Omnitek Engineering Corp - Quarter Report: 2018 June (Form 10-Q)

ITEM 1. FINANCIAL STATEMENTS 

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(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 June 30, 2018 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, 2017 audited financial statements.  The results of operations for the periods ended June 30, 2018 and 2017 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.

New Revenue Recognition Standard

In May 2014, the FASB issued ASU 2014-09, which provides a single conprehensive accounting standard for revenue recognition for contracts with customers and supersedes current industry-specific guidance, including ASC 605-35. The new standard requires companies to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the company expects to be entitled in exchange for the goods or services. The new model requires companies to identify contractural performance obligations and determine whether revenue should be recognized at a point in time or over time for each of these obligations. The new standard also significantly expands disclosure requirements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

We adopted the new standard on January 1, 2018 (“Adoption Date”), using the modified retrospective method, which provides for a cumulative effect adjustment to beginning 2018 retained earnings for those uncompleted contracts impacted by the adoption of the new standard. The changes to the method and/or timing of our revenue recognition associated with our adoption of the new standard primarily relate to long-term engine development contracts. We will continue to recognize these contracts over time utilizing the cost to cost measure of progress under the new standard, consistent with our historical accouting treatment for these contracts. Due to the low level of backlog at December 31, 2017 for our contracts impacted by the new standard, no adjustmnet to beginning 2018 retained earnings resulted from the adoption of the new standard.

See Note 3 for additional discussion of our revenue recognition accounting policies and expanded disclosures required by the new standard.

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(unaudited)

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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:

The Company has established an allowance for obsolete inventory.  Expense for obsolete inventory was $50,000 and $-0-, for the periods ended June 30, 2018 and June 30, 2017, respectively.

Property and Equipment

Property and equipment at June 30, 2018 and December 31, 2017 consisted of the following:

Depreciation expense for the periods ended June 30, 2018 and June 30, 2017 was $5,726 and $12,448, 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 2,577,223 and 2,379,723 stock options  that would have been included in the fully diluted earnings per share as of June 30, 2018 and December 31, 2017, respectively.  However, the common stock equivalents were not included in the computation of the loss per share computation because they are anti dilutive.  

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(unaudited)

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 June 30, 2018 and December 31, 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 2012.

Liquidity and Going Concern

Historically, the Company has incurred net losses and negative cash flows from operations.  As of June 30, 2018, the Company had an accumulated deficit of $19,961,734 and total stockholders’ equity of $329,226.  At June 30, 2018, the Company had current assets of $1,543,343 including cash of $41,182, and current liabilities of $1,162,637, resulting in working capital of $380,706. For the six months ended June 30, 2018, the Company reported a net loss of $174,633 and net cash used by operating activities of $79,383. Management believes that based on its operating plan, the projected sales for 2018, combined with funds available from its working capital will be sufficient to fund operations for the next twelve months.  However, there can be no assurance that operations and operating cash flows will continue at the current levels or improve in the near future. Whether, and when, the Company can attain profitability and positive cash flows from operations is uncertain. The Company is also uncertain whether it can raise additional capital. These uncertainties cast significant doubt upon the Company’s ability to continue as a going concern. Our financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. The financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities should we be unable to continue as a going concern.     

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.  

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(unaudited)

NOTE 3 – COSTS AND ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS (CONTINUED)

Included in the accompanying balance sheets under the following captions:

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 June 30, 2018, the Company owned a 15% interest in Omnitek Engineering Thailand Co. Ltd. and a 20% interest in Omnitek Peru S.A.C.  As of June 30, 2018 and December 31, 2017, the Company was owed $5,771 and $3,440, 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 June 30, 2018 and December 31, 2017, the Company owed related parties for such expenses, goods and services in the amounts of $134,617 and $114,321, respectively.

Accrued Management Expenses

For the periods ended June 30, 2018 and December 31, 2017, the Company’s president and chief financial officer were due amounts for services performed for the Company.  

As of June 30, 2018 and December 31, 2017 the accrued management fees consisted of the following:

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(unaudited)

NOTE 5 – NOTE PAYABLE - RELATED PARTY TRANSACTIONS

Convertible Notes – Related Party

On November 7, 2017 the Company issued a convertible promissory note for $15,000 to a related party. The note has an annual interest rate of 8% and is unsecured. The principal amount of the note and all accrued interest is due and payable on or before July 7, 2018. The note has a conversion feature, wherein, at the lender’s option, at the maturity date the lender may convert the remaining unpaid principal balance and any unpaid accrued interest into shares of the Company’s common stock. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (i) the remaining unpaid principal balance and any unpaid accrued interest of this note by (ii) 90% of the average closing price of the common stock of the Company, for five trading days before the maturity date. Due to this provision, the Company considered whether the imbedded conversion option qualifies for derivative accounting under ASC 815-15 “Derivatives and Hedging.” As the note isn’t convertible until maturity, no derivative liability was recognized as of June 30, 2018.

As of June 30, 2018 and December 31, 2017 Convertible Notes – Related Party consisted of the following:

Note Payable – Related Party

On January 19, 2017 the Company issued a promissory note for $15,000 to a related party. The note has an annual interest rate of 5% and is unsecured. The principal amount of the note and all accrued interest is due and payable on or before January 19, 2019.

As of June 30, 2018 and December 31, 2017 Note Payable – Related Party consisted of the following:

NOTE 6 – CONVERTIBLE NOTE PAYABLE

On June 15, 2018 the Company entered into a Securities Purchase Agreement with an accredited investor, under which the investor purchased a Secured Convertible Promissory Note from the Company in the principal amount of $100,000. Under the terms of the Note simple interest will accrue at a rate of 10% per annum. The note will automatically mature and be due and payable on the eighteen (18) month anniversary. The Company shall make principal payments under the Note in the amount of $5,000 per month, beginning on the seventh month anniversary and continuing each month thereafter through the maturity date. Also commencing on the seventh month anniversary of the Note, the Company shall make interest payments under this Note based on the unpaid principal balance. The Note is secured by the inventory of the Company in accordance with a Security Agreement executed concurrently with the Note and UCC-1 Financing Statement perfecting said security interest. The Note includes a conversion feature wherein, under certain circumstances, the Lender may request that a portion of the principal repayment be converted and payable in restricted shares of the Company’s Common Stock at the lesser of five cents

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(unaudited)

NOTE 6 – CONVERTIBLE NOTE PAYABLE (CONTINUED)

($0.05) per share or 90% of the average closing price calculated over the prior 20 trading days, but not less than $0.025 per share. The floor of $0.025 per share prevents the imbedded conversion option from qualifying for derivative accounting under ASC 815-15 “Derivative and Hedging”.

As of June 30, 2018 and December 31, 2017 Convertible Note Payable consisted of the following:

NOTE 7 -  STOCK OPTIONS AND WARRANTS

During the six months ended June 30, 2018 and 2017, the Company granted 590,000 and 350,000 options for services, respectively. During the six months ended June 30, 2018 and 2017, the Company recognized expense of $27,186 and $94,733, 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 $35,194. During the six months ended June 30, 2018 and 2017, the Company granted -0- and 555,556 options to the CEO for accrued compensation, respectively.

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 June 30, 2018 the Company has a total of 675,000 options issued under the 2011 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 June 30, 2018 the Company has a total of 2,065,556 options issued under the 2015 Plan. In October 2017, the Company’s shareholders approved its 2017 Long-Term Incentive Plan (the “2017 Plan”). Under the 2017 plan, the Company may issue up to 5,000,000 shares of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. As of June 30, 2018, the Company has a total of 300,000 options issued under the 2017 Plan. During the three months ended June 30, 2018 and 2017 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.

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

June 30, 2018

(unaudited)

NOTE 7 -  STOCK OPTIONS AND WARRANTS (CONTINUED)

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

A summary of the status of the options and warrants granted at June 30, 2018 and December 31, 2017 and changes during the periods then ended is presented below:  

A summary of the status of the options and warrants outstanding at June 30, 2018 is presented below:

NOTE 8 -  SUBSEQUENT EVENT

On July 6, 2018, the Company issued 139,320 restricted shares of Common Stock to John Palumbo, a Director of the Company, upon the conversion of $15,799, constituting unpaid principal of $15,000 and accrued interest of $799, owing under that certain Promissory Note dated November 7, 2017. The shares were issued at a price of $0.1134 per share, representing 90% of the average five (5) trading days pursuant to the terms of the Note.

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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 June 30, 2018 and 2017

Revenues were $369,555 for the three months ended June 30, 2018 compared with $246,314 for the three months ended June 30, 2017, an increase of $123,241. The results for the period are primarily the result of increased international (Turkey, India and China) sales of conversion kits.

Cost of sales was $200,488 for the three months ended June 30, 2018 compared with $145,794 for the three months ended June 30, 2017, an increase of $54,694. Our gross margin percentage was 46% for the three months ended June 30, 2018 compared with 41% in the same period in 2017. The higher margin for the three months ended June 30, 2018 relates primarily to product mix, specifically conversion kits versus filters.

Operating expenses for the three months ended June 30, 2018 were $241,288 compared with $289,046 in the same period in 2017, a decrease of $47,758 or 17%. General and administrative expense for the three months ended June 30, 2018 was $213,776 compared with $249,017 for the three months ended June 30, 2017.  Major components of general and administrative expenses for the three months ended June 30, 2018 were professional fees of $12,592, rent expense of $29,703, and salary and wages of $72,465. This compares to professional fees of $10,270, rent expense of $24,830 and salaries and wages of $101,183 for the three months ended June 30, 2017.  For the three months ended June 30, 2018 research and development outlays were decreased to $25,767 compared with $33,805 for the three months ended June 30, 2017.

Our net loss for the three months ended June 30, 2018 was $76,543, or ($0.00) per share, compared with a net loss of $191,589, or ($0.01) per share, for the three months ended June 30, 2017.  The decreased net loss was primarily due to higher revenues and decreased general and administrative and research and development expenses, as noted above, during the three months ended June 30, 2018 over the same period a year earlier.

Results for the three months ended June 30, 2018 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $5,215, depreciation and amortization of $1,745 and the

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inventory reserve adjustment of $25,000.  For the three month period a year earlier non-cash expenses included options and warrants granted in the amount of $25,200 and depreciation and amortization of $6,224.

For the six months ended June 30, 2018 and 2017

Revenues increased to $729,085 for the six months ended June 30, 2018 from $537,968 for the six months ended June 30, 2017, an increase of $191,117 or 36%. The increase is attributable to increased sales of both conversion kits and filters.

Our cost of sales increased to $404,980 for the six months ended June 30, 2018 from $298,407 for the six months ended June 30, 2017, an increase of $106,573. Our gross margin was 44% for the six months ended June 30, 2018 compared to 45% in 2017.

Our operating expenses for the six months ended June 30, 2018 were $492,601 compared to $635,276 in 2017, a decrease of $142,675 or 22%.  General and administrative expense for the six months ended June 30, 2018 was $434,306 as compared to $549,139 for the six months ended June 30, 2017. Major components of general and administrative expenses for the six months ended June 30, 2018 were professional fees of $42,130, rent expense of $57,081 and salary and wages of $150,401. This compares to professional fees of $30,899, rent expense of $57,792, and salary and wages of $204,169 for the six months ended June 30, 2017. Research and development outlays were decreased to $52,569 for the six months ended June 30, 2018 compared to $73,689 for the six months ended June 30, 2017.

Our net loss for the six months ended June 30, 2018 was $174,633, or $0.01 per share, compared to a net loss of $400,630, or $0.02 per share, for the six months ended June 30, 2017. The decreased net loss was primarily due to higher revenues and decreases in general and administrative and research and development expenses, as noted above, during the six months ended June 30, 2018 over the same period a year earlier.

Results for the six months ended June 30, 2018 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $27,186, depreciation and amortization of $5,726 and the inventory reserve adjustment of $50,000. For the six-month period a year earlier, non-cash expenses included the value of options and warrants granted of $94,733 and depreciation and amortization of $12,448.

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 June 30, 2018, our current liabilities totaled $1,162,637 and our current assets totaled $1,543,343, resulting in positive working capital of $380,706 and a current ratio of 1.33.  

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.

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We have historically incurred significant losses, which have resulted in a total accumulated deficit of $19,961,734 at June 30, 2018, 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 $79,383 for the six months ended June 30, 2018 compared with a positive cash flow of $79,191 during the six months ended June 30, 2017.  

Included in the operating loss of $174,633 for the six months ended June 30, 2018 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 $27,186, depreciation and amortization of $5,726 and the inventory reserve adjustment of $50,000.  Excluding these non-cash amounts and interest expense of $6,287, our adjusted EBITDA for the six months ended June 30, 2018 was a loss of $85,434.

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.

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.

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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.  In accordance with the new revenue recognition standards under ASC Topic 606, revenues are recognized when all of the following steps have been satisfied: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) performance obligations are satisfied. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.

Contracts – Under ASC Topic 606, the same five steps that apply to our sales of products also apply to our long-term contracts. For long-term contract revenue recognition, the concept of performance obligations is of particular significance. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We generally measure transfer of control of the performance obligation utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as materials and labor. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in accounting for such performance obligations. See “Contract assets and liabilities” for a description of the balance sheet accounts used for long-term contract accounting.        

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.

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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 June 30, 2018, 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 June 30, 2018, the Company had net operating loss carry forwards of approximately $6,239,260 through 2034. No tax benefit has been reported in the June 30, 2018 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.

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, as a result of the material weakness described below, our disclosure controls and procedures were not effective as of June 30, 2018. The material weakness, which relates to internal control over financial reporting, that was identified is: due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.

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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 June 30, 2018 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

Entry Into a Material Definitive Agreement

On June 15, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an accredited investor, under which the investor purchased a Secured Convertible Promissory Note (the “Note”) from the Company in the principal amount of $100,000. Under the terms of the Note simple interest will accrue at rate of 10% per annum.  The Note will automatically mature and be due and payable on the eighteen (18) month anniversary.  The Company shall make principal payments under the Note in the amount of $5,000 per month, beginning on the seventh month anniversary and continuing each month thereafter through the maturity date.  Also commencing on the seventh month anniversary date of the Note, the Company shall make interest payments under this Note based on the unpaid principal balance. At any time prior to the maturity date, the Company shall have the right at its option to prepay entire principal amount of the Note, without penalty or premium, as follows: (a) the Lender at the Lender’s option may request that up to $25,000 of the prepayment amount be converted and payable in restricted shares of the Company’s Common Stock at the lesser of five cents ($0.05) per share or 90% of the average closing price calculated over the prior 20 trading days, but not less than $0.025; and (b) the remaining principal balance and any accrued unpaid interest shall be payable in cash.  At the Maturity Date, the Company shall have the option to pay down remaining balance to no lower than $25,000. The Lender at the Lender’s option may convert all or any portion of the remaining unpaid principal balance of the Note into restricted shares of the Company’s Common Stock, at the lesser of five cents ($0.05) per share or 90% of the average closing price calculated over the prior 20 trading days, but not less than $0.025. Any principal balance which Lender has elected not to convert, and any unpaid accrued interest, shall be payable in cash. The Note is secured by the inventory of the Company in accordance with a Security Agreement executed concurrently with the Note and UCC-1 Financing Statement perfected said security interest.

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The offer and sale of the Note was made by the Company in reliance upon exemptions from the registration provisions of the Securities Act of 1933, as amended, set forth in Section 4(a)(2) and Rule 506 of Regulation D, thereof, relative to the offer and sale of accredited investors, within the meaning of Rule 501 of Regulation D, of the securities of an issuer not involving any public offering.

Subsequent Events

On July 6, 2018, subsequent to the period covered by this report, the Company issued 139,320 restricted shares of Common Stock to John Palumbo a Director of the Company, upon the conversion of $15,798.90, constituting unpaid principal of $15,000 and accrued interest of $798.90, owing under that certain Promissory Note dated November 7, 2017.  The shares were issued at a price of $0.1134 per share representing 90% of the average five (5) trading days pursuant to the terms of the Note.  No underwriters were used. The shares were issued pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933. As a Director of the Company, Mr. Palumbo was familiar with the Company’s business, financial condition and possessed the necessary information to make an informed investment decision.

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 June 30, 2018 and the audited balance sheet as of December 31, 2017, the condensed unaudited Statements of Operations for the three month periods ended June 30, 2018 and 2017, and the condensed unaudited Statements of Cash Flows for the three month periods ended June 30, 2018 and 2017, 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 

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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.

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