Omnitek Engineering Corp - Quarter Report: 2017 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2017 |
Commission File Number 000-53955
OMNITEK ENGINEERING CORP.
(Exact name of Registrant as specified in its charter)
California |
| 330984450 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1333 Keystone Way, #101, Vista, California 92081
(Address of principal executive offices, Zip Code)
(760) 591-0089
(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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☒ |
Emerging growth company | ☐ |
|
|
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 8, 2017, the Registrant had 20,281,082 shares of its no par value Common Stock outstanding
TABLE OF CONTENTS | ||
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Item 1. Financial Statements |
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Condensed Balance Sheets as of September 30, 2017 and December 31, 2016 | 4 | |
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5 | ||
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6 | ||
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7 | ||
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Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations | 13 | |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk | 17 | |
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Item 4. Controls and Procedures | 17 | |
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Item 1. Legal Proceedings | 18 | |
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Item 1A. Risk Factors | 18 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 18 | |
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Item 3. Defaults Upon Senior Securities | 18 | |
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Item 5. Other Information | 18 | |
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Item 6. Exhibits | 18 | |
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Page 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page 3
OMNITEK ENGINEERING CORP.
Condensed Balance Sheets
| September 30, |
| December 31, | ||
| 2017 |
| 2016 | ||
| (unaudited) |
|
|
| |
ASSETS | |||||
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
Cash | $ | 44,444 |
| $ | 17,782 |
Accounts receivable, net |
| 28,457 |
|
| 28,159 |
Accounts receivable - related parties |
| 7,654 |
|
| 7,005 |
Inventory, net |
| 1,898,755 |
|
| 1,869,900 |
Prepaid expense |
| - |
|
| 5,324 |
Costs and estimated earnings in excess of billings |
| - |
|
| 30,973 |
Deposits |
| 41,330 |
|
| 21,716 |
|
|
|
|
|
|
Total Current Assets |
| 2,020,640 |
|
| 1,980,859 |
|
|
|
|
|
|
FIXED ASSETS, net |
| 13,245 |
|
| 31,839 |
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
Other noncurrent assets |
| 14,280 |
|
| 14,280 |
|
|
|
|
|
|
Total Other Assets |
| 14,280 |
|
| 14,280 |
|
|
|
|
|
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TOTAL ASSETS | $ | 2,048,165 |
| $ | 2,026,978 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
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CURRENT LIABILITIES |
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|
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Accounts payable and accrued expenses | $ | 288,185 |
| $ | 325,255 |
Accrued management compensation |
| 437,897 |
|
| 314,788 |
Accounts payable - related parties |
| 75,311 |
|
| 18,373 |
Billings in excess of costs and estimated earnings |
| 30,000 |
|
| - |
Customer deposits |
| 265,594 |
|
| 87,114 |
|
|
|
|
|
|
Total Current Liabilities |
| 1,096,987 |
|
| 745,530 |
|
|
|
|
|
|
Total Liabilities |
| 1,096,987 |
|
| 745,530 |
|
|
|
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STOCKHOLDERS' EQUITY |
|
|
|
|
|
Common stock, 125,000,000 shares authorized no par value 20,281,082 shares issued and outstanding |
| 8,411,411 |
|
| 8,411,411 |
Additional paid-in capital |
| 11,841,050 |
|
| 11,620,841 |
Accumulated deficit |
| (19,301,283) |
|
| (18,750,804) |
|
|
|
|
|
|
Total Stockholders' Equity |
| 951,178 |
|
| 1,281,448 |
|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,048,165 |
| $ | 2,026,978 |
The accompanying notes are an integral part of these financial statements.
Page 4
OMNITEK ENGINEERING CORP.
Condensed Statements of Operations (unaudited)
|
|
| For the Three Months Ended September 30 2017 |
|
| For the Three Months Ended September 30 2016 |
|
| For the Nine Months Ended September 30 2017 |
|
| For the Nine Months Ended September 30 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
| $ | 263,572 |
| $ | 354,533 |
| $ | 795,018 |
| $ | 930,755 |
REVENUES, related parties |
|
| 12,669 |
|
| 517 |
|
| 19,192 |
|
| 16,193 |
Total Revenues |
|
| 276,241 |
|
| 355,050 |
|
| 814,210 |
|
| 946,948 |
COST OF GOODS SOLD |
|
| 158,358 |
|
| 200,894 |
|
| 456,765 |
|
| 521,387 |
GROSS MARGIN |
|
| 117,883 |
|
| 154,156 |
|
| 357,445 |
|
| 425,561 |
|
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|
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OPERATING EXPENSES |
|
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|
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|
|
|
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|
|
|
|
|
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General and administrative |
|
| 240,477 |
|
| 306,535 |
|
| 789,618 |
|
| 960,789 |
Research and development |
|
| 18,978 |
|
| 57,402 |
|
| 92,667 |
|
| 151,706 |
Depreciation and amortization |
|
| 6,147 |
|
| 6,617 |
|
| 18,594 |
|
| 21,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 265,602 |
|
| 370,554 |
|
| 900,879 |
|
| 1,133,576 |
|
|
|
|
|
|
|
|
|
|
|
|
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LOSS FROM OPERATIONS |
|
| (147,719 |
|
| (216,398) |
|
| (543,434) |
|
| (708,015) |
|
|
|
|
|
|
|
|
|
|
|
|
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OTHER INCOME (EXPENSE) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income |
|
| - |
|
| 200 |
|
| - | 5,574 | ||
Interest expense |
|
| (2,130) |
|
| (1,711) |
|
| (6,245) |
|
| (4,351) |
|
|
|
|
|
|
|
|
|
|
|
|
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Total Other Income (Expense) |
|
| (2,130) |
|
| (1,511) |
|
| (6,245) |
|
| 1,223 |
|
|
|
|
|
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|
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LOSS BEFORE INCOME TAXES |
|
| (149,849) |
|
| (217,909) |
|
| (549,679) |
|
| (706,792) |
INCOME TAX EXPENSE |
|
| - |
|
| - |
|
| 800 |
|
| 800 |
|
|
|
|
|
|
|
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|
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NET LOSS |
| $ | (149,849) |
| $ | (217,909) |
| $ | (550,479) |
| $ | (707,592) |
|
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|
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BASIC AND DILUTED LOSS PER SHARE |
| $ | (0.01) |
| $ | (0.01) |
| $ | (0.03) |
| $ | (0.04) |
|
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -BASIC AND DILUTED |
|
| 20,281,082 |
|
| 20,273,473 |
|
| 20,281,082 |
|
| 20,095,681 |
The accompanying notes are an integral part of these financial statements.
Page 5
OMNITEK ENGINEERING CORP.
Condensed Statements of Cash Flows (unaudited)
|
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| For the Nine Months Ended September 30 2017 |
|
| For the Nine Months Ended September 30 2016 |
OPERATING ACTIVITIES |
|
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Net loss |
| $ | (550,479) |
| $ | (707,592) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
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|
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Amortization and depreciation expense |
|
| 18,594 |
|
| 21,081 |
Options and warrants |
|
| 120,209 |
|
| 148,955 |
Common stock issued for services |
|
| - |
|
| 20,000 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
| (298) |
|
| (1,078) |
Accounts receivable–related parties |
|
| (649) |
|
| 13,882 |
Costs and estimated earnings in excess of billings |
|
| 30,973 |
|
| (21,242) |
Deposits |
|
| (19,614) |
|
| 2,331 |
Prepaid expense |
|
| 5,325 |
|
| 726 |
Inventory |
|
| (28,855) |
|
| 112,080 |
Accounts payable and accrued expenses |
|
| (37,070) |
|
| 195,629 |
Customer deposits |
|
| 178,479 |
|
| (111,453) |
Accounts payable-related parties |
|
| 56,938 |
|
| 2,928 |
Billings in excess of costs and estimated earnings |
|
| 30,000 |
|
| - |
Accrued management compensation |
|
| 223,109 |
|
| 124,712 |
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Operating Activities |
|
| 26,662 |
|
| (199,041) |
|
|
|
|
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|
|
INVESTING ACTIVITIES |
|
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Net Cash Provided by Investing Activities |
|
| - |
|
| - |
|
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FINANCING ACTIVITIES |
|
|
|
|
|
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Proceeds from stock sale |
|
| - |
|
| 100,000 |
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
| - |
|
| 100,000 |
|
|
|
|
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NET INCREASE (DECREASE) IN CASH |
|
| 26,662 |
|
| (99,041) |
CASH AT BEGINNING OF YEAR |
|
| 17,782 |
|
| 105,846 |
|
|
|
|
|
|
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CASH AT END OF PERIOD |
| $ | 44,444 |
| $ | 6,805 |
|
|
|
|
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SUPPLEMENTAL DISCLOSURES OF CASH FLOWS |
|
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CASH PAID FOR: |
|
|
|
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Interest |
| $ | 5,721 |
| $ | 1,711 |
Income taxes |
| $ | 800 |
| $ | 800 |
NON CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Options issued for accrued salary |
| $ | 100,000 |
| $ | - |
The accompanying notes are an integral part of these financial statements.
Page 6
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
September 30, 2017
(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, 2017 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, 2016 audited financial statements. The results of operations for the periods ended September 30, 2017 and 2016 are not necessarily indicative of the operating results for the full years.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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.
Recent Accounting Pronouncements
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.
Inventory
Inventory is stated at the lower of cost or market. The Company’s inventory consists of finished goods and raw material and is located in Vista, California, consisting of the following:
| September 30, |
| December 31, | ||
Location : Vista, CA | 2017 |
| 2016 | ||
Raw materials | $ | 1,003,613 |
| $ | 965,821 |
Finished goods |
| 1,211,721 |
|
| 1,247,230 |
Work in process |
| 26,572 |
|
| - |
Allowance for obsolete inventory |
| (343,151) |
|
| (343,151) |
Total | $ | 1,898,755 |
| $ | 1,869,900 |
The Company has established an allowance for obsolete inventory. Expense for obsolete inventory was $-0- and $-0-, for the periods ended September 30, 2017 and September 30, 2016, respectively.
Page 7
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
September 30, 2017
(unaudited)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment at September 30, 2017 and December 31, 2016 consisted of the following:
| September 30, |
| December 31, | ||
| 2017 |
| 2016 | ||
Production equipment | $ | 61,960 |
| $ | 61,960 |
Computers/Office equipment |
| 28,540 |
|
| 28,540 |
Tooling equipment |
| 12,380 |
|
| 12,380 |
Leasehold Improvements |
| 42,451 |
|
| 42,451 |
Less: accumulated depreciation |
| (132,086) |
|
| (113,492) |
Total | $ | 13,245 |
| $ | 31,839 |
Depreciation expense for the nine month periods ended September 30, 2017 and September 30, 2016 was $18,594 and $21,081, respectively.
Basic and Diluted Loss per Share
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 2,406,806 stock options and warrants that would have been included in the fully diluted earnings per share as of September 30, 2017. However, the common stock equivalents were not included in the loss per share computation because they are anti-dilutive.
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.
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, 2017 and December 31, 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 2012.
Page 8
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
September 30, 2017
(unaudited)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Going Concern
Historically, the Company has incurred net losses and negative cash flows from operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company may raise additional operating capital through the sale of debt or equity securities. Management believes that with sufficient working capital, from financing activities or from sales of the Company’s products, the Company will be able to meet its obligations and continue as a going concern. However, there is no assurance that the Company will be successful in its plan.
NOTE 3 – COSTS AND ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
Billing practices for our contracts are governed by the contract terms of each project based on progress toward completion approved by the owner, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. The current liability, “Billings in excess of costs and estimated earnings,” represents billings in excess of revenues recognized. The current asset, “Costs and estimated earnings in excess of billings,” represents revenues recognized in excess of amounts billed to the customer, which are usually billed during normal billing processes following achievement of contractural requirements.
The two tables below set forth the costs incurred and earnings accrued on uncompleted contracts compared with the billings on those contracts through September 30, 2017 and December 31, 2016 and reconcile the net excess billings to the amounts included in the balance sheets at those dates.
| September 30, |
| December 31, | ||||
| 2017 |
| 2016 | ||||
Cost incurred on uncompleted contracts |
| $ | - |
|
| $ | 100,335 |
Estimated earnings |
|
| - |
|
|
| 52,138 |
|
|
| - |
|
|
| 152,473 |
Billings on uncompleted contracts |
|
| (30,000) |
|
|
| (121,500) |
Costs incurred and estimated earnings over (under) billings on uncompleted contracts |
|
| (30,000) |
|
|
| 30,973 |
Included in the accompanying balance sheets under the following captions:
| September 30, |
| December 31, |
| ||||
| 2017 |
| 2016 |
| ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| $ | - |
|
| $ | 30,973 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| (30,000) |
|
|
| - |
|
Net amount of costs and estimated earnings on uncompleted contracts above (below) billings |
| $ | (30,000) |
|
| $ | 30,973 |
|
Page 9
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
September 30, 2017
(unaudited)
NOTE 4 - RELATED PARTY TRANSACTIONS
Accounts Receivable – Related Parties
The Company holds a non-controlling interest in various distributors in exchange for use of the Company’s name and logo. As of September 30, 2017, the Company owned a 15% interest in Omnitek Engineering Thailand Co. Ltd. and a 20% interest in Omnitek Peru S.A.C. As of September 30, 2017 and December 31, 2016, the Company was owed $7,654 and $7,005, respectively, by related parties for the purchase of products and services.
Accounts Payable – Related Parties
The Company regularly incurs expenses that are paid to related parties and purchases goods and services from related parties. As of September 30, 2017 and December 31, 2016, the Company owed related parties for such expenses, goods and services in the amounts of $75,311 and $18,373, respectively.
Accrued Management Expenses
For the periods ended September 30, 2017 and December 31, 2016, the Company’s president, chief financial officer and vice president were due amounts for services performed for the Company.
As of September 30, 2017 and December 31, 2016 the accrued management fees consisted of the following:
| September 30, |
| December 31, |
| ||||
| 2017 |
| 2016 |
| ||||
Amounts due to the president |
| $ | 284,322 |
|
| $ | 210,257 |
|
Amounts due to the chief financial officer |
|
| 72,818 |
|
|
| 35,962 |
|
Amounts due to the vice president |
|
| 80,757 |
|
|
| 68,569 |
|
Total |
| $ | 437,897 |
|
| $ | 314,788 |
|
NOTE 5 - STOCK OPTIONS AND WARRANTS
During the nine months ended September 30, 2017 and 2016, the Company granted 350,000 and 250,000 options for services, respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized expense of $120,209 and $148,955, 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 $34,163. During the nine months ended September 30, 2017 and 2016, the Company granted 555,556 and 470,000 options to the CEO for accrued compensation, respectively.
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 Non-Qualified Stock Options to employees and consultants at its discretion. As of September 30, 2017 the Company has a total of 815,000 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, 2017 the Company has a total of 1,875,556 options issued under the plan. During the nine months ended September 30, 2017 and 2016 the Company issued -0- and -0- warrants, respectively.
Page 10
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
September 30, 2017
(unaudited)
NOTE 5 - STOCK OPTIONS AND WARRANTS (CONTINUED)
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:
|
|
|
|
| September 30, 2017 |
| September 30, 2016 |
Expected volatility | 105% |
| 87% |
Expected dividends | 0% |
| 0% |
Expected term | 7 Years |
| 7 Years |
Risk-free interest rate | 2.22% |
| 1.52% |
A summary of the status of the options and warrants granted at September 30, 2017 and December 31, 2016 and changes during the periods then ended is presented below:
| September 30, |
| December 31, | ||||||
| 2017 |
| 2016 | ||||||
|
|
|
| Weighted-Average |
|
|
|
| Weighted-Average |
| Shares |
|
| Exercise Price |
| Shares |
|
| Exercise Price |
Outstanding at beginning of year | 4,510,313 |
| $ | 2.81 |
| 3,890,313 |
| $ | 3.28 |
Granted | 905,556 |
|
| 0.18 |
| 720,000 |
|
| 0.28 |
Exercised | - |
|
| - |
| - |
|
| - |
Expired or cancelled | (2,775,313) |
|
| 3.84 |
| (100,000) |
|
| 2.74 |
Outstanding at end of period | 2,640,556 |
|
| 0.83 |
| 4,510,313 |
|
| 2.81 |
Exercisable | 2,406,806 |
| $ | 0.84 |
| 4,222,813 |
| $ | 2.93 |
Page 11
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
September 30, 2017
(unaudited)
NOTE 5 - STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the status of the options and warrants outstanding at September 30, 2017 is presented below:
Range of Exercise Prices |
| Number Outstanding |
| Weighted-Average Remaining Contractual Life |
|
| Number Exercisable |
| Weighted-Average Exercise Price |
|
|
|
|
|
|
|
|
|
|
$0.01-0.99 |
| 1,950,556 |
| 5.68 years |
|
| 1,723,473 |
| 0.26 |
$1.00-1.99 |
| 165,000 |
| 1.85 years |
|
| 165,000 |
| 1.29 |
$2.00-2.99 |
| 525,000 |
| 2.01 years |
|
| 518,333 |
| 2.52 |
|
|
|
|
|
|
|
|
|
|
$0.01-2.99 |
| 2,640,556 |
| 4.71 years |
|
| 2,406,806 |
| $0.82 |
|
|
|
|
|
|
|
|
|
|
NOTE 6 - SUBSEQUENT EVENTS
On October 27, 2017 the shareholders approved the Omnitek Engineering Corp. 2017 Long-Term Incentive Plan, under which 5,000,000 shares of Company’s common stock were reserved for issuance of both Incentive Stock Options to employees only and Nonstatutory Stock Options to employees and consultants at its discretion.
Page 12
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.
Results of Operations
For the three months ended September 30, 2017 and 2016
Revenues were $276,241 for the three months ended September 30, 2017 compared with $355,050 for the three months ended September 30, 2016, a decrease of $78,809. The decrease is primarily attributable to the recognition of long-term contract revenues.
Cost of sales was $158,358 for the three months ended September 30, 2017 compared with $200,894 for the three months ended September 30, 2016, a decrease of $42,536. Our gross margin percentage was 43% for the three months ended September 30, 2017 and 43% for the same period in 2016.
Operating expenses for the three months ended September 30, 2017 were $265,602 compared with $370,554 in the same period in 2016, a decrease of $104,952 or 28%. General and administrative expense for the three months ended September 30, 2017 was $240,477 compared with $306,535 for the three months ended September 30, 2016. Major components of general and administrative expenses for the three months ended September 30, 2017 were professional fees of $14,730, rent expense of $25,746, and salary and wages of $104,018. This compares to professional fees of $13,129, rent expense of $23,568 and salaries and wages of $140,226 for the three months ended September 30, 2016. For the three months ended September 30, 2017 research and development outlays were decreased to $18,978 compared with $57,402 for the three months ended September 30, 2016. The decrease reflects a reduction in active research and development projects.
Our net loss for the three months ended September 30, 2017 was $149,849, or ($0.01) per share, compared with a net loss of $217,909, or ($0.01) per share, for the three months ended September 30, 2016. The decreased net loss was primarily due to reduced general and administrative expenses during the three months ended September 30, 2017 over the same period a year earlier.
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Results for the three months ended September 30, 2017 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $25,476 and depreciation and amortization of $6,147. For the three month period a year earlier non-cash expenses included options and warrants granted in the amount of $30,887 and depreciation and amortization of $6,617.
For the nine months ended September 30, 2017 and 2016
Revenues decreased to $814,210 for the nine months ended September 30, 2017 from $946,948 for the nine months ended September 30, 2016, a decrease of $132,738 or 14%, attributable to reduced customer demand.
Our cost of sales decreased to $456,765 for the nine months ended September 30, 2017 from $521,387 for the nine months ended September 30, 2016, a decrease of $64,622. Our gross margin was 44% for the nine months ended September 30, 2017 compared to 45% in 2016.
Our operating expenses for the nine months ended September 30, 2017 were $900,879 compared to $1,133,576 in 2016, a decrease of $232,697 or 21%. General and administrative expense for the nine months ended September 30, 2017 was $789,618 as compared to $960,789 for the nine months ended September 30, 2016. Major components of general and administrative expenses for the nine months ended September 30, 2017 were professional fees of $45,629, rent expense of $83,538 and salary and wages of $308,187. This compares to professional fees of $65,107, rent expense of $71,639, and salary and wages of $381,588 for the nine months ended September 30, 2016. Research and development outlays were decreased to $92,667 for the nine months ended September 30, 2017 compared to $151,706 for the nine months ended September 30, 2016. The decrease reflects a reduction in active research and development projects.
Our net loss for the nine months ended September 30, 2017 was $550,479, or ($0.03) per share, compared to a net loss of $707,592, or ($0.04) per share, for the nine months ended September 30, 2016. The decreased loss was the result of reductions in both general and administrative expenses and research and development expenses.
Results for the nine months ended September 30, 2017 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $120,209 and depreciation and amortization of $18,594. For the nine-month period a year earlier, non-cash expenses for the value of options and warrants granted were $148,955 and depreciation and amortization of $21,081.
Liquidity and Capital Resources
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.
At September 30, 2017, our current liabilities totaled $1,096,987 and our current assets totaled $2,020,640, resulting in positive working capital of $923,653 and a current ratio of 1.84.
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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 $19,301,283 at September 30, 2017, 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 positive cash flow from operations of $26,662 for the nine months ended September 30, 2017 compared with a negative cash flow of $199,041 during the nine months ended September 30, 2016.
Included in the net loss of $550,479 for the nine months ended September 30, 2017 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 $120,209 and depreciation and amortization of $18,594. Excluding these non-cash amounts, our adjusted EBITDA for the nine months ended September 30, 2017 would be a loss of $411,676.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
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 15
Inventory
Inventory is stated at the lower of cost or market. The Company’s inventory consists of finished goods and raw materials. 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 and Estimated Earnings and Billings on Completed Contracts
Billing practices for our contracts are governed by the contract terms of each project based on progress toward completion approved by the owner, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. The current liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized. The current asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed to the customer, which are usually billed during normal billing processes following achievement of contractual requirements.
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
Products - The Company recognizes revenue from the sale of new engines for use with compressed natural gas, engine components to convert existing engines to compressed natural gas use and components for the maintenance of natural gas engines. Revenues are recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.
Contracts – Revenues are recognized on the percentage-of-completion method, measured by either achievement of milestones or the ratio of costs incurred up to a given date to estimated total costs for each contract. Contract costs include all direct material, labor, subcontract and other costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Our contracts generally take 12 to 24 months to complete. 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. The current asset, “Costs and estimated earnings in excess of billings,” represents revenues recognized in excess of amounts billed to the customer, which are usually billed during normal billing processes following achievement of contractual requirements.
Page 16
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.
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, 2017, 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, 2017, the Company had net operating loss carry forwards of approximately $5,772,304 through 2034. No tax benefit has been reported in the September 30, 2017 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.
Recently Issued Accounting Pronouncements
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Page 17
Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2017.
Changes in Internal Controls
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding. No federal, state or local governmental agency is presently contemplating any proceeding against the Company. No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.
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.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a)Documents filed as part of this Report.
1. Financial Statements. The condensed unaudited Balance Sheet of Omnitek Engineering Corp. as of September 30, 2017 and the audited balance sheet as of December 31, 2016, the condensed unaudited Statements of Operations for the three and nine month periods ended September 30, 2017 and 2016, and the condensed unaudited Statements of Cash Flows for the nine month periods ended September 30, 2017 and 2016, together with the notes thereto, are included in this Quarterly Report on Form 10-Q.
Page 18
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.
Exhibit |
|
|
Number |
| Description of Exhibit |
3.1 |
| |
3.2 |
| |
31.01 |
| CEO certification pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 (3) |
31.02 |
| CFO certification pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 (3) |
32.01 |
| |
101 |
| The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in Extensible Business Reporting Language ("XBRL"): (i) the balance sheets (unaudited); (ii) the statements of operations (unaudited); (iii) the statements of cash flows (unaudited); and, (iv) related notes. |
(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 19
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.
| Omnitek Engineering Corp. |
| ||||
|
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|
| |||
|
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|
| |||
|
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|
| |||
|
|
|
| |||
Dated: November 8, 2017 |
|
|
| |||
|
| By: Werner Funk |
| |||
|
| Its: Chief Executive Officer Principal Executive Officer |
| |||
|
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| |||
|
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| ||||
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Dated: November 8, 2017 |
| /s/ Richard L. Miller |
| |||
|
| By: Richard L. Miller |
| |||
|
| Its: Chief Financial Officer Principal Financial Officer |
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