Annual Reports

 
Quarterly Reports

  • 10-Q (Jul 31, 2008)
  • 10-Q (May 2, 2008)
  • 10-Q (Oct 30, 2007)
  • 10-Q (Aug 1, 2007)
  • 10-Q (May 8, 2007)
  • 10-Q (Oct 31, 2006)

 
8-K

 
Other

Nevada Chemicals 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-99.1
  7. Ex-99.1

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

 

 

ý

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the quarterly period ended March 31, 2006

 

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the transition period from                 to                

 

Commission File No. 0-10634

 


 

Nevada Chemicals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Utah

87-0351702

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

9149 So. Monroe Plaza Way, Suite B

Sandy, Utah 84070

(Address of principal executive offices, zip code)

 

(801) 984-0228

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 ý  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Large Accelerated Filer o

Accelerated Filer o

Non-accelerated Filer ý

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

 

The number of shares outstanding of the registrant’s par value $0.001 Common Stock as of April 27, 2006 was 6,983,172.

 

 



 

Nevada Chemicals, Inc.

Form 10-Q

Table of Contents

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and March 31, 2005 (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and March 31, 2005 (Unaudited)

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 2.

Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

 

2



PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

NEVADA CHEMICALS, INC.

Condensed Consolidated Balance Sheets

 

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

17,228,000

 

$

16,784,000

 

Receivables

 

103,000

 

94,000

 

Prepaid expenses

 

54,000

 

48,000

 

 

 

 

 

 

 

Total current assets

 

17,385,000

 

16,926,000

 

 

 

 

 

 

 

Investment in joint venture

 

9,545,000

 

8,975,000

 

Other assets

 

235,000

 

236,000

 

 

 

 

 

 

 

 

 

$

27,165,000

 

$

26,137,000

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities — accounts payable and accrued expenses

 

$

4,234,000

 

$

3,559,000

 

 

 

 

 

 

 

Deferred income taxes

 

826,000

 

1,068,000

 

 

 

 

 

 

 

Total liabilities

 

5,060,000

 

4,627,000

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

7,000

 

7,000

 

Capital in excess of par value

 

3,751,000

 

3,751,000

 

Retained earnings

 

18,347,000

 

17,752,000

 

 

 

 

 

 

 

Total stockholders’ equity

 

22,105,000

 

21,510,000

 

 

 

 

 

 

 

 

 

$

27,165,000

 

$

26,137,000

 

 

See accompanying notes to condensed consolidated financial statements

 

3



 

NEVADA CHEMICALS, INC.

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Revenues and equity in earnings:

 

 

 

 

 

Management fee from joint venture

 

$

198,000

 

$

140,000

 

Equity in earnings of joint venture

 

1,570,000

 

694,000

 

 

 

 

 

 

 

Total

 

1,768,000

 

834,000

 

 

 

 

 

 

 

General and administrative expenses

 

311,000

 

174,000

 

 

 

 

 

 

 

Operating income

 

1,457,000

 

660,000

 

 

 

 

 

 

 

Investment and other income

 

150,000

 

92,000

 

 

 

 

 

 

 

Income before provision for income taxes

 

1,607,000

 

752,000

 

 

 

 

 

 

 

Provision for income taxes

 

529,000

 

247,000

 

 

 

 

 

 

 

Net income

 

$

1,078,000

 

$

505,000

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.16

 

$

0.07

 

 

 

 

 

 

 

Diluted

 

$

0.15

 

$

0.07

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

Basic

 

6,901,000

 

6,816,000

 

 

 

 

 

 

 

Diluted

 

6,978,000

 

6,890,000

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.07

 

$

0.06

 

 

See accompanying notes to condensed consolidated financial statements

 

4



 

NEVADA CHEMICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,078,000

 

$

505,000

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation expense

 

1,000

 

1,000

 

Equity in earnings of joint venture

 

(1,570,000

)

(694,000

)

Deferred income taxes

 

(242,000

)

(186,000

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

(9,000

)

(17,000

)

Prepaid expenses

 

(6,000

)

(8,000

)

Other assets

 

 

6,000

 

Accounts payable and accrued expenses

 

675,000

 

446,000

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(73,000

)

53,000

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Distributions from joint venture

 

1,000,000

 

1,000,000

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payment of dividends

 

(483,000

)

(408,000

)

 

 

 

 

 

 

Net increase in cash

 

444,000

 

645,000

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

16,784,000

 

15,972,000

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

17,228,000

 

$

16,617,000

 

 

See accompanying notes to condensed consolidated financial statements

 

5



 

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 Company’s capital account as reported in the financial statements of Cyanco.  Summarized financial information for Cyanco is included in Note 3.

 

The interim financial information of the Company for the three-month periods ended March 31, 2006 and March 31, 2005 included herein is unaudited, and the balance sheet as of December 31, 2005 is derived from audited financial statements.  These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements.  Accordingly, they do not include all the information and disclosures normally required by accounting principles generally accepted in the United States for complete financial statements.  Such financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods.  These adjustments are of a normal recurring nature.

 

The results of operations for the three-month period ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.

 

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation.

 

 

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Cash EquivalentsThe Company considers all investments purchased with original maturities of three or fewer months to be cash equivalents.  Cash equivalents were $17,072,000 and $16,484,000 as of March 31, 2006 and December 31, 2005, respectively.  Cash was $156,000 and $300,000 as of March 31, 2006 and December 31, 2005, respectively.  The Company has $200,000 of cash that is federally insured.  All remaining amounts of cash and cash equivalents exceed federally insured limits.

 

Short-Term Investments — Investments with scheduled original maturities of greater than three months but not greater than one year are recorded as short-term investments.  The Company had no short-term investments meeting this criterion at March 31, 2006 and December 31, 2005.  Short-term investments are recorded at fair value with net unrealized gains or losses reported in stockholders’ equity.  Realized gains and losses are included in the consolidated statements of income.

 

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 Company’s 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 Company’s 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.  At March 31, 2006 the Company had reduced its deferred tax assets by recording a valuation allowance of $1,945,000 (see Note 5).

 

Revenue Recognition — The Company’s revenues and equity in earnings consist mainly 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 Company’s 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.

 

6



 

The shares used in the computation of the Company’s basic and diluted earnings per share are reconciled as follows:

 

 

 

Three Months Ended March 31

 

 

 

2006

 

2005

 

Weighted average number of shares outstanding — basic

 

6,901,000

 

6,816,000

 

Dilutive effect of stock options

 

77,000

 

74,000

 

 

 

 

 

 

 

Weighted average number of shares outstanding — diluted

 

6,978,000

 

6,890,000

 

 

Stock-Based Compensation — On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, an amendment of FASB Statements No. 123 and 95.  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 three months ended March 31, 2006, resulting in no impact on the consolidated financial statements of the Company for that period.

 

For stock options granted to employees and directors prior to January 1, 2006, the Company utilized the footnote disclosure provisions of Statement of SFAS No. 123.  SFAS No. 123 encouraged entities to adopt a fair-value based method of accounting for stock options or similar equity instruments.  However, it also allowed an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by APB No. 25.  The Company elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS No. 123 as applicable.  The pro forma footnote disclosures required by SFAS No. 123 were not applicable during the periods presented prior to January 1, 2006 as no options were granted or vested during the periods presented.

 

Recent Accounting Pronouncements — The FASB has issued SFAS Statement No. 154, Accounting Changes and Error Corrections.  This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.  Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so.  SFAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.”  The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.  Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005.  The Company adopted SFAS No. 154 on January 1, 2006, resulting in no impact on the consolidated financial statements of the Company for the three months ended March 31, 2006.

 

In March 2005, the FASB issued SFAS Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143 (FIN 47).  Asset retirement obligations are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees.  FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing and settlement method are conditional on future events should be recorded at fair value as soon as fair value is reasonably estimable.  FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability.  FIN. 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises).  Cyanco’s operations are subject to environmental regulations of the State of Nevada, and Cyanco is required to perform ongoing monitoring, testing and reporting activities at its manufacturing facility, the costs of which are expensed as incurred.  Cyanco has potential asset retirement obligations related to its manufacturing facility; however, Cyanco is unaware of any legal obligation.  Although the timing of the performance of any asset retirement obligation is conditional on the facility undergoing major renovations, being demolished or sold, potential regulations may create a duty or responsibility for the Company to properly clean up the site.  Currently, there is an indeterminate settlement date for the asset retirement obligation because the range of time over which Cyanco may settle the obligation is unknown or cannot be estimated.  Therefore, Cyanco cannot reasonably estimate the fair value of a liability, and has not recorded a liability for asset retirement obligations through March 31, 2006, resulting in no impact on the consolidated financial statements of the Company for the three months ended March 31, 2006 and the year ended December 31, 2005.

 

7



 

NOTE 3.  INVESTMENT IN JOINT VENTURE

 

Summarized financial information for Cyanco is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Revenues

 

$

13,195,000

 

$

9,325,000

 

Costs and expenses

 

10,055,000

 

7,937,000

 

Net income before taxes

 

3,140,000

 

1,388,000

 

Company’s equity in earnings

 

1,570,000

 

694,000

 

 

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.

 

 

NOTE 4.  DIVIDENDS

 

In March 2006, the Company declared a cash dividend of $.07 per share on a total of 6,901,406 outstanding shares of record as of March 20, 2006, payable on April 4, 2006.  As of March 31, 2006, dividends payable of approximately $483,000 were included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet.

 

In January 2006, the Company paid dividends of approximately $483,000, which were declared in December 2005.  In January 2005, the Company paid dividends of approximately $408,000, which were declared in December 2004.

 

 

NOTE 5.  INCOME TAXES

 

The Company’s 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 five 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.

 

The Company believes that amounts accrued and included in accounts payable and accrued expenses at March 31, 2006 will be adequate for the resolution of the audit by CCRA.  However, there can be no assurance that such costs will not ultimately exceed the current estimate.

 

The Company’s United States corporate income tax returns are currently under audit by the IRS.  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.  However, management of the Company believes the amounts accrued in accounts payable and accrued expenses at March 31, 2006 will be adequate for the resolution of the IRS audit

 

Deferred tax assets (liabilities) are comprised of the following:

 

 

 

March 31,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

Foreign income taxes and credit carryforwards

 

$

2,893,000

 

$

2,893,000

 

Other

 

44,000

 

44,000

 

Less valuation allowance

 

(1,945,000

)

(1,945,000

)

 

 

 

 

 

 

 

 

992,000

 

992,000

 

Deferred tax liabilities — depreciation and amortization

 

(1,818,000

)

(2,060,000

)

 

 

 

 

 

 

 

 

$

(826,000

)

$

(1,068,000

)

 

8



 

Due to uncertainties surrounding the realization of the benefit of certain foreign tax payments, 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 March 31, 2006, the Company recorded a valuation allowance of $1,945,000 relating to the foreign income tax payments and accruals.

 

 

NOTE 6.  SUBSEQUENT EVENTS

 

In April 2006, each of the five members of the Company’s Board of Directors was granted options to purchase 21,000 shares of the Company’s common stock.  The options are exercisable at $8.28 per share, the market price of the Company’s common stock on the date of grant, for a period of five years.

 

In April 2006, three members of the Company’s Board of Directors each exercised options to purchase 30,000 shares of the Company’s common stock at $1.21 per share, for total consideration of $108,900.  One director paid $36,300 cash to exercise his options. The other directors surrendered 4,347 and 3,887 shares of the Company’s common stock, respectively, with a combined market value of $72,600 as consideration for the exercise of their options, as permitted by the underlying stock option agreement.

 

 

Item 2.  Management’s 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 ended March 31, 2006 and March 31, 2005 consist primarily of the Company’s 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 ended March 31, 2006 and March 31, 2005 is presented in Note 3 to the Company’s condensed consolidated financial statements.

 

Cyanco historically represented one of three sources of sodium cyanide for use in the mining industry in the western United States.  The world market for briquette or dry-form sodium cyanide is dominated by E.I. DuPont Nemours (“DuPont”).  Historically, Cyanco competed with DuPont and also with FMC Corporation (“FMC”), which marketed and delivered liquid sodium cyanide in the same geographic area as Cyanco.

 

Effective April 1, 2002, Cyanco purchased the commercial and certain distribution assets related to FMC’s sodium cyanide business.  As a result of this transaction, FMC exited the business, ending its role as a supplier of sodium cyanide to the Nevada gold mining industry.  Cyanco assumed FMC’s on-going contractual obligations under its existing sodium cyanide contracts and began supplying these customers in April 2002.  As a consequence, DuPont is presently the sole competitor of Cyanco in supplying sodium cyanide to the mining industry in the western United States.

 

Cyanco’s business is characterized by reliance on the mining industry, competitive demands, dependence on a relatively small number of customers, fluctuating market prices for energy and 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 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 results by being creative and service-oriented and offering competitive prices.

 

All of Cyanco’s sales occur within the western United States.  Since most of Cyanco’s cyanide customers are large mining companies, the number of companies it services is relatively small compared to those of a wholesale distribution or retail business.  It should be noted that each large mining concern may have multiple operating properties within Cyanco’s 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 Company’s 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.  However, such losses of customers due to mine closures are not currently expected to occur, based on existing gold prices.  With increasing gold prices, existing gold mining operations tend to expand and new or old mines are opened.  The reverse is true with falling gold prices.

 

9



 

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 Company’s consolidated financial statements.  The Company’s significant accounting policies are summarized in Note 1 to the Company’s consolidated financial statements and the most critical of such policies are discussed below.

 

                  Investment in Cyanco

                  Short-Term Investments

                  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 Company’s 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 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 Cyanco’s 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.

 

 

Short-Term Investments - The Company’s current assets at March 31, 2006 were comprised primarily of cash and cash equivalents of $17,228,000.  Investments with scheduled original maturities of three months or less are recorded as cash equivalents.  Investments with scheduled original maturities of greater than three months but not greater than one year are recorded as short-term investments.  The Company had no short-term investments meeting this criterion at March 31, 2006 or December 31, 2005.  Short-term investments are recorded at fair value with net unrealized gains or losses reported in stockholders’ equity.  Realized gains and losses are included in the consolidated statements of income.  Changes in market rates will affect interest earned on these instruments, and potentially the carrying value of the investments.

 

 

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 Company’s 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 Company’s 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.  At March 31, 2006 the Company had reduced its deferred tax assets by recording a valuation allowance of $1,945,000.  If the Company were to determine that it would be able to

 

10



 

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 be charged to income in the period such determination was 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 Company’s 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

 

Equity in earnings of Cyanco increased $876,000, or 126%, to $1,570,000 in the three months ended March 31, 2006 compared to $694,000 in the three months ended March 31, 2005.  Cyanco revenues increased $3,870,000, or 42%, to $13,195,000 in the three months ended March 31, 2006 compared to $9,325,000 in the three months ended March 31, 2005.  Increased market prices of gold have resulted in increased mining activities in the area served by Cyanco, resulting in higher volumes of product sold.  Cyanco experienced significant increases in raw material costs in the latter part of 2005, that have somewhat leveled out in the first three months of 2006.  Cyanco does have the ability, under certain of its contracts, to pass on increases in the cost of raw materials to its customers and the obligation to pass on decreases.  However, price changes to Cyanco’s customers often lag the changes in the cost of raw materials by two to four months.  This “lag effect” resulted in Cyanco realizing a higher price per pound for sodium cyanide sold during the three months ended March 31, 2006.  In addition, new business during the first quarter of 2006 that replaced a significant contract that expired December 31, 2005 has generated higher profit margins.  Cyanco’s costs and expenses increased $2,118,000, or 27%, to $10,055,000 in the three months ended March 31, 2006 compared to $7,937,000 in the three months ended March 31, 2005.  The increase in operating costs in the current year resulted primarily from the higher volumes of product sold and the increase in the cost of certain key raw material costs compared to the first three months of last year.  As a result, Cyanco’s net income before taxes (on a 100% basis) increased $1,752,000, or 126%, to $3,140,000 during the three months ended March 31, 2006 compared to $1,388,000 in the three months ended March 31, 2005.

 

Management fee income from Cyanco increased $58,000, or 42%, to $198,000 in the three months ended March 31, 2006 compared to $140,000 in the three months ended March 31, 2005, due to the increase in Cyanco’s revenues discussed above, upon which the management fee is computed.

 

Investment and other income increased $58,000, or 63%, to $150,000 in the three months ended March 31, 2006 compared to $92,000 in the three months ended March 31, 2005.  This increase is due primarily to an increase in the average balance of cash and cash equivalents during the period and to more favorable rates realized during the current year.

 

General and administrative expenses increased $137,000, or 79%, to $311,000 in the three months ended March 31, 2006 compared to $174,000 in the three months ended March 31, 2005.  This increase is due to primarily to increases in professional fees and other expenses related to income tax audits, the dispute with the Company’s Cyanco joint venture partner, and Sarbanes — Oxley Act compliance activities.

 

 

Income Taxes

 

The Company’s 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 five 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 appeals process is currently uncertain.

 

The Company believes the amounts that it has accrued and included in its consolidated financial statements under accounts payable and accrued expenses at March 31, 2006 will be adequate for the resolution of the audit by CCRA.  However, there can be no assurance that such costs will not ultimately exceed the current estimate.

 

11



 

The Company’s United States corporate income tax returns are currently under audit by the IRS.  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.  However, management of the Company believes the amounts accrued in accounts payable and accrued expenses at March 31, 2006 will be adequate for the resolution of the IRS audit.

 

 

Liquidity and Capital Resources

 

At March 31, 2006, the liabilities of the Company consisted of current liabilities of $4,234,000 and deferred income taxes of $826,000.  Current liabilities consisted of trade accounts payable of $64,000, dividends payable of $483,000 and accrued expenses (comprised primarily of accrued income taxes) of $3,687,000.  These current liabilities compare favorably to total current assets of $17,385,000 at March 31, 2006.  Current assets were comprised primarily of cash and cash equivalents of $17,228,000.

 

The Company’s 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 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 Company’s business, further investment in Cyanco, the payment of dividends to shareholders and other strategies.

 

Net cash used in operating activities for the three months ended March 31, 2006 was $(73,000) compared to net cash provided by operating activities of $53,000 for the three months ended March 31, 2005.  This increase in net cash used in operations is due primarily to the increase general and administrative expenses, as discussed above.  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 $1,000,000 for the three months ended March 31, 2006 and the three months ended March 31, 2005, consisting of distributions from Cyanco.

 

Net cash used in financing activities was $(483,000) and $(408,000) for the three months ended March 31, 2006 and the three months ended March 31, 2005, respectively, consisting of the payment of dividends.

 

The Company considers its cash resources sufficient to meet the operating needs of its current level of business for the next twelve months.

 

The Company’s operations have not been, and are not expected to be, materially effected 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 management’s 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 Cyanco’s customers as to the continuation, suspension, or termination of mining activities in the area served by Cyanco; decisions made by Cyanco’s 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; political, environmental, regulatory, economic and financial risks; 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 Company’s 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 Company’s consolidated financial position and results of operations.  Assuming

 

12



 

that the balance of cash and cash equivalents at March 31, 2006 of $17,228,000 was outstanding during the 2006 year, a 1% change in interest rates would result in a change of annual earnings of approximately $172,000.

 

The Company has no foreign operations and is currently not exposed to material risks from changes in foreign currency.

 

 

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 Company’s disclosure controls and procedures as of March 31, 2006.  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

 

During the course of an audit of the Company’s corporate income tax returns by the IRS, the Company determined in 2005 that certain income tax provisions and related balance sheet accounts and disclosures associated with accruals and payments of foreign income taxes had previously been inaccurately presented in the Company’s consolidated financial statements.  The errors commenced in 2001 in connection with the sale by the Company of its explosives business, including substantially all of its foreign operations, and related to the incorrect recognition of the benefit of foreign tax credits in the Company’s consolidated financial statements.  As a result, the consolidated financial statements as of December 31, 2004, and 2003, and each of the three years in the period ended December 31, 2004, and the subsequent interim fiscal periods of March 31, 2005 and June 30, 2005 were restated.

 

As a result, management identified a material weakness in the Company’s controls over financial reporting as of December 31, 2005 relating to the accounting for and disclosure of income taxes.  The Company continued to improve its internal controls over financial reporting related to accounting for income taxes during the first quarter of fiscal 2006, permitting it to conclude that its disclosure controls and procedures were effective as of March 31, 2006.  These additional controls include the engagement of a tax professional to perform a second review of all significant United States and foreign income tax matters and their impact on the consolidated financial statements of the Company, including appropriate footnote disclosures; the continued evaluation by the Audit Committee of the Board of Directors of the service capabilities of all accounting and tax professionals; and additional training in the treatment and accounting for income taxes for the Chief Financial Officer of the Company.  Other than as a described in the foregoing, there were no changes in the internal control over financial reporting of the Company during the quarter ended March 31, 2006 or since the date of the last evaluation that materially affect or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

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.

 

13



 

As discussed previously, Cyanco is a non-corporate joint venture owned 50 percent by Winnemucca Chemicals, a wholly-owned subsidiary of the Company, and 50 percent by Degussa Corporation.  The Joint Venture Agreement provides a first right of refusal to purchase the other partner’s interest in the event the other partner transfers its interest in the joint venture to a third party.

 

Effective January 1, 2003, Degussa Corporation purportedly transferred its 50% joint venture interest in Cyanco to CyPlus Corporation (CyPlus) as part of a reorganization of the world-wide mining chemicals business of Degussa AG.  CyPlus is an indirect, wholly-owned subsidiary of Degussa AG in Germany.  Degussa AG is also the direct parent of Degussa Corporation.

 

On January 5, 2004, Winnemucca Chemicals filed a complaint in Nevada State Court (the case was later removed to the United States District Court for the District of Nevada) related to Degussa Corporation’s purported transfer of its joint venture interest to CyPlus and seeking commission payments owed to Cyanco under a prior distribution agreement between Cyanco and Degussa Corporation. (Case No.: CV-N-04-364-ECR (RAM), WINNEMUCCA CHEMICALS, INC. f/k/a NEVADA CHEMICALS, INC., a Nevada Corporation, vs, DEGUSSA CORPORATION, an Alabama corporation, and CYPLUS CORPORATION, a Delaware corporation).  Winnemucca Chemicals claims the transfer of the joint venture interest was in violation of the Joint Venture Agreement.  The litigation seeks, among other things, to void such transfer or, alternatively, to enforce Winnemucca Chemicals’ rights under the Joint Venture Agreement arising out of the transfer.  This litigation has no impact on the operations of Cyanco other than the potential recovery of commission payments.

 

 

Item 2.  Changes in Securities, Use of Proceeds and Issuer Repurchase of Equity Securities

 

In November 2001, the Company’s Board of Directors authorized a stock repurchase plan that provides for the purchase of up to 500,000 shares of the Company’s currently issued and outstanding shares of common stock.  Purchases under the stock repurchase plan may be made from time to time at various prices in the open market, through block trades or otherwise.  These purchases may be made or suspended by the Company from time to time, without prior notice, based on market conditions or other factors.  During the three-month period ended March 31, 2006, the Company did not purchase any shares of its common stock under the repurchase plan.

 

 

Item 6.  Exhibits

 

Exhibit 11 — Statement re: computation of per share earnings (included in notes to condensed consolidated financial statements)

 

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 April 27, 2006

 

 

14



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)

 

 

 

 

 

 

April 27, 2006

 

/s/ John T. Day

(Date)

 

John T. Day, President (principal executive officer)

 

 

 

 

 

 

April 27, 2006

 

/s/ Dennis P. Gauger

(Date)

 

Dennis P. Gauger,

 

 

Chief Financial Officer (principal financial and accounting officer)

 

 

15


Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki