UCLE US Nuclear Corporation (PK)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand US Nuclear Corp, our operations and our present business environment. MD&A is provided as a supplement to—and should be read in conjunction with—our consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q. The audited financial statements for our fiscal year ended December 31, 2016 filed with the Securities Exchange Commission on Form 10-K on April 17, 2017 should be read in conjunction with the discussion below. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in these unaudited financial statements. 

We were incorporated in Delaware on February 14, 2012, and on March 2, 2012, we filed a registration statement on Form 10 to register with the U.S. Securities and Exchange Commission as a public company.  We were originally organized as a vehicle to investigate and, if such investigation warrants, acquire a target company or business seeking the perceived advantages of being a publicly held corporation.

On April 18, 2012, Richard Chiang, then our sole director and shareholder, entered into a Stock Purchase Agreement whereby Mr. Goldstein of US Nuclear Corp purchased 10,000,000 shares of our common stock from Mr. Chiang, which constituted 100% of our issued and outstanding shares of common stock. Mr. Chiang then resigned from all positions. Subsequently, on May 18, 2012, the Registrant appointed Mr. Chiang to serve as a member of the Board of Directors. He resigned from this position on March 31, 2013. 

Since our acquisition of Overhoff Technology in 2006, we have had discussions with other companies in our industry for an acquisition. While we targeted Overhoff due to its unique position in the tritium market, we had not commenced an acquisition since our Overhoff Technology acquisition; we believe in part the reason was due to lack of additional capital, our status as a privately-held entity at the time, and focus on developing our own products. We will seek out companies whom our management believes will provide value to our customers and will complement our business. We will focus on diversifying our product line into a larger range so that our customers and vendors may have a more expansive experience in type, choice, options, price and selection. We also believe that with a more diverse product line we will become more competitive as our industry is intensely competitive.

Our current product concentration places a heavy reliance on our Overhoff Technology division; where we derived 38% of our total revenues in 2016 from one customer. We expect to encounter a continuation of this trend unless we are successful in diversifying our client base, executing our acquisition strategy and experience increases in business from our Technical Associates division.

Our international revenues were 34% of our total revenue in 2016. We expect this to increase over time as we continue to field new orders inquires and engage new customers overseas. We believe that Korea and China will likely be a larger contributor to revenue within the next few years. While we maintain steady growth domestically, the international side of our business may be a larger component as nuclear technology and rapid development for clean energy grows abroad. Additionally, the Company relies on continued growth and orders from CANDU reactors (Canada Deuterium Uranium), and rapid development of the next generation of nuclear reactors called Molten Salt Reactors, (MSR) and Liquid-Fluoride Thorium Reactors (LFTR), all of which purchase tritium detection and monitor products. There can be no assurances as to our growth projections and our risk profile as we depend upon increased foreign customers for business.

For the next twelve months, we anticipate we will need approximately $5,000,000 in additional capital to fund our business plans. If we do not raise the required capital we may not meet our expenses and there can be no assurance that we will be able to do so and if we do, we may find the cost of such financing to be burdensome on the Company. Additionally, we may not be able to execute on our business plans due to unforeseen market forces such as lower natural gas prices, difficulty attracting qualified executive staff, general downturn in our sector or by competition as we operate in an extremely competitive market for all of our product offerings.

Robert I. Goldstein, our President, Chief Executive Officer and Chairman of the Board of Directors also maintains a position as President of Gold Team Inc., a Delaware company that invests in industrial real estate properties for investment purposes.

He holds an 8% interest in Gold Team Inc. and spends approximately 5 hours per week with affairs related to Gold Team Inc. The Company leases its current facilities from Gold Team Inc. which owns both the Canoga Park, CA and Milford, Ohio properties at an expense of $7,000 for each facility per month. 

On May 31, 2016, we entered into an Asset Purchase Agreement with Electronic Control Concepts (“ECC”) whereby the Company purchased certain tangible and intangible assets of ECC.  ECC a small manufacturer of test and maintenance meters for x-ray machines both medical and industrial. We acquired ECC to give a boost to our current x-ray related product and hospital/medical product sales.

Sales for the three months ended September 30, 2017 were $844,779 compared to $751,036 for the same period in 2016. The increase of $93,743 or 12.5% is a result of an increase in sales from our Optron and Overhoff subsidiaries of $28,826 and $64,917, respectively. The increase in sales from both our Optron and Overhoff subsidiaries was due to the completion and delivery of new purchase orders obtained during the past year. We recognize revenue from the sale of our products when the orders are completed and we ship the product to our customer. The sales breakdown for the three months ended September 30, 2017 is as follows:

North America 47%

Asia (Including Japan) 38%

Our gross margins for the three months ended September 30, 2017 were 45.2% as compared to 48.5% for the same period in 2016. The decrease in gross margin percentage is due to higher labor, material and overhead costs.

Selling, general and administrative expense for the three months ended September 30, 2017 were $362,187 compared to $256,179 for the same period in 2016. The increase of $106,008 or 41.4% is due to higher rent costs, professional fees and the amortization of intangible assets.

Other expense for the three months ended September 30, 2017 was $6,494, an increase of $895 from $5,599 for the same period in 2016. The increase is not significant.

Net income for the three months ended September 30, 2017 was $13,508 compared to $102,243 for the same period in 2016. The decrease in net income was principally attributed to higher selling, general and administrative expenses, and a decrease in gross profits due to lower sales and higher cost of goods sold as a percentage of sales.

For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

Sales for the nine months ended September 30, 2017 were $2,061,687 compared to $1,649,061 for the same period in 2016. The increase of $412,626 or 25.0% is a result of an increase in sales from our Overhoff subsidiary of $451,211 offset by a decrease in sales from our Optron subsidiary of $38,585. The increase in sales from our Overhoff subsidiary was due to the delivery of some large orders during the first quarter of 2017. The decrease in sales from our Optron subsidiary was due to the timing of the completion of larger orders. We recognize revenue from the sale of our products when the orders are completed and we ship the product to our customer. The sales breakdown for the nine months ended September 30, 2017 is as follows:

North America 58%

Asia (Including Japan) 35%

Our gross margins for the nine months ended September 30, 2017 were 45.2% as compared to 49.2% for the same period in 2016. The decrease in gross margin percentage is due to higher material costs.

Selling, general and administrative expense for the nine months ended September 30, 2017 were $935,745 compared to $722,215 for the same period in 2016. The increase of $213,530 or 29.6% is due to higher rent costs, professional fees and the amortization of intangible assets.

Other expense for the nine months ended September 30, 2017 was $17,787, an increase of $2,372 from $15,415 for the same period in 2016. The increase is not significant.

Net loss for the nine months ended September 30, 2017 was $22,497 compared to net income of $74,468 for the same period in 2016. The change was principally attributed to higher selling, general and administrative expenses offset by an increase in gross profits due to higher sales.

Liquidity and Capital Resources

Our operations have historically been financed by our majority shareholder. As funds were needed for working capital purposes, our majority shareholder would loan us the needed funds. During the nine months ended September 30, 2017, our majority shareholder loan us an additional $116,585 and we were able to repay $42,659. We anticipate funding the growth of our business through the sales of shares of our common stock and loans from our majority stockholder if necessary.

At September 30, 2017, total assets increased by 8.1% to $2,635,076 from $2,437,720 at December 31, 2016 principally related to an increase in inventory offset by a decrease in intangible assets (due to amortization).

At September 30, 2017, total liabilities increased by 18.8% to $1,388,002 from $1,168,149 at December 31, 2016. The increase was principally due to an increase in accounts payable, accrued compensation and notes to stockholder, offset by a decrease in customer deposits.

Net cash provided by operating activities for the nine months ended September 30, 2017 was $3,771 compared to net cash used in operating activities of $236,908 for the same period in 2016. The change in cash from operations was principally due to the changes in accounts receivable, inventory and accounts payable.

Net cash used in investing activities for the nine months ended September 30, 2017 was $1,989 compared to $60,000 for the same period in 2016. The decrease in cash used in investing activities was principally due to cash paid for an acquisition in 2016.

Net cash provided by financing activities for the nine months ended September 30, 2017 was $16,321 compared to $183,077 for the same period in 2016. The change in cash from financing activities was principally due to the paid down of the line of credit balance in 2017 compared to additional borrowings in 2016, and the sale of common stock for $99,000 in 2016.

Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes . ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

As an emerging growth company, the company is exempt from Section 14A and B of the Securities Exchange Act of 1934 which require the shareholder approval of executive compensation and golden parachutes.

The Company is an Emerging Growth Company under the JOBS Act of 2012, but the Company has irrevocably opted out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(B) of the JOBS Act. 

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.