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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

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 000-05388

 

 

DEER VALLEY CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Florida   20-5256635

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

3030 N Rocky Point Drive W, Suite 150, Tampa, FL   33607
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (813) 418-5250

 

 

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 a large accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

The Registrant had 15,961,912 shares of Common Stock, par value $0.001 per share, outstanding as of August 3, 2012.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE  
PART I    FINANCIAL INFORMATION   

Item 1

  

Financial Statements

  
  

Condensed Consolidated Balance Sheets
As of June 30, 2012 (unaudited)
As of December 31, 2011

     F-2   
  

Condensed Consolidated Statements of Operations
Three and Six Months ended June 30, 2012 (unaudited)
Three and Six Months ended June 30, 2011 (unaudited)

     F-3   
  

Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months ended June 30, 2012 (unaudited)
Six Months ended June 30, 2011 (unaudited)

  

 

F-4 - F-6

  

  

Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2012 (unaudited)
Six Months ended June 30, 2011 (unaudited)

  

 

F-7

  

  

Notes to Condensed Consolidated Financial Statements (unaudited)

     F-8 - F-16   

Item 2

  

Management’s Discussion and Analysis

     1   

Item 4T

  

Controls and Procedures

     8   
PART II    OTHER INFORMATION   

Item 1

  

Legal Proceedings

     9   

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     9   

Item 3

  

Defaults Upon Senior Securities

     10   

Item 4

  

Reserved

     10   

Item 5

  

Exhibits

     11   

Unless otherwise indicated or the context otherwise requires, all references in this filing to “we,” “us,” the “Company,” and “Deer Valley” are to Deer Valley Corporation, a Florida corporation, together with its wholly-owned subsidiaries, Deer Valley Homebuilders, Inc., an Alabama corporation, Deer Valley Finance Corp., a Florida corporation, and Deer Valley Home Repair Services, Inc., a Florida corporation.


Table of Contents

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Financial Statements

 

 

 

Contents:

  

Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

     F-2   

Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended June  30, 2012 and 2011 (unaudited)

     F-3   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Month Period Ended June 30, 2012 and 2011 (unaudited)

     F-4 - F-6   

Condensed Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended June  30, 2012 and 2011 (unaudited)

     F-7   

Notes to Condensed Consolidated Financial Statements (unaudited)

     F-8 - F-16   

 

 

 

F-1


Table of Contents

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Balance Sheets

 

     June 30,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Current Assets:

    

Cash

   $ 3,904,304      $ 3,270,048   

Short-term investments

     —          2,900,000   

Accounts receivable, net

     522,706        2,044,869   

Inventory

     1,373,258        1,041,879   

Deferred tax asset

     644,318        661,048   

Inventory finance notes receivable

     2,627,628        3,392,085   

Prepaid expenses and other current assets

     123,674        96,735   
  

 

 

   

 

 

 

Total Current Assets

     9,195,888        13,406,664   
  

 

 

   

 

 

 

Fixed Assets:

    

Property, plant and equipment, net

     2,226,158        2,330,291   
  

 

 

   

 

 

 

Other Assets:

    

Inventory finance notes receivable, net

     3,945,099        3,345,858   

Deferred tax asset, net

     1,669,364        1,791,220   

Other assets

     41,570        43,118   
  

 

 

   

 

 

 

Total Other Assets:

     5,656,033        5,180,196   
  

 

 

   

 

 

 

Total Assets

   $ 17,078,079      $ 20,917,151   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities:

    

Current maturities on long term debt

   $ 125,600      $ 125,600   

Revolving credit loans

     4,000,000        4,200,000   

Accounts payable

     595,710        410,324   

Accrued expenses

     1,490,826        1,411,883   

Accrued warranties

     1,240,000        1,330,000   

Warrant liability

     18,021        34,486   

Income tax payable

     41,329        511,654   
  

 

 

   

 

 

 

Total Current Liabilities

     7,511,486        8,023,947   
  

 

 

   

 

 

 

Long Term Liabilities:

    

Long-term debt, net of current maturities

     994,333        1,057,133   

Deferred tax liability

     78,046        78,046   
  

 

 

   

 

 

 

Total Long Term Liabilities

     1,072,379        1,135,179   
  

 

 

   

 

 

 

Total Liabilities

     8,583,865        9,159,126   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 10)

     —          —     

Stockholders’ Equity:

    

Series A Preferred stock, $0.01 par value, 750,000 shares authorized, 0 and 21,500 shares issued and outstanding, respectively.

     —          215   

Series C Preferred stock, $0.01 par value, 26,750 shares authorized, 0 and 22,463 shares issued and outstanding, respectively.

     —          224   

Series E Preferred stock, $0.01 par value, 1,000,000 authorized, 0 and 1,000,000 shares issued and outstanding, respectively.

     —          10,000   

Common stock, $0.001 par value, 100,000,000 shares authorized, 17,786,184 and 17,499,517 shares issued and 15,986,883 and 16,878,063 outstanding, respectively.

     17,788        17,501   

Additional paid-in capital

     33,254,293        35,998,560   

Treasury Stock, at cost; 1,799,301 and 621,454 shares, respectively

     (926,593     (310,075

Accumulated deficit

     (23,851,274     (23,958,400
  

 

 

   

 

 

 

Total Stockholders’ Equity

     8,494,214        11,758,025   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 17,078,079      $ 20,917,151   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

F-2


Table of Contents

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Statements of Operations

 

     For The Three Month Period Ended     For The Six Month Period Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

REVENUE

   $ 7,643,245      $ 7,881,194      $ 12,962,209      $ 12,233,308   

COST OF REVENUE

     6,341,144        6,456,337        10,826,475        10,042,360   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     1,302,101        1,424,857        2,135,734        2,190,948   

OPERATING EXPENSES:

        

Depreciation and Amortization

     3,221        3,687        6,486        7,916   

Selling, general and administrative

     998,519        957,222        2,135,681        1,937,739   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OPERATING EXPENSES

     1,001,740        960,909        2,142,167        1,945,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME/(LOSS)

     300,361        463,948        (6,433     245,293   

OTHER INCOME (EXPENSES)

        

Derivative income

     6,230        53,394        16,465        344,972   

Interest income

     230        4,488        2,938        10,875   

Other income (expense)

     —          11,108        1,640        9,508   

Interest expense

     (12,254     (24,677     (25,782     (55,973
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER (EXPENSES)/INCOME

     (5,794     44,313        (4,739     309,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME/(LOSS) BEFORE INCOME TAXES

     294,567        508,261        (11,172     554,675   

INCOME TAX (EXPENSE)/BENEFIT

     (114,916     (180,776     116        (92,429
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME/(LOSS)

   $ 179,651      $ 327,485      $ (11,056   $ 462,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of income/(loss) from operations to income attributable to common shareholders:

        

Income/(loss) from operations

   $ 179,651      $ 327,485      $ (11,056   $ 462,246   

Deemed distribution on redemption of preferred stock

       —          118,182        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

per common share

   $ 179,651      $ 327,485      $ 107,126      $ 462,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Share (Basic)

   $ 0.01      $ 0.02      $ 0.01      $ 0.03   

Net Income Per Share (Fully Diluted)

   $ 0.01      $ 0.02      $ 0.01      $ 0.02   

Weighted Average Common Shares Outstanding

     16,019,656        17,239,903        17,252,314        17,253,666   

Weighted Average Common and Common Equivalent Shares Outstanding

     16,019,656        20,772,846        16,499,699        20,786,608   

See notes to condensed consolidated financial statements

 

F-3


Table of Contents

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     Preferred A      Preferred C      Series E  
     Shares      Amount      Shares      Amount      Shares      Amount  

Balance - January 1, 2011

         21,500       $   214,995           22,463       $   224           1,000,000       $   10,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Conversion of Series A Preferred

     —           —           —           —           —           —     

Common Stock purchase related to amended Earnout Agreement

     —           —           —           —           —           —     

Treasury Stock purchase at cost

     —           —           —           —           —           —     

Net Income

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance - June 30, 2011

     21,500       $ 214,995         22,463       $ 224         1,000,000       $ 10,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Preferred A     Preferred C     Series E  
     Shares     Amount     Shares     Amount     Shares     Amount  

Balance - January 1, 2012

     21,500      $ 215        22,463      $ 224        1,000,000      $ 10,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Conversion of Series A Preferred

     (21,500     (215     —          —          —          —     

Redemption of Series C and E Preferred

     —          —          (22,463     (224     (1,000,000     (10,000

Purchase of Common Stock Option

     —          —          —          —          —          —     

Treasury Stock purchase at cost

     —          —          —          —          —          —     

Deemed distribution on redemption of preferred stock

     —          —          —          —          —          —     

Net Loss

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2012

     —        $ —          —        $ —          —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

F-4


Table of Contents

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     Common      Additional  
     Shares      Amount      Paid in Capital  

Balance - January 1, 2011

     17,499,517       $ 17,501       $ 35,783,780   
  

 

 

    

 

 

    

 

 

 

Conversion of Series A Preferred

     —           —           —     

Common Stock purchase related to amended Earnout Agreement

     —           —           —     

Treasury Stock purchase at cost

     —           —           —     

Net Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance - June 30, 2011

     17,499,517       $ 17,501       $ 35,783,780   
  

 

 

    

 

 

    

 

 

 

 

     Common      Additional  
     Shares      Amount      Paid in Capital  

Balance - January 1, 2012

     17,499,517       $ 17,501       $ 35,998,560   
  

 

 

    

 

 

    

 

 

 

Conversion of Series A Preferred

     286,667         287         (72

Redemption of Series C and E Preferred

     —           —           (1,864,776

Purchase of Common Stock Option

     —           —           (879,419

Treasury Stock purchase at cost

     —           —           —     

Deemed distribution on redemption of preferred stock

     —           —           —     

Net Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance - June 30, 2012

     17,786,184       $ 17,788       $ 33,254,293   
  

 

 

    

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

F-5


Table of Contents

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

                                                                                       
     Treasury     Accumulated        
     Shares     Amount     Deficit     Total  

Balance - January 1, 2011

     (227,520   $ (100,024   $ (25,412,007   $ 10,514,469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Conversion of Series A Preferred

     —          —          —          —     

Common Stock purchase related to amended Earnout Agreement

     —          —          —          —     

Treasury Stock purchase at cost

     (88,899     (63,012     —          (63,012

Net Loss

     —          —          462,247        462,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2011

     (316,419   $ (163,036   $ (24,949,760   $ 10,913,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                                       
     Treasury     Accumulated        
     Shares     Amount     Deficit     Total  

Balance - January 1, 2012

     (621,454   $ (310,075   $ (23,958,400   $ 11,758,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Conversion of Series A Preferred

     —          —          —          —     

Redemption of Series C and E Preferred

     —          —          —          (1,875,000

Purchase of Common Stock Option

           (879,419

Treasury Stock purchase at cost

     (1,177,847     (616,518     —          (616,518

Deemed distribution on redemption of preferred stock

     —          —          118,182        118,182   

Net Loss

     —          —          (11,056     (11,056
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2012

     (1,799,301   $ (926,593   $ (23,851,274   $ 8,494,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

F-6


Table of Contents

Deer Valley Corporation & Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

     For The Six Month Period Ended
June 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net (loss)/income

   $ (11,056   $ 462,246   

Adjustments to reconcile net income/(loss) to net cash provided for/used in operating activities:

    

Depreciation and amortization

     106,552        125,185   

Derivative (income)

     (16,465     (344,972

Gain on sale of equipment

     (1,640     (6,508

Bad debt expense

     59,830        8,280   

Changes in assets and liabilities:

    

(Increase)/decrease in receivables

     1,522,162        (652,177

(Increase)/decrease in inventories

     (331,379     (375,195

(Increase)/decrease in deferred tax asset

     138,586        135,454   

(Increase)/decrease in inventory finance receivable

     131,622        (1,584,423

(Increase)/decrease in prepayments and other

     (51,626     218,952   

Increase/(decrease) in accounts payable

     185,386        211,732   

Increase/(decrease) in income tax payable

     (470,325     (23,910

Increase/(decrease) in estimated services and warranties

     (90,000     (45,000

Increase/(decrease) in accrued expenses

     78,943        269,347   

Increase/(decrease) in deferred tax liability

     —          (19,114
  

 

 

   

 

 

 

CASH FLOW PROVIDED BY/(USED) IN OPERATING ACTIVITIES

   $ 1,250,590      $ (1,620,103
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of equipment

     (2,779     (65,571

Proceeds from sale of property, plant and equipment

     2,000        21,549   

Purchases of short-term investments

     —          —     

Sales of short-term investments

     2,900,000        102,700   
  

 

 

   

 

 

 

CASH FLOW PROVIDED BY INVESTING ACTIVITIES

   $ 2,899,221      $ 58,678   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of long-term debt

     (62,800     (41,300

Proceeds from revolving credit loans

     5,775,000        5,750,000   

Repayments of revolving credit loans

     (5,975,000     (4,275,000

Purchases of common stock option

     (879,419     —     

Purchases of treasury stock

     (616,518     (63,012

Purchases of preferred stock

     (1,756,818     —     
  

 

 

   

 

 

 

CASH FLOW (USED) IN/PROVIDED BY FINANCING ACTIVITIES

   $ (3,515,555   $ 1,370,688   
  

 

 

   

 

 

 

NET INCREASE/(DECREASE) IN CASH

   $ 634,256      $ (190,737

CASH, Beginning

   $ 3,270,048      $ 3,727,228   
  

 

 

   

 

 

 

CASH, Ending

   $ 3,904,304      $ 3,536,491   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 84,124      $ 137,074   
  

 

 

   

 

 

 

Taxes

   $ 330,123      $ —     
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:

    

Conversion of Series A preferred stock for common stock-net

   $ 214,995      $ —     
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

F-7


Table of Contents

Deer Valley Corporation & Subsidiaries

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements for the three and six month periods ended June 30, 2012 and 2011 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 period. The operations for the three and six month periods ended June 30, 2012 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 consolidated financial statements and notes thereto included in the Registrant’s December 31, 2011 Annual Report on Form 10-K and subsequent filings on Form 10-Q and Form 8-K.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Accounting Estimates - The Company’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year - The Company’s operating subsidiaries, Deer Valley Homebuilders, Inc. (DVH), Deer Valley Finance Corp. (DVFC) and Deer Valley Home Repair Services, Inc. (DVHRS), operate on a 52-53 week fiscal year end. For presentation purposes, the reporting period has been presented as ending on June 30, the Company’s quarter end.

Cash Equivalents - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

The Company maintains its cash balances in two different financial institutions. At June 30, 2012 these balances totaled $3,904,304. The balances are insured by the Federal Deposit Insurance Corporation up to $250,000 or in the case of non-interest bearing checking accounts, the insurance is unlimited until December 31, 2012. At June 30, 2012, $534,431 of our cash balances exceeded the current FDIC insurance limits.

Investments - Short-term investments are comprised of Variable Rate Demand Bonds (“VRDB’s”). In accordance with FASB Topic ASC 320, Investments-Debt and Equity Securities, based on our ability to market and sell these instruments and our intent to not hold such instruments until maturity, we classify such variable rate demand bonds as available-for-sale, and carry them at their fair value. VRDB’s are similar to short-term debt instruments because their interest rates are reset periodically. Investments in these securities can be sold for cash on the auction date. We classify VRDB’s as short-term or long-term investments based on the reset dates.

Inventory Finance Notes Receivable - The Company offers inventory-secured financing for its products to qualified retail dealers and developers. Finance contracts require periodic installments of principal and interest over periods of up to 24 months. The Company periodically evaluates the collectability of our notes receivable and considers the need to establish an allowance for doubtful accounts based upon our historical collection experience. We have established an allowance for doubtful accounts of $260,770 as of June 30, 2012 and $153,500 at June 30, 2011.

 

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Impairment of Long-Lived Assets - Property and intangible assets are material to our consolidated financial statements. Further, these assets are subject to the potential negative effects arising from factors beyond the Company’s control including changing economic conditions. The Company evaluates its tangible and definite-lived intangible assets for impairment annually during our fourth quarter or more frequently in the presence of circumstances or trends that may be indicators of impairment. The evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, the Company compares the carrying values to the related fair values and, if the fair value is lower, record an impairment adjustment. For purposes of fair value, the Company generally uses replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates, for intangible assets. These estimates are made by competent employees, using the best available information, under the direct supervision of our management. For tangible property, plant and equipment, there have been no changes in assumptions or methodologies in the three and six month periods ended June 30, 2012 as compared to June 30, 2011. The Company did not have definite-lived intangible assets at June 30, 2012 and June 30, 2011.

In accordance with FASB Topic ASC 420 “Exit on Disposal Cost Obligations”, the Company evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair market values are primarily based on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose.

Revenue Recognition - Revenue for manufactured homes sold to independent dealers generally is recorded when all of the following conditions have been met; (a) an order for the home has been received from the dealer, (b) an agreement with respect to payment terms (usually in the form of a written or verbal approval for payment has been received from the dealer’s flooring institution), and (c) the home has been shipped and risk of loss has passed to the dealer and collectability is reasonably assured.

Cost of Sales - The Company’s factory-built housing segment includes the following types of expenses in cost of sales: purchase and receiving costs, freight in, direct labor, supply costs, warehousing, direct and indirect overhead costs, inspection, transfer, actual and accrued warranty, depreciation, and amortization costs. The Company’s financial services segment includes the following types of expenses in cost of sales: interest expense

Selling, General and Administrative - The Company includes the following types of expenses in selling, general and administrative expense: sales salaries, sales commissions, bad debt expense, advertising, administrative overhead, administrative salaries and bonuses and legal and professional fees.

Derivative Financial Instruments - We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of our financial instruments. However, we have entered into certain financial instruments, such as the issuance of certain freestanding warrants, which do not meet the conditions for equity classification due to their “down-round” protection features. As required by ASC 815 Derivatives and Hedging, these instruments are required to be carried as derivative liabilities, at fair value with changes in fair value, in our financial statements with changes in fair value reflected in our income (loss). See Note 8 Derivative Liabilities of the condensed consolidated financial statements for additional disclosure data.

Earnings (Loss) Per Share - The Company uses the guidance set forth under FASB topic ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. Basic income/(loss) per share is computed by dividing net income/(loss) and net income/(loss) attributable to common shareholders by the weighted average number of common shares outstanding. Diluted income/(loss) per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. Common equivalent shares are excluded from the computation of net loss per share if they would be anti-dilutive.

The Company’s dilutive common stock equivalent shares as of June 30, 2012 and 2011 include all of the Convertible Preferred shares and any incremental shares associated with the Company’s outstanding warrants and stock options.

See the detailed list of Common Stock Equivalents below.

 

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Common Stock Equivalents

as of

 
     Exercise           June 30,  

Securities

   Price      Expiration Date    2012      2011  

Preferred:

           

Series A Preferred

           —           286,642   

Series C Preferred

           —           2,246,300   

Series E Preferred

           —           1,000,000   
        

 

 

    

 

 

 

Total

           —           3,532,942   
        

 

 

    

 

 

 

Warrants:

           

Class A Warrants

   $ 1.50       Expired      —           2,218,690   

Class B Warrants

   $ 2.25       August 11, 2013      1,112,487         1,112,487   

Class BD-2 Warrants

   $ 1.50       Expired      —           477,479   

Class BD-3 Warrants

   $ 2.25       Expired      —           238,740   

Class BD-4 Warrants

   $ 1.50       Expired      —           66,121   

Class BD-5 Warrants

   $ 3.00       Expired      —           66,121   
        

 

 

    

 

 

 

Total

           1,112,487         4,179,638   
        

 

 

    

 

 

 

Total common stock equivalents

           1,112,487         7,712,580   
        

 

 

    

 

 

 

Income Taxes - Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Recent accounting pronouncements - We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We believe that the following impending standards may have an impact on our future filings. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a GAAP perspective, the amendments are largely clarification, but some could have a significant effect on certain companies. A number of new disclosures are also required. Except for certain disclosures, the guidance applies to public companies and nonpublic companies and is to be applied prospectively. For public and nonpublic companies, the amendments are effective during interim and annual periods beginning after December 15, 2011.

In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires entities to provide new disclosures in their financial statements about their financing receivables, including credit risk exposures and the allowance for credit losses on a disaggregated basis. In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies when creditors should classify loan modifications as troubled debt restructurings. In addition, ASU 2011-02 deferred the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 to periods beginning after June 15, 2011. The Company has adopted all of the aforementioned provisions of ASU 2010-20 and ASU 2011-02.

 

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NOTE 3 - INVENTORY

Inventory consisted of the following components:

 

     June 30,
2012
     December 31,
2011
 

Raw Materials

   $ 691,466       $ 609,673   

Work-in-Process

     220,350         312,643   

Finished Goods

     461,442         119,563   
  

 

 

    

 

 

 

Total Inventory

   $ 1,373,258       $ 1,041,879   
  

 

 

    

 

 

 

NOTE 4 - ACCRUED EXPENSES

Accrued expenses consisted of the following:

 

Category

   June 30,
2012
     December 31,
2011
 

Accrued dealer incentive program

   $ 282,692       $ 216,901   

Accrued third party billings

     473,895         442,800   

Accrued compensation

     353,377         395,380   

Accrued repurchase commitment

     122,785         131,395   

Other

     258,077         225,407   
  

 

 

    

 

 

 

Total Accrued Expenses

   $ 1,490,826       $ 1,411,883   
  

 

 

    

 

 

 

NOTE 5 - PRODUCT WARRANTIES

The Company provides the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. The Company estimated warranty costs are accrued at the time of the sale to the dealer following industry standards and historical warranty cost incurred. Periodic adjustments to the estimated warranty accrual are made as events occur which indicate changes are necessary. As of June 30, 2012, the Company has recorded an accrued liability of $1,240,000 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:

 

     For The Three
Month Period
Ended
    For The Six
Month  Period
Ended
 
     June 30,
2012
    June 30,
2012
 

Balance at beginning of period

   $ 1,225,000      $ 1,330,000   

Warranty charges

     330,341        602,802   

Warranty payments

     (315,341     (692,802
  

 

 

   

 

 

 

Balance at end of period

   $ 1,240,000      $ 1,240,000   
  

 

 

   

 

 

 

NOTE 6 - REVOLVING CREDIT LOANS

Effective October 14, 2011, Deer Valley (a) renewed its Revolving Credit Loan and Security Agreement with Fifth Third Bank, used for display model financing for dealers of the products produced by DVHB (the “Display Model LOC”), and (b) in connection with such renewal, Deer Valley reduced the limits of the Display Model LOC from $7,500,000 to $5,000,000. The $5,000,000 Facility has a two year term and has a variable interest rate at 4.00% above LIBOR or 4.375% at June 30, 2012. As of June 30, 2012, the Company had an outstanding balance of $2,500,000 under the revolving credit loan.

 

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Effective October 14, 2011, Deer Valley (a) renewed its Revolving Credit Loan and Security Agreement with Fifth Third Bank, used for short term working capital financing, letters of credit and as a bridge loan on financing the sale of retail units by DVHB (the “Working Capital LOC”), and (b) in connection with such renewal, Deer Valley reduced the limits of the Working Capital LOC from $5,000,000 to $3,000,000. The $3,000,000 Facility has a two year term and has a variable interest rate at 2.50% above LIBOR or 2.875% at June 30, 2012. As of June 30, 2012, the Company had an outstanding balance of $1,500,000 under the revolving credit loan.

The amount available under the revolving credit loans is equal to the lesser of $8,000,000 or an amount based on defined percentages of accounts receivable and inventories reduced by any outstanding letters of credit. At June 30, 2012, $4,903,544 was available under the revolving credit loans after deducting letters of credit of $100,000.

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 insurance policies. As of June 30, 2012, no amounts had been drawn on the above irrevocable letters of credit by the beneficiaries.

NOTE 7 - LONG-TERM DEBT

On May 26, 2006, DVH entered into a Loan Agreement with Fifth Third Bank (the “Lender”) providing for a loan of Two Million 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 Loan had 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 DVH guaranteed the Loan. Should Deer Valley default, thereby triggering acceleration of the Loan, the Company would become liable for payment of the Loan. On June 1, 2011 Fifth Third Bank agreed to extend to maturity date on the loan until an amendment to the loan agreement could be finalized.

On July 8, 2011, DVHB and the Lender entered into that certain Amendment to Loan Agreement effective June 1, 2011, pursuant to which, among matters, (a) DVHB made a cash payment to reduce the outstanding principal balance of the Real Estate Loan to $1,256,000, (b) the term of the Real Estate Loan was extended to June 1, 2016, and (c) the variable interest rate was set at 400 basis points (4.00%) above the One-Month LIBOR-Index Rate. The Real Estate Loan is guaranteed by DVC and DVFC.

NOTE 8 - DERIVATIVE LIABILITIES

Under ASC 815, share-linked contracts which contain full ratchet anti-dilution provisions are not considered indexed to a company’s own stock for purposes of determining whether it meets the first part of the scope exception in ASC 815-10-15-74. The application of this standard required us to (1) evaluate our instrument’s contingent exercise provisions and (2) evaluate the instrument’s settlement provisions. Based upon applying this approach to instruments within the scope of the consensus, we determined that certain of our warrants do not meet the definition of Indexed to a Company’s Own Stock provided in the Consensus. Accordingly, those Warrants are recorded as liabilities at their fair value. ASC 815 “Derivatives and Hedging” requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

As of June 30, 2012 and December 31, 2011, derivative financial instruments recorded as liabilities consisted of Class B Warrants indexed to 1,112,487 shares of our common stock with an exercise price of $2.25. The fair value of the Class B warrants as of June 30, 2012 and December 31, 2011 was $18,022 and $34,486, respectively.

The following tables summarize the effects on our income (loss) associated with changes in the fair values of our derivative financial instruments:

 

     Three months
ended
June  30,

2012
     Three months
ended
June  30,

2011
 

Class A Warrants (Class A-1 & Class A-2)

   $ 0       $ 8,960   

Class B Warrants

     6,230         42,942   

Class BD-2 Warrants

     0         1,241   

Class BD-3 Warrants

     0         72   

Class BD-4 Warrants

     0         172   

Class BD-5 Warrants

     0         7   
  

 

 

    

 

 

 
   $ 6,230       $ 53,394   
  

 

 

    

 

 

 

 

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Table of Contents

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. We value our derivative warrants using a Binomial Lattice valuation model which provides for early exercise scenarios and incorporates the down-round anti-dilution protection possibilities that could arise in early exercise scenarios.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Lattice models) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair value, our (income) loss will reflect the volatility in these estimate and assumption changes.

 

     June 30, 2012     December 31, 2011  

Significant assumptions (or ranges):

    

Trading market values (1)

   $ .70      $ 0.60   

Term (years) (3)

     1.13        1.64   

Volatility (3)

     60.02     74.84

Risk-free rate (2)

     0.15     0.09

Fair value hierarchy:

 

(1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. Our trading market values and the volatilities that are calculated thereupon are level 1 inputs.
(2) Level 2 inputs are inputs other than quoted prices that are observable. We use the current published yields for zero-coupon US Treasury Securities, with terms nearest the remaining term of the warrants for our risk free rate.
(3) Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety. The remaining term used equals the remaining contractual term as our best estimate of the expected term.

ASC 820-10-55-62 Fair Value Measurements and Disclosures provides that for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, reconciliation is required of the beginning and ending balances. The reconciliation of our derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2012 is as follows:

 

     Warrant
Derivative
 

Beginning balance, December 31, 2011

   $ 34,486  

Total (gains) or losses included in earnings

     (16,465

Issuances

     —     
  

 

 

 

Ending balance, June 30, 2012

   $ 18,021  
  

 

 

 

The significant unobservable inputs used in the fair value measurement of the warrants included management’s estimate of the expected remaining term and the probability of a down round financing occurring during the remaining term of the warrant. Generally an increase (decrease) in the expected term or the probability of the occurrence of a down round financing would result in a higher (lower) fair value measurement

 

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NOTE 9 - INCOME TAXES

Income Taxes:

 

The components of the provision for income taxes are as follows:

 

     Six months ended
June 30, 2012
 

Current income tax (benefit)

   $ (138,702

Deferred income tax expense

     138,586   
  

 

 

 

Total income tax benefit

   $ (116
  

 

 

 

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes are as follows:

 

     Six months ended
June 30, 2012
 
     Amount     Impact on
Rate
 

Income tax (benefit) at federal rate

   $ (3,799     34.00
  

 

 

   

 

 

 

State tax benefit, net of Federal effect

     (472     4.23
  

 

 

   

 

 

 

Permanent Differences:

    

Meals and entertainment

     9,781        -87.54

Officer’s life insurance

     669        -5.98

Derivative expense

     (6,294     56.33
  

 

 

   

 

 

 

Total permanent differences

     4,156        -37.19
  

 

 

   

 

 

 

Rounding

     (1     0.00
  

 

 

   

 

 

 

Total income tax (benefit)

   $ (116     1.04
  

 

 

   

 

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income taxes are as follows:

 

     June 30, 2012  

Current Deferred Tax Assets:

  

Warranty reserve

   $ 474,001   

Repurchase reserve

     46,936   

Loan loss reserve

     99,682   

Allowance for doubtful accounts

     5,734   

Inventory reserve

     6,497   

Accrued legal fees

     11,468   
  

 

 

 

Total Current Deferred Tax Asset

     644,318   
  

 

 

 

Non-Current Deferred Tax Assets:

  

Goodwill impairment

     2,071,981   

Valuation allowance

     (402,617
  

 

 

 

Total Non-Current Deferred Tax Assets

     1,669,364   
  

 

 

 

Non-Current Deferred Tax Liability:

  

Accelerated depreciation

     (85,576

Sale of assets

     7,530   
  

 

 

 

Total Non-Current Deferred Tax Liability

     (78,046
  

 

 

 

Total Deferred Tax Assets (Liabilities) - Net

   $ 2,235,636   
  

 

 

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Litigation - The Company in the normal course of business is subject to claims and litigation. Management of the Company is of the opinion that, based on information available, such legal matters will not ultimately have a material adverse effect on the financial position or results of operation of the Company.

 

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Table of Contents

Reserve for Repurchase Commitments - DVH is contingently liable under the terms of repurchase agreements with financial institutions providing inventory financing for retailers of DVH’s products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price DVH is obligated to pay generally declines over the period of the agreement (typically 18 to 24 months) and the risk of loss is further reduced by the sale value of repurchased homes. The maximum amount for which the Company is contingently liable under repurchase agreements is approximately $3,300,000 at June 30, 2012. As of June 30, 2012 the Company reserved $122,785 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.

NOTE 11 - EQUITY TRANSACTIONS

Series A Convertible Preferred Stock - During the six month periods ended June 30, 2012 certain shareholders converted 21,500 shares of Series A Preferred stock, par value $215, into 286,667 shares of the Company’s common stock. The conversion represents all of the outstanding shares of the Company’ Series A Preferred stock.

Treasury Stock - Pursuant to a common stock repurchase program approved by our Board of Directors, a total of 1,177,847 shares, inclusive of the shares purchased pursuant to the common stock redemption agreement described below, were purchased during the six month period ended June 30, 2012 at a cost of $616,518 and recorded as treasury stock.

Stock Redemption Agreement - During the six month period ended June 30, 2012 the Company entered into (i) a common stock redemption agreement wherein the Company purchased 1,096,291 shares of common stock; (ii) a securities redemption and purchase agreement wherein (a) the Company purchased 22,463 shares of Series C Preferred and 1,000,000 shares of Series E Preferred, representing 100% of the issued and outstanding shares of each class and convertible to 3,246,300 shares of common stock and (b) the Company purchased an option to purchase from Vicis Capital Master Fund’s remaining 12,310,359 shares of common stock (the “Option”). The aggregate purchase price of the stock redemption agreement was $3,200,000 and was allocated to the financial instruments acquired on the basis of relative fair value.

The above referenced option is a freestanding forward contract with a call option (right to buy) element that provides for the Company’s right and option, but not its responsibility, to purchase 12,310,359 shares, and no fewer shares, of its common stock until the Option expiration on June 1, 2013. The option provides for graduated exercise prices over the term to expiration: $5,300,000 through June 1, 2012; thereafter, $6,300,000 through August 1, 2012; thereafter, $6,800,000 through December 1, 2012; and thereafter $7,300,000 through the expiration date on June 1, 2013.

Accounting for redemptions of preferred stock is provided in ASC S99-2 and states that if a registrant redeems its preferred stock, the difference between (1) the fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock in the company’s balance sheet should be reflected in a manner similar to a dividend on preferred stock and subtracted from net income to arrive at income available to common stockholders in the calculation of earnings per share. A credit, as opposed to a debit, could result from the calculation under this method.

The Option was accounted for as provided in ASC 815 Derivatives and Hedging. ASC 815 further provides that if the instrument’s exercise price or number of shares are not fixed, the instrument would still be considered indexed to a company’s own stock if the only variables that could affect the settlement would be inputs to the fair value of a fixed-for-fixed forward or option equity shares.

NOTE 12 - SEGMENT INFORMATION

Our business segments consist of factory-built housing and financial services. Our financial services business commenced during the fourth quarter of 2009 to provide dealer inventory-secured financing for houses built by the Company. Management considers income (loss) from operations as the basis to measure segment profitability. The following table summarizes net sales, income (loss) from operations, and identifiable assets by segment for the three and six month period ended June 30, 2012 and 2011.

 

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Table of Contents
     For The Three Months Ended     For The Six Months Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Revenues from external customers

        

Factory-built housing

   $ 7,515,007      $ 7,766,506      $ 12,694,535      $ 12,013,642   

Financial services

     128,238        114,688        267,674        219,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 7,643,245      $ 7,881,194      $ 12,962,209      $ 12,233,308   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

        

Factory-built housing

   $ 353,082      $ 560,004      $ 273,837      $ 519,016   

Financial services

     49,472        21,668        84,199        59,129   

General corporate expenses

     (102,193     (117,724     (364,469     (332,852
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) from operations

   $ 300,361      $ 463,948      $ (6,433   $ 245,293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Derivative income (expense)

   $ 6,230      $ 53,394      $ 16,465      $ 344,972   

Other income (expense)

     —          11,108        1,640        9,508   

Interest income

     230        4,488        2,938        10,875   

Interest expense

     (12,254     (24,677     (25,782     (55,973
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (5,794   $ 44,313      $ (4,739   $ 309,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 294,567      $ 508,261      $ (11,172   $ 554,675   
  

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable assets

        

Factory-built housing

   $ 10,286,781      $ 13,741,425       

Financial services

     6,732,055        6,290,526       

Other

     59,243        94,928       
  

 

 

   

 

 

     
   $ 17,078,079      $ 20,126,879       
  

 

 

   

 

 

     

 

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Item 2. Management’s Discussion and Analysis

Cautionary Notice Regarding Forward Looking Statements

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, risks discussed in our Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

The Company, through its wholly owned subsidiaries Deer Valley Homebuilders, Inc. (“DVH”), Deer Valley Financial Corp (“DVFC”) and Deer Valley Home Repair Services, Inc. (DVHRS), designs and manufactures factory built homes and provides dealer inventory-secured financing for our factory built homes. The Company’s manufacturing plant located in Guin, Alabama, produces homes which are marketed in 12 states through a network of independent dealers, builders, developers and government agencies located primarily in the southeastern and south central regions of the United States. Inventory-secured loan financing is offered to qualified retail dealers and developers, through DVFC.

Our business segments consist of factory-built housing and financial services. Our financial services provide qualified independent retail dealers and developers inventory-secured financing for homes the Company produces. The Company does not maintain separate operating segments for regions and does not separately report financial information by geographic sales area because they are similar products using similar production techniques and sold to the same class of customer. See Note 12 - Segment Information of the Notes to Condensed Consolidated Financial Statements for information on our net sales, income (loss) from operations, and identifiable assets by segment for the three and six month periods ended June 30, 2012 and 2011.

Industry and Company Outlook

The manufactured housing industry and the Company continue to operate at low production and shipment levels. According to data provided by the Manufactured Housing Institute (“MHI”), our industry shipped approximately 52,000 HUD code manufactured homes during the calendar year 2011, compared to approximately 50,000 HUD code manufactured homes in both calendar years 2010 and 2009.

We believe our market and housing in general may have reached bottom: however, we expect that there may be more periods of volatility in the future. We believe that, once the unemployment rate declines and confidence improves, pent-up demand will be released, and, gradually, more buyers will enter the market. We believe the key to full recovery in our business depends on these factors as well as an increased availability of consumer financing for the retail purchase of manufactured homes.

 

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The Company’s executives are continuing to focus on matters relating to challenges faced by our industry and the general economy. (i) Management has been addressing the continued slowness in the housing industry by adjusting capacity and rate of production with market demand. The Company will continue to monitor demand and adjust capacity based on our views of and direction of the industry. (ii) As part of the Company’s strategic plan, management seeks to identify niche market opportunities where our custom building capabilities provide us with a competitive advantage. The Company continues to focus on the production of custom built, energy efficient, “heavy built homes” and has intensified efforts in innovative exterior elevations to meet the needs of homeowners, dealers, developers and government agencies. The Company believes that establishing alternative distribution channels will add stability and position the company for growth when market conditions improve. (iii) Management has addressed the limited availability of “dealer inventory financing” with the establishment of its wholly owned subsidiary, (DVFC). The subsidiary was created to provide inventory-secured loans to qualified retail dealers and developers. (iv) The Company continues to focus on operating activities to improve manufacturing efficiencies, reduce overall costs and increase gross margins.

Manufacturing Operations

We produce all of our factory built homes at our plant in Guin, Alabama. Our plant is currently staffed for a single shift; 40 hour work week and producing on average 20 “floors” per week. During the quarter ended June 30 2012, the Company’s average production rate was approximately 19 “floors” produced per week or 55% of our maximum capacity of a single shift, 40 hour work week. As of June 30, 2012, our backlog of orders stood at approximately $1,100,000 or approximately 8 days at our current production rate. We have one idle plant located in Sulligent, Alabama.

When evaluating the Company’s operating performance, the key performance indicators management examines are (1) the Company’s production rate, in “floors” produced per day, (2) the cost of sales, (3) the size of the Company’s sales backlog, and (4) the prevailing market conditions. For more information on these performance indicators, please see the attached financial statements and notes thereto and the section of the Company’s Annual Report on Form 10-K titled “Description of Business

Financial Operations

The Company offers inventory-secured financing for its products to a limited number of qualified retail dealers and developers. Products shipped to dealers under the Company’s inventory-secured financing program are recorded by the Company as sales and the dealers obligations to the Company are reflected as inventory finance notes receivable.

Finance contracts require periodic installments of principal and interest over periods of up to twenty-four months. These notes are secured by a first priority secured interest in the inventory collateral and other security depending on borrower circumstances. Dealers who sell products utilizing inventory-secured financing are required to make immediate payment for those products to the Company upon sale to the retail customer. This type of inventory-secured financing accounts for approximately, 45% of the Company’s sales for the three and six month period ending June 30, 2012 compared to 37% of the Company’s sales for the three and six month period ended June 30, 2011.

Results of Operations

The following discussion examines the results of the Company’s operations for the three and six month periods ended June 30, 2012. This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes to the consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. It is also imperative that one read our December 31, 2011 Annual Report on Form 10-K and subsequent filings on Form 8-K.

 

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HISTORICAL RESULTS - THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2012 AND JUNE 30, 2011.

Revenues. Overall gross revenue for the three month period ended June 30, 2012 was $7,643,245 compared to $7,881,194 for the three month period ended June 30, 2011, representing a decrease of $237,949, or approximately 3.0%. Overall gross revenue for the six month period ended June 30, 2012 was $12,962,209 compared to $12,233,308 for the six month period ended June 30, 2011, representing an increase of $728,901, or approximately 6.0%. The increase in revenue for the six month period ended June 30, 2012 compared to the six month period ended June 30, 2011, is partially attributable to mild winter weather allowing construction projects to continue and consumers access to retail dealers. In addition, we were able to avoid production shutdowns that occurred due to winter storms during the six month period ended June 30, 2011. Although we remain cautiously optimistic, several challenges such as persistently high national unemployment levels and the threat of more foreclosures continue to hinder a recovery in the housing market. If the current lethargy in the national economy generally, or in the housing market specifically, continues for an extended period of time, our operating results could continue to be negatively affected by such market forces. This ongoing crisis has continued to materially impacted liquidity in the financial markets, reducing the availability of wholesale financing for our industry retailers and consumer financing for purchasers of a manufactured homes. The likelihood that we will be able to sustain or increase our net income in the future must be considered in light of the continuing difficulties facing the manufactured housing industry as a whole, the national and local economies, the credit markets and the financial services industry, the competitive environment in which we operate, and other risks and uncertainties.

Gross Profit. Gross profit for the three month period ended June 30, 2012 was $1,302,101 or 17.0% of total revenue compared to $1,424,857 or 18.1% of total revenue for the three month period ended June 30, 2011, a decrease of 1.10% from the prior year. The decrease is attributable to an increase in raw material costs of 1.80% and an increase in labor costs of .20%, which were partially offset by a decrease in service and warranty costs of 1.20%. Gross profit for the six month period ended June 30, 2012 was $2,135,734 or 16.5% of total revenue compared to $2,190,948 or 17.9% of total revenue for the six month period ended June 30, 2011, a decrease of 1.40% from the prior year. The decrease in gross profit is attributable to an increase in raw material costs of 1.75% and an increase in labor costs of .50%, which were partially offset by a decrease in service and warranty costs of .90%. Gross profit continues to be adversely impacted by pricing competition from competing home providers aggressively pricing products in an effort to obtain a portion of the constricted overall housing market. The Company includes the following types of expenses in cost of sales: purchase and receiving costs, freight in, direct labor, supply costs, warehousing, direct and indirect overhead costs, inspection, transfer, actual and accrued warranty, depreciation, and amortization costs.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses for the three month period ended June 30, 2012 were $998,519 compared to $957,222 for the three month period ended June 30, 2011. The increase in selling, general and administrative expenses, of $41,297 primarily relates to an increase in salary and wages of $77,015, and an increase in legal and professional expenses of $45,439. Selling, general, and administrative expenses for the six month period ended June 30, 2012 were $2,135,681 compared to $1,937,739 for the six month period ended June 30, 2011. The increase in selling, general and administrative expenses, of $197,942 primarily relates to an increase in salary and wages of $82,139, an increase in sales and marketing expenses of $84,579, and an increase in legal and professional expenses of $30,367. The Company includes the following types of expenses in selling, general and administrative expense: sales salaries, sales commissions, bad debt expense, advertising, administrative overhead, administrative salaries and bonuses and legal and professional fees.

Other Income (Expense). Derivative income for the three month period ended June 30, 2012 was $6,230 compared to income of $53,394 for the three month period ended June 30, 2011. Derivative income for the six month period ended June 30, 2012 was $16,465 compared to income of $344,972 for the six month period ended June 30, 2011. Our derivative income represents a change in the fair value of our derivative warrants. Since derivative financial instruments are initially and subsequently carried at fair values, our derivative income/expense will reflect the volatility in these estimates and assumption changes. In August 2011, approximately 73% of our derivative warrants expired, the expiration of these derivative warrants should decrease the volatility in changes in our derivative income (expenses) in future periods. See Note 9 - Derivative Liabilities of the condensed consolidated financial statements for additional disclosure data.

Net Income (Loss). The net income for the three month period ended June 30, 2012 was $179,651 compared to net income of $327,485 for the three month period ended June 30, 2011, representing a decrease in net income of $147,834. The net income (loss) for the six month period ended June 30, 2012 was $(11,056) compared to net income of $462,246 for the six month period ended June 30, 2011, representing a decrease in net income of

 

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$473,302. The decrease in net income for the three and six month period ended June 30, 2012 compared to the three and six month period ended June 30, 2011, is attributable to a decrease in gross profit, an increase in selling, general and administrative expenses, and a decrease in derivative income.

Net Income available to common stockholders - Net income available to common stockholders represents our net income (loss) as adjusted for deemed distribution on redemption on our preferred stock. See Note 11 - Equity Transactions of the condensed consolidated financial statements for additional disclosure data.

Liquidity and Capital Resources

Management believes that the Company currently has sufficient cash flow from operations, available bank borrowings, cash, and cash equivalents to meet its short-term working capital requirements. The Company had $3,904,304 in cash and cash equivalents as of June 30, 2012, compared to $6,170,048 in cash and cash equivalents and short-term investments as of December 31, 2011. The decrease in cash and cash equivalents is primarily attributable to the redemption of all of the Company’s issued and outstanding Series C and Series E Convertible Preferred Stock, together with a block of the Company’s common stock and an option to purchase shares of common stock, for an aggregate purchase price of $3,200,000. Should our costs and expenses prove to 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 or a dramatic increased participation in alternative financing programs for our dealers, our working capital could be depleted at an accelerated rate.

To fund the growth in our dealer finance business, the Company’s operations may require significant use of cash reserves during 2012 compared to prior years. In October 2009, the Company created DVFC, a wholly owned subsidiary. The subsidiary was created to provide inventory-secured loans to qualified retail dealers and developers. Although our dealer finance business is largely funded by advances under its credit facility with Fifth Third Bank, the Company has historically used cash reserves to fund a portion of our financing business.

Effective October 14, 2011, Deer Valley (a) renewed its Revolving Credit Loan and Security Agreement with Fifth Third Bank, used for short term working capital financing, letters of credit and as a bridge loan on financing the sale of retail units by DVHB (the “Working Capital LOC”), and (b) in connection with such renewal, Deer Valley reduced the limits of the Working Capital LOC from $5,000,000 to $3,000,000. Historically Deer Valley has not borrowed up to the line of credit limits under the Working Capital LOC. The reduced limit will reduce Deer Valley’s future unused line fees associated with the Working Capital LOC.

As of June 30, 2012, the aggregate balance on the $5,000,000 Facility and the $3,000,000 Facility was $4,000,000. In addition, we have a real estate loan from Fifth Third that had a balance, as of June 30, 2012, of $1,119,933.

 

  1 - Cash flow from operating activities:

For the six month period ended June 30, 2012, operating activities provided net cash of $1,250,590 primarily as a result of the following:

 

  (a) a decrease in accounts receivable of $1,522,162 (a source of cash), approximately $1.6 million of the decrease in accounts receivable is related to homes manufactured for a government agency, which was offset by

 

  (b) an increase in inventories of $331,379 (a use of cash), primarily as a result of a return to normal production levels subsequent to holiday shutdown period at December 31, 2011 , and

 

  (c) a decrease in income tax payable of $470,325 (use of cash), due to income tax payments made during the period.

 

  2 - Cash flow from investing activities:

The net cash provided by investing activities for the six month period ending June 30, 2012 was $2,899,221, which reflects sales of short-term investments of $2,900,000.

 

  3 - Cash flow from financing activities:

The net cash used in financing activities for the six month period ending June 30, 2012 was $3,515,555, which is primarily attributable to (i) the redemption of all of the Company’s issued and outstanding

 

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Series C and Series E Convertible Preferred Stock, together with a block of the Company’s common stock and an option to purchase shares of common stock, for an aggregate purchase price of $3,200,000 and (ii) a decrease in revolving credit loans of $200,000.

During the six month period ended June 30, 2012 the Company entered into (i) a common stock redemption agreement wherein the Company purchased 1,096,291 shares of common stock; (ii) a securities redemption and purchase agreement wherein (a) the Company purchased 22,463 shares of Series C Preferred and 1,000,000 shares of Series E Preferred, representing 100% of the issued and outstanding shares of each class and linked to 3,246,300 shares of common stock and (b) the Company purchased an option to purchase from Vicis Capital Master Fund’s remaining 12,310,359 shares of common stock (the “Option”). The aggregate purchase price of the stock redemption agreement was $3,200,000.

The Company is contingently liable under the terms of the 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 there under, please see “Reserve for Repurchase Commitments” below.

DVH, during its normal course of business, is required to issue irrevocable standby letters of credit to cover obligations under its workmen compensation insurance policy in the amount of $100,000. As of June 30, 2012, no amounts had been drawn on the above irrevocable letters of credit by the beneficiaries.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. For a description of those estimates, see Note 2, Summary of Significant Accounting Policies, contained in the explanatory notes to the Company’s financial statements for the quarter ended June 30, 2012, contained in this filing and the Company’s Form 10-K for December 31, 2011. 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 believes the Company’s estimates are reasonable. A summary of the most critical accounting estimates employed by the Company in generating financial statements follows below.

Warranties

We provide our retail buyers with a one-year limited warranty covering defects in material or workmanship, including plumbing and electrical systems. We record a liability for estimated future warranty costs relating to homes sold, based upon our assessment of historical experience and industry trends. In making this estimate, we evaluate historical sales amounts, warranty costs related to homes sold and timing in which any work orders are completed. The Company has accrued a warranty liability reserve of $1,240,000 on its balance sheet as of June 30, 2012. Based on management’s assessment of historical experience and current trends in wholesale shipments and dealer inventories we increased our warranty provision by $15,000 for the quarter ended June 30, 2012. 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.

 

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Volume Incentives Payable

We have relied upon volume incentive payments to our independent dealers who retail our products. These volume incentive payments are accounted for as a reduction to gross sales, and are estimated and accrued when sales of our factory-built homes are made to our independent dealers. Volume incentive reserves are recorded based upon the annualized purchases of our independent dealers who purchase a qualifying amount of home products from us. We accrue a liability to our dealers, based upon estimates derived from historical payout rates. We had a reserve for volume incentives payable of $282,692 as of June 30, 2012.

Reserve for Repurchase Commitments

Most of our independent dealers finance their purchases under a wholesale floor plan financing arrangement under which a financial institution provides the dealer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. When entering into a floor plan arrangement, the financial institution routinely requires that we enter into a separate repurchase agreement with the lender, under which we are obligated, upon default by the independent dealer, to repurchase the factory-built home at our original invoice price less the cost of administrative and shipping expenses. Our potential loss under a repurchase obligation depends upon the estimated net resale value of the home, as compared to the repurchase price that we are obligated to pay. This amount generally declines on a predetermined schedule over a period that usually does not exceed 24 months.

The risk of loss that we face under these repurchase agreements is lessened by several factors, including the following:

 

  (i) the sales of our products are spread over a number of independent dealers,

 

  (ii) historically we have had only isolated instances where we have incurred a repurchase obligation, although with the declining market and deteriorating financial conditions of dealer network there is no guarantee that such historical trends will continue,

 

  (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 such agreements amounted to approximately $3,300,000 as of June 30, 2012, as compared to $3,845,000 as of June 30, 2011. As of June 30, 2012 and June 30, 2011, we had reserves of $122,785 and $148,230, respectively, established for future repurchase commitments, based upon our prior experience and evaluation of our independent dealers’ financial conditions. Deer Valley to date has not experienced any significant losses under these agreements; consequently, management does not expect any future losses to have a material effect on our accompanying financial statements.

Allowance for Doubtful Accounts for Inventory Finance Notes Receivable

The Company offers inventory-secured financing for its products to qualified retail dealers and developers. Finance contracts require periodic installments of principal and interest over periods of up to 24 months. The Company periodically evaluates the collectability of our notes receivable and considers the need to establish an allowance for doubtful accounts based upon our historical collection experience. The Company had a total inventory-secured financing receivable of $6,833,497 as of June 30, 2012. We have established an allowance for doubtful accounts of $260,770 as of June 30, 2012 and $153,500 at June 30, 2011.

The risk of loss that we face in connection with inventory-secured financing is lessened by several factors, including the following:

 

  (i) the financing for our products are spread over a number of independent dealers,

 

  (ii) historically we have had only isolated instances where we have had our dealers default on floor plan financing, although with the declining market and deteriorating financial conditions of dealer network there is no guarantee that such historical trends will continue, and

 

  (iii) historically we have been able to resell homes repurchased from third party floor plan lenders at current market prices, although there is no guarantee that we will be able to do so in the future.

Although we maintain an allowance for doubtful accounts, there can be no assurance that such allowance will remain at current levels or that such allowances will be adequate. The Company has not experienced any losses to date.

 

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Impairment of Long-Lived Assets

As previously discussed, the manufactured housing industry has experienced an overall market decline. Addressing the constriction of the retail housing market, in 2008 the Company idled its Sulligent, Alabama plant and thereafter consolidated its production operations at the Company’s larger plant located in Guin, Alabama. In accordance with FASB Topic ASC 420 “Exit on Disposal Cost Obligations”, the Company evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair market values are primarily based on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose. Based on our estimates of the fair value of idled facility no impairment charges have been recorded.

Revenue Recognition

Revenue for our products sold to independent dealers are generally recorded when all of the following conditions have been met: (i) an order for the home has been received from the dealer, (ii) an agreement with respect to payment terms has been received, and (iii) the home has been shipped and risk of loss has passed to the dealer and collectability is reasonably assured.

The Company provides limited inventory-secured financing for its independent dealers. Products shipped to dealers under the Company’s inventory-secured financing program are recorded by the Company as sales and the dealers’ obligations to the Company are reflected as inventory finance note receivables.

Derivative Liability

Effective on January 1, 2009, we adopted the requirements of ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of derivative contracts linked to our equity instruments. Derivative contracts may be classified in equity only when they both are indexed to a company’s own stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) would be considered indexed to an entity’s own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity’s equity shares and a fixed monetary amount. We were unable to continue to carry 21,821,160 warrants in equity because they embodied anti-dilution protections that did not achieve the fixed-for-fixed definition. The reclassification of the fair value of the warrants, amounting to $635,691, to liabilities was recorded on January 1, 2009 as a cumulative effect of a change in accounting principle wherein the original amounts recorded were removed from paid-in capital ($6,172,913) and the difference ($24,673,969), representing the fair value changes, was recorded as an adjustment to beginning accumulated deficit. These derivative liabilities are measured at fair value each reporting period and the changes in the fair value are recorded in our consolidated statement of operations.

The fair value of the derivative warrant liability was $34,486 on December 31, 2011, and $18,021 on June 30, 2012. The change in the warrant liability resulted in a derivative income of $6,230 for the three month period ended June 30, 2012. See Note 8 - Derivative Liabilities of the notes to Condensed Consolidated Financial Statements for additional disclosure data.

Recent accounting pronouncements

Recent accounting pronouncements - We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We believe that the following impending standards may have an impact on our future filings. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a GAAP perspective, the amendments are largely clarification, but some could have a significant effect on certain companies. A number of new disclosures are also required. Except for certain disclosures, the guidance applies to public companies and nonpublic companies and is to be applied prospectively. For public and nonpublic companies, the amendments are effective during interim and annual periods beginning after December 15, 2011.

 

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In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires entities to provide new disclosures in their financial statements about their financing receivables, including credit risk exposures and the allowance for credit losses on a disaggregated basis. In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies when creditors should classify loan modifications as troubled debt restructurings. In addition, ASU 2011-02 deferred the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 to periods beginning after June 15, 2011. The Company has adopted all of the aforementioned provisions of ASU 2010-20 and ASU 2011-02.

 

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer 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 June 30, 2012 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

Changes in Internal Controls over Financial Reporting

During the quarter ended June 30, 2012, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations of the Effectiveness of Disclosure and Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure control system or internal control system are met. Because of the inherent limitations of any disclosure control system or internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

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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

Series A Convertible Preferred Stock - During the six month period ended June 30, 2012 certain shareholders converted 21,500 shares of Series A Preferred stock, par value $215, into 286,667 shares of the Company’s common stock. The conversion represents all of the outstanding shares of the Company’ Series A Preferred stock.

Treasury Stock - Pursuant to a common stock repurchase program approved by our Board of Directors, a total of 1,177,847 shares, inclusive of the shares purchased pursuant to the common stock redemption agreement described below, were purchased during the six month period ended June 30, 2012 at a cost of $616,518 and recorded as treasury stock.

Share Redemption Agreement - During the six month period ended June 30, 2012 the Company entered into (i) a common stock redemption agreement wherein the Company purchased 1,096,291 shares of common stock; (ii) a securities redemption and purchase agreement wherein (a) the Company purchased 22,463 shares of Series C Preferred and 1,000,000 shares of Series E Preferred, representing 100% of the issued and outstanding shares of each class and linked to 3,246,300 shares of common stock and (b) the Company purchased an option to purchase from Vicis Capital Master Fund’s remaining 12,310,359 shares of common stock (the “Option”).

The Option is a freestanding forward contract with a call option (right to buy) element that provides for the Company’s right and option, but not its responsibility, to purchase 12,310,359 shares, and no fewer shares, of its common stock until the Option expiration on June 1,2013. The option provides for graduated exercise prices over the term to expiration: $5,300,000 through June 1, 2012; thereafter, $6,300,000 through August 1, 2012; thereafter, $6,800,000 through December 1, 2012; and thereafter $7,300,000 through the expiration date on June 1, 2013.

 

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Table of Contents

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   (a)
Total
number of
shares
purchased
     (b)
Average
price paid
per share
     (c)
Total number of
shares purchased
as part of publicly
announced
plans or programs
     (d)
Maximum number
(or approximate
dollar value) of
shares that may yet
be purchased under
the plans or
programs
 

Month #1

 

Jan. 1 to Jan. 31, 2012

     17,790       $ .56         0         0   

Month #2

 

Feb. 1 to Feb. 28, 2012

     0         0         0         0   

Month #3

 

March 1 to March 31, 2012

     1,113,196       $ .51         0         0   

Month #4

 

April 1 to April 30, 2012

     6,917       $ .65         0         0   

Month #5

 

May 1 to May 31, 2012

     19,944       $ .70         0         0   

Month #6

 

June 1 to June 30, 2012

     20,000       $ .70         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total (1)

     1,177,847       $ .52         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Total does not include 24,971 shares of the Company’s common stock repurchased by the Company between July 1, 2012 and August 3, 2012 at an average price of $.70 per share.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Reserved

 

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Item 5. Exhibits

 

Exhibit
No.

  

Description

    3.01    Articles of Incorporation of Deer Valley Corporation. (1)
    3.02    Bylaws of Deer Valley Corporation. (1)
    4.01    Certificate of Designation, Rights, and Preferences of Series A Convertible Preferred Stock. (1)
    4.02    Certificate of Designation, Rights, and Preferences of Series B Convertible Preferred Stock. (1)
    4.03    Certificate of Designation, Rights, and Preferences of Series C Convertible Preferred Stock. (1)
    4.04    Certificate of Designation, Rights, and Preferences of Series D Convertible Preferred Stock. (1)
    4.05    Certificate of Designation, Rights, and Preferences of Series E Convertible Preferred Stock. (2)
  10.1    Third Amendment to Revolving Credit Loan and Security Agreement – $5,000,000 (3)
  10.2    Third Amendment to Revolving Credit Loan and Security Agreement – $3,000,000 (3)
  10.3    Fourth Amendment to Loan Agreement – Real Estate Loan (3)
  10.4    First Amended and Restated Employment Agreement – Joel S. Logan (4)
  10.5    First Amended and Restated Employment Agreement – Charles L. Murphree, Jr. (4)
  10.6    First Amended and Restated Employment Agreement – John S. Lawler (4)
  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 August 8, 2012. (5)
  31.02    Certification of 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 August 8, 2012. (5)
  32.01    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 8, 2012. (5)
  32.02    Certification of 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 August 8, 2012. (5)
101.INS    XBRL Instance Document (6)
101.SCH    XBRL Taxonomy Extension Scheme Document (6)
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document (6)
101.LAB    XBRL Taxonomy Extension Label Linkbase Document (6)
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document (6)

 

(1) Previously filed as an exhibit to the Form 8-K, filed with the SEC on July 28, 2006 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Form 10-QSB, filed with the SEC on November 20, 2006 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Form 8-K, filed with the SEC on April 25, 2012 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Form 8-K, filed with the SEC on June 28, 2012 and incorporated herein by reference.
(5) Filed herewith.
(6) Pursuant to Rule 406T of Regulation S-T, these Interactive Data Files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to the liability under these sections.

 

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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: August 8, 2012   By:  

/s/ Charles G. Masters

  Charles G. Masters
  President & Chief Executive Officer