PART I
. FINANCIAL INFORMATION
Item 1
.
Financial Statements
NEVADA CHEMICALS, INC.
Condensed Consolidated
Balance Sheets
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,682,000
|
|
$
|
15,875,000
|
|
Receivables
|
|
70,000
|
|
57,000
|
|
Income tax deposits
|
|
|
|
239,000
|
|
Prepaid expenses
|
|
44,000
|
|
44,000
|
|
|
|
|
|
|
|
Total current assets
|
|
18,796,000
|
|
16,215,000
|
|
|
|
|
|
|
|
Investment in joint venture
|
|
8,245,000
|
|
9,193,000
|
|
Other assets
|
|
351,000
|
|
254,000
|
|
|
|
|
|
|
|
|
|
$
|
27,392,000
|
|
$
|
25,662,000
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities accounts payable and accrued expenses
|
|
$
|
2,365,000
|
|
$
|
1,572,000
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
515,000
|
|
980,000
|
|
|
|
|
|
|
|
Total liabilities
|
|
2,880,000
|
|
2,552,000
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Common stock
|
|
7,000
|
|
7,000
|
|
Capital in excess of par value
|
|
4,286,000
|
|
4,286,000
|
|
Retained Earnings
|
|
20,219,000
|
|
18,817,000
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
24,512,000
|
|
23,110,000
|
|
|
|
|
|
|
|
|
|
$
|
27,392,000
|
|
$
|
25,662,000
|
|
See accompanying notes to condensed
consolidated financial statements
3
NEVADA CHEMICALS, INC.
Condensed Consolidated
Statements of Income
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Revenues and equity in earnings:
|
|
|
|
|
|
Management fee from joint venture
|
|
$
|
212,000
|
|
$
|
206,000
|
|
Equity in earnings of joint venture
|
|
1,672,000
|
|
1,616,000
|
|
|
|
|
|
|
|
Total
|
|
1,884,000
|
|
1,822,000
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
293,000
|
|
202,000
|
|
|
|
|
|
|
|
Operating income
|
|
1,591,000
|
|
1,620,000
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Investment and other income
|
|
777,000
|
|
160,000
|
|
Interest expense
|
|
(11,000
|
)
|
(224,000
|
)
|
|
|
|
|
|
|
Total other income (expense)
|
|
766,000
|
|
(64,000
|
)
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
2,357,000
|
|
1,556,000
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
893,000
|
|
740,000
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,464,000
|
|
$
|
816,000
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
$
|
0.12
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
$
|
0.12
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
Basic
|
|
6,983,000
|
|
6,983,000
|
|
|
|
|
|
|
|
Diluted
|
|
7,000,000
|
|
6,985,000
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.09
|
|
$
|
0.08
|
|
See accompanying notes to condensed
consolidated financial statements
4
NEVADA CHEMICALS, INC.
Condensed Consolidated
Statements of Income
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Revenues and equity in earnings:
|
|
|
|
|
|
Management fee from joint venture
|
|
$
|
571,000
|
|
$
|
607,000
|
|
Equity in earnings of joint venture
|
|
4,052,000
|
|
5,026,000
|
|
|
|
|
|
|
|
Total
|
|
4,623,000
|
|
5,633,000
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
910,000
|
|
1,032,000
|
|
|
|
|
|
|
|
Operating income
|
|
3,713,000
|
|
4,601,000
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Investment and other income
|
|
1,113,000
|
|
464,000
|
|
Interest expense
|
|
(35,000
|
)
|
(224,000
|
)
|
|
|
|
|
|
|
Total other income (expense)
|
|
1,078,000
|
|
240,000
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
4,791,000
|
|
4,841,000
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
1,574,000
|
|
2,706,000
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,217,000
|
|
$
|
2,135,000
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
|
$
|
0.46
|
|
$
|
0.31
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
$
|
0.31
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
Basic
|
|
6,983,000
|
|
6,949,000
|
|
|
|
|
|
|
|
Diluted
|
|
7,001,000
|
|
6,953,000
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.26
|
|
$
|
0.23
|
|
See accompanying notes to condensed
consolidated financial statements
5
NEVADA CHEMICALS, INC.
Condensed Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
3,217,000
|
|
$
|
2,135,000
|
|
Adjustments to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
Depreciation expense
|
|
1,000
|
|
1,000
|
|
Stock option expense
|
|
|
|
269,000
|
|
Equity in earnings of joint venture
|
|
(4,052,000
|
)
|
(5,026,000
|
)
|
Deferred income taxes
|
|
(465,000
|
)
|
(278,000
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Receivables
|
|
(13,000
|
)
|
29,000
|
|
Prepaid expenses
|
|
|
|
22,000
|
|
Other assets
|
|
|
|
(1000
|
)
|
Accounts payable and accrued expenses
|
|
963,000
|
|
785,000
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
(349,000
|
)
|
(2,064,000
|
)
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of life insurance policy
|
|
(83,000
|
)
|
|
|
Purchase of property and equipment
|
|
(15,000
|
)
|
|
|
Distributions from joint venture
|
|
5,000,000
|
|
5,000,000
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
4,902,000
|
|
5,000,000
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
36,000
|
|
Payment of dividends
|
|
(1,746,000
|
)
|
(1,524,000
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(1,746,000
|
)
|
(1,488,000
|
)
|
|
|
|
|
|
|
Net increase in cash
|
|
2,807,000
|
|
1,448,000
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
15,875,000
|
|
16,784,000
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
18,682,000
|
|
$
|
18,232,000
|
|
See accompanying notes to condensed
consolidated financial statements
6
NEVADA
CHEMICALS, INC.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1.
ORGANIZATION AND BASIS OF PRESENTATION
Nevada Chemicals, Inc. (the
Company), through its ownership in Cyanco Company (Cyanco), supplies
chemicals to the gold mining industry in the United States. Winnemucca Chemicals, Inc. (Winnemucca
Chemicals), a wholly owned subsidiary of the Company, has a fifty percent
interest in Cyanco, a non-corporate joint venture engaged in the manufacture
and sale of liquid sodium cyanide. The
Company accounts for its investment in Cyanco using the equity method of
accounting
with the book value of the investment recorded at an amount that
approximates the balance of the Companys capital account as reported in the
financial statements of Cyanco.
Summarized financial information for Cyanco
is included in Note 3.
The accompanying unaudited
condensed consolidated financial statements of the Company have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) on a basis consistent with the Companys audited
annual financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information set forth therein. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to SEC rules and regulations, although
the Company believes that the following disclosures, when read in conjunction
with the audited annual financial statements and the notes thereto included in
the Companys most recent annual report on Form 10-K, are adequate to make the
information presented not misleading.
The results of
operations for the three-month and nine-month periods ended September 30, 2007
are not necessarily indicative of the results to be expected for the full year.
NOTE 2. SIGNIFICANT
ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all investments purchased with original
maturities of three or fewer months to be cash equivalents. Cash equivalents were $5,284,000 and
$15,606,000 as of September 30, 2007 and December 31, 2006, respectively. Cash was $13,398,000 and $269,000 as of
September 30, 2007 and December 31, 2006, respectively. The Company has $200,000 of cash that is federally
insured. All remaining amounts of cash
and cash equivalents exceed federally insured limits.
Deferred Income Taxes
- As part of
the process of preparing consolidated financial statements, the Company is
required to estimate income taxes in each of the jurisdictions in which it
operates. This process involves
estimating the Companys actual current income tax exposure together with
assessing temporary differences resulting from differing treatment of items for
income tax and financial accounting purposes.
These temporary differences result in deferred tax assets and liabilities,
the net amount of which is included in the Companys consolidated balance
sheets. When appropriate, the Company
records a valuation allowance to reduce its deferred tax assets to the amount
that the Company believes is more likely than not to be realized. Through September 30, 2007 the Company had
reduced its deferred tax assets by recording a valuation allowance of $580,000
(see Note 5).
Revenue Recognition
The Companys
revenues and equity in earnings consist primarily of earnings from Cyanco based
on the equity method of accounting and management fees from Cyanco. Equity in net earnings of Cyanco is based on
the Companys 50% ownership in Cyanco, and is calculated and recognized at the
end of each month. Management fee income
from Cyanco is recognized monthly based on the Cyanco joint venture agreement.
Earnings per Common Share
The computation of basic earnings per common share is based on the
weighted average number of shares outstanding during the period. The computation of diluted earnings per
common share is based on the weighted average number of shares outstanding
during the period plus the weighted average common stock equivalents which
would arise from the exercise of stock options outstanding using the treasury
stock method and the average market price per share during the period.
7
The shares used in the
computation of the Companys basic and diluted earnings per share are
reconciled as follows:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted average number of shares outstanding basic
|
|
6,983,000
|
|
6,983,000
|
|
6,983,000
|
|
6,949,000
|
|
Dilutive effect of stock options
|
|
17,000
|
|
2,000
|
|
18,000
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding diluted
|
|
7,000,000
|
|
6,985,000
|
|
7,001,000
|
|
6,953,000
|
|
Stock-Based Compensation
On January 1, 2006, the Company adopted
Statement of Financial
Accounting Standards (SFAS) No. 123(R),
Share-Based
Payment
. SFAS No. 123(R)
replaces SFAS No. 123,
Accounting for
Stock-Based Compensation
, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees
. This statement requires the Company to
measure the compensation cost of stock options and other stock-based
compensation to employees and directors at fair value at the grant date and
recognize compensation expense over the requisite service period for awards
expected to vest. The fair value of
stock options is computed using the Black-Scholes valuation model. No stock options were granted to employees or
directors during the nine months ended September 30, 2007.
Recent Accounting Pronouncements
The FASB has issued SFAS Statement No.
157,
Fair Value Measurements
. This new standard provides enhanced guidance
for using fair value to measure assets and liabilities, and requires expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value.
Under the new standard, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. The standard clarifies
the principle that fair value should be based on the assumptions market
participants would use when pricing the asset or liability. The new standard is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.
Early adoption is permitted. The
Company anticipates adopting SFAS No. 157 on January 1, 2008, but is currently
unable to determine the impact of the adoption of the standard on its
consolidated financial statements.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement No. 115. SFAS
No. 159 allows companies the choice to measure financial instruments and
certain other items at fair value. This allows the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The Statement is effective for fiscal years beginning after
November 15, 2007. The Company is currently reviewing the potential impact,
if any, of SFAS No. 159 on our consolidated financial statements.
NOTE 3.
INVESTMENT IN JOINT VENTURE
Summarized financial information for Cyanco is as
follows:
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
$
|
14,168,000
|
|
$
|
13,688,000
|
|
$
|
38,093,000
|
|
$
|
40,449,000
|
|
Costs and expenses
|
|
10,824,000
|
|
10,455,000
|
|
29,988,000
|
|
30,396,000
|
|
Net income before taxes
|
|
3,344,000
|
|
3,233,000
|
|
8,105,000
|
|
10,053,000
|
|
Companys equity in earnings
|
|
1,672,000
|
|
1,616,000
|
|
4,052,000
|
|
5,026,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cyanco reviews its
long-lived assets, including customer relationships and other intangible
assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. Cyanco assesses the recoverability of the
long-lived assets by comparing the estimated undiscounted cash flows associated
with the related asset or group of assets against their respective carrying
amounts. Cyanco did not have any write
downs during the three months and nine months ending September 30, 2007 and
2006.
NOTE 4.
DIVIDENDS
In August 2007, the
Company declared a cash dividend of $0.09 per share on a total of 6,983,172
shares outstanding
8
of record as of September 20, 2007, which was paid
on October 5, 2007. As of
September 30, 2007, dividends payable of approximately $628,000 were
included in accounts payable and accrued expenses in the accompanying condensed
consolidated balance sheet. In May 2007,
the Company declared a cash dividend of $.09 per share on a total of 6,983,172
shares outstanding of record as of September 20, 2007, which was paid on July
5, 2007. In March 2007, the Company
declared a cash dividend of approximately $559,000, or $.08 per share, on a
total of 6,983,172 shares outstanding of record as of March 22, 2007,
which as paid on April 10, 2007.
In January 2007,
the Company paid dividends of approximately $559,000, which were declared in
December 2006 and were included in accounts payable and accrued expense on
the December 31, 2006 balance sheet
NOTE 5. INCOME
TAXES
Adoption of
Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48)
Effective January 1, 2007, the
Company adopted FIN 48. The validity of any tax position is a matter of tax
law, and generally there is no controversy about recognizing the benefit of a
tax position in a companys financial statements. The tax law is, however,
subject to varied interpretations, and whether a tax position will ultimately
be sustained may be uncertain. Prior to January 1, 2007, the impact of an
uncertain tax position, which did not create a difference between the financial
statement basis and the tax basis of an asset or liability and that would have
future tax consequences, was included in our income tax provision if it was
probable the position would be sustained upon audit. The benefit of any
uncertain tax position that created a basis difference in an asset or liability
was reflected in our tax provision if it was more likely than not that the
position would be sustained upon audit. Prior to the adoption of FIN 48, we
recognized interest expense based on our estimate of the ultimate outcome of
the uncertain tax position. Under FIN 48, the impact of an uncertain tax
position that is more likely than not of being sustained upon audit by the
relevant taxing authority must be recognized at the largest amount that is more
likely than not to be sustained. No portion of an uncertain tax position will
be recognized if the position in the aggregate has less than a 50% likelihood
of being sustained. Also, under FIN 48, interest expense is recognized on the
full amount of the deferred benefit for the uncertain tax position.
The Company recognizes
interest accrued related to unrecognized tax benefits in interest expense and
penalties in operating expenses. During the nine months ended September 30,
2007, the Company recognized approximately $35,000 in interest accrued and
penalties.
The Companys corporate income tax returns filed in
Canada for the years ended December 31, 1995 through 2001 are under audit
by the Canada Customs and Revenue Agency (CCRA). This audit has been ongoing for the past six
years without final resolution. The
first phase of the audit has been completed, and the Company has been assessed
additional income taxes based on positions taken by CCRA on certain matters
that differ from positions taken by the Company.
The Company, based on
consultation with its professional tax advisors in Canada, believes that, in
most instances, the facts and circumstances support the positions taken by the
Company, and has filed with CCRA formal notices of objection for each year
under audit, and the audit has progressed to the appeals level. The timing of the completion of the appeals
process is currently uncertain.
Certain of the Companys United States corporate
income tax returns are currently under audit by the IRS. The IRS has taken the position that the
Company owes additional income taxes, penalties and interest where the IRS has
disagreed with certain tax positions taken by the Company. During 2006 the Company reviewed the position
taken by the IRS and paid certain taxes for which it believes it has
liability. The Company is pursuing the
internal appeal process at the IRS for those positions taken by the IRS with
which the Company disagrees. The
ultimate outcome of the IRS audit and the impact of the final audit results on
the consolidated financial statements of the Company cannot be determined at
this time
.
The Company believes
that amounts accrued and included in accounts payable and accrued expenses at
September 30, 2007 will be adequate for the resolution of the audits by CCRA
and the IRS. However, there can be no
assurance that such costs will not ultimately exceed the current estimate.
The accrual for the potential Canadian
tax liability is payable in Canadian dollars and the company increased this
amount in the third quarter of 2007, based on foreign currency exchange rates
and the strengthening of the Canadian dollar against the U.S. dollar.
9
Deferred tax assets (liabilities) are comprised of
the following:
|
|
September 30,
2007
|
|
December 31,
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
Foreign income taxes and credit carryforwards
|
|
$
|
879,000
|
|
$
|
926,000
|
|
Accrued expenses
|
|
147,000
|
|
136,000
|
|
Stock-based compensation
|
|
92,000
|
|
92,000
|
|
Other
|
|
34,000
|
|
31,000
|
|
Less valuation allowance
|
|
(580,000
|
)
|
(611,000
|
)
|
|
|
572,000
|
|
574,000
|
|
|
|
|
|
|
|
Deferred tax liabilities
depreciation
and amortization
|
|
(1,087,000
|
)
|
(1,554,000
|
)
|
|
|
|
|
|
|
|
|
$
|
(515,000
|
)
|
$
|
(980,000
|
)
|
Due to uncertainties
surrounding the realization of the benefit of certain accrued foreign income
taxes, the Company is currently unable to conclude that the realization of
portions of the deferred tax assets meet the more likely than not criterion
in paragraph 17.e of SFAS No. 109.
Therefore, as of September 30, 2007, the Company had recorded a
valuation allowance of $580,000.
NOTE 6. OTHER INCOME
Other
income for the three and nine months
ended September 30, 2007 includes the amount received by Winnemucca Chemicals,
a wholly-owned subsidiary of the Company, from the July 18, 2007 settlement of
its litigation with Degussa Corporation.
Under terms of the settlement, CyPlus Corporation, an affiliate of
Degussa Corporation, will maintain its ownership of Degussas 50% interest in
Cyanco, Winnemucca Chemicals has a right of first refusal with respect to the
sale of CyPlus or the Cyanco interest, and CyPlus paid Winnemucca Chemicals
$581,000, which includes attorneys fees.
Item 2
. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The operations reported in the condensed consolidated
statements of income for the three months and nine months ended September 30,
2007 and September 30, 2006 consist primarily of the Companys proportionate
share of the operating results from its 50% interest in Cyanco, a non-corporate
joint venture engaged in the manufacture and sale of liquid sodium cyanide,
management fee income from Cyanco, investment income earned on cash and cash
equivalents and short-term investments, and corporate overhead, costs and
expenses. Since the Company does not own
more than 50% of Cyanco, and has determined that other factors requiring
consolidation do not exist, the financial statements of Cyanco are not
consolidated with the financial statements of the Company. Summarized financial information for Cyanco
for the three months and nine months ended September 30, 2007 and September 30,
2006 is presented in Note 3 to the Companys unaudited condensed consolidated
financial statements.
Cyanco represents one of two sources of sodium
cyanide for use in the mining industry in the western United States. E.I. DuPont Nemours (DuPont) is presently
the sole competitor of Cyanco in supplying sodium cyanide to the mining
industry. Sodium cyanide is manufactured
in two distinct forms: (1) as a solid briquette,
which can be shipped economically but, requires an additional dissolution
process before it can be utilized in the mining industry, or (2) sodium
cyanide produced as a liquid and shipped
directly to the mines for immediate use, which is the preferred method by the
mines and is the process currently utilized by Cyanco.
Cyancos sodium cyanide
business is dependent upon the gold mining industry located within the western
United States. Based on a January 2007
report prepared by the U.S. Geological Survey, Mineral Commodity Summaries the
United States is in a tie with Australia as the second leading gold-producing
nation, after South Africa for the 2006 calendar year. Domestic mine output continues to be dominated
by the Nevada region in which Cyanco operates, with about 82% of the gold
produced within the United States according to the Mineral Commodity Summaries
report.
Cyancos business is
subject to competitive demands, dependence on a relatively small number of
customers, fluctuating market prices for energy, raw materials
,
and increases in the cost of labor.
The Company believes that the important competitive factors in the
sodium cyanide market are service, quality and price. Cyanco delivers product to its
10
customers pursuant to supply contracts, which vary
in length. Cyanco must meet competitive
demands in order for its customers to renew product supply contracts as they
expire, and has been able to achieve positive results by being creative and
service-oriented and offering competitive prices.
All of Cyancos sales
occur within the western United States.
Since most of Cyancos cyanide customers are large mining companies, the
number of companies it services is relatively small.
Each large mining concern
may have multiple operating properties within Cyancos operating region.
A
loss of one or more of these customers could adversely affect future sales, and
may have a material adverse effect on the Companys results of operations. Such a loss can occur either from the
customer switching to another source or from the customer electing to close or
suspend a mining operation.
With high or increasing
gold prices, existing gold mining operations tend to expand current operations
and begin the process of permitting for new mines or to reopen old existing
mining operations. However, this
permitting process can take several years.
Although we have continued to see very strong gold prices during the
first nine months of this year, Cyanco financial results show a downturn in
year to date revenue and volume as compared to its banner results in 2006.
This year to date decrease is not attributable to
changes in base customer mix however; it is primarily a result of changes in
the mining operations and activities of Cyanco customers, changes in operations
due to complex ore bodies, challenges of start up and discontinued mining
activities.
In
addition to the changes in mining operations and activities discussed above
Cyancos decline in earnings as compared to the prior year can be explained in
part by
the lag-effect in the Cyanco cost plus pricing agreements, which
historically had two to four month true up provisions. As raw material prices fell during the first
six months of 2006, Cyancos pricing agreements required them to pass along the
reduced costs only after the lag period had expired. This resulted in higher than normal margins
during the first six months of 2006 as compared to the first six months of
2007. Although raw material prices
continue to fluctuate, they have remained comparable to the prior year period
for the three month period ending September 30, 2007. In 2007 Cyanco modified its pricing
agreements to a shorter 30 day true-up provision that would be more
responsive to the fluctuating raw material costs.
Cyanco
results for the three months ended September 30, 2007 show an increase in sales
as compared to the prior year quarter, primarily a result of spot or short term
contract sales, closing the gap on the year to date variance.
We are encouraged by our third quarter results and
find them indicative of the strong gold prices and activities of the mining
industry. Cyancos modified pricing
contracts beginning in 2007, with 30 day true up provisions, will help
eliminate the overall lag-effect on earnings that Cyanco has experienced in the
past.
Although
we are encouraged it should be noted that we cannot predict with certainty
future results as mining operations and activities are continually changing due
to complex ore bodies, challenges of startup discontinued mining activities,
and seasonal variations, all of which are in a continual state of flux and
change.
Critical Accounting Policies
The preparation of financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States requires management to make judgments, estimates and assumptions
that affect the reported amounts in the Companys consolidated financial
statements. The Companys significant
accounting policies are summarized in Note 1 to the Companys consolidated
financial statements and the most critical of such policies are discussed
below.
Investment in
Cyanco
Accounting for
Income Taxes
Stock-Based
Compensation
Investment in Cyanco
As previously
discussed, the Company does not own more than 50% of Cyanco, and as a result,
the financial statements of Cyanco are not consolidated with the financial
statements of the Company. The Company
accounts for its investment in Cyanco using the equity method of
accounting. Equity in earnings of Cyanco
is based on the Companys 50% ownership in Cyanco and is calculated and
recognized at the end of each month.
Management fees from Cyanco are recognized monthly and are calculated as
a percentage of Cyanco revenues based on the joint venture agreement.
The determination of useful lives and depreciation
and amortization methods utilized by Cyanco for its property and equipment and
intangible assets are considered critical accounting estimates. Cyanco management uses its judgment to
estimate the useful lives of long-lived assets, taking into consideration
historical experience, engineering estimates, industry information and other
factors. Inherent in these estimates of useful
lives is the assumption that periodic maintenance will be performed and there
will be an appropriate level of annual capital expenditures. Without on-going capital improvements and
11
maintenance,
productivity and cost efficiency declines and the useful lives of assets would
be shorter.
Cyanco reviews its long-lived assets, including
customer relationships and other intangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. Cyanco
assesses the recoverability of the long-lived assets by comparing the estimated
undiscounted cash flows associated with the related asset or group of assets
against their respective carrying amounts, using assumptions concerning the
following factors:
Contract price
per pound of product delivered
Projected
number of pounds of product to be delivered
Projected life
of the contract, including reasonable assumptions for renewals beyond the
initial contract period
Projected costs
of raw materials
Projected
reductions in cash flows for revenue sharing obligation
If the carrying amount of the asset exceeds the
estimated undiscounted cash flows, the amount of impairment loss recorded in
Cyancos statement of operations is calculated based on the excess of the
carrying amount over the estimated fair value of those assets, calculated using
the discounted cash flows expected during the remaining useful life of the
asset.
Accounting for Income Taxes
- As part of
the process of preparing consolidated financial statements, the Company is
required to estimate income taxes in each of the jurisdictions in which it
operates. This process involves
estimating the Companys actual current income tax exposure together with
assessing temporary differences resulting from differing treatment of items for
income tax and financial accounting purposes.
These temporary differences result in deferred tax assets and
liabilities, the net amount of which is included in the Companys consolidated
balance sheet. When appropriate, the
Company records a valuation allowance to reduce its deferred tax assets to the
amount that the Company believes is more likely than not to be realized. Key assumptions used in estimating a
valuation allowance include potential future taxable income, projected income
tax rates, expiration dates of foreign and other tax credit carryforwards,
anticipated results of tax audits, and ongoing prudent and feasible tax
planning strategies. Through
September 30, 2007 the Company recorded a valuation allowance of
$580,000. If the Company were to
determine that it would be able to realize its deferred tax assets in the
future in excess of the net recorded amount, an adjustment to reduce the
valuation allowance would increase income in the period such determination was
made. Similarly, should the Company
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to increase the valuation allowance
would decrease income in the period such determination was made.
Certain
of the Companys United States and Canadian income tax returns are currently
under audit. The ultimate outcome of
these audits and the impact of the final audit results on the consolidated
financial statements of the Company cannot be determined at this time. The Company believes that amounts accrued and
included in accounts payable and accrued expenses at September 30, 2007
will be adequate for the resolution of the audits. However, there can be no assurance that such
costs will not ultimately exceed the current estimate. The Company reviews the accrued amount at
each balance sheet date. Any increase in
the accrual or the final resolution of the amount due in excess of the accrual
would reduce income in the period such determination is made. Similarly, any decrease in the accrual or
final determination that the amount due is less than the accrual would increase
income in the period such determination is made.
Stock-Based Compensation -
On
January 1, 2006, the Company adopted SFAS No. 123(R), which requires
the Company to measure the compensation cost of stock options and other
stock-based awards to employees and directors at fair value at the grant date
and recognize compensation expense over the requisite service period for awards
expected to vest. The fair value of
stock options is computed using the Black-Scholes valuation model, which model
utilizes inputs that are subject to change over time, including the volatility
of the market price of the Companys common stock, risk-free interest rates,
requisite service periods, and assumptions made by the Company regarding the
assumed life and vesting of stock options and stock-based awards. As new options or stock-based awards are
granted and vest, additional non-cash compensation expense will be recorded by
the Company.
Results of Operations
Three Months Ended September 30, 2007
Equity in earnings of Cyanco increased $56,000, or
3%, to $1,672,000 in the three months ended September 30, 2007 compared to
$1,616,000 in the three months ended September 30, 2006. Cyanco revenues increased $480,000, or 4%, to
$14,168,000 in the three months ended September 30, 2007 compared to
$13,688,000 in the three months ended September 30, 2006. The increase in Cyanco earnings is due
primarily to a slight increase in its gross margin. The increase in Cyanco revenues can be
attributed to an increase in the average sales price, a result of its cost plus
pricing agreements.
12
In addition, we have seen an increase in our spot or short
term contract sales this quarter as compared to the same period last year,
primarily a result of changes in operations and activities of our customers.
In our
previous quarterly reports we have discussed the impact of the lag-effect of
Cyanco cost plus pricing arrangements, which historically had two to four month
true up provisions. As raw material
prices fell during the first six months of 2006, Cyancos pricing agreements
required them to pass along the reduced costs only after the lag period had
expired. This resulted in higher than
normal margins during the first six months of 2006 as compared to the first six
months of 2007. In our current
consolidated financial results for the three months ended September 30,
2007, the lag-effect is no longer applicable as raw material prices, although
continually fluctuating, have remained comparable in the year over year analysis. Additionally, in 2007 Cyanco modified its
pricing agreements to a shorter 30 day true-up provision that would be more
responsive to the fluctuating raw material costs.
Cyancos costs and expenses increased $369,000, or
4%, to $10,824,000 in the three months ended September 30, 2007 compared
to $10,455,000 in the three months ended September 30, 2006. The increase in operating costs in the three
months ended September 30, 2007 resulted primarily from an increase in
production for the period. Cyancos net
income before taxes (on a 100% basis) increased $111,000, or 3%, to $3,344,000
during the three months ended September 30, 2007 compared to $3,233,000 in
the three months ended September 30, 2006.
The increase in net income is a result of the increase in our average
sales price and gross margin.
We are encouraged by Cyancos third quarter results
and find them indicative of the strong gold prices and activities of the mining
industry. The changes in Cyanco pricing
contracts beginning in 2007, with 30 day true up provisions, will help eliminate
the overall lag-effect that we have experienced in the first six months of this
year as compared to the prior year.
Although we are encouraged it should be noted that we cannot predict with
certainty future results as mining operations and activities are continually
changing due to complex ore bodies, challenges of startup and discontinued
mining activities, and seasonal variations, all of which are in a continual
state of flux and change.
Management fee income from Cyanco increased $6,000,
or 4%, to $212,000 in the three months ended September 30, 2007 compared
to $206,000 in the three months ended September 30, 2006, due to the
increase in Cyancos revenues discussed above, upon which the management fee is
computed.
Investment and other
income increased $617,000, or 386%, to $777,000 in the three months ended
September 30, 2007 compared to $160,000 in the three months ended
September 30, 2006. This unusual
increase is due primarily to the settlement of Winnemucca Chemicals litigation
with Degussa Corporation. Under the
terms of the agreement, CyPlus (Degussa) was required to pay $581,000 to Nevada
Chemicals, which included attorneys fees.
The additional increase of $36,000 is the result of an increase in the
average balance of cash and cash equivalents during the period and an increase
in interest rate on investments and cash during the current period.
General and
administrative expenses increased $91,000, or 45%, to $293,000 in the three
months ended September 30, 2007 compared to $202,000 in the three months
ended September 30, 2006.
This increase
is due primarily to an increase in wages
and benefits expense of $53,000 due to the recent addition of two full time
employees and $31,000 increase in legal fees.
Interest expense decreased $213,000 or 95% to
$11,000 in the three months ending September 30, 2007 compared to $224,000
in the three months ended September 30, 2006. This decrease is the result of accruing and
expensing $224,000 in 2006, an amount representing estimated interest charges
over a period of several years on certain assessments related to the U.S.
corporate income tax audits.
The Company recorded a provision for income tax
expense for the three month period ended September 30, 2007 and 2006 of
$893,000 and $740,000 respectively. The
provision increased due to higher income for the current period as a result of
increased sales at Cyanco and the litigation settlement with Degussa.
Nine
Months Ended September 30, 2007
Equity in earnings of Cyanco decreased $974,000, or
19%, to $4,052,000 in the nine months ended September 30, 2007 compared to
$5,026,000 in the nine months ended September 30, 2006. Cyanco revenues decreased $2,356,000, or 6%,
to $38,093,000 in the nine months ended September 30, 2007 compared to
$40,449,000 in the nine months ended September 30, 2006. The Cyanco revenue and earnings have been
positively impacted by its third quarter results, which posted a 4% increase in
sales as compared to the prior year quarter, primarily the result of an
increase in the average sales price, a slight increase in gross margin,
increased mining activities, and an increase in
the spot or short term contract sales.
These positive
13
results have slightly closed the gap on the year over year
variances and results.
Although we have
continued to see very strong gold prices during the first nine months of this
year, Cyanco financial results show a downturn in revenue and volume as
compared to its banner results in 2006.
This year to date decrease is not
attributable to changes in our base customer mix however; it is primarily a
result of changes in mining operations and activities of its customers. Seasonal variations, changes in operations
due to complex ore bodies, challenges of start up and discontinued mining
activities.
In
addition to the changes in mining operations and activities discussed above
Cyancos decline in earnings as compared to the prior year can be explained in
part by
the lag-effect in its cost plus pricing agreements, which historically
had two to four month true up provisions.
As raw material prices fell during the first six months of 2006, Cyancos
pricing agreements required it to pass along the reduced costs only after the
lag period had expired. This resulted in
higher than normal margins during the first six months of 2006 as compared to
the first six months of 2007. Although
raw material prices continue to fluctuate, they have remained comparable in our
year over year results for the three month period ending September 30,
2007. In 2007 Cyanco modified its
pricing agreements to a shorter 30 day true-up provision that would be more
responsive to the fluctuating raw material costs.
Cyancos costs and expenses decreased $408,000, or
1%, to $29,988,000 in the nine months ended September 30, 2007 compared to
$30,396,000 in the nine months ended September 30, 2006. The decrease in operating costs in the
current year resulted primarily from a 6% reduction in the volume of product
sold, partially offset by the increase in the cost of certain key raw materials
compared to the first nine months of last year.
As a result, Cyancos net income before taxes (on a 100% basis)
decreased $1,948,000, or 19%, to $8,105,000 during the nine months ended
September 30, 2007 compared to $10,053,000 in the nine months ended
September 30, 2006.
Management fee income from Cyanco decreased $36,000,
or 6%, to $571,000 in the nine months ended September 30, 2007 compared to
$607,000 in the nine months ended September 30, 2006, due to the decrease in
Cyancos revenues discussed above, upon which the management fee is computed.
Investment and other
income increased $649,000, or 140%, to $1,113,000 in the nine months ended
September 30, 2007 compared to $464,000 in the nine months ended September 30,
2006. This increase is due primarily to
an increase in the average balance of cash and cash equivalents during the
period, an increase in the interest rate, and the settlement of Winnemucca
Chemicals litigation with Degussa Corporation.
Under the terms of the settlement agreement, CyPlus (Degussa) was
required to pay $581,000 to Nevada Chemicals, which included attorneys fees.
General and
administrative expenses decreased $122,000, or 12%, to $910,000 in the nine
months ended September 30, 2007 compared to $1,032,000 in the nine months ended
September 30, 2006.
This decrease
is due to primarily to a non-cash stock based compensation expense of $269,000
recorded in 2006 and no corresponding charges present in 2007, offset by an
increase in wages expense of $140,000 due to the recent additions of two full
time employees.
The results of
operations for the nine month period ended September 30, 2007 have been
positively impacted by the Company adjusting its estimates of the amount of
taxes, penalties and interest that will be due in Canada related to the ongoing
audit of the Companys Canadian tax returns. (see note 5 to the accompanying
condensed consolidated financial statements).
The adjustment was based on a more likely than not assessment of our
current tax liabilities associated with our Canadian tax positions.
As a result, the provision for income taxes reported in the Companys
condensed consolidated statements of income for the nine months ended September
30, 2007 is lower than amounts which would be computed by applying the
statutory federal income tax rate to income before provision for income taxes,
resulting in higher net income. The
provision for income taxes was negatively impacted in the first nine months of
2006 as the Company accrued and expensed an additional $883,000 related to tax
audits.
The Company believes that amounts accrued
and included in accounts payable and accrued expenses at September 30, 2007
will be adequate for the resolution of the audits by CCRA and the IRS. However, there can be no assurance that such
costs will not ultimately exceed the current estimate.
Liquidity and Capital Resources
At September 30, 2007,
the liabilities of the Company consisted of current liabilities of $2,365,000
and deferred income taxes of $515,000.
Current liabilities consisted of trade accounts payable of $19,000,
dividends payable of $628,000 and accrued expenses (comprised primarily of
accrued income taxes and related interest expense) of $1,718,000. These current liabilities compare favorably
to total current assets of $18,796,000 at September 30, 2007. Current assets were comprised primarily of
cash and cash equivalents of $18,682,000.
The Companys current
strategy is to invest cash in excess of short-term operating needs in highly
liquid, variable interest rate investments with maturities of 90 days or
less. The Board of Directors of the
Company is currently evaluating
14
alternative uses for the cash of the Company,
including optimizing short-term investment results without exposing the Company
to high levels of market risk, diversification of the Companys business,
additional investment in Cyanco, and the payment of dividends to
shareholders. The Board of Directors is
also looking at strategic opportunities to leverage our patents and technology
related to the manufacturing of sodium cyanide in other strategic potential
on-site manufacturing facilities.
Net cash used in
operating activities for the nine months ended September 30, 2007 was $349,000
compared to net cash used in operating activities of $2,064,000 for the nine
months ended September 30, 2006.
This decrease in net cash used in operations is due primarily to the
decreased equity in earnings of Cyanco, decreased general and administrative
expenses, and an increase in net income over the prior year. Because the Company accounts for its
investment in Cyanco using the equity method, equity in earnings of Cyanco, a
non-cash item, is eliminated from operating activities in the condensed
consolidated statements of cash flows, with cash distributions from Cyanco
included in cash flows from investing activities.
Net cash provided by
investing activities was $4,902,000 for the nine months ended September 30,
2007, and $5,000,000 for the nine months ended September 30, 2006. The distributions from Cyanco in the current
and prior year are equivalent, with the current years balance offset by the
purchase of equipment and a life insurance policy.
Net cash used in
financing activities was $1,746,000 for the nine months ended September 30,
2007, consisting of the payment of dividends of $1,746,000 Net cash used in financing activities was
$1,488,000 for the nine months ended September 30, 2006, consisting of the
payment of dividends of 1,524,000, offset by proceeds from the exercise of
stock options of $36,000.
The Company considers
its cash resources sufficient to meet the operating needs of its current level
of business for the next twelve months.
The Companys operations
have not been, and are not expected to be, materially affected by inflation.
Forward Looking Statements
Within this quarterly report on Form 10-Q, including
the discussion in this Item 2, there are forward-looking statements made in an
effort to inform the reader of managements expectation of future events. These expectations are subject to numerous
factors and assumptions, any one of which could have a material effect on
future results. The factors which may
impact future operating results include, but are not limited to, decisions made
by Cyancos customers as to the continuation, suspension, or termination of
mining activities in the area served by Cyanco; decisions made by Cyancos
customers with respect to the use or sourcing of sodium cyanide used in their
operations; changes in world supply and demand for commodities, particularly
gold; changes in the costs of raw materials, labor, and consumables used by
Cyanco in the production of sodium cyanide; political, environmental,
regulatory, economic and financial risks; resolution of contingencies related
to the audits of the Companys U.S. and Canadian income tax returns; major
changes in technology which could affect the mining industry as a whole or
which could affect sodium cyanide specifically; competition; and the continued
availability of qualified technical and other professional employees of the
Company and Cyanco. Many of these risks
are outside the control of the Company, and the actions taken by the Company
may not be sufficient to avoid the adverse consequences of one or more of the
risks. Consequently, the actual results
could differ materially from those indicated in the statements made.
Item 3
. Quantitative and Qualitative Disclosure About
Market Risk
A significant portion of the Companys cash
equivalents bear variable interest rates that are adjusted to market
conditions. Changes in market rates will
affect interest earned on these instruments, and potentially the carrying value
of the investments. The Company does not
utilize derivative instruments to offset the exposure to interest rates. The cash equivalents and short-term
investments are placed in a variety of products with different
institutions. Significant changes in
interest rates could have an impact on the Companys consolidated financial
position and results of operations.
Assuming that the balance of cash and cash equivalents at
September 30, 2007 of $18,682,000 was outstanding during the 2007 year, a
1% change in interest rates would result in a change of annual earnings of
approximately $187,000.
The Company has no current foreign operations;
however some of the Companys prior year Canadian tax returns are currently
under audit. Although the ultimate
outcome of this audit and the impact of the final results on the consolidated
financial statements cannot be determined at this time, the Company has accrued
and included in its accounts payable and accrued expenses a Canadian tax
liability, which it believes will be adequate for the resolution of the audits. This Canadian tax liability is subject to
foreign currency fluctuations and is accounted for and adjusted on the Companys
consolidated financial statements. (see note 5).
15
Item
4
. Controls
and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and
procedures designed to ensure that information required to be disclosed in its
reports filed under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized, and reported within the required
time periods and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, as
appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objective, and management
is required to exercise its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the
Exchange Act, management conducted an evaluation, under the supervision and
with the participation of the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of September 30, 2007. Based on this evaluation, the chief executive
officer and the chief financial officer have concluded that our disclosure
controls and procedures were effective as of the period covered by this quarterly
report.
Change in Internal Control Over Financial Reporting
There
have not been any changes in the Companys internal controls over financial
reporting identified in connection with the evaluation of disclosure controls
and procedures discussed above that occurred during the quarter ended September
30, 2007 or subsequent to that date that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
PART II
. OTHER INFORMATION
Item
1
. Legal
Proceedings
The
wholly-owned subsidiary of the Company, Winnemucca Chemicals, has reached a
settlement of the claims asserted in WINNEMUCCA CHEMICALS, INC. vs. DEGUSSA
CORPORATION and CYPLUS CORPORATION, Case No.: CV-N-04-364-ECR (RAM), filed
January 5, 2004. On July 18, 2007,
Winnemucca Chemicals, a wholly-
owned subsidiary of the Company, reached a settlement
of the litigation with Degussa Corporation.
The dispute arose over the transfer by
Degussa Corporation of its 50% joint venture interest in Cyanco to CyPlus
Corporation. CyPlus is an indirect,
wholly-owned subsidiary of Degussa GmbH in Germany, which is also the direct
parent of Degussa Corporation. This
litigation had no impact on the operations of Cyanco.
The
settlement
allows CyPlus to maintain ownership of Degussa Corporations 50% ownership
interest in Cyanco, grants Winnemucca Chemical a right of first refusal with
respect to the sale of CyPlus or the Cyanco interest, and required that CyPlus
to pay Winnemucca Chemicals $581,000, which included legal costs incurred by
Winnemucca Chemicals. In addition, in
December 2006 CyPlus paid Winnemucca Chemicals $128,000 in settlement of its
claims to recover commissions under the distribution agreement, which amount
also included legal fees incurred by Winnemucca Chemicals.
The
Company is, from time to time, subject to legal proceedings arising out of the
normal conduct of its business, which the Company believes are not material to
its financial position or results of operations.
Item
1A
. Risk
Factors.
The business and operations of the Company,
particularly through its 50% ownership in Cyanco, are subject to risks. In addition to considering the other
information in this report, you should consider carefully the following factors
in deciding whether to invest in the Companys securities. If any of these risks occur, or if other
risks not currently anticipated or fully appreciated occur, the Companys
business and prospects could be materially adversely affected, which could have
an adverse effect on the trading price for our shares.
The number of Cyanco customers is relatively small and
a loss of one or more customers could adversely affect future Cyanco sales, and
may have a material adverse effect on the Companys results of operations.
All of the Companys sales occur within the western
United States. Since most of Cyancos
cyanide customers are large mining companies, the number of companies it
services is relatively small compared to those of a wholesale distribution
16
or
retail business. A loss of one or more
customers could adversely affect future sales, and may have a material adverse
effect on the Companys results of operations.
Price increases in energy and other raw materials
could have a significant impact on Cyancos ability to sustain and grow
earnings.
Cyancos manufacturing processes consume significant
amounts of natural gas, electricity and other raw materials, such as ammonia
and caustic soda. The prices of energy
and raw materials are subject to worldwide supply and demand as well as other
factors beyond the control of Cyanco.
The Company expects energy costs to remain high and volatile in the near
future, which may result in further increases in Cyanco costs. Significant variations in the cost of energy
and raw materials affect Cyancos operating results. When possible, Cyanco purchases raw materials
through negotiated long-term contracts to minimize the impact of price
fluctuations. Success in offsetting higher
raw material costs with price increases is largely influenced by competitive
and economic conditions and could vary significantly depending on the market
served. Cyanco does have the ability,
under certain of its contracts, to pass on increases in the cost of raw
materials to its customers. If Cyanco is
not able to fully offset the effects of higher energy and raw material costs,
it could have a significant impact on Cyancos financial results and on the
Companys equity in earnings of Cyanco.
Cyanco is subject to risks caused by the production of
hazardous materials, including legal liability created by its operations.
Cyancos operations are subject to the hazards and
risks normally incident to production of a hazardous material, any of which
could result in damage to life, property, or the environment. Cyanco may be subject to significant legal
liability for any damage caused by its operations, which could be substantial.
Changes to the extensive regulatory and environmental
rules and regulations to which Cyanco is subject could have a material adverse
effect on Cyancos future operations.
In addition to normal laws and regulations
applicable to companies, Cyancos operations are subject to various additional
laws and regulations governing the protection of the environment, production of
chemicals, occupational health, waste disposal, toxic substances, and other
similar matters. New laws and
regulations, amendments to existing laws and regulations, or more stringent
implementation of existing laws and regulations could have a material adverse
impact on Cyanco, increase costs, and cause a reduction in levels of
production. Compliance with these laws
and regulations requires significant expenditures and increases the operating
costs of Cyanco. Changes in regulations
and laws could adversely affect Cyancos operations or substantially increase
the costs associated with those operations.
The Company may not be able to control the decisions
and strategy of joint ventures to which it is a party.
Through its wholly owned subsidiary, Winnemucca
Chemicals, Inc., the Company holds a 50% interest in Cyanco. Because the Company shares ownership in
Cyanco with another chemical company, it is subject to the risks normally
associated with the conduct of joint ventures.
The existence or occurrence of one or more of the following
circumstances and events could have a material adverse impact on the Companys
profitability or the viability of its interests held through the joint venture,
which could have a material adverse impact on the Companys results of
operations and financial condition:
inability to exert influence over
certain strategic decisions made in respect of joint venture operations;
inability of partners to meet
their obligations to the joint venture or third parties; and
litigation between partners
regarding joint venture matters.
Cyancos production of liquid sodium cyanide is
subject to risks related to environmental liability.
The production of liquid sodium cyanide is subject
to extensive federal, state and local laws, regulations, rules and ordinances
relating to pollution, protection of the environment and the generation,
storage, handling, transportation, treatment, disposal and remediation of
hazardous substances and waste materials.
Actual or alleged violations of environmental laws or permit
requirements could result in restrictions or prohibitions on plant operations,
substantial civil or criminal sanctions, as well as assessment of
liabilities. The payment of related liabilities
would reduce funds otherwise available and could have a material adverse effect
on the Company. Should Cyanco be unable
to fund fully the cost of remedying an environmental problem, Cyanco might be
required to suspend operations or enter into interim compliance measures
pending completion of the required remedy, which could have a material adverse
effect on the operations and business of the Company.
17
The business of Cyanco would be adversely affected by
the loss of services or infrastructure near its production site.
Production of liquid sodium cyanide depends, to one
degree or another, on adequate infrastructure.
Reliable roads, railroad lines, bridges, power sources, and water supply
are important determinants which affect capital and operating costs. A lack of such infrastructure or unusual or
infrequent weather phenomena, sabotage, terrorism, government, or other
interference in the maintenance or provision of such infrastructure could adversely
affect Cyancos operations, financial condition, and results of operations.
Shortage of supplies could adversely affect Cyancos
ability to operate.
Cyanco is dependent on various supplies and
equipment to carry out its chemical production.
Cyanco may not be able to control its receipt of necessary supplies or
equipment. The shortage of such
supplies, equipment and parts could have a material adverse effect on the
Companys ability to carry out its operations and therefore limit or increase
the cost of production.
Cyanco requires the issuance and renewal of licenses
and permits in order to conduct its operations, and failure to receive these
licenses may result in delays in development or cessation of certain
operations.
The operations of Cyanco require licenses and
permits from various governmental authorities, and the process for obtaining
licenses and permits from governmental authorities often takes an extended
period of time and is subject to numerous delays and uncertainties. Such licenses and permits are subject to
change in various circumstances. Cyanco
may be unable to timely obtain or maintain in the future all necessary licenses
and permits that may be required to continue operations that economically
justify the cost.
A substantial or extended decline in gold prices would
have a material adverse effect on the Company.
The profitability of Cyancos operations and
ultimately the earnings of the Company are significantly affected by changes in
the market price of gold. Demand for
liquid sodium cyanide is affected by the level of gold exploration and
development, which is in turn affected by the price of gold. Gold prices fluctuate on a daily basis and
are affected by numerous factors beyond the control of the Company. The supply and demand for gold, the level of
interest rates, the rate of inflation, investment decisions by large holders of
gold, including governmental entities, and changes in exchange rates can all
cause significant fluctuations in gold prices.
Such external economic factors are in turn influenced by changes in
international investment patterns and monetary systems and political
developments. The price of gold has
fluctuated widely and future serious price declines could cause continued
commercial production to be impractical.
Depending on the price of gold, cash flow from mining operations may not
be sufficient to cover costs of production and capital expenditures, which may
cause gold mining companies to suspend or terminate operations. In such event, demand for Cyancos product
would decrease.
Local, state and federal governments have begun a
regulatory process that could lead to new regulations impacting the security of
chemical plant locations and the transportation of hazardous chemicals.
Growing public and political attention has been
placed on protecting critical infrastructure, including the chemical industry,
from security threats. Terrorist attacks
and natural disasters have increased concern regarding the security of chemical
production and distribution. In
addition, local, state and federal governments have begun a regulatory process
that could lead to new regulations impacting the security of chemical plant
locations and the transportation of hazardous chemicals, which could result in
higher operating costs and interruptions in normal business operations at
Cyanco.
Cyancos insurance may not cover the risks to which
its business is exposed.
Cyancos business is subject to a number of risks
and hazards generally, including adverse environmental conditions, industrial
accidents, changes in the regulatory environment and natural phenomena such as
inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to
production facilities, personal injury or death, environmental damage to Cyancos
properties or the properties of others, delays in production, monetary losses
and legal liability. Available insurance
does not cover all the potential risks associated with a chemical companys
operations. Cyanco may also be unable to
maintain insurance to cover insurable risks at economically feasible premiums,
and insurance coverage may not be available in the future or may not be
adequate to cover any resulting loss. As
a result, Cyanco might become subject to liability for pollution or other
hazards for which it is uninsured or for which it elects not to insure because
of premium costs or other reasons.
Losses from these events may cause Cyanco to incur significant costs
that could have a material adverse effect upon the Companys financial
condition and results of operations.
18
The business of Cyanco is dependent on good labor and
employment relations.
Production at Cyancos facilities is dependent upon
the efforts of employees of Cyanco.
Relationships between Cyanco and its employees may be impacted by
changes in labor relations which may be introduced by, among others, employee
groups, unions, and the relevant governmental authorities in whose
jurisdictions Cyanco carries on business.
Adverse changes in such legislation or in the relationship between
Cyanco and its employees may have a material adverse effect on Cyancos
business, and the results of operations and financial condition of the Company.
Future changes to tax accruals or the final resolution
of tax audits may adversely affect the results of operations in applicable
periods.
Certain of the Companys United States and Canadian
income tax returns are currently under audit.
The ultimate outcome of these audits and the impact of the final audit
results on the consolidated financial statements of the Company cannot be
determined at this time. The Company has
accrued estimated amounts and has amounts on deposit for the potential outcome
of these audits, but there can be no assurance that such costs will not
ultimately exceed the current estimate.
In addition, the accrual for the potential tax liability in the Canadian
audit is subject to change based on the foreign currency exchange rates between
the Canadian and U.S. dollar. The recent
increase in the strength of the Canadian dollar has resulted in an increase in
the accrued amount, which is expressed in U.S. dollars. The Company reviews the accrued amounts at
each balance sheet date. Any increase in
the accrual or the final resolution of the amount due in excess of the accrual
would reduce income in the period such determination is made. Similarly, any decrease in the accrual or
final determination that the amount due is less than the accrual would increase
income in the period such determination is made. Consequently, the Companys results of
operations for any particular period may be affected by these adjustments,
unrelated to the results of the current business operations of the Company for
that period, which may affect the price for the Companys common shares in the
trading market.
Changes in the market price of Company common shares
may be unrelated to its results of operations and could have an adverse impact
on the Company.
The Companys common shares are listed on the
National Association of Securities Dealers Automated Quotation system (Nasdaq). The price of the Companys common shares is
likely to be significantly affected by short-term changes in the market price
of gold or in its financial condition or results of operations as reflected in
its quarterly earnings reports. A drop
in trading volume and general market interest in the securities of the Company
may adversely affect an investors ability to liquidate an investment and
consequently an investors interest in acquiring a significant stake in the
Company. A failure of the Company to
meet the reporting and other obligations under U.S. securities laws or imposed
by Nasdaq could result in a delisting of Company common shares. A substantial decline in the price of Company
common shares that persists for a significant period of time could cause
Company common shares to be delisted from the Nasdaq, further reducing market
liquidity. As a result of any of these
factors, the market price of the common shares at any given point in time may
not accurately reflect the Companys long-term value. Securities class action litigation often has
been brought against companies following periods of volatility in the market
price of their securities. The Company
may in the future be the target of similar litigation, which could result in
substantial costs and damages and divert managements attention and resources.
The Company has paid dividends in the past but future
dividends are not guaranteed.
The Company has paid dividends in recent history and
anticipates that it will continue to do so in the future. However, continued payment of dividends is
subject to the discretion of the Companys board of directors, after taking
into account many factors, including the Companys operating results, financial
condition, and current and anticipated cash needs. There is no guarantee that the Company will
continue to pay dividends in the future.
The loss of key executives could adversely affect the
Company.
The Company has a small executive management team. In the event that the services of an
executive were no longer available, the Company and its business could be
adversely affected. The Company carries
key-man life insurance with respect to its chief executive officer.
The Company may be subject to litigation in the
future.
Legal proceedings that could be brought against the
Company or Cyanco in the future, for example, litigation based on its business
activities, environmental laws, volatility in its stock price, or failure of
its disclosure obligations, could have a material adverse effect on the Companys
financial condition or prospects.
19
Item
6
. Exhibits
Exhibit 31.1 Certification of principal
executive officer pursuant to Rule 13a -14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of principal
financial officer pursuant to Rule 13a -14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of principal
executive officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
Exhibit 32.2 Certification of principal
financial officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
Exhibit 99.1 Press Release Dated October 30,
2007
20
SIGNATURES
In accordance with the requirements of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
NEVADA CHEMICALS, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
October 30, 2007
|
|
/s/ John T. Day
|
|
(Date)
|
John T. Day, President (principal executive officer)
|
|
|
|
|
|
|
|
|
October 30, 2007
|
|
/s/ Kevin L. Davis
|
|
(Date)
|
Kevin L. Davis, Chief Financial Officer (principal
financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
21
Nevada Chemicals (NASDAQ:NCEM)
Graphique Historique de l'Action
De Avr 2024 à Mai 2024
Nevada Chemicals (NASDAQ:NCEM)
Graphique Historique de l'Action
De Mai 2023 à Mai 2024