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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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)

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 x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Yes  o   No  x

The number of shares outstanding of the registrant’s par value $0.001 Common Stock as of July 31, 2008 was 7,004,172.

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Nevada Chemicals, Inc.

Form 10-Q

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

NEVADA CHEMICALS, INC.

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements

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NEVADA CHEMICALS, INC.

Condensed Consolidated Statements of Income

(Unaudited)

See accompanying notes to condensed consolidated financial statements

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NEVADA CHEMICALS, INC.

Condensed Consolidated Statements of Income

(Unaudited)

See accompanying notes to condensed consolidated financial statements

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NEVADA CHEMICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements

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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 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 Company’s 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 Company’s 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 six-month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008.

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

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 $19,328,000 and $18,117,000 as of June 30, 2008 and December 31, 2007, respectively.  Cash was $19,252,000 and $13,367,000 as of June 30, 2008 and December 31, 2007, 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 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 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.

Revenue Recognition – The Company’s revenues and equity in earnings consist primarily of earnings from Cyanco based on the equity method of accounting, billing for engineering services, 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.

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

Stock-Based Compensation – The Company has a stock-based employee compensation plan.  The Company accounts for stock-based compensation in accordance with Financial Accounting Standard (“SFAS”) No. 123R, Share-Based Payment, an amendment of FASB Statements 123 and 95, 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 Company’s current practice is to grant options to employees and members of its Board of Directors that vest immediately, resulting in reporting the entire compensation expense for the options in the period in which they are granted.  No stock options were granted to employees or directors during the three and six months ended June 30, 2008 and 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 on sale of an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts such business.  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 generally effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company adopted SFAS No. 157 on January 1, 2008, which did not have a material impact on the 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 adoption of this statement did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations .  This statement replaces SFAS No. 141, Business Combinations and applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration.  This statement establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This statement will be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements .  This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, and amends Accounting Research Bulletin (“ARB”) 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141 (revised 2007).  This statement will be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.

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In December 2007, the FASB issued EITF Issue 07-1 “Accounting for Collaborative Arrangements” (EITF 07-1). Collaborative arrangements are agreements between parties to participate in some type of joint operating activity. The task force provided indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The task force also expanded disclosure requirements about collaborative arrangements. Conclusions within EITF 07-1 are to be applied retrospectively. The Company adopted EITF 07-1 effective January 1, 2008. The adoption of EITF 07-1 did not have a material impact on the Company’s consolidated results of operations and financial condition.

NOTE 3.  INVESTMENT IN JOINT VENTURE

Summarized financial information for Cyanco is as follows:

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 May 2008, the Company declared a cash dividend of $.10 per share on a total of 7,004,172 outstanding shares of record as of June 20, 2008, payable on July 7, 2008.  As of June 30, 2008, dividends payable of approximately $700,000 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 outstanding shares of record as of June 20, 2007, which was paid on July 5, 2007.  As of June 30, 2007, dividends payable of approximately $628,000 were included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet.

In March 2008, the Company declared a cash dividend of $.09 per share on a total of 6,983,172 outstanding shares of record as of March 25, 2008, payable on April 10, 2008.

In January 2008, the Company paid dividends of approximately $628,000, which were declared in December 2007.

NOTE 5.  INCOME TAXES

Uncertainty in Income Taxes

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or Interpretation 48, on January 1, 2007.  There were no adjustments required as a result of the implementation of Interpretation 48 on our financial statements.

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 seven years.  In December of 2007 the Company received notification that the CCRA had reviewed the formal notices of objection and agreed with many of the positions presented by the Company.  The Company has received additional notification from the CCRA indicating that further adjustments will be made offsetting all remaining assessments.  Based on these developments and in consultation with its professional tax advisors in Canada, the Company has reduced the estimated Canadian tax liability to $0 as of June 30, 2008.

Certain of the Company’s United States corporate income tax returns are currently under audit by the Internal Revenue Service (“IRS”).  The IRS took the position that the Company owes additional income taxes, penalties and interest

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where the IRS has disagreed with certain tax positions taken by the Company.  The Company reviewed the positions taken by the IRS and, in the fourth quarter of 2006, paid those taxes for which it believed it was liable.  In June 2008 the Company received the “Preliminary IRS Appeals Report”, which supported the long standing positions of the Company.  As a result of this notification the Company has reduced its estimated tax liability related to this audit to $0 as of June 30, 2008.

The Company classifies interest and penalties recognized pursuant to Interpretation 48 as interest expense.  As a result of the reduction of the US tax liability, which consisted entirely of estimated interest expense, the Company recorded an interest benefit included in interest and other income, of $400,000 as of June 30, 2008.  None of these amounts accrued are related to unrecognized tax benefits.

At June 30, 2008 the Company has reduced all tax and interest liabilities associated with the IRS and the Canadian audits to $0.  However, the ultimate outcome received from the IRS and CCRA may vary from our current estimates.

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

Although the Company has received notification from the CCRA indicating that the reassessment will require no additional payments, there are uncertainties surrounding the final calculation of the benefit of certain foreign tax payments and or refunds.  However, based upon our analysis and consultation with our professional tax advisors, the Company has eliminated the valuation allowance associated with the uncertainty because it believes the amount would be immaterial.

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 and six months ended June 30, 2008 and June 30, 2007 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 and six months ended June 30, 2008 and June 30, 2007 is presented in Note 3 to the Company’s unaudited condensed consolidated financial statements.

Cyanco represents one of two present 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 in this area.  Sodium cyanide is manufactured in two distinct forms:  (1) as a solid “briquette”, which can be shipped economically but requires in general 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 the Company believes is the method preferred by the mines and is the process currently utilized by Cyanco.

Cyanco’s sodium cyanide business is dependent upon the gold mining industry located within the western United States.  Based on a January 2008 report prepared by the U.S. Geological Survey, Mineral Commodity Summaries, the 2007 domestic gold mine production in the United States decreased 5% from 2006 figures, which dropped the United States from the third to the fourth largest gold producer after Australia, South Africa, and China for the 2007 calendar year.  The United States mine production output continues to be dominated by the Nevada region in which

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Cyanco operates, with about 80% of the gold produced within the United States according to the Mineral Commodity Summaries report.

Cyanco’s business is subject to 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 positive 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 sodium 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.  E ach large mining concern may have multiple operating properties within Cyanco’s operating region.  A loss of one or more of Cyanco’s 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 upon existing gold prices.

With high or increasing gold prices, mines tend to expand their current operations and expand their reserves by bringing on new properties.  This requires permitting for new mines or reopening old mining operations, which can take several years.  The Company’s strengthened financial results in the second quarter of 2008 as compared to 2007 are primarily due to an increase in spot or non-contract sales.

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.  The most critical of such policies are discussed below.

·       Investment in Cyanco

·       Accounting for Income Taxes

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

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 the asset, calculated using the discounted cash flows expected during the remaining useful life.  For the three and six month periods ending June 30, 2008, Cyanco recorded no impairment losses.

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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 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.  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 be charged to income in the period such determination was made.

Certain of the Company’s United States and Canadian income tax returns are currently under audit.  The Company has received positive correspondence from both the CCRA and the IRS during this past quarter which has allowed the Company to adjust the tax liabilities as of June 30, 2008.  The Company, along with its professional advisors, believes that there will be no further significant amounts necessary to be paid to conclude the CCRA and IRS tax appeals.  The Company reviews the accrued amount at each balance sheet date quarterly.  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 (including the decrease in the quarter ended June 30, 2008) or final determination that the amount due is less than the accrual would increase income in the period such determination is made.

Results of Operations

Three Months Ended June 30, 2008

Equity in earnings of Cyanco increased $194,000, or 13%, to $1,647,000 in the three months ended June 30, 2008 compared to $1,453,000 in the three months ended June 30, 2007.  Cyanco revenues increased $4,358,000, or 34%, to $17,032,000 in the three months ended June 30, 2008 compared to $12,674,000 in the three months ended June 30, 2007.  The increase in Cyanco revenues is in part due to an increase in the average sales price per pound of sodium cyanide, primarily resulting from higher raw material prices.  Cyanco has the ability, under all of its contracts, to pass on increases in the cost of raw materials to its customers and the obligation to pass on decreases.  Product sales volume for the second quarter of 2008 was up 6% primarily due to increased mining activities and an increase in the non-contract sales as compared to the same period in 2007.

Cyanco’s costs and expenses increased $3,971,000, or 41%, to $13,738,000 in the three months ended June 30, 2008 compared to $9,767,000 in the three months ended June 30, 2007.  The increase in operating costs in the current year resulted primarily from higher volumes of product sold and a substantial increase in the cost of raw materials.  As a result, Cyanco’s net income before taxes (on a 100% basis) increased $388,000, or 13%, to $3,294,000 during the three months ended June 30, 2008 compared to $2,906,000 in the three months ended June 30, 2007.

Management fee income from Cyanco increased $76,000, or 40%, to $266,000 in the three months ended June 30, 2008 compared to $190,000 in the three months ended June 30, 2007.  The increase is due primarily to the increase in Cyanco’s revenues, upon which the management fee is computed, and the billing for engineering services in the amount of $11,000.

General and administrative expenses decreased $2,000, or 1%, to $339,000 in the three months ended June 30, 2008 compared to $341,000 in the three months ended June 30, 2007.

Investment and other income increased $353,000, or 192%, to $537,000 in the three months ended June 30, 2008 compared to $184,000 in the three months ended June 30, 2007.  This increase is due primarily to the reduction in accrued interest expense associated with the outstanding United States IRS tax audits resulting in a net benefit of $400,000, offset by a $48,000 reduction in interest earned as a result of lower interest rates, in the three months ended June 30, 2008 compared to the same period in 2007.

In the second quarter of fiscal 2008, the Company received notification from the Canada Customs and Revenue Agency with respect to the outstanding tax audit of the Company.  In the notification the Canada Customs and Revenue

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Agency agreed with several of the positions that the Company had presented.  The Company applied this information to the tax provision using the “more likely than not” guidance and eliminated its estimated Canadian tax liability accrual as of June 30, 2008.

In May 2008 the Company received notification from the IRS appeals division with respect to the outstanding United States tax audits.  The appeals division presented a “Preliminary IRS Appeals Report” supporting several of the Company’s positions.  As a result of this notification and the assessment of its professional advisors the Company has eliminated its US tax liability estimate associated with the audit as of June 30, 2008.  Although the ultimate outcome is subject to review by the courts and the IRS calculation division the Company and its advisors believe that no further payments will be due.  Consequently, the Company’s results of operations for the period ending June 30, 2008 has been positively affected by the reduction of these accrued estimates.  Accrued interest expense associated with the outstanding United States IRS tax audits was reversed completely resulting in a decrease of the accrual and an increase in the Company’s results of operations of $400,000, in the three months ended June 30, 2008 compared to the same period in 2007.

The provision for income taxes increased $238,000, or 48%, to $734,000 in the three months ended June 30, 2008 compared to $496,000 in the three months ended June 30, 2007.  This increase is due primarily to increased net income in the current period.

Six Months Ended June 30, 2008

Equity in earnings of Cyanco increased $654,000, or 27%, to $3,034,000 in the six months ended June 30, 2008 compared to $2,380,000 in the six months ended June 30, 2007.  Cyanco revenues increased $7,607,000, or 32%, to $31,531,000 in the six months ended June 30, 2008 compared to $23,924,000 in the six months ended June 30, 2007.  The increase in Cyanco revenues is primarily due to increased product sales and an increase in the average sales price per pound of sodium cyanide.  Cyanco has the ability, under most of its contracts, to pass on increases in the cost of raw materials to its customers and the obligation to pass on decreases.  Product sales volumes for the first quarter of 2008 were up 5% primarily due to increased mining activities and an increase in the non-contract sales as compared to the same period in 2007.

Cyanco’s costs and expenses increased $6,300,000, or 33%, to $25,463,000 in the six months ended June 30, 2008 compared to $19,163,000 in the six months ended June 30, 2007.  The increase in operating costs in the current year resulted primarily from higher volumes of product sold and a substantial increase in the cost of raw materials.    As a result, Cyanco’s net income before taxes (on a 100% basis) increased $1,307,000, or 27%, to $6,068,000 during the six months ended June 30, 2008 compared to $4,761,000 in the six months ended June 30, 2007.

Management fee income from Cyanco increased $124,000, or 35%, to $483,000 in the six months ended June 30, 2008 compared to $359,000 in the six months ended June 30, 2007, primarily due to the increase in Cyanco’s revenues, upon which the management fee is computed and the billing of engineering services in the amount of $11,000.

General and administrative expenses increased $45,000, or 7%, to $662,000 in the six months ended June 30, 2008 compared to $617,000 in the six months ended June 30, 2007.  This increase is due to primarily to an increase in salary and benefits, research and development and recruitment expense.

Investment and other income increased $379,000, or 113%, to $715,000 in the six months ended June 30, 2008 compared to $336,000 in the six months ended June 30, 2007.  This increase is due primarily to the reduction in accrued interest expense associated with the outstanding United States IRS tax audits resulting in a net benefit of $400,000, in the six months ended June 30, 2008 compared to the same period in 2007.

The provision for income taxes increased $553,000, or 81%, to $1,234,000 in the six months ended June 30, 2008 compared to $681,000 in the six months ended June 30, 2007.  This increase is due primarily to increased net income in the current period and the tax effect of reducing the U.S. interest accrual.

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 seven years.  In December of 2007 the Company received notification that the CCRA had reviewed the formal notices of objection and agreed with many of the positions presented by the Company.  The Company has received additional notification from the CCRA indicating that further adjustments will be made offsetting all remaining assessments.  The Company, based on consultation with its professional tax advisors in Canada and notification from the CCRA appeals division, has eliminated the estimated Canadian tax liability as of June 30, 2008.

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Certain of the Company’s United States corporate income tax returns are currently under audit by the Internal Revenue Service (“IRS”).  The IRS took 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.  The Company has reviewed the positions taken by the IRS and, in the fourth quarter of 2006, paid those taxes for which it believed it was liable.  In June 2008 the Company received the Preliminary IRS Appeals Report which supported several of the long standing positions of the Company.  As a result of this notification the Company has reversed in its entirety the US Tax liability as of June 30, 2008.  Consequently, the Company’s results of operations for the six months ending June 30, 2008 has been positively affected by the reduction of these accrued estimates.

The Company classifies interest and penalties recognized pursuant to Interpretation 48 as interest expense.  As a result of the reversal of the US Tax liability, the Company recorded interest income in the amount of $400,000 as of June 30, 2008.  None of these amounts accrued are related to unrecognized tax benefits.

The Company believes that no further amounts will be required in accounts payable and accrued expenses.  At June 30, 2008 the Company has reduced all tax liabilities associated with the IRS appeals and the Canadian appeals to $0.  However, the ultimate outcome received from the IRS and CCRA may vary from our current estimates including potential refunds.

Liquidity and Capital Resources

At June 30, 2008, the liabilities of the Company consisted of current liabilities of $1,025,000 and deferred income taxes of $1,025,000.  Current liabilities consisted of trade accounts payable of $23,000, dividends payable of $700,000 and accrued expenses (comprised primarily of accrued income taxes) of $302,000.  These current liabilities compare favorably to total current assets of $19,500,000 at June 30, 2008.  Current assets were comprised primarily of cash and cash equivalents of $19,328,000.

The Company’s current strategy is to invest cash in excess of short-term operating needs in highly liquid, certificate of deposits or U.S. Treasuries 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 provided in operating activities for the six months ended June 30, 2008 was $2,295,000 compared to net cash provided in operating activities of $1,684,000 for the six months ended June 30, 2007.  This increase in net cash provided in operations is due primarily to the increase in the equity in earnings of Cyanco, and a decrease in accounts payable and accrued expenses as a result of eliminating the U.S. and Canadian tax liability accruals

Net cash used by investing activities was $0 for the six months ended June 30, 2008 and $93,000 for the six months ended June 30, 2007.  The Company had no investing activities during the period ending June 30, 2008.

Net cash used in financing activities was $1,084,000 for the six months ended June 30, 2008, consisting of the payment of dividends of $1,258,000, offset by the receipt of $174,000 due to the exercise of stock options.  Net cash used in financing activities was $1,187,000 for the six months ended June 30, 2007, 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 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 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; 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 Company’s 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

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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.  Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report.

Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to Company management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.  In designing and evaluating the disclosure controls and procedures, the Company 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 the Company’s is required to exercise its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Change in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal controls over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the quarter ended June 30, 2008 or subsequent to that date that have materially affected, 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 subject from time-to-time to legal proceedings arising out of the normal conduct of its business, which the Company believes will not materially affect 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 Company’s securities.  If any of these risks occur, or if other risks not currently anticipated or fully appreciated occur, the Company’s 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 Company’s results of operations.

All of the 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.  A loss of one or more customers could adversely affect future sales, and may have a material adverse effect on the Company’s results of operations.

Price increases in energy and other raw materials could have a significant impact on Cyanco’s ability to sustain and grow earnings.

Cyanco’s 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

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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 Cyanco’s 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 has 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 Cyanco’s financial results and on the Company’s equity in earnings of Cyanco.

Cyanco is subject to risks caused by the production of hazardous materials, including legal liability created by its operations.

Cyanco’s 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 Cyanco’s future operations.

In addition to normal laws and regulations applicable to companies, Cyanco’s 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 Cyanco’s 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 Company’s profitability or the viability of its interests held through the joint venture, which could have a material adverse impact on the Company’s 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.

Cyanco’s 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.

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 Cyanco’s operations, financial condition, and results of operations.

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Shortage of supplies could adversely affect Cyanco’s 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 Company’s 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 Cyanco’s 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 Cyanco’s 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.

Cyanco’s insurance may not cover the risks to which its business is exposed.

Cyanco’s 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 Cyanco’s 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 company’s 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 Company’s financial condition and results of operations.

The business of Cyanco is dependent on good labor and employment relations.

Production at Cyanco’s 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 Cyanco’s business, and the results of operations and financial condition of the Company.

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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 Company’s 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 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 Company’s 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 Company’s 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 Company’s common shares are listed on the National Association of Securities Dealers Automated Quotation system (“Nasdaq”).  The price of the Company’s 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 investor’s ability to liquidate an investment and consequently an investor’s 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 Company’s 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 management’s 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 Company’s board of directors, after taking into account many factors, including the Company’s 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 Company’s financial condition or prospects.

Item 2.  Unregistered Sales of Equity and Use of Proceeds

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 and six-month periods ended June 30, 2008, the Company did not purchase any shares of its common stock under the repurchase plan.

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Item 4T.  Submission of Matters to a Vote of Security Holders

On May 30, 2008, the annual meeting of shareholders was held.  The shareholders voted, either in person or by proxy, to elect five directors to serve until the next annual meeting of shareholders or until their successors are elected and duly qualified, and to ratify the appointment of Tanner LC to be the Company’s independent registered public accountants for the year ending December 31, 2008.  The directors elected were Dr. John T. Day, Nathan L. Wade, E. Bryan Bagley, James E. Solomon and M. Garfield Cook.  The results of the shareholder vote were as follows:

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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 July 31, 2008

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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.

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