US NUCLEAR CORP.
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, 2019 filed with the Securities Exchange Commission on
Form 10-K on July 2, 2020 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.
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 international revenues were 23.1% of our total revenue in 2020. 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 allof our product offerings.
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. OnFebruary 5, 2020 , the Company entered into a Stock Purchase Agreement ("SPA") withGrapheton, Inc. , aCalifornia corporation ("Grapheton"). The transaction was closed onMarch 12, 2020 . Grapheton is a start-up company that focuses on building energy storage devises, known as supercapacitors, from a new material system. The technology utilized by Grapheton has been proven to provide a compelling advantage in microelectrode arrays with superior electrical and
electrochemical properties.
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Pursuant to the terms of the SPA, the Corporation will acquire a total of 2,552
shares of Grapheton's common stock over a two year period. At closing, the
Company was issued at total of 1,452 shares of Grapheton's common stock for
On the one-year anniversary of the closing of the SPA, the Company shall receive an additional 1,100 shares of Grapheton's common stock in exchange for shares of the Company's common stock in an amount equal to$707,777 , as valued by an independent third-party valuator.
An additional "true up" issuance of the Company's common stock to Grapheton may be made on the second anniversary of the closing of the SPA, based on the valuation of the Company's common stock on that date by a third-party valuator
Novel Coronavirus (COVID-19)
While we are still operating, our business has been and will continue to be adversely impacted by the effects of the Novel Coronavirus (COVID-19). In addition to global macroeconomic effects, the COVID-19 outbreak and any other related adverse public health developments will cause disruption to our operations and sales activities. Our third-party manufacturers, suppliers, third-party distributors, sub-contractors and customers have been and will be disrupted by worker absenteeism, quarantines and restrictions on our employees' ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions. Depending on the magnitude of such effects on our manufacturing, assembling, and testing activities or the operations of our suppliers, third-party distributors, or sub-contractors, our supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business, operations and customer relationships. In addition, COVID-19 or other disease outbreak will in the short-run and may over the longer term adversely affect the economies and financial markets of many countries, resulting in an economic downturn that will affect demand for our products and impact our operating results. There can be no assurance that any decrease in sales resulting from COVID-19 will be offset by increased sales in subsequent periods. Although the magnitude of the impact of the COVID-19 outbreak on our business and operations remains uncertain, the continued spread of COVID-19 or the occurrence of other epidemics and the imposition of related public health measures and travel and business restrictions will adversely impact our business, financial condition, operating results and cash flows. In addition, we have experienced and will experience disruptions to our business operations resulting from quarantines, self-isolations, or other movement and restrictions on the ability of our employees to perform their jobs that may impact our ability to develop and design our products in a timely manner or meet required milestones or customer commitments. Results of Operations For the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 : Three Months Ended September 30, Change 2020 2019 $ % Sales$ 484,318 $ 659,325 $ (175,007 ) -26.5 % Cost of goods sold 281,808 336,882 (55,074 ) -16.3 % Gross profit 202,510 322,443 (119,933 ) -37.2 %
Selling, general and administrative expenses 1,021,507 1,729,246 (707,739 ) -40.9 % Loss from operations (818,997 ) (1,406,803 ) 587,806 -41.8 % Other expense (31,389 ) (3,103 ) (28,286 ) 911.6 % Loss before provision for income taxes (850,386 ) (1,409,906 ) 559,520 -39.7 % Provision for income taxes - -
-
Net loss $ (850,386 ) $ (1,409,906 ) $ 559,520 -39.7 %
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Sales for the three months endedSeptember 30, 2020 were$484,318 compared to$659,325 for the same period in 2019. The decrease of$175,007 or 26.5% is a result of a decrease in sales from both our Overhoff and Optron subsidiaries of$130,882 and$44,125 , respectively. The decrease in sales is principally due to the impact of COVID-19 had on our company and on our customers. The sales breakdown for the three months endedSeptember 30, 2020 is as follows:North America 70.5 %Middle East 0 %Asia (Including Japan) 29.5 %South America 0 % Other 0 %
Our gross margins for the three months endedSeptember 30, 2020 were 41.8% as compared to 48.9% for the same period in 2019. The decrease in gross margin
is due to overhead allocations. Selling, general and administrative expense for the three months endedSeptember 30, 2020 were$1,021,507 compared to$1,729,246 for the same period in 2019. The decrease of$707,739 or 40.9% was due to lower stock-based compensation in 2020. During the three months endedSeptember 30, 2020 , stock-based compensation was$542,560 compared to$1,150,321 during the same period in 2019. Other expense for the three months endedSeptember 30, 2020 was$31,389 , an increase of$28,286 from$3,103 for the same period in 2019. The increase was due to the amortization of the debt discount associated with the convertible debenture; offset by the change in value of the derivative liability. Net loss for the three months endedSeptember 30, 2020 was$850,386 compared to$1,409,906 for the same period in 2019. The change was principally attributed to the factors described above. For the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 : Nine Months Ended September 30, Change 2020 2019 $ % Sales$ 1,108,758 $ 2,818,901 $ (1,710,143 ) -60.7 % Cost of goods sold 596,542 1,392,608 (796,066 ) -57.2 % Gross profit 512,216 1,426,293 (914,077 ) -64.1 % Selling, general and administrative expenses 2,262,552 3,474,788 (1,212,236 ) -34.9 % Loss from operations (1,750,336 ) (2,048,495 ) 298,159 -14.6 % Other expense (292,536 ) (14,849 ) (277,687 ) 1870.1 % Loss before provision for income taxes (2,042,872 ) (2,063,344 ) 20,472 -1.0 % Provision for income taxes - - - Net loss$ (2,042,872 ) $ (2,063,344 ) $ 20,472 -1.0 %
Sales for the nine months endedSeptember 30, 2020 were$1,108,758 compared to$2,818,901 for the same period in 2019. The decrease of$1,710,143 or 60.7% is a result of a decrease in sales from both our Overhoff and Optron subsidiaries of$780,049 and$930,094 , respectively. The decrease in sales is principally due to the impact of COVID-19 had on our company and on our customers. The sales breakdown for the nine months endedSeptember 30, 2020 is as follows:North America 74.1 %Middle East 0 %Asia (Including Japan) 22.4 %South America 0 % Other 3.5 % 22 Our gross margins for the nine months endedSeptember 30, 2020 were 46.2% as compared to 50.6% for the same period in 2019. The decrease in gross margin
is due to overhead allocations. Selling, general and administrative expense for the nine months endedSeptember 30, 2020 were$2,262,552 compared to$3,474,788 for the same period in 2019. The decrease of$1,212,236 or 34.9% was due to lower stock-based compensation in 2020. During the nine months endedSeptember 30, 2020 , stock-based compensation was$995,656 compared to$2,073,019 during the same period in 2019. Other expense for the nine months endedSeptember 30, 2020 was$292,536 , an increase of$277,687 from$14,849 for the same period in 2019. The increase was due to the amortization of the debt discount associated with the convertible debenture; offset by the change in derivative liability. Net loss for the nine months endedSeptember 30, 2020 was$2,042,872 compared to$2,063,344 for the same period in 2019. 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, 2020 , our majority shareholder loaned the Company an additional$520,600 and paid expenses on the Company's behalf of$40,000 . We also repaid our majority shareholder$616,801 of amount previously advanced to the Company. 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
AtSeptember 30, 2020 , total liabilities increased by 15.3% to$2,123,059 from$1,840,872 atDecember 31, 2019 . The increase is principally related to an increase in convertible notes and notes payable, offset by a decrease in accrued liabilities, note payable to stockholder and derivative liability. Net cash used in operating activities for the nine months endedSeptember 30, 2020 was$366,405 compared to cash provided by operating activities of$92,007 for the same period in 2019. The change in cash from operations was principally due to changes in working capital accounts, principally inventory, accounts receivable and customer deposit. Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$235,000 compared to$300,000 for the same period in 2019. The decrease in cash used in investing activities was principally due to the investment in Grapheton of$235,000 in 2020 compared to an acquisition deposit of$300,000 in 2019. Net cash used in financing activities for the nine months endedSeptember 30, 2020 was$2,243 compared to cash provided by financing activities of$290,406 for the same period in 2019. The change in cash from financing activities was principally the issuance of a$107,587 note payable and the net repayment of note payable to stockholder of$96 ,201in 2020 compared to the issuance of common stock for$325,000 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.
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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 notbe 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.
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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.
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