US NUCLEAR CORP. Overview
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 thereto contained
in "Item 8. Financial Statements and Supplementary Data" of this report on Form
10-K. 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.
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.
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 . 20 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 year endedDecember 31, 2019 we derived 21.3% 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 54% 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.
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 also entered into a Cooperative Agreement with MIFTI whereby the Company acquired certain exclusive manufacturing and supply rights, including thermonuclear fusion-powered reactor for production of electricity per MIFTI designs 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$500,000 is an option to buy a 10% interest in MIFTI for$2,700,000 , if completed with 24 months of the agreement date. If the options expires, MIFTI shall issue the Company 500,000 shares of common stock and rescind all other exclusive rights contained in the agreement. The option was rescinded and the Company received 500,000 shares of MIFTI common stock which represents an ownership of approximately 0.56% for its$500,000
investment.
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Results of Operations
For the year ended December 31, 2019 compared to the year ended December 31,
2018
Years Ended December 31, Change
2019 2018 $ %
Sales $ 3,540,387 $ 3,634,560 $ (94,173 ) -2.6 %
Cost of goods sold 1,605,447 1,707,355 (101,908 ) -6.0 %
Gross profit 1,934,940 1,927,205 7,735 0.4 %
Consulting expense 1,668,958 1,440,213 228,745 15.9 %
Professional fees 380,951 330,536 50,415 15.3 %
Officer compensation 896,000 110,000 786,000 714.5 %Payroll and related expense 858,152 689,874 168,278 24.4 % General and administrative expense 590,783 664,162 (73,379 ) -11.0 % Acquisition of manufacturing and supply rights - 1,084,000 (1,084,000 ) -100.0 % Loss from operations (2,459,904 ) (2,391,580 ) (68,324 ) 2.9 % Other expense (700,869 ) (15,490 ) (685,379 ) 4424.7 % Loss before provision for income taxes (3,160,773 ) (2,407,070 ) (753,703 ) 31.3 % Provision for income taxes - -
-
Net loss $ (3,160,773 ) $ (2,407,070 ) $ (753,703 ) 31.3 %
Sales for the year ended December 31, 2019 were $3,540,387 compared to
$3,634,560 for the same period in 2018. The decrease of $94,173 or 2.6% is a
result of a decrease in sales from our Overhoff subsidiary of $124,930 ; offset
by an increase in sales from our Optron subsidiary of $30,757 . The decrease in
sales from our Overhoff subsidiary was due to the timing of shipment for larger
orders. The increase in sales from our Optron subsidiary was due to the
fulfillment of a large order of drone detector instruments in 2019. 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 year ended December 31,
2019 is as follows:
North America 46.0%
Middle East 21.2%
South America 0.4% Other 3.1% Our gross margins for the year endedDecember 31, 2019 were 54.7% as compared to 53.0% for the same period in 2018. The increase in gross margin is due to the sale of more higher margin products. Consulting expense for the year endedDecember 31, 2019 was$1,668,958 compared to$1,440,213 for the same period in 2018. The increase of$228,745 or 15.9% was due to common stock issued to consultants for services rendered. Professional fees for the year endedDecember 31, 2019 were$380,951 compared to$330,536 for the same period in 2018. The increase of$50,415 or 15.3% was due to additional legal and accounting fees Officer compensation for the year endedDecember 31, 2019 was$896,000 compared to$110,000 for the same period in 2018. The increase of$786,000 or 714.5% was due to the issuance of 700,000 shares of common stock to our CEO. Payroll and related expense for the year endedDecember 31, 2019 was$858,152 compared to$689,874 for the same period in 2018. The increase of$168,278 or 24.4% was due to the increase in personnel.
General and administrative expense for the year ended
Other expense for the year endedDecember 31, 2019 was$700,869 , an increase of$685,379 from$15,490 for the same period in 2018. The increase was due to the write-down of investments of$508,000 and loss on issuance of convertible debenture of$183,978 in 2019 and higher interest expense associated with the amortization of the debt discount associated with the convertible debenture.
Net loss for the year ended
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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 and the issuance of a convertible debenture. As funds were needed for working capital purposes, our majority shareholder would loan us the needed funds. During the year endedDecember 31, 2019 , our majority shareholder loaned the Company an additional$16,255 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 used in operating activities for the year endedDecember 31, 2019 was$130,621 compared to$394,863 for the same period in 2018. The change in cash from operations was principally due to a decrease in the net loss, the increase in non-cash expenses in 2019 and the changes in working capital accounts, principally inventory and accounts receivable. Net cash used in investing activities for the year endedDecember 31, 2019 was$503,592 compared to$15,777 for the same period in 2018. The increase in cash used in investing activities was principally due to$500,000 paid for an investment in 2019. Net cash provided by financing activities for the year endedDecember 31, 2019 was$752,755 compared to$937,417 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 year endedDecember 31, 2018 compared to the sale of 730,393 shares of our common stock for proceeds of$325,000 during the same period in 2019 the issuance of a convertible debenture in 2019 for$465,000 .
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. 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.
Derivative Financial Instruments
The Company evaluates all of its agreements to determine if such instruments
have derivatives or contain features that qualify as embedded derivatives. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported in the
statements of operations. For stock-based derivative financial instruments, the
Company uses a weighted-average Black-Scholes-Merton option pricing model to
value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date. The Company's only derivative financial instruments were
an embedded conversion feature associated with convertible notes payable due to
certain provisions that allow for a change in the conversion price based on a
percentage of the Company's stock price at the date of conversion and a warrant
with an exercise price that is adjustable based on future events.
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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 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. Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
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