The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understandUS 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 endedDecember 31, 2018 filed with theSecurities Exchange Commission on Form 10-K onApril 17, 2019 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 inDelaware onFebruary 14, 2012 , and onMarch 2, 2012 , we filed a registration statement on Form 10 to register with theU.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.
OnApril 18, 2012 ,Richard Chiang , then our sole director and shareholder, entered into a Stock Purchase Agreement wherebyMr. Goldstein ofUS Nuclear Corp purchased 10,000,000 shares of our common stock fromMr. Chiang , which constituted 100% of our issued and outstanding shares of common stock.Mr. Chiang then resigned from all positions. Subsequently, onMay 18, 2012 , the Registrant appointedMr. Chiang to serve as a member of the Board of Directors. He resigned from this position onMarch 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. Generally, our product concentration places a heavy reliance on our Overhoff Technology division; however, during the nine months endedSeptember 30, 2019 we derived 26.7% of our total revenues from sales made by Optron to 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 ourTechnical Associates division. Our international revenues were 65% of our total revenue in 2019. We expect this to increase over time as we continue to field new orders inquires and engage new customers overseas. We believe thatKorea andChina 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. 16
Robert I. Goldstein , our President, Chief Executive Officer and Chairman of the Board of Directors also maintains a position as President ofGold Team Inc. , aDelaware company that invests in industrial real estate properties for investment purposes. He holds an 8% interest inGold Team Inc. and spends approximately 5 hours per week with affairs related toGold Team Inc. The Company leases its current facilities fromGold Team Inc. which owns both theCanoga Park, CA andMilford, Ohio properties at an expense of$7,000 for each facility per month. OnMay 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. OnAugust 3, 2018 , we closed an agreement by and among,MIFTEC Laboratories, Inc. ("MIFTEC"), a licensee ofMagneto-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 inNorth America andAsia . 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. OnApril 22, 2019 the Company entered into a Cooperative Agreement with MIFTI whereby the Company acquired certain exclusive manufacturing and supply rights in return for$500,000 , of which$100,000 is payable upon signing,$200,000 within four months of the agreement and$200,000 within nine months of the agreement. The Company also has the option to purchase 10% of MIFTI for$2,700,000 . Results of Operations For the three months endedSeptember 30, 2019 compared to the three months endedSeptember 30, 2018 Three Months Ended September 30, Change 2019 2018 $ % Sales$ 659,325 $ 1,145,480 $ (486,155 ) -42.4 % Cost of goods sold 336,882 633,384 (296,502 ) -46.8 % Gross profit 322,443 512,096 (189,653 ) -37.0 % Selling, general and administrative expenses 1,729,246 1,918,685 (189,439 ) -9.9 % Loss from operations (1,406,803 ) (1,406,589 ) (214 ) 0.0 % Other expense (3,103 ) (8,126 ) 5,023 -61.8 % Loss before provision for income taxes (1,409,906 ) (1,414,715 ) 4,809 -0.3 % Provision for income taxes - - - Net loss$ (1,409,906 ) $ (1,414,715 ) $ 4,809 -0.3 %
Sales for the three months endedSeptember 30, 2019 were$659,325 compared to$1,145,480 for the same period in 2018. The decrease of$486,155 or 42.4% is a result of a decrease in sales from both our Overhoff and Optron subsidiaries of$180,999 and$305,156 , respectively. The decrease in sales from our Overhoff subsidiary was due to several large orders not shipping within the quarter. The decrease in sales from our Optron subsidiary was due to a decrease in large purchase 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 three months endedSeptember 30, 2019 is as follows:North America 29%Middle East 0%Asia (Including Japan) 65%South America 0% Other 6% 17
Our gross margins for the three months endedSeptember 30, 2019 were 48.9% as compared to 44.7% for the same period in 2018. The increase in gross margin
is due to lower overhead costs. Selling, general and administrative expense for the three months endedSeptember 30, 2019 were$1,729,246 compared to$1,918,685 for the same period in 2018. The decrease of$189,439 or 9.9% was due to the acquisition of manufacturing and supply rights in 2018 of$1,084,000 offset by higher stock-based compensation in 2019. During the three months endedSeptember 30, 2019 , stock-based compensation was$1,150,321 compared to$448,740 during the same period in 2018.
Other expense for the three months ended
Net loss for the three months endedSeptember 30, 2019 was$1,409,906 compared to$1,414,715 for the same period in 2018. The change was principally attributed to the factors described above. For the nine months endedSeptember 30, 2019 compared to the nine months endedSeptember 30, 2018 Nine Months Ended September 30, Change 2019 2018 $ % Sales$ 2,818,901 $ 2,706,785 $ 112,116 4.1 % Cost of goods sold 1,392,608 1,429,606 (36,998 ) -2.6 % Gross profit 1,426,293 1,277,179 149,114 11.7 % Selling, general and administrative expenses 3,474,788 3,629,379 (154,591 ) -4.3 % Loss from operations (2,048,495 ) (2,352,200 ) 303,705 -12.9 % Other expense (14,849 ) (21,910 ) 7,061 -32.2 % Loss before provision for income taxes (2,063,344 ) (2,374,110 ) 310,766 -13.1 % Provision for income taxes 0 0 0 Net loss$ (2,063,344 ) $ (2,374,110 ) $ 310,766 -13.1 %
Sales for the nine months endedSeptember 30, 2019 were$2,818,901 compared to$2,706,785 for the same period in 2018. The increase of$112,116 or 4.1% is a result of an increase in sales from our Optron subsidiary of$282,004 ; offset by a decrease in sales from our Overhoff subsidiary of$169,888 . The increase in sales from our Optron subsidiary was due to the fulfillment of a large order of drone detector instruments shipped inMay 2019 . The decrease in sales from our Overhoff subsidiary was due to several large orders not shipping during the third quarter. 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 endedSeptember 30, 2019 is as follows:North America 35%Middle East 27%Asia (Including Japan) 35%South America 0% Other 3% 18 Our gross margins for the nine months endedSeptember 30, 2019 were 50.6% as compared to 47.2% for the same period in 2018. The increase in gross margin
is due to lower overhead costs. Selling, general and administrative expense for the nine months endedSeptember 30, 2019 were$3,474,788 compared to$3,629,379 for the same period in 2018. The decrease of$154,591 or 4.3% was due to the acquisition of manufacturing and supply rights in 2018 of$1,084,000 offset by higher stock-based compensation in 2019. During the nine months endedSeptember 30, 2019 , stock-based compensation was$2,073,019 compared to$1,410,016 during the same period in 2018.
Other expense for the nine months ended
Net loss for the nine months endedSeptember 30, 2019 was$2,063,344 compared to$2,374,110 for the same period in 2018. The change was principally attributed to the factors described above.
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 endedSeptember 30, 2019 , our majority shareholder loaned the Company an additional$15,155 and was repaid$30,159 . 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
At
Net cash provided by operating activities for the nine months endedSeptember 30, 2019 was$92,007 compared to cash used in operating activities of$525,311 for the same period in 2018. The change in cash from operations was principally due to a decrease in the net loss and the changes in working capital accounts, principally inventory and accounts receivable. Net cash used in investing activities for the nine months endedSeptember 30, 2019 was$300,000 compared to$15,777 for the same period in 2018. The increase in cash used in investing activities was principally due to an acquisition deposit paid in 2019 of$300,000 . Net cash provided by financing activities for the nine months endedSeptember 30, 2019 was$290,406 compared to$990,118 for the same period in 2018. 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 during the nine months endedSeptember 30, 2018 compared to the sale of 730,393 shares of our common stock for proceeds of$325,000 during the same period in 2019. Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted inthe 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. 19 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:
? have an auditor report on our internal controls over financial reporting
pursuant to Section 404(b) of the Sarbanes-Oxley Act;
? comply with any requirement that may be adopted by the
Accounting Oversight Board regarding mandatory audit firm rotation or a
supplement to the auditor's report providing additional information about the
audit and the financial statements (i.e., an auditor discussion and analysis);
? submit certain executive compensation matters to shareholder advisory votes,
such as "say-on-pay" and "say-on-frequency;" and
? disclose certain executive compensation related items such as the correlation
between executive compensation and performance and comparisons of the CEO's
compensation to median employee compensation. 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 anEmerging 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. 20
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