Omnitek Engineering Corp - Quarter Report: 2019 September (Form 10-Q)

FINANCIAL INFORMATION

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OMNITEK ENGINEERING CORP.

September 30, 2019

(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, 2019 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, 2018 audited financial statements.  The results of operations for the periods ended September 30, 2019 and 2018 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.

Revenue Recognition

In general, revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for the goods or services. In order to achieve that core principle, a five-step approach is applied: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue allocated to each performance obligation when we satisfy the performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition.

We recognize revenue on various products and services as follows:

Products - The Company recognizes revenue from the sale of products (e.g., filters and engine components) as performance obligations are satisfied. This type of revenue is primarily generated from the sale of finished product to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer (i.e., the performance obligation has been satisfied).

Contracts – Revenues are recognized as performance obligations are satisfied over time (also known as 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. Changes in job performance, job conditions, estimated profitability and associated change orders and claims, including those changes arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.  

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OMNITEK ENGINEERING CORP.

September 30, 2019

(unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority

of Omnitek’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.

Performance Obligations Satisfied Over Time

Revenues for Omnitek’s long-term contracts that satisfy the criteria for over time recognition (formerly known as percentage-of-completion method) is recognized as the work progresses. The majority of the revenue is derived from long-term engine development agreements that typically span between 12 to 24 months. Omnitek’s long-term contracts will continue to be recognized over time because our typical contract is for a customized asset with no alternative use and generally the Company has a right to payment for work completed to date. Under the new revenue standard, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as the Company incurs costs. Contract costs include labor and material. Revenue from products and services transferred to customers over time accounted for 6% and 0% of revenue for the periods ended September 30, 2019 and 2018, respectively.

Performance Obligations Satisfied at a Point in Time

Revenue from product sales is recognized at a point in time. These sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risk and rewards transfer. Upon fulfilment of the performance obligation, the customer is provided an invoice demonstrating transfer of control to the customer. Revenue from goods and services transferred to customers at a point in time accounted for 94% and 100% of revenue for the periods ended September 30, 2019 and 2018, respectively.

Assurance-type warranties are the only warranties provided by the Company and, as such, Omnitek does not recognize revenue on warranty-related work. Omnitek generally provides a one-year warranty for products that it sells. Warranty claims historically have been insignificant.

Pre-contract costs are generally not incurred by the Company

Contract Estimates

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, Omnitek estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract.  

Variable Consideration 

The transaction price for contracts may include variable consideration, which includes increases to transaction price for approved and unapproved change orders, claims and incentives, and reductions to transaction price for liquidated damages. Variable consideration historically has been insignificant.  

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OMNITEK ENGINEERING CORP.

September 30, 2019

(unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Disaggregation of Revenue

The following table presents Omnitek’s revenues disaggregated by region and product type for the three months ended September 30, 2019 and September 30, 2018:

The following table presents Omnitek’s revenues disaggregated by region and product type for the nine months ended September 30, 2019 and September 30, 2018:

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(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 materials and is located in Vista, California, consisting of the following:

The Company has established an allowance for obsolete inventory.  Expense for obsolete inventory was $26,667 and $50,000, for the periods ended September 30, 2019 and September 30, 2018, respectively

Property and Equipment

Property and equipment at September 30, 2019 and December 31, 2018 consisted of the following:

Depreciation expense for the periods ended September 30, 2019 and September 30, 2018 was $431 and $7,294, 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 2,970,140 and 2,563,473 stock options  that would have been included in the fully diluted earnings per share as of September 30, 2019 and September 30, 2018, respectively.  However, the common stock equivalents were not included in the computation of 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

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, 2019 and December 31, 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 2012.

Liquidity and Going Concern

Historically, the Company has incurred net losses and negative cash flows from operations.  As of September 30, 2019, the Company had an accumulated deficit of $20,668,696 and total stockholders’ deficit of $176,371.  At September 30, 2019, the Company had current assets of $1,368,228 including cash of $80,673, and current liabilities of $1,576,969, resulting in negative working capital of $208,741. For the nine months ended September 30, 2019, the Company reported a net loss of $413,189 and net cash used by operating activities of $13,387. Management believes that based on its operating plan, the projected sales for 2019, 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.     

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-2 - Leases (Topic 842), which significantly amends the way companies are required to account for leases.  Under the updated leasing guidance, some leases that did not have to be reported previously are now required to be presented as an asset and liability on the balance sheet. In addition, for certain leases, what was previously classified as an operating expense must now be allocated between amortization expense and interest expense. The Company adopted this update as of January 1, 2019 using the modified retrospective transition method and prior periods have not been restated. The Company has not entered into any leases subject to the new guidance since January 1, 2019.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. With the adoption of ASU 2018-07, the accounting for share-based payments to nonemployees and employees will be substantially the same. ASU 2018-07 is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the standard on January 1, 2019. This standard did not have a material impact on the Company’s financial statements and related disclosures.

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

NOTE 3 - CONTRACT ASSETS AND LIABILITIES

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the balance sheet. For Omnitek’s long-term contracts, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, Omnitek sometimes receives advances or deposits from its customers, before revenue is recognized, resulting in billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities).

The table below reconciles the net excess billings to the amounts included in the balance sheets at those dates:

NOTE 4 – COMMITMENTS

Effective September 1, 2019, the Company entered into the Fourth Amendment to the Lease for its facility, reducing the size of the leased space to 21,786 square feet and extending the lease term to August 31, 2020, at which time a new lease extension has to be negotiated.  Effective as of September 1, 2019, the base rent is reduced to $14,161 per month, plus a reduced charge for common area maintenance expenses (CAM) reflecting the reduced square footage.  The security deposit amount of $14,000 remained the same.  Additionally, the amendment calls for payment of past due rents of $89,454, as of September 1, 2019, as follows:

(a)An initial payment of $22,363 on or before September 1, 2019 

(b)Monthly installments of $10,000 thereafter, until such time as the past due rent has been paid in full. 

NOTE 5 - 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, 2019, 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, 2019 and December 31, 2018, the Company was owed $18,511 and $6,666, 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, 2019 and December 31, 2018, the Company owed related parties (primarily for

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(unaudited)

NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)

services performed by a company controlled by a board member) for such expenses, goods and services in the amounts of $143,921 and $145,171, respectively.

Accrued Management Compensation

For the periods ended September 30, 2019 and December 31, 2018, the Company’s president and chief financial officer were due amounts for services performed for the Company.  

As of September 30, 2019 and December 31, 2018 the accrued management fees consisted of the following:

NOTE 6 - NOTE PAYABLE - RELATED PARTY TRANSACTIONS

Note Payable – Related Party

On September 11, 2019 the Company borrowed $12,000 from a board member.  The loan was evidenced by an unsecured promissory note which bears simple interest at the rate of 8% per annum. The principal amount of the note and all accrued interest is due and payable on or before December 11, 2019.

On May 28, 2019 the Company issued a promissory note for $5,000 to the Company’s CEO. 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 December 31, 2019.

On January 19, 2017 the Company issued a promissory note for $15,000 to the Company’s CEO. 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, 2020.

As of September 30, 2019 and December 31, 2018 Note Payable – Related Party consisted of the following:

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(unaudited)

NOTE 7 - 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 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 ($0.05) per share or 90% of the average closing price calculated over the prior 20 trading days, but not less than $.025 per share. The floor of $0.025 per share prevents the embedded conversion option from qualifying for derivative accounting under ASC 815-15 “Derivative and Hedging”.

As of September 30, 2019 and December 31, 2018 Convertible Note Payable consisted of the following:

NOTE 8 - STOCK OPTIONS

During the nine months ended September 30, 2019 and 2018, the Company granted 450,000 and 590,000 options for services, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized expense of $42,059 and $32,458, 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 $14,741.

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, 2019 the Company has a total of 550,000 options issued under the 2011 P lan. 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, 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 September 30, 2019, the Company has a total of 750,000 options issued under the 2017 Plan.  During the nine months ended September 30, 2019 and 2018 the Company issued  -0- and -0- warrants, respectively.

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(unaudited)

NOTE 8 - STOCK OPTIONS (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:

A summary of the status of the options granted at September 30, 2019 and December 31, 2018 and changes during the periods then ended is presented below:  

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2019

(unaudited)

NOTE 8 - STOCK OPTIONS (CONTINUED)

A summary of the status of the options outstanding at September 30, 2019 is presented below:

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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, 2019 and 2018

Revenues were $136,452 for the three months ended September 30, 2019 compared with $280,567 for the three months ended September 30, 2018, a decrease of $144,115. The decrease is primarily attributable to a reduction in filter sales as principal customers depleted their existing inventory levels.

Cost of sales was $101,106 for the three months ended September 30, 2019 compared with $170,108 for the three months ended September 30, 2018, a decrease of $69,002. Our gross margin percentage was 26% for the three months ended September 30, 2019 compared with 39% in the same period in 2018. The lower margin for the three months ended September 30, 2019 relates primarily to the application of effectively fixed cost of sales costs (manufacturing labor and overhead) being applied to a lower revenue base.  

Operating expenses for the three months ended September 30, 2019 were $207,589 compared with $215,257 in the same period in 2018, a decrease of $7,668 or 4%. General and administrative expense for the three months ended September 30, 2019 was $179,942 compared with $184,374 for the three months ended September 30, 2018.  Major components of general and administrative expenses for the three months ended September 30, 2019 were professional fees of $11,831, rent expense of $38,349, and salary and wages of $67,822. This compares to professional fees of $11,195, rent expense of $36,818 and salaries and wages of $64,124 for the three months ended September 30, 2018.  For the three months ended September 30, 2019 research and development outlays were decreased to $27,512 compared with $29,315 for the three months ended September 30, 2018.

Our net loss for the three months ended September 30, 2019 was $176,920, or ($0.01) per share, compared with a net loss of $143,305, or ($0.01) per share, for the three months ended September 30, 2018.  The increased net loss was primarily due to reduced filter sales as principal customers depleted their existing inventory levels.

Results for the three months ended September 30, 2019 reflect the impact of non-cash expenses, including the value of options granted in the amount of $5,237 and depreciation and amortization of $135.  For the three month period a year earlier non-cash expenses included options and warrants granted in the amount of $5,272, depreciation and amortization of $1,568 and loss on settlement of debt of $32,963.

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For the nine months ended September 30, 2019 and 2018

Revenues decreased to $752,196 for the nine months ended September 30, 2019 from $1,009,653 for the nine months ended September 30, 2018, a decrease of $257,457 or 25%. The decrease is primarily attributable to a reduction in filter sales as principal customers depleted their existing inventory levels.

Our cost of sales decreased to $469,318 for the nine months ended September 30, 2019 from $575,088 for the nine months ended September 30, 2018, a decrease of $105,770. Our gross margin was 38% for the nine months ended September 30, 2019 compared to 43% in 2018. The lower margin for the nine months ended September 30, 2019 relates primarily to the application of effectively fixed cost of sales costs (manufacturing labor and overhead) being applied to a lower revenue base.  

Our operating expenses for the nine months ended September 30, 2019 were $680,119 compared to $707,859 in 2018, a decrease of $27,740 or 4%.  General and administrative expense for the nine months ended September 30, 2019 was $599,708 as compared to $618,680 for the nine months ended September 30, 2018. Major components of general and administrative expenses for the nine months ended September 30, 2019 were professional fees of $55,270, rent expense of $118,084 and salary and wages of $201,449. This compares to professional fees of $53,324, rent expense of $93,900, and salary and wages of $214,525 for the nine months ended September 30, 2018. The decrease in salary and wages for the current period is due primarily to a reduction in officers’ salaries. Research and development outlays were decreased to $79,980 for the nine months ended September 30, 2019 compared to $81,885 for the nine months ended September 30, 2018.  

Our net loss for the nine months ended September 30, 2019 was $413,189, or $(0.02) per share, compared to a net loss of $317,938, or $(0.02) per share, for the nine months ended September 30, 2018. The increased net loss was primarily due to reduced filter sales as principal customers depleted their existing inventory levels.  

Results for the nine months ended September 30, 2019 reflect the impact of non-cash expenses, including the value of options granted in the amount of $42,059, depreciation and amortization of $431 and inventory reserve adjustment of $26,667. For the nine-month period a year earlier, non-cash expenses included the value of options granted of $32,458, depreciation and amortization of $7,294, inventory reserve adjustment of $50,000 and loss on settlement of debt of $32,963.

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, 2019, our current liabilities totaled $1,576,969 and our current assets totaled $1,368,228, resulting in negative working capital of $208,741.  

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 of 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 $20,668,696 at September 30, 2019, of which $5,604,135 is a direct result of derivative expense and change in fair

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value of derivative liability, which occurred during the year ended December 31, 2013, and is unrelated to our operations or cash flow.

Operating Activities

We realized a negative cash flow from operations of $13,387 for the nine months ended September 30, 2019 compared with a negative cash flow of $115,067 during the nine months ended September 30, 2018.  

Included in the operating loss of $397,241 for the nine months ended September 30, 2019 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 granted in the amount of $42,059, depreciation and amortization of $431 and the inventory reserve adjustment of $26,667. 

Financing Activities

We realized a positive cash flow from financing activities of $77,000 for the nine months ended September 30, 2019 compared with positive cash flow of $100,000 for the nine months ended September 30, 2018. The positive cash flow for the nine months ended September 30, 2019 relates primarily to proceeds from the sale of common stock. The positive cash flow for the nine months ended September 30, 2018 relates to proceeds from the convertible note payable.  

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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Contract assets and liabilities

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the balance sheet. For Omnitek’s long-term contracts, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, Omnitek sometimes receives advances or deposits from its customers, before revenue is recognized, resulting in billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities). 

Revenue Recognition

In general, revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for the goods or services. In order to achieve that core principle, a five-step approach is applied: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue allocated to each performance obligation when we satisfy the performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition.

We recognize revenue on various products and services as follows:

Products - The Company recognizes revenue from the sale of products (e.g., filters and engine components) as performance obligations are satisfied. This type of revenue is primarily generated from the sale of finished product to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer (i.e., the performance obligation has been satisfied).

Contracts – Revenues are recognized as performance obligations are satisfied over time (also known as 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. Changes in job performance, job conditions, estimated profitability and associated change orders and claims, including those changes arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.  

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of Omnitek’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.

Performance Obligations Satisfied Over Time

Revenues for Omnitek’s long-term contracts that satisfy the criteria for over time recognition (formerly known as percentage-of-completion method) is recognized as the work progresses. The majority of the revenue is derived from long-term engine development agreements that typically span between 12 to 24 months. Omnitek’s long-term contracts will continue to be recognized over time because our typical contract is for a customized asset with no alternative use and generally the Company has a right to payment for work completed to date. Under the new revenue standard, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as the Company incurs costs. Contract costs include labor and material. Revenue from products and services transferred to customers over time accounted for 6% and 0% of revenue for the periods ended September 30, 2019 and 2018, respectively.

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Performance Obligations Satisfied at a Point in Time

Revenue from product sales is recognized at a point in time. These sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risk and rewards transfer. Upon fulfilment of the performance obligation, the customer is provided an invoice demonstrating transfer of control to the customer. Revenue from goods and services transferred to customers at a point in time accounted for 94% and 100% of revenue for the periods ended September 30, 2019 and 2018, respectively.

Assurance-type warranties are the only warranties provided by the Company and, as such, Omnitek does not recognize revenue on warranty-related work. Omnitek generally provides a one-year warranty for products that it sells. Warranty claims historically have been insignificant.

Pre-contract costs are generally not incurred by the Company.

Contract Estimates

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, Omnitek estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract.

Variable Consideration 

The transaction price for contracts may include variable consideration, which includes increases to transaction price for approved and unapproved change orders, claims and incentives, and reductions to transaction price for liquidated damages. Variable consideration historically has been insignificant.  

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-2 - Leases (Topic 842), which significantly amends the way companies are required to account for leases.  Under the updated leasing guidance, some leases that did not have to be reported previously are now required to be presented as an asset and liability on the balance sheet. In addition, for certain leases, what was previously classified as an operating expense must now be allocated between amortization expense and interest expense. The Company adopted this update as of January 1, 2019 using the modified retrospective transition method and prior periods have not been restated. The Company has not entered into any leases subject to the new guidance since January 1, 2019.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. With the adoption of ASU 2018-07, the accounting for share-based payments to nonemployees and employees will be substantially the same. ASU 2018-07 is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. In management’s opinion, ASU 2018-07 will not have a material impact on the Company’s financial statements and related disclosures.

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.

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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.

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 September 30, 2019. 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.

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, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II.

OTHER INFORMATION

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.

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.

On September 30, 2019, the Company issued 419,463 restricted shares of common stock to G. On global Investments S.R.L., at a price of $0.1788 per share for aggregate consideration of $75,000 representing the Tranche  1 payment pursuant to the Securities Purchase Agreement dated September 6, 2019.

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 amended (the “Act’). The investor is an “Accredited Investor” as defined under Rule 501 of Regulation D of the Act and has such knowledge and experience and possessed such information as it deemed necessary to make an informed investment decision.

None

Entry Into a Material Definitive Agreement

On January 19, 2019 the Company and Werner Funk, President and CEO, agreed to a one-year extension of the $15,000 related party note payable due to Mr. Funk. The extended due date is January 19, 2020.

Effective September 1, 2019, the Company entered into the Fourth Amendment to the Lease for its facility, reducing the size of the leased space to 21,786 square feet and extending the lease term to August 31, 2020, at which time a new lease extension has to be negotiated.  Effective as of September 1, 2019, the base rent is reduced to $14,161 per month, plus a reduced charge for common area maintenance expenses (CAM) reflecting the reduced square footage.  The security deposit amount of $14,000 remained the same.  Additionally, the amendment calls for payment of past due rents of $89,454, as of September 1, 2019, as follows:

(a)An initial payment of $22,363 on or before September 1, 2019 

(b)Monthly installments of $10,000 thereafter, until such time as the past due rent has been paid in full. 

On September 11, 2019 the Company borrowed $12,000 from a director of the Company.  The loan is evidenced by an unsecured promissory note which bears simple interest at the rate of 8% per annum. The principal amount of the note and all accrued interest is due and payable on or before December 11, 2019.

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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, 2019 and the audited balance sheet as of December 31, 2018, the condensed unaudited Statements of Operations for the three and nine month periods ended September 30, 2019 and 2018, and the condensed unaudited Statements of Cash Flows for the nine month periods ended September 30, 2019 and 2018, and the condensed unaudited Statements of Stockholders’ Equity (Deficit) as of September 30, 2019 and 2018, 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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