SEPTEMBER 30, 2006 21,907,458 - $0.75-3.00 - $ 1.61 -
===================== ======= ========== ======== ========= ========
During the three month period ending September 30, 2006 certain holders of the
F-7
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company's BD-1 warrants, pursuant to the cashless provisions contained in such
warrants, converted 919,162 warrants into 641,769 shares of the Company's common
stock.
The warrants expire at various dates ranging from January 2011 through March
2013.
5. EARNINGS PER SHARE
- ---------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
------------ ------------ ------------ ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS ($4,916,715) ($9,098) ($7,272,925) ($159,640)
------------ ------------ ------------ ----------
Weighted average shares outstanding:
Basic 5,824,933 922,622 2,608,311 898,144
EARNINGS PER SHARE:
BASIC ($0.84) ($0.01) ($2.79) ($0.18)
============ ============ ============ ==========
DILUTED* ($0.84) ($0.01) ($2.79) ($0.18)
============ ============ ============ ==========
*Diluted weighted average per share outstanding for three and nine month periods
ended September 30, 2006 does not include the effect of dilutive Series A and C
Preferred Stock and Series A, B, C, D, E, BD-2, BD-3, BD-4 and BD-Warrants
because to do so would have been antidilutive (see detailed list of antidiluted
shares below). Accordingly, basic and diluted net loss per share for this period
is the same.
COMMON
STOCK
SECURITIES EQUIVALENTS
- ---------- ------------
Preferred:
Series A Preferred 9,400,326
Series B Preferred -
Series C Preferred 2,675,000
Series D Preferred -
Warrants:
Class A Warrants 10,545,105
Class B Warrants 4,970,824
Class C Warrants 2,000,000
Class D Warrants 2,000,000
Class E Warrants 880,544
Class BD-1 Warrants -
Class BD-2 Warrants 919,162
Class BD-3 Warrants 459,581
Class BD-4 Warrants 66,121
Class BD-5 Warrants 66,121
------------
Total antidilutive shares 33,982,784
============
F-8
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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's estimated warranty costs are accrued at the time of the
sale to the dealer following industry standards and historical warranty costs
incurred. Periodic adjustments to the estimated warranty accrual are made as
events occur which indicate changes are necessary. As of September 30, 2006, the
Company has provided a liability of $1,550,000 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 30, DECEMBER 31,
2006 2005
------------- --------
(unaudited)
BALANCE AT BEGINNING OF PERIOD $1,150,000 $ -
Warranty Charges 1,963,411 -
Warranty Payments (1,563,411) -
------------- --------
BALANCE AT END OF PERIOD $1,550,000 $ -
============= =========
7. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ---------------------------------------------
The Company applies judgment and estimates, which may have a material effect in
the eventual outcome of assets, liabilities, revenues and expenses, for accounts
receivable, inventory and goodwill. The following explains the basis and the
procedure for each asset account where judgment and estimates are applied.
REVENUE RECOGNITION
The Company recognizes revenues for manufactured homes sold to independent
dealers when all of the following conditions have been met:
- an order for the home has been received from the dealer,
- an agreement with respect to payment terms (usually in the form
F-9
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of a written or verbal approval for payment has been received
from the dealer's inventory financing institution),
- the home has been shipped, and
- risk of loss has passed to the independent dealer.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred and are included in
operating expenses. Advertising costs for the three and nine month periods
ending September 30, 2006 were $25,800 and $86,034, respectively. Advertising
costs for the three and nine month periods ending June 30, 2005 were $0, and $0,
respectively.
GOODWILL
As a result of the acquisition of DeerValley Acquisitions Corp. and Deer Valley
Homebuilders, Inc., on January 18, 2006, goodwill is reflected on the
consolidated balance sheets. A valuation was performed by the Company and it was
determined that the estimated fair value of the goodwill in the accounts
exceeded its book value by $3,611,994. Additional adjustments to Goodwill have
been booked since that time bringing the total balance to $5,523,895 as of
September 30, 2006. The adjustments which have been included are an additional
$100,000 which was paid and represented a purchase price adjustment and accruals
related to the Earnout Agreement totaling: $496,407 for 2005, $823,298 for the
1st and 2nd Quarters of 2006, and $492,196 for the Quarter ended September 30,
2006. There is no assurance that the value of the acquired entities will not
decrease in the future due to changing business conditions.
DEALER INCENTIVE PROGRAMS
The Company provides rebates to dealers based upon a predetermined formula
applied to the volume of homes sold to the dealer during the year. These rebates
are recorded at the time the dealer sales are consummated.
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
F-10
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
repurchase agreements is approximately $15,375,000 at September 30, 2006. As of
September 30, 2006 the Company had reserved $67,325 for future repurchase
losses, based on prior experience and an evaluation of dealers' financial
conditions. 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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------
The Financial Accounting Standards Board (FASB) has recently issued the
following accounting standards, which are effective as of January 1, 2007.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48)
is an interpretation which clarifies FASB No. 109, "Accounting for Income
Taxes". This Statement addresses uncertainty in income taxes recognized in an
enterprise's financial statements and prescribes a recognition threshold and
measurement of a tax position taken or expected to be taken in a tax return. Any
cumulative impact resulting from the adoption of FIN 48 would be recorded as an
adjustment to beginning retained earnings. The Company is currently evaluating
the impact of FIN 48 on the Company's Consolidated Financial Statements.
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-an amendment
of FASB Statements No. 133 and 140" (SFAS No. 155) addresses the application of
beneficial interests in securitized financial assets. The adoption of SFAS No.
155 is not anticipated to have an impact on the Company's Consolidated Financial
Statements.
9. COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------
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.
EARNOUT AGREEMENT
On January 18, 2006, the Company's wholly-owned subsidiary, DeerValley
F-11
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Capital Stock Purchase Agreement, the
Company entered into the Earnout Agreement, pursuant to which, 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. For the fourth quarter of 2005, such pre-tax profit was
reduced to $250,000. During the nine month period ending September 30, 2006 the
Company's wholly owned subsidiary, Deer Valley Homebuilders, Inc., had pre-tax
profit in the amount of $3,630,987, of which $2,630,987 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 $1,315,494. The maximum remaining
potential accrual under the Earnout Agreement is $4,188,099.
LOAN AND LETTER OF CREDIT
On April 12, 2006, DVH 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 "Loan") evidenced by a revolving
credit note (the "Note") and secured by accounts receivable, inventory,
equipment and all other tangible and intangible personal property of DVH,
DeerValley Acquisitions Corp. (a subsidiary of the Company, now dissolved), and
the Company. The purpose of the Loan was to provide working capital, to provide
Letter of Credit support, to replace DVH's previous revolving line of credit
with State Bank and Trust, and to provide interim financing for the acquisition
of the real property on which DVH operates a plant in Sulligent, Alabama. The
Loan 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
1.00% of the face amount of the letter of credit. The Loan provides for
conditions to meet prior to each advance, including financial ratios.
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.
All of the Letters of Credit above are required under the terms of the
F-12
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Repurchase Agreements described above in the section entitled "Reserve for
Repurchase Commitments." As of September 30, 2006, no amounts had been drawn on
the above irrevocable letters of credit by the beneficiaries.
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.
EXECUTIVE AGREEMENT
On June 29, 2006 the Company elected Charles G. Masters to serve as President,
Chief Executive Officer, and Chief Financial Officer. As compensation for
services rendered relative to the integration of Deer Valley Homebuilders, Inc.
and the ongoing operations of Deer Valley Corporation from January 18, 2006 to
June 30, 2006 the Company authorized a lump-sum payment of $60,000 (prior to
deductions for federal or state withholding requirements). In addition the
Board of Directors for the Company authorized $120,000 as annual compensation
for services rendered as President, Chief Executive Officer, and Chief Financial
Officer. Mr. Masters will continue to pay for his own medical insurance, but
shall be entitled to be reimbursed for reasonable business related expenses.
DIVIDENDS PAYABLE
On July 18, 2006, a dividend to holders of Series A Preferred Stock became due.
On September 20, 2006 the Company issued 106,412 shares of the Company's common
stock to Series A Preferred shareholders as payment for $260,968 of accrued
dividends. As of September 30, 2006 the total dividend payable to Series A
Preferred shareholders is $356,739, of which $95,771 is accrued but unpaid. The
F-13
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company's Series A Preferred stock is not registered with the United States
Securities and Exchange Commission, but ranks prior to the Company's registered
common stock.
10. EQUITY TRANSACTIONS
- -----------------------
CAPITAL STOCK PURCHASE AGREEMENT
Pursuant to the Capital Stock Purchase Agreement dated November 1, 2005, as
amended (the "Capital Stock Purchase Agreement"), DeerValley Acquisitions Corp.,
a wholly-owned subsidiary of the Company, acquired, immediately after completion
of the Series A Financing and the Share Exchange, one hundred percent (100%) of
the issued and outstanding capital stock of Deer Valley Homebuilders, Inc. Upon
completion of the acquisition of the capital stock of Deer Valley Homebuilders,
Inc., Deer Valley Homebuilders, Inc. became an indirectly wholly-owned
subsidiary of the Company. (With the dissolution of DeerValley Acquisitions
Corp., Deer Valley Homebuilders, Inc. is now a wholly-owned subsidiary of the
Company.)
In order to effectuate the Capital Stock Purchase Agreement, Deer Valley
Corporation f.k.a Cytation Corporation completed a series of transactions exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) of the Act for transactions not involving a public
offering and Rule 506 promulgated by the United States Securities and Exchange
Commission under the Securities Act of 1933, as amended. As of the date of these
financials, the Company has closed on a private placement of approximately
745,622 shares of Series A Preferred Stock. Pursuant to the Securities Purchase
and Share Exchange Agreement, dated as of January 18, 2006, the Company (a)
issued and sold to the Purchasers, and the Purchasers purchased from the
Company, (a) Series A Preferred Stock, (b) Series A Common Stock Purchase
Warrants, and (c) Series B Common Stock Purchase Warrants. Also on January 18,
2006, the Company completed a share exchange pursuant to which the Company
acquired 100% of the issued and outstanding capital stock of DeerValley
Acquisitions, Corp. Pursuant to the Share Exchange Agreement, in exchange for
100% of the issued and outstanding common stock of DeerValley Acquisitions,
Corp., the Company issued the following securities to the shareholders of
DeerValley Acquisitions, Corp.: (a) Series B Preferred Stock, (b) Series C
Preferred Stock, and (c) Series C Common Stock Purchase Warrants.
In connection with the Securities Purchase and Share Exchange Agreement, on
January 18, 2006, the Company issued to a Lender an Interest Bearing
Non-Convertible Installment Promissory Note ("the Note"), in the original
principal
F-14
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amount of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000),
together with interest accruing thereon at an annual rate of twelve percent
(12%) per annum. The business purpose of executing the Note was to fund the
acquisition of Deer Valley Homebuilders, Inc. On March 17, 2006 the Lender
decided to convert the Note to stock.
Pursuant to the terms of a Debt Exchange Agreement, the Company issued the
Lender its Series A Convertible Preferred Stock, Series A Warrants, and Series B
Warrants to the investor, in exchange for the retirement of its obligations to
repay such promissory note.
In January 2006, the Company issued 17,338 common shares to Sequence Advisors
Corporation, an affiliate of two former directors.
On January 18, 2006, DeerValley Acquisitions, Corp., a wholly-owned subsidiary
of Deer Valley Corporation, acquired 100% of the issued and outstanding capital
stock of Deer Valley Homebuilders, Inc. The results of Deer Valley Homebuilders,
Inc. will be included in consolidated financial statements for periods after
January 18, 2006. Deer Valley Homebuilders, Inc. is an Alabama corporation with
its business offices located at 205 Carriage Street, P.O. Box 310, Guin, Alabama
35563 and is engaged in the production, sale and marketing of manufactured homes
in the southeastern and south central U.S. housing market. Deer Valley
Corporation purchased Deer Valley Homebuilders, Inc. to serve as its primary
operating company and to gain entry into the manufactured home market. Deer
Valley Homebuilders, Inc. comprises substantially all of Deer Valley
Corporation's operations.
The aggregate purchase price for Deer Valley Homebuilders, Inc. was $6,000,000,
including $5,500,000 cash and $500,000 of Deer Valley Corporation's Series A
Convertible Preferred Stock, Series A Common Stock Purchase Warrants, and Series
B Common Stock Purchase Warrants. In addition, an Earnout Agreement was entered
into, pursuant to which 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. The Company is accounting for the $6,000,000 earnout as
contingent consideration in accordance with paragraphs 25 through 28 of SFAS
141. Because the amount, if any, of contingent consideration was not
determinable at the acquisition date, no amount for the contingency will be
recorded in the Company's financial statements until the contingency is
resolved, or the consideration is issued or becomes issuable.
The Company considered the effect of EITF 95-8 and based its analysis on the
F-15
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
fact that the contingent consideration of a minimum of $0 and a maximum of
$6,000,000 over the next five years was nothing more than a way for the Company
to defer payments of purchase price so that the Company did not have to pay Deer
Valley Homebuilders Inc.'s shareholders the full purchase price up front. Since
Deer Valley Homebuilders, Inc. had a pre-tax profit in 2005 in excess of
$3,000,000, the Company concluded that Deer Valley Homebuilders, Inc.'s business
was worth in excess of $6,000,000, or approximately two times pre-tax profits.
The sellers were interested in receiving all $12 million up front, but the
Company was unwilling to pay in this fashion because Deer Valley Homebuilders,
Inc. had been in business less than two years and because to do so would be too
dilutive to shareholders to raise all monies up front. Therefore the Company and
previous shareholders of Deer Valley Homebuilders, Inc. agreed to the price
adjustment target account ("PATA"). So long as Deer Valley Homebuilders, Inc.
continues to have pre-tax profits in excess of one million dollars over the next
five years, the shareholders, pursuant to their interest sold, will be given a
pro-rata portion of the maximum $6,000,000 PATA. Based on this analysis, the
Company will account for all of the PATA, when earned, by recording it as
additional consideration for the acquisition of Deer Valley Homebuilders, Inc.
and will not record it as a period expense related to compensation. The Company
will account for this on an ongoing basis and book any accrued liability in
connection with the PATA as incurred.
The value of the Series A Convertible Preferred Stock, Series A Common Stock
Purchase Warrants, and Series B Common Stock Purchase Warrants were determined
in a private offering also completed on January 18, 2006.
SERIES A CONVERTIBLE PREFERRED STOCK
In connection with the Series A Convertible Preferred Stock offering the Company
Calculated the effect of EITF 00-27 and EITF 98-5 and determined on a relative
fair value basis that, of the $7,456,215 raised, $5,669,186 was attributable to
the beneficial conversion feature of the warrants and $1,787,029 was
attributable to the beneficial conversion feature of the Series A Convertible
Preferred Stock. As such, the Company adjusted its balance sheet to reflect an
increase of $5,699,186 to additional paid-in capital and $1,787,029 to preferred
stock. The Company also noted that, of the $1,787,029 booked to preferred, 100%
was allocated to the beneficial conversion feature and was recorded as a
reduction to preferred stock and an increase to additional paid-in capital.
Conversion of the preferred stock can also occur at anytime. During the three
month period ending September 30, 2006, the registration statement for the
Company was declared effective and the remaining $4,126,453 of un-amortized
beneficial conversion feature related to the Series A Preferred was considered a
deemed dividend.
F-16
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In addition, during the three month period ending September 30, 2006 certain
shareholders converted 29,217 shares of Series A Preferred stock, par value
$291,970, into 389,196 shares of the Company's common stock.
TOTAL PREFERRED SERIES A PROCEEDS $7,456,215
Amount of proceeds allocated to Warrants (5,669,186)
Amount of proceeds allocated to Preferred Series A (1,787,029)
Amortization of Beneficial Conversion Feature 1,491,243
----------
PREFERRED SERIES A BALANCE AT APRIL 1, 2006 $1,491,243
Amortization of Beneficial Conversion Feature 1,838,519
----------
PREFERRED SERIES A BALANCE AT JULY 1, 2006 $3,329,762
Amortization of Beneficial Conversion Feature 4,126,453
Conversion of Series A Preferred (405,970)
----------
PREFERRED SERIES A BALANCE AT SEPTEMBER 30, 2006 $7,050,245
==========
PREFERRED SERIES D
On April 17, 2006, the Company completed a private placement of $1,320,810 of
its Series D Convertible Preferred Stock (the "Series D Offering"). In
connection with the Series D Offering, the Company issued (a) 132,081 shares of
its Series D Convertible Preferred Stock and (b) Series E Common Stock Purchase
Warrants entitling the holder to purchase up to an aggregate of 880,540 shares
of its Common Stock at an exercise price of three dollars ($3.00) per share.
The issuance of the Series D Convertible Preferred Stock and Series E
Warrants were exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) of the Act for transactions not
involving a public offering and Rule 506 promulgated by the United States
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Such securities were issued only to institutional, accredited investors, and a
limited number of non-accredited investors.
In connection with the Series D Convertible Preferred Stock offering, the
Company Calculated the effect of EITF 00-27 and EITF 98-5 and determined on a
relative fair value basis that, of the $1,320,810 raised, $434,945 was
attributable to the beneficial conversion feature of the warrants, and $753,618
was attributable to the beneficial conversion feature of the preferred stock.
As such, the Company adjusted its balance sheet to reflect an increase of
$434,945 to additional paid-in capital and $753,618 to preferred stock. The
Company also noted that, of the $753,618 booked
F-17
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
to preferred, 100% was allocated to the beneficial conversion feature and was
recorded as a reduction to preferred stock and an increase to additional paid-in
capital. Conversion of the preferred stock can also occur anytime at anytime.
During the three month period ending September 30, 2006, the registration
statement for the Company was declared effective and the remaining $1,079,841 of
un-amortized beneficial conversion feature related to the Series D Preferred was
considered a deemed dividend.
TOTAL PREFERRED SERIES D PROCEEDS $1,320,810
Issuance Costs ($132,247)
Amount of proceeds allocated to Warrants (434,945)
Amount of proceeds allocated to Preferred Series D (753,618)
Amortization of Beneficial Conversion Feature 240,969
----------
PREFERRED SERIES D BALANCE AT JULY 1, 2006 $240,969
Amortization of Beneficial Conversion Feature 1,079,841
Conversion of Series D Preferred (1,320,810)
----------
PREFERRED SERIES D BALANCE AT SEPTEMBER 30, 2006 $0
==========
DEERVALLEY ACQUISITIONS CORP
DeerValley Acquisitions, Corp., a wholly owned subsidiary of DeerValley
Corporation, was dissolved by filing an Articles of Dissolution with the Florida
Department of State. The dissolution of DeerValley Acquisitions, Corp. was
effective as of June 30, 2006. On the effective date of dissolution, DeerValley
Acquisitions, Corp. had no assets and no revenues.
11. RELATED PARTY
- -----------------
On July 1, 2006, the Company entered into an oral agreement with a company to
provide accounting services related to the filing of the Company's financial
statements. The service provider is owned and operated by family members of one
of the Company's Board of Directors. Pursuant to the agreement the Company will
pay the service provider $5,000 per month as compensation for services. The
agreement is on a month-to-month basis.
F-18
12.SUBSEQUENT EVENTS
- --------------------
In early November of 2006, a shareholder approached the Company about exchanging
registered shares of the Company's common stock for shares of the Company's
preferred stock and "out of the money" warrants. On November 16, 2006, the
Company entered into a Share Exchange Agreement with that holder of the
Company's common stock, par value $0.01 (the "Common Stock") whereby the
shareholder agreed to exchange 750,000 shares of Common Stock for 750,000 shares
of the Company's Series E Convertible Preferred Stock (the "Series E Preferred
Stock") and Series F Warrants (the "Series F Warrants"). The Series E Preferred
Stock is convertible into the Company's Common Stock at the option of the holder
any time after the date of issuance on a one-for-one basis. The conversion
rights of the holder of Series E Preferred Stock is limited so that the holder
cannot convert any Series E Preferred Stock if, after such conversion, the
number of shares of Common Stock beneficially owned by the holder and its
affiliates, will exceed 4.99% of the outstanding shares of Common Stock.
Pursuant to the Share Exchange Agreement, the Company also issued the Series F
Warrants. The Series F Warrants entitle the holder to purchase 750,000 shares of
the Company's Common Stock at an exercise price of two dollars and twenty five
cents ($2.25) per share. The Series F Warrants are exercisable, in whole or in
part, at any time from the date of grant, November 16, 2006, and expire on the
fifth anniversary of the grant date. Similar to the Series E Preferred Stock,
the exercise rights of the Series F Warrants are limited so that the holder is
not entitled to exercise the warrants if, after such exercise, the number of
shares of common stock beneficially owned by the holder and its affiliates, will
exceed 4.99% of the outstanding shares of common stock. The Series E Preferred
Stock and the Series F Warrants were issued pursuant to the exemption from
registration found in Section 3(a)(9) of the Securities Act of 1933.
F-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, the risks to be discussed
in our Annual Report on form 10-KSB and in the press releases and other
communications to shareholders issued by us from time to time which attempt to
advise interested parties of the risks and factors which may affect our
business. 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
During the period commencing with the fourth quarter of 2002 and ending in
December 2004, the Company, under the name Cytation Corporation, engaged in the
business of providing consulting and related services to private companies which
wished to become reporting companies under the Securities Exchange Act of 1934,
but which lacked the financial resources for an initial public offering ("IPO")
and which did not wish to become a reporting company via a reverse merger. The
Company discontinued these operations in the first quarter of 2005 and was a
shell company (as defined in Rule 12b-2 of the Exchange Act) from the first
quarter of 2005 through January 18, 2006.
At the end of 2005, the Company had nominal operations. The Company had
revenues of $59,114 in fiscal year 2005, as compared to $240,368 in fiscal
year 2004. The Company had a net loss of $173,605 in fiscal year 2005, as
compared to a net loss of $696,689 in fiscal year 2004. The differences in the
foregoing figures are the result of the Company's discontinuation of operations
and costs related to identification of an acquisition candidate in contemplation
of a reverse merger, which did not occur.
On January 18, 2006, the Company acquired an operating subsidiary, Deer
Valley Homebuilders, Inc. Deer Valley Homebuilders, Inc. is a wholly-owned
subsidiary of the Company which was formed in January, 2004. Deer Valley
Homebuilders, Inc. manufactures and designs manufactured homes which are sold to
a network of independent dealers located primarily in the southeastern and south
central regions of the United States. Deer Valley Homebuilders, Inc. maintains
-3-
its business offices in Guin, Alabama and operates manufacturing facilities in
Guin, Alabama and in Sulligent, Alabama. Deer Valley Corporation is not a
holding company for multiple operating companies in several different
businesses. Deer Valley Homebuilders, Inc. is the Company's only operating
company, and the Company is engaged exclusively in the manufactured housing
business.
As a result of the acquisition of Deer Valley Homebuilders, Inc. on January
18, 2006, the Company had gross revenues of $48,767,224 for the nine months
ending on September 30, 2006, had assets of $18,399,911 as of the same date, and
had 406 employees. Because the Company discontinued its prior operations in the
first quarter of 2005 and was a shell company (as defined in Rule 12b-2 of the
Exchange Act) from the first quarter of 2005 through January 18, 2006 and
because the Company now has significant revenues from a subsidiary operating in
an entirely different industry, management does not believe that it is
informative or useful to compare the Company's results of operations for the
three month and nine month periods ended September 30, 2006 to the three month
and nine month periods ended September 30, 2005. As a result, the remainder of
this discussion examines only the results of the Company's operations for the
three month and nine month periods ended September 30, 2006. In conjunction
with this discussion it is imperative that investors read the footnotes to the
financial statements attached to this filing.
In order to insure that we maintain the current balance between sales and
production levels, the Company is developing new product offerings which are
compatible with the high product quality standards and production techniques and
systems now in use at its operating facilities. As a result of this ongoing
effort, in July 2006, the Company introduced a new single-wide product series
which is built to the same exacting specifications as its multisection homes.
This single-wide series allows the Company to compete for the lower price retail
buyer by reducing the size but not the quality of the home product.
To sustain the Company's growth rate in an industry which is not
experiencing broad growth, management is seeking to continue to increase its
market share. In addition, we are positioning the Company and seeking to take
advantage of our Alabama location and reputation in Mississippi to become a
major participant in the permanent rebuilding of the Gulf Coast area (see
Hurricane Katrina paragraphs below). Toward that end, we are evaluating several
new plant sites, potential corporate acquisitions, and adding modular products
to our product line. As of September 30, 2006, no definitive action had been
taken to initiate a transaction which would result in such an expansion.
Management feels that the following areas present significant opportunities
or risks for the Company:
1) Securities Compliance
Deer Valley Homebuilders, Inc. has been operated as a private company which
is not subject to federal securities laws and, therefore, may lack the internal
or financial control infrastructure and procedures necessary for public
companies to comply with the provisions of the Securities Exchange Act and
Sarbanes-Oxley regulations. Deer Valley Homebuilders, Inc. and Deer Valley
Corporation are coordinating with legal counsel and auditors to put in place
proper financial controls and procedures necessary to insure full compliance
with and disclosure under all relevant securities laws. Of course, there can be
no guarantee that there will be no significant deficiencies or material
weaknesses in the quality of the Company's financial controls, as defined by
Sarbanes-Oxley. The greatest challenge management foresees in implementing
necessary controls and procedures is the cost to the Company of such compliance
could be substantial, which could have a material adverse effect on our results
of operations.
2) Downturn in the Manufactured Housing Industry
In recent years, the manufactured housing industry experienced a prolonged
and significant downturn as consumer lenders began to tighten underwriting
standards and curtail credit availability in response to higher than anticipated
rates of loan defaults and significant losses upon the repossession and resale
of homes securing defaulted loans. According to the Manufactured Housing
Institute, domestic shipments of manufactured homes peaked in calendar year 1998
with the shipment of 372,843 homes, before declining to a total of 130,802
manufactured homes in calendar year 2004. Management's best estimate is that
2006 will see aggregate sales in the industry of 115,000 to 120,000 homes.
Despite the industry decline, which commenced in calendar year 1999, we
have been able to successfully launch and grow our business through efficient
manufacturing and production facilities, flexible product designs, an
experienced and capable sales team, stringent cost controls, and attention to
dealer relations, customer satisfaction, and service efforts. Additionally, our
affiliated dealers often endeavor to distinguish our products by selling our
manufactured homes as part of a land-home package which may be financed by a
conventional mortgage. Finally, we focus on the "heavy built", finished drywall
sector of the manufactured housing market, which management feels offers the
greatest potential for growth Homes of this type often have the features and
"feel" of traditional site-built homes, but are often more readily available and
-4-
more competitively priced than site-built homes. Note: the term "heavy built"
refers to the use of more closely spaced floor joists, thicker exterior wall
construction, and more closely spaced roof trusses (1) than is strictly required
by the HUD building code and (2) than is standard practice in much of the
manufactured housing industry.
3) Changing Dynamics in the Gulf Coast Market in the wake of Hurricane
Katrina.
Hurricane Katrina created a great need for the rapid provision of temporary
housing in the Gulf Coast Region, prompting the Federal Emergency Management
Agency ("FEMA") to order large numbers of FEMA houses, which are similar to
small, single-wide HUD-Code homes. With the FEMA demand "bubble" having passed,
management concurs with others in the industry who believe that the overall
market is slightly weaker than at this point in 2005 and continues to be
pressured by a lack of new finance capacity for wholesale and retail sales.
Many manufacturers believed that 2006 would see an increase in HUD-Code home
orders, largely because of the need for more permanent replacement homes along
the Gulf Coast, which would offset the lack of continuing FEMA orders. Through
September 30, 2006, reconstruction and replacement efforts had not yet developed
at the pace expected, reflecting a complex and unpredictable interplay of FEMA,
insurance claims, and other rebuilding issues.
In the weeks subsequent to September 30, 2006, FEMA has begun releasing new
guidelines related to reconstruction in storm damaged areas along the Gulf
Coast. As a result of having the new guidelines, local authorities can now begin
issuing new building permits, and insurance companies can quote and issue new
homeowner policies in the affected areas. Furthermore, federal, state, and local
funding programs for rebuilding appear to be closer to disbursing funds, and
insurance claims are reportedly being resolved at a slightly quicker pace.
Finally, both modular and HUD Code housing is being permitted in certain areas
where only site-built houses were previously allowed. As a result of all of
these factors, Management believes that, beginning in the first half of calendar
year 2007, there will be an upswing in production for the portion of the
industry serving the Gulf Coast to meet a long-delayed demand for manufactured
housing, particularly for modular homes, along the Gulf coast. Accordingly, the
Company is implementing plans to add a limited number of modular houses to its
product line. The Company believes that it is well-positioned geographically to
serve the target area. Because the Company exclusively builds a "heavy built"
version of the HUD Code house with finished drywall interiors, the inclusion of
modular homes in the product line presents few challenges to the existing
manufacturing operations. Nevertheless, modular homes require more on-site
erection and finishing. Consequently, the Company expects to augment its
distribution and dealer support system to facilitate delivery of this new
product series.
4) Rising Interest Rates and "Floor Plan" Credit Available to Manufactured
Home Dealers.
Interest rates have a marked effect upon the manufactured housing market.
Management feels that rising interest rates will drive buyers from new,
traditional, "site built" homes toward the upper end of the manufactured housing
market, where our products are positioned. As a counter effect, the increased
interest rates have resulted in an increased inventory of site-built homes on
the market, which, in turn, has increased pressure on the manufactured housing
industry, leading to plant slowdowns, closings, and bankruptcies. This will
likely increase competition in the industry. Moreover, additional increases in
interest rates could eventually adversely affect buyers of our products and
could cause dealers to reduce inventories because of "Floor-Plan" expenses.
Reduced availability of floor plan financing for manufactured home dealers
could negatively impact our business. Sources of this financing are highly
concentrated, with a few companies dominating the market. If one of the four
largest providers were to discontinue floor plan financing programs for
manufactured home dealers, approximately one-fourth of the floor plan financing
available to manufactured home dealers would disappear. An occurrence of this
type could have a material, adverse impact upon our business, since dealers
would have additional difficulty in procuring funds to inventory homes based on
floor plan financing. As of the date of this filing, the dealers to whom we
sell have not experienced any disruption in their floor plan financing.
RESULTS OF OPERATIONS
The following discussion examines the results of the Company's operations
for the three month and nine month periods ended September 30, 2006. This
discussion of our financial condition and results of operations should be read
in conjunction with our 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.
Historical financial information presented for the nine month period ended
September 30, 2006 is that of the Company on a consolidated basis with Deer
Valley Homebuilders, Inc. and Deer Valley Acquisitions Corp., which reflects the
-5-
Company's acquisition of Deer Valley Homebuilders, Inc. on January 18, 2006,
retroactive to January 1, 2006. Deer Valley Acquisitions Corp. was dissolved on
July 1, 2006. Historical financial information presented for the three month
period ended September 30, 2006 is that of the Company on a consolidated basis
with Deer Valley Homebuilders, Inc.
HISTORICAL RESULTS - PERIODS ENDED SEPTEMBER 30, 2006
INTRODUCTORY EXPLANATORY NOTE. Because the Company discontinued its prior
operations in the first quarter of 2005 and was a shell company (as defined in
Rule 12b-2 of the Exchange Act) from the first quarter of 2005 through January
18, 2006 and because the Company now has significant revenues from a subsidiary
operating in an entirely different industry, management does not believe that it
is informative or useful to compare the Company's results of operations for the
three month and nine month periods ended September 30, 2006 to the three month
and nine month periods ended September 30, 2005. As a result, the remainder of
this discussion examines only the results of the Company's operations for the
three month and nine month periods ended September 30, 2006. To the extent that
this analysis references data from 2005, those data refer to Deer Valley
Homebuilders, Inc.
REVENUES. Overall gross revenue for the three month and nine month periods
ended September 30, 2006 was $16,901,751 and $48,767,224, respectively. Revenue
for the three month period ended September 30, 2006 declined slightly from the
previous three month period, primarily due to there being approximately eight
(8) fewer production days in the three month period ended September 30, 2006.
Our production ceases on normal holidays, such as Labor Day, and for
approximately one week at July 4 and at Christmas of each year, in order to
allow management to survey inventory, perform maintenance on equipment, and to
prepare forecasts and plans for the upcoming six month periods.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. 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 month and
nine month periods ended September 30, 2006 were $1,565,801 and $4,544,792,
respectively. These general and administrative costs have increased at our
operating subsidiary, Deer Valley Homebuilders, Inc., primarily due to increased
production, sales, and operating expenses. The production direct cost of goods
has remained generally in the same ratio to sales, with increased quantity
discounts being offset by a rise in material cost.
NET INCOME (LOSS). The net income for the three month and nine month periods
ended September 30, 2006 was $404,536 and $1,860,839, respectively. After
accounting for the dividend payable to preferred shareholders and the deemed
dividend to preferred shareholders on beneficial conversion features, the loss
to common stockholders for the three month and nine month periods ended
September 30, 2006 was $4,916,715 and $7,272,925, respectively. Increased
production and sales of our products have bolstered net income. The effect of
the beneficial conversion features were fully realized as of the end of the
quarter ended September 30, 2006 and, consequently, will not affect future
quarterly financial statements.
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. As of September 30, 2006, the
Company had $4,304,911 in cash and cash equivalents. Because of the current
profits generated by operations and lack of significant capital demand under our
current business plan, our cash reserves are expected to continue to grow each
month. 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 Company spends its cash to fund increases in production capacity at its
operating subsidiary, Deer Valley Homebuilders, Inc., for special legal,
accounting, and audit services necessary to meet SEC reporting requirements, and
to pay expenses. To the extent that it becomes necessary to raise
additional cash in the future as our current cash and working capital resources
are depleted, we will seek to raise it through the public or private sale of
debt or equity securities, the procurement of advances on contracts or licenses,
funding from joint-venture or strategic partners, debt financing or short-term
loans, or a combination of the foregoing. We also may seek to satisfy
indebtedness without any cash outlay through the private issuance of debt or
equity securities.
The net cash provided by operating activities for the nine month period
ending September 30, 2006 was $633,146. The net cash used in investing
activities for the nine month period ending September 30, 2006 was $7,366,029,
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which primarily reflects the amount related to the purchase of Deer Valley
Homebuilders, Inc., which was $6,475,000, net of cash acquired in the purchase,
as well as purchases of equipment. The net cash provided by financing
activities for the nine month period ending September 30, 2006 was $8,106,311,
the majority of which resulted from the issuance of Series A and D preferred
stock.
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.
FINANCING
On April 12, 2006, Deer Valley Homebuilders, Inc. 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 ($2,500,000.00) (the
"Loan") evidenced by a revolving credit note (the "Note") and secured by
accounts receivable, inventory, equipment and all other tangible and intangible
personal property of Deer Valley Homebuilders, Inc., Deer Valley Acquisitions
Corp. (a subsidiary of the Company, now dissolved), and the Company. The purpose
of the Loan was to provide working capital, to provide Letter of Credit support,
to replace Deer Valley Homebuilders, Inc.'s previous revolving line of credit
with State Bank and Trust, and to provide interim financing for the acquisition
of the real property on which we operate a plant in Sulligent, Alabama. The
Loan 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 Homebuilders, Inc. is charged a
letter of credit fee equal 1.00% of the face amount of the letter of credit.
The Loan provides for conditions to meet prior to each advance, including
financial ratios.
In addition to the revolving line of credit described in the preceding
paragraph, Deer Valley Homebuilders, Inc., 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, 2006, the following letters of credit were issued
and in force:
A letter of credit issued through State Bank & Trust in the amount of
$400,000 to the favor of beneficiary GE Commercial issued on January 27,
2006 and expiring January 27, 2007. Personally guaranteed by Joel Logan,
President and General Manager of Deer Valley.
A letter of credit issued through Fifth Third Bank in the amount of
$150,000 to the favor of beneficiary Textron.
A letter of credit issued through Fifth Third Bank in the amount of
$380,000 to the favor of beneficiary Universal Insurance, on a bond.
A letter of credit issued through Fifth Third Bank in the amount of
$50,000 to the favor of beneficiary Lincoln General, on a Florida bond.
A letter of credit issued through Fifth Third Bank in the amount of
$350,000 to the favor of beneficiary 21st Mortgage.
All of the Letters of Credit above are required under the terms of the
Repurchase Agreements described below in the section entitled "Reserve for
Repurchase Commitments." As of September 30, 2006, no amounts had been drawn on
the above irrevocable letters of credit by the beneficiaries.
On May 26, 2006, Deer Valley Homebuilders, Inc. entered into a Loan
Agreement with Fifth Third Bank (the "Lender") providing for a loan of Two
Million and No/100 Dollars ($2,000,000.00) (the "Loan") evidenced by a
promissory note and secured by a first mortgage on Deer Valley Homebuilders,
Inc.'s properties in Guin, Alabama and Sulligent, Alabama, including the
structures and fixtures located thereon, as well as its 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 Deer
Valley Homebuilders, Inc.'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 Deer Valley Homebuilders, Inc. 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 guaranteed the Loan.
Should Deer Valley Homebuilders, Inc. default, thereby triggering acceleration
of the Loan, the Company would become liable for payment of the Loan.
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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 7, Critical
Accounting Policies and Estimates, contained in the explanatory notes to the
Company's financial statements for the quarter ended September 30, 2006,
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. We had
a reserve for estimated warranties of $1,550,000 as of September 30, 2006. We
plan to increase our reserve for warranties because (1) we have more homes under
warranty due to increased sales in the past year and (2) we made a one-time
provision related to a possible change out of ventilation ducts installed in
certain models delivered prior to September 30, 2006. The increase in our
reserve for warranties will occur during the fourth fiscal quarter of 2006 and
will adversely impact our profits during that period. 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
manufactured 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. We had a reserve for volume incentives payable of $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 manufactured 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.
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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,
(iii) 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
repurchase agreements is approximately $15,375,000 at September 30, 2006. As of
September 30, 2006 the Company had reserved $67,325 for future repurchase
commitments, based upon our prior experience and evaluation of our independent
dealers' financial conditions. Because Deer Valley Homebuilders, Inc. 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 is 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
The Financial Accounting Standards Board (FASB) has recently issued the
following accounting standards, which are effective as of January 1, 2007.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
(FIN 48) is an interpretation which clarifies FASB Statement No. 109,
"Accounting for Income Taxes." This Statement addresses uncertainty in income
taxes recognized in an enterprise's financial statements and prescribes a
recognition threshold and measurement of a tax position taken or expected to be
taken in a tax return. Any cumulative impact resulting from the adoption of FIN
48 would be recorded as an adjustment to beginning retained earnings. The
Company is currently evaluating the impact of FIN 48 on the Company's
Consolidated Financial Statements.
Statement of Financial Accounting Standards (SFAS) No. 156, "Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140" (SFAS
No. 156) simplifies the accounting for servicing assets and liabilities. The
adoption of SFAS No. 156 is not anticipated to have an impact on the Company's
Consolidated Financial Statements.
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140" (SFAS No. 155) addresses the
application of beneficial interests in securitized financial assets. The
adoption of SFAS No. 155 is not anticipated to have an impact on the Company's
Consolidated Financial Statements.
PROPERTY
The Company's executive and operating offices are located at 4902
Eisenhower Blvd., Suite 185, Tampa, FL 33634. The Company is provided these
offices by a related party at no charge. The telephone number at the Company's
executive offices is (813) 885-5998. Deer Valley Homebuilders, Inc.'s principal
manufacturing plant and offices are located at 205 Carriage Street, Guin,
Alabama 35563, and its telephone number is (205) 468-8400. Deer Valley
Homebuilders, Inc.'s principal manufacturing plant and company offices consists
of a manufacturing plant with 107,511 square feet, a frame shop with 10,800
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square feet, material shed of 23,172 square feet and offices with 11,250 square
feet of space. Deer Valley Homebuilders, Inc. owns the buildings and 25.5 acres
underlying these facilities. Deer Valley Homebuilders, Inc.'s second
manufacturing plant is located at 7668 Highway 278 in Sulligent, Alabama (the
"Sulligent Plant"). The Sulligent Plant consists of a 65,992 square foot
manufacturing plant located on approximately 13 acres of land. Deer Valley
Homebuilders, Inc. owns the buildings and land underlying the Sulligent Plant.
Deer Valley Homebuilders, Inc. does not invest in real estate or real
estate mortgages except for those necessary to support the company's normal
business purposes.
WEBSITE
Deer Valley Homebuilders, Inc. maintains a website at www.deervalleyhb.com.
The information contained on this website is not a part of this filing, nor is
it incorporated by reference into this filing.
OFF-BALANCE SHEET ARRANGEMENTS
In connection with the purchase of Deer Valley Homebuilders, Inc. on
January 18, 2006, the Company entered into the Earnout Agreement, pursuant to
which additional payments, up to a maximum of $6,000,000, 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. 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 Deer Valley Homebuilders, Inc. and the Company could
not agree on an outright purchase price
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 Deer Valley Homebuilders, Inc. Deer Valley Homebuilders, Inc.
had pre-tax profit in the nine months ended September 30, 2006 in the amount of
$3,630,987, of which $2,630,987 was above the earnout threshold of $1,000,000.
Accordingly, the Company accrued 50% of the amount in excess of earnout
threshold in the amount of $1,315,494. The maximum remaining potential accrual
under the Earnout Agreement is $4,188,099.
ITEM 3. CONTROLS AND PROCEDURES
INTERNAL CONTROL OVER FINANCIAL REPORTING; EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES
The Company's Chief Executive and 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 30, 2006 covered by this Report on Form 10-QSB. Based upon
such evaluation, the Chief Executive and Chief Financial Officer has concluded
that, as of the end of such period, the Company's disclosure controls and
procedures were not in full compliance with the requirements of Rules 13a-15(e)
and 15d-15(e) under the Exchange Act.
As reported in the Form 8-K filed with the United States Securities and
Exchange Commission on September 27, 2007, several individuals were recently
elected to the Board of Directors of the Company. It is anticipated that the
new Board of Directors will establish audit and compensation committees. In
addition, the Company's Chief Executive and Chief Financial Officer is devoting
considerable effort to continue to develop and implement a system of disclosure
controls and procedures to ensure that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934 is accumulated and
communicated to management and its officers, as appropriate, to allow timely
decisions regarding required disclosure.
Beginning after the year ending 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. Pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002,
beginning at the first annual report for a fiscal year ending on or after
December 15, 2008 we must provide an auditor's attestation report on internal
control over financial reporting in their annual reports.
-10-
In order to achieve compliance with Section 404 within the prescribed
period, at the appropriate time management will 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.
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 within a company, if any, have been detected.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the third quarter of fiscal year 2006, there were no changes in our
internal control over financial reporting which materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.
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
Unregistered Sales of Equity Securities
Other than sales previously reported, there were no unregistered sales of
equity securities.
Issuer Purchases of Equity Securities
The Company did not repurchase any equity securities during the fiscal
quarter ended September 30, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
SUBSEQUENT EVENT - SHARE EXCHANGE
In early November of 2006, a shareholder, Vicis Capital Master Fund, LP,
approached the Company about exchanging registered shares of the Company's
common stock for shares of the Company's preferred stock and "out of the money"
warrants. On November 16, 2006, the Company entered into a Share Exchange
Agreement with that holder of the Company's common stock, par value $0.01 (the
"Common Stock") whereby the shareholder agreed to exchange 750,000 shares of
Common Stock for 750,000 shares of the Company's Series E Convertible Preferred
Stock (the "Series E Preferred Stock") and Series F Warrants (the "Series F
Warrants"). The Series E Preferred Stock is convertible into the Company's
Common Stock at the option of the holder any time after the date of issuance on
a one-for-one basis. The conversion rights of the holder of Series E Preferred
Stock is limited so that the holder cannot convert any Series E Preferred Stock
if, after such conversion, the number of shares of Common Stock beneficially
owned by the holder and its affiliates, will exceed 4.99% of the outstanding
shares of Common Stock. Pursuant to the Share Exchange Agreement, the Company
also issued the Series F Warrants. The Series F Warrants entitle the holder to
purchase 750,000 shares of the Company's Common Stock at an exercise price of
two dollars and twenty five cents ($2.25) per share. The Series F Warrants are
exercisable, in whole or in part, at any time from the date of grant, November
16, 2006, and expire on the fifth anniversary of the grant date. Similar to the
Series E Preferred Stock, the exercise rights of the Series F Warrants are
limited so that the holder is not entitled to exercise the warrants if, after
such exercise, the number of shares of common stock beneficially owned by the
holder and its affiliates, will exceed 4.99% of the outstanding shares of common
stock. The Series E Preferred Stock and the Series F Warrants were issued
pursuant to the exemption from registration found in Section 3(a)(9) of the
Securities Act of 1933. As a result of the Share Exchange Agreement, the 750,000
shares of registered Common Stock tendered by the shareholder to the Company
will be returned to the pool of authorized but unissued shares of Common Stock,
which will reduce the number of shares of outstanding Common Stock to 7,928,263
shares as of November 16, 2006.
The Certificate of Designation, Rights and Preferences of Series E
Convertible Preferred Stock constitutes an amendment to the Articles of
Incorporation of the Company. Such amendment was approved by the Board of
Directors, pursuant to its powers under the Articles of Incorporation of the
Company, the Bylaws of the Company, and the Florida Business Corporation Act, on
November 8, 2006 and became effective onNovember 17, 2006.
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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. (7)
10.01 Securities Purchase and Share Echange Agreement dated January 18, 2006,
by and among the Company, Richard A. Fisher, Kevin J. High, certain
purchasers of the Company's Series A Convertible Preferred Stock,
DeerValley Acquisitions Corp., and certain other persons a party thereto.
(2)
10.02 Investor Rights Agreement, by and among the Company, each of the
purchasers of the Company's Series A Convertible
10.03 Earnout Agreement. (2)
10.04 Form of Series A Common Stock Purchase Warrant. (2)
10.05 Form of Series B Common Stock Purchase Warrant. (2)
10.06 Form of Series C Common Stock Purchase Warrant. (3)
10.07 Form of Series D Common Stock Purchase Warrant. (3)
10.08 Form of Series E Common Stock Purchase Warrant. (3)
10.09 Form of Series BD-1 Common Stock Purchase Warrant. (3)
10.10 Form of Series BD-2 Common Stock Purchase Warrant. (3)
10.11 Form of Series BD-3 Common Stock Purchase Warrant. (3)
10.12 Form of Series BD-4 Common Stock Purchase Warrant. (3)
10.13 Form of Series BD-5 Common Stock Purchase Warrant. (3)
10.14 Interest Bearing Non-Convertible Installment Promissory Note. (2)
10.15 Placement Agent Agreement between Cytation Corporation and Midtown
Partners, LLC. (2)
10.16 Debt Exchange Agreement between Vicis Capital Master Fund and Cytation
Corporation. (3)
10.17 Revolving Credit and Security Agreement. (4)
10.18 Revolving Credit Note. (4)
10.19 Continuing Guaranty of Cytation Corporation. (4)
10.20 Continuing Guaranty of Deer Valley Acquisitions Corp. (4)
10.21 Agreement and Plan of Merger between Cytation Corp., a Delaware
corporation, and Deer Valley Corporation, a Florida corporation. (1)
10.22 Sales Contract for Sulligent Property. (5)
10.23 Form of Loan Agreement (6)
10.24 Form of Commercial Promissory Note (6)
10.25 Form of Mortgage, Assignment of Leases and Rents, Security Agreement and
Fixture Filing (6)
10.26 Form of Guaranty of Loan, Cytation Corp. (6)
10.27 Form of Guaranty of Loan, DeerValley Acquisitions Corp. (6)
10.28 Form of Share Exchange Agreement. (7)
10.29 Form of Series F Common Stock Purchase Warrant. (7)
21.01 List of Subsidiaries of the Company. (7)
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 March 3, 2006. (7)
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 March 3, 2006. (7)
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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 March 3, 2006. (7)
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 March 3, 2006. (7)
(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 8-K filed with the SEC on
January 25, 2006 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registration Statement on Form SB-2
filed with the SEC on April 19, 2006 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Form 8-K filed with the SEC on April
18, 2006 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Form 8-K filed with the SEC on April
24, 2006 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Form 8-K filed with the SEC on June
1, 2006 and incorporated herein by reference.
(7) Filed herewith.
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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 20, 2006 By: /s/Charles G. Masters
-------------------------------
Charles G. Masters
President & Chief Executive Officer
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