Omnitek Engineering Corp - Quarter Report: 2016 September (Form 10-Q)

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

Commission File Number     000-53955

 (Exact name of Registrant as specified in its charter)

 

 (Address of principal executive offices, Zip Code)

 (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☒   No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer,"  "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

As of November 7, 2016, the Registrant had 20,281,082 shares of its no par value Common Stock outstanding.

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Page 1

 

 

		September 30,				December 31,
		2016				2015
		(unaudited)
ASSETS
CURRENT ASSETS
Cash		$	6,805			$	105,846
Accounts receivable, net			31,913				30,835
Accounts receivable - related parties			3,375				17,257
Inventory, net			1,995,384				2,107,463
Prepaid expense			5,324				6,050
Costs in excess of billings			21,242				-
Deposits			31,694				19,745
Total Current Assets			2,095,737				2,287,196
FIXED ASSETS, net			38,351				59,151
OTHER ASSETS
Intellectual property, net			-				281
Other noncurrent assets			-				14,280
Total Other Assets			-				14,561
TOTAL ASSETS		$	2,134,088			$	2,360,908
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	340,837			$	145,207
Accrued management compensation			213,875				189,163
Accounts payable - related parties			10,519				7,591
Customer deposits			118,896				230,349
Total Current Liabilities			684,127				572,310
Total Liabilities			684,127				572,310
STOCKHOLDERS' EQUITY
Common stock, 125,000,000 shares authorized no par value
20,281,082 and 19,981,082 shares issued and outstanding,
respectively			8,411,411				8,291,411
Additional paid-in capital			11,595,554				11,346,599
Accumulated deficit			(18,557,004	)			(17,849,412	)
Total Stockholders' Equity			1,449,961				1,788,598
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	2,134,088			$	2,360,908
The accompanying notes are an integral part of these condensed financial statements.

 

 

Page 2

 

 

OMNITEK ENGINEERING CORP.

Condensed Statements of Operations (unaudited)

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

Page 3

 

 

OMNITEK ENGINEERING CORP.

Condensed Statements of Cash Flows (unaudited)

 

 

 The accompanying notes are an integral part of these financial statements.

 

Page 4

 

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

 

 NOTE 1 - CONDENSED FINANCIAL STATEMENTS

 

The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2016 and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2015 audited financial statements.  The results of operations for the periods ended September 30, 2016 and 2015 are not necessarily indicative of the operating results for the full years.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company's financial position, or statements.

Costs in excess of billings represent unbilled amounts earned and reimbursable under contracts. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. Generally, such unbilled amounts will be billed and collected over the next twelve months. Based on our historical experience, we generally consider the collection risk related to these amounts to be low. When events or conditions indicate that the amounts outstanding may become uncollectible, an allowance is estimated and recorded.

 

Page 5

 

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Property and equipment at September 30, 2016 and December 31, 2015 consisted of the following:

Depreciation expense for the nine month periods ended September 30, 2016 and September 30, 2015 was $20,800 and $22,173, respectively.

The computation of basic earnings per share of common stock is based on the weighted average number of shares outstanding during the periods presented. The computation of fully diluted earnings per share includes common stock equivalents outstanding at the balance sheet date. The Company had -0- and -0- stock options and warrants that would have been included in the fully diluted earnings per share as of September 30, 2016 and December 31, 2015, respectively.  

 

Page 6

 

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes ("Topic 740"), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.

Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company's financial statements. Topic 740 requires a company to determine whether it is more

likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

At the adoption date of November 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized. The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision for income taxes. As of September 30, 2016 and December 31, 2015 the Company had no accrued interest or penalties related to uncertain tax positions. The Company files an income tax return in the U.S. federal jurisdiction and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2008.

NOTE 3 – COSTS IN EXCESS OF BILLINGS

Costs in excess of billings at September 30, 2016 and December 31, 2015 consisted of the following:

 

Page 7

 

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

NOTE 4 - RELATED PARTY TRANSACTIONS

NOTE 5 -  STOCK OPTIONS AND WARRANTS

During the nine months ended September 30, 2016 and 2015, the Company granted 250,000 and 125,000 options for services, respectively. During the nine months ended September 30, 2016 and 2015, the Company recognized expense of $148,955 and $176,895, respectively, for options and warrants that vested during the periods pursuant to ASC Topic 718. Total remaining amount of compensation expense to be recognized in future periods is $131,209.

 

Page 8

 

 

 

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

NOTE 5 -  STOCK OPTIONS AND WARRANTS (CONTINUED)

In April 2007, the Company's shareholders approved its 2006 Long-Term Incentive Plan ("the 2006 Plan").   Under the 2006 plan, the Company may issue up to 10,000,000 shares of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion.  As of December 31, 2014 the remaining 2,590,000 options previously issued under the plan expired. On August 3, 2011 the Board of Directors adopted the Omnitek Engineering Corp. 2011 Long-term Incentive Plan (the "2011 Plan"), under which 1,000,000 shares of Company's Common Stock were reserved for issuance of both Incentive Stock Options to employees only and and Non-Qualified Stock Options to employees and consultants at its discretion. As of September 30, 2016 the Company has a total of 915,000 options issued under the plan. On September 11, 2015 the Board of Directors adopted the Omnitek Engineering Corp. 2015 Long Term Incentive Plan (the "2015 Plan"), under which 2,500,000 shares of the Company's Common Stock were reserved for issuance of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. As of September 30, 2016 the Company has a total of 820,000 options issued under the plan. During the nine months ended September 30, 2016 and 2015 the Company issued -0- and -0- warrants, respectively.

The Company recognizes compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value.  The Company estimates the fair value of stock options using a Black-Scholes option pricing model which requires management to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock. When determining expected volatility, the Company considers the historical performance of the Company's stock, as well as implied volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options' expected term. The expected term of the options is based on the Company's evaluation of option holders' exercise patterns and represents the period of time that options are expected to remain unexercised. The Company uses historical data to estimate the timing and amount of forfeitures.

The following table presents the assumptions used to estimate the fair values of the stock options granted:

 

Page 9

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

NOTE 5 -  STOCK OPTIONS AND WARRANTS (CONTINUED)

A summary of the status of the options and warrants granted at September 30, 2016 and December 31, 2015 and changes during the periods then ended is presented below:

 

 

NOTE 6 – STOCKHOLDERS' EQUITY

On June 13, 2016 the Company sold, to an unrelated party, 250,000 shares of restricted common stock at a price of $0.40 per share for an aggegrate sales price of $100,000. On July 15, 2016, the Company issued, to an unrelated party, 50,000 shares of restricted common stock at a price of $0.40 per share for services rendered.

Page 10

 

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2016

(unaudited)

NOTE 7 – SUBSEQUENT EVENTS

In accordance with ASC 855-10, Company management reviewed all material events through the date of this report.  There are no material subsequent events to report

 

 

Page 11

 

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this periodic report.  Some of the statements under "Management's Discussion and Analysis," "Description of Business" and elsewhere herein may include forward-looking statements which reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and the alternative fuels engines industry in general. Statements which include the words "expect," "intend," "plan," "believe," "project," "anticipate," "will," and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. The safe harbor provisions of the federal securities laws do not apply to any forward-looking statements contained in this registration statement. 

All forward-looking statements address such matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read herein reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our written and oral forward-looking statements attributable to us or individuals acting on our behalf and such statements are expressly qualified in their entirety by this paragraph.

For the three months ended September 30, 2016 and 2015

Revenues were $355,050 for the three months ended September 30, 2016 compared with $438,178 for the three months ended September 30, 2015, a decrease of $83,128. The results for the period reflect the impact of the timing of shipments.

 

Cost of sales was $200,894 for the three months ended September 30, 2016 compared with $245,419 for the three months ended September 30, 2015, a decrease of $44,525. Our gross margin was 43% for the three months ended September 30, 2016 compared with 44% in the same period in 2015.

 

Operating expenses for the three months ended September 30, 2016 were $370,554 compared with $464,697 in the same period in 2015, a decrease of $94,143 or 20%. General and administrative expense for the three months ended September 30, 2016 was $306,535 compared with $385,209 for the three months ended September 30, 2015. The decrease was primarily due to options expense of $30,887 for the three months ended September 30, 2016 compared with $89,806 for the three months ended September 30, 2015.  Major components of general and administrative expenses for the three months ended September 30, 2016 were professional fees of $13,129, rent expense of $23,568, and salary and wages of $140,226. This compares to professional fees of $13,221, rent expense of $42,068 and salaries and wages of $122,106 for the three months ended September 30, 2015.  For the three months ended September 30, 2016 research and development outlays were decreased to $57,402 compared with $71,963 for the three months ended September 30, 2015. The decrease in outlays between the two periods was primarily due to a reduction in active research and development projects.

 

Page 12

 

 

Our net loss for the three months ended September 30, 2016 was $217,909, or $0.01 per share, compared with a net loss of $271,972, or $0.01 per share, for the three months ended September 30, 2015.  Additionally, operating loss for the three months ended September 30, 2016 was $216,398 compared with $271,938 for the three months ended September 30, 2015.  The decreased operating loss was primarily due to lower options expense during the three months ended September 30, 2016 over the same period a year earlier.

 

Results for the three months ended September 30, 2016 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $30,887 and depreciation and amortization of $6,617.  For the three month period a year earlier non-cash expenses included options and warrants granted in the amount of $89,806 and depreciation and amortization of $7,526.

For the nine months ended September 30, 2016 and 2015

Revenues decreased to $946,948 for the nine months ended September 30, 2016 from $1,480,063 for the nine months ended September 30, 2015, a decrease of $533,115 or 36%. The results for the period reflect the impact of the timing of shipments.

Cost of sales decreased to $521,387 for the nine months ended September 30, 2016 from $766,067 for the nine months ended September 30, 2015, a decrease of $244,680. Our gross margin was 45% for the nine months ended September 30, 2016 compared with 48% in 2015. The reduction in gross margin was the result of the change in product mix between the two periods.

Our operating expenses for the nine months ended September 30, 2016 were $1,133,576 compared with $1,394,353 in 2015, a decrease of $260,777 or 19%.  General and administrative expense for the nine months ended September 30, 2016 was $960,789 compared with $1,133,102 for the nine months ended September 30, 2015.  The decrease was due primarily to options expense of $148,955 for the nine months ended September 30, 2016 compared with $176,895 for the nine months ended September 30, 2015 and travel expense of $12,002 for the nine months ended September 30, 2016 compared with $39,919 for the nine months ended September 30, 2015.  Major components of general and administrative expenses for the nine months ended September 30, 2016 were professional fees of $65,107, rent expense of $71,639 and salary and wages of $381,588. This compares to professional fees of $73,008, rent expense of $117,051, and salary and wages of $387,592 for the nine months ended September 30, 2015. Research and development outlays were decreased to $151,706 for the nine months ended September 30, 2016 compared with $238,201 for the nine months ended September 30, 2015.

Our net loss for the nine months ended September 30, 2016 was $707,592, or $0.04 per share, compared with a net loss of $677,414, or $0.03 per share, for the nine months ended September 30, 2015. Additionally, operating loss for the nine months ended September 30, 2016 was $708,015 compared with $680,357 for the nine months ended September 30, 2015.  The increased operating loss was primarily due to non-cash expenses and decreased revenues in the nine months ended September 30, 2016 over the same period a year earlier.

Results for the nine months ended September 30, 2016 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $148,955 and depreciation and amortization of $21,081. For the nine-month period a year earlier, non-cash expenses for the value of options and warrants granted were $176,895, depreciation and amortization of $23,050.

 

 

Overview

 

Our primary sources of liquidity are cash provided by operating activities and available working capital. Additionally, from time to time we may raise funds from the equity capital markets to fund our research and development programs, expansion of our business and general operations.

Page 13

 

 

At September 30, 2016, our current liabilities totaled $684,127 and our current assets totaled $2,095,737, resulting in positive working capital of $1,411,610 and a current ratio of 3.06.

 

We have no firm commitments or obligations for capital expenditures.  However, substantial discretionary expenditures may be required to enable us to conduct existing and planned product research, design, development, manufacturing, marketing and distribution of our products. We may need to raise additional capital to facilitate growth and support our long-term product development, manufacturing, and marketing programs. The Company has no established bank-financing arrangements. Therefore, it is possible that we need to seek additional financing through subsequent future public or private sales of our securities, including equity securities. We may also seek funding for the development, manufacturing, and marketing of our products through strategic partnerships and other arrangements with corporate partners. There can be no assurance, however, that such collaborative arrangements or additional funds will be available when needed, or on terms acceptable to us, if at all. If adequate funds are not available, we may be required to curtail one or more of our research and development programs.

We have historically incurred significant losses, which have resulted in a total accumulated deficit of $18,557,004 at September 30, 2016, of which $5,604,135 is a direct result of derivative expense and change in fair value of derivative liability and is unrelated to our operations or cash flow.

 

Operating Activities

 

We realized a negative cash flow from operations of $199,041 for the nine months ended September 30, 2016 compared with a negative cash flow of $293,071 during the nine months ended September 30, 2015.

Included in the operating loss of $707,592 for the nine months ended September 30, 2016 are non-cash expenses, which are not a drain on our capital resources.  During the period, these non-cash expenses include the value of options and warrants granted in the amount of $148,955 and depreciation and amortization of $21,081.  Excluding these non-cash amounts, our adjusted operating loss for the nine months ended September 30, 2016 is $537,556.

 

 

None.

 

 

Accounting Method and Use of Estimates

 

The Company's financial statements are prepared using the accrual method of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas where significant estimates are required include the following:

 

Accounts Receivable

 

Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts.

Page 14

 

 

Inventory

 

Inventory is stated at the lower of cost or market. The Company's inventory consists of finished goods and raw material. The Company identifies items in its inventory that have not been sold in a timely manner. Accordingly, the Company has established an allowance for the cost of such obsolete inventory.

 

Long-lived assets

 

The Company assesses the recoverability of its long lived assets annually and whenever circumstances would indicate that there may be an impairment. The Company compares the estimated undiscounted future cash flows to the carrying value of the long lived assets to determine if an impairment has occurred. In the event that an impairment has occurred, the Company recognizes the impairment immediately.

 

Costs in excess of billings

 

Costs in excess of billings represent unbilled amounts earned and reimbursable under contracts. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. Generally, such unbilled amounts will be billed and collected over the next twelve months. Based on our historical experience, we generally consider the collection risk related to these amounts to be low. When events or conditions indicate that the amounts outstanding may become uncollectible, an allowance is estimated and recorded.

 

Income Taxes

 

The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized. The Company uses historical experience to determine the likelihood of realization of deferred tax liabilities and assets.

 

Revenue Recognition

 

The Company recognizes revenue from the sale of new natural gas engines and components to convert existing diesel engines to natural gas engines. Revenue is recognized upon shipment of the products, and when collection is reasonably assured.

 

Accounting for Income Taxes

 

The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes ("Topic 740"), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.

 

Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company's financial statements. Topic 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

Page 15

 

 

At the adoption date of November 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.

 

The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision for income taxes. As of September 30, 2016, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Company files an income tax return in the U.S. federal jurisdiction and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2008.

 

At September 30, 2016, the Company had net operating loss carry forwards of approximately $6,300,000 through 2034. No tax benefit has been reported in the September 30, 2016 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

 

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.

 

 

The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company's financial position, or statements.

 

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

 

 Page 16

 

 

PART II - OTHER INFORMATION

 

 

 

ITEM 1A.         RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

 

None

 

 

None

 

Page 17

 

 

 

(a)  Documents filed as part of this Report.

 

1.  Financial Statements.  The condensed unaudited Balance Sheet of Omnitek Engineering Corp. as of September 30, 2016 and the audited balance sheet as of December 31, 2015, the condensed unaudited Statements of Operations for the three month and the nine month periods ended September 30, 2016 and 2015, and the condensed unaudited Statements of Cash Flows for the nine month periods ended September 30, 2016 and 2015, together with the notes thereto, are included in this Quarterly Report on Form 10-Q.

 

3. Exhibits. The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers correspond to the numbering system in Item 601 of Regulation S-K.

 

 

(1)

Previously filed on Form on Form 10 on April 27, 2010

 

(2)

Previously filed on Form 8-K on August 2, 2012

 

(3)

Filed herewith

 

Page 18

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Page 19