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, 2017 filed with the Securities Exchange Commission on Form 10-K on April 17, 2018 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 39% of our total revenues in 2017 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 35% of our total revenue in 2017. 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.

On August 3, 2018, we closed an agreement by and among, MIFTEC Laboratories, Inc. (“MIFTEC”), a licensee of Magneto-Inertial Fusion Technologies, Inc., (“MIFTI”), and us. MIFTEC is a licensee of MIFTI radionuclide technology. MIFTEC will engage us to manufacture equipment pursuant to MIFTEC’s specifications and designs and have us as a sales representative for the manufactured equipment. We will be the exclusive manufacturer and supplier to MIFTEC of equipment in North America and Asia. In addition, we received a 10% ownership interest in MIFTEC. The consideration for the exclusive manufacturing rights and a 10% ownership interest in MIFTEC was $500,000 and 300,000 shares of our common stock.

Sales for the three months ended September 30, 2018 were $1,145,480 compared to $844,779 for the same period in 2017. The increase of $300,701 or 35.6% is a result of an increase in sales from our Overhoff and Optron subsidiaries of $176,216 and $124,485, respectively. The increase in sales from our Overhoff and Optron subsidiaries was due to the delivery of large international orders during the third quarter of 2018. 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, 2018 is as follows:

Our gross margins for the three months ended September 30, 2018 were 44.7% as compared to 45.2% for the same period in 2017. The decrease in gross margin percentage is not significant.

Selling, general and administrative expense for the three months ended September 30, 2018 were $385,945 compared to $362,187 for the same period in 2017. The increase of $23,758 or 6.6% is due to higher professional and consulting fees.

Stock-based compensation for the three months ended September 30, 2018 was $448,740 compared to $0 for the same period in 2017. During the three months ended September 30, 2018, the Company issued 326,000 shares of common stock to consultants for services rendered valued at $448,740. There were no such issuances in 2017.

Acquisition of manufacturing and supply rights for the three months ended September 30, 2018 was $1,084,000 compared to $0 for the same period in 2017. During the three months ended September 30, 2018, the Company entered into an agreement with MIFTEC and paid $1,084,000 for certain manufacturing and supply rights. There were no such agreements in 2017.

Other expense for the three months ended September 30, 2018 was $8,126, an increase of $1,632 from $6,494 for the same period in 2017. The increase was not significant.

Net loss for the three months ended September 30, 2018 was $1,414,715 compared to net income of $13,508 for the same period in 2017. The change was principally attributed to higher selling, general and administrative expenses and stock-based compensation, and the acquisition of manufacturing and supply rights offset by an increase in gross profits due to higher sales. 

For the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017

Sales for the nine months ended September 30, 2018 were $2,706,785 compared to $2,061,687 for the same period in 2017. The increase of $645,098 or 31.3% is a result of an increase in sales from our Overhoff subsidiary of $242,187 and our Optron subsidiary of $402,911. The increase in sales was due to the delivery of large orders during the first nine months of 2018. 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, 2018 is as follows:

Our gross margins for the nine months ended September 30, 2018 were 47.2% as compared to 45.2% for the same period in 2017. The increase in gross margin percentage is due to lower overhead allocation costs due to the higher volume of sales.

Selling, general and administrative expense for the nine months ended September 30, 2018 were $1,135,363 compared to $935,745 for the same period in 2017. The increase of $199,618 or 21.3% is due to higher professional and consulting fees.

Stock-based compensation for the nine months ended September 30, 2018 was $1,410,016 compared to $0 for the same period in 2017. During the nine months ended September 30, 2018, the Company issued 838,410 shares of common stock to employees and consultants for services rendered valued at $1,410,016. There were no such issuances in 2017.

Acquisition of manufacturing and supply rights for the nine months ended September 30, 2018 was $1,084,000 compared to $0 for the same period in 2017. During the nine months ended September 30, 2018, the Company entered into an agreement with MIFTEC and paid $1,084,000 for certain manufacturing and supply rights. There were no such agreements in 2017.

Other expense for the nine months ended September 30, 2018 was $21,910, an increase of $4,123 from $17,787 for the same period in 2017. The increase was not significant.

Net loss for the nine months ended September 30, 2018 was $2,374,110 compared to $22,497 for the same period in 2017. The change was principally attributed to higher selling, general and administrative expenses and stock-based compensation, and the acquisition of manufacturing and supply rights 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 and more recently from proceeds from the sale of our common stock. As funds were needed for working capital purposes, our majority shareholder would loan us the needed funds. During the nine months ended September 30, 2018, our majority shareholder loaned us an additional $41,900 and the majority shareholder was repaid $40,174. We anticipate funding the growth of our business through the sales of additional shares of our common stock and loans from our majority stockholder if necessary.

At September 30, 2018, total assets increased by 24.4% to $3,316,276 from $2,665,617 at December 31, 2017 principally related to an increase in cash and accounts receivable.

At September 30, 2018, total liabilities decreased by 3.5% to $1,307,919 from $1,355,916 at December 31, 2017. The decrease was not significant.

Net cash used in operating activities for the nine months ended September 30, 2018 was $525,311 compared to cash provided by operating activities of $3,771 for the same period in 2017. The change in cash from operations was principally due to the changes in working capital accounts.

Net cash used in investing activities for the nine months ended September 30, 2018 was $15,777 compared to $1,989 for the same period in 2017. The increase in cash used in investing activities was principally due to the investment in MIFTEC in August 2018.

Net cash provided by financing activities for the nine months ended September 30, 2018 was $990,118 compared to $16,321 for the same period in 2017. The change in cash from financing activities was principally due to the sale of 1,730,000 shares of our common stock for proceeds of $1,068,750.

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.