Notes to Condensed Financial Statements
March 31, 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 March 31, 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 March 31, 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 adjustment 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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6
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 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:
|
|
|
|
Location : Vista, CA
|
|
March 31, 2018
|
|
|
December 31, 2017
|
Raw materials
|
$
|
980,490
|
|
$
|
990,945
|
Finished goods
|
|
1,179,466
|
|
|
1,185,888
|
Work in progress
|
|
26,432
|
|
|
26,432
|
Allowance for obsolete inventory
|
|
(673,609)
|
|
|
(648,609)
|
Total
|
$
|
1,512,779
|
|
$
|
1,554,656
|
The Company has established an allowance for obsolete inventory. Expense for obsolete inventory was $25,000 and $305,458, for the periods ended March 31, 2018 and December 31, 2017, respectively.
Property and Equipment
Property and equipment at March 31, 2018 and December 31, 2017 consisted of the following:
|
March 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Production equipment
|
$
|
61,960
|
|
$
|
61,960
|
Computers/Office equipment
|
|
28,540
|
|
|
28,540
|
Tooling equipment
|
|
12,380
|
|
|
12,380
|
Leasehold Improvements
|
|
42,451
|
|
|
42,451
|
Less: accumulated depreciation
|
|
(142,059)
|
|
|
(138,078)
|
Total
|
$
|
3,272
|
|
$
|
7,253
|
Depreciation expense for the periods ended March 31, 2018 and March 31, 2017 was $3,981 and $6,224, 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 2,690,973 and 2,379,723 stock options and warrants that would have been included in the fully diluted earnings per share as of March 31, 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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7
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 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 March 31, 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 March 31, 2018, the Company had an accumulated deficit of $19,885,191 and total stockholders’ equity of $400,554. At March 31, 2018, the Company had current assets of $1,601,431 including cash of $11,522, and current liabilities of $1,218,429, resulting in working capital of $383,002.
For 2017, the Company reported a net loss of $1,036,297 and net cash used by operating activities of $24,503. 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 substantial 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 – CONTRACT ASSETS AND LIABILITIES
Under ASC Topic 606, performanace obligations are a critical step in revenue recognition. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recoginzed as revenue when, or as, the performation obligation is satisfied. We 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 signficant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided or products are shipped. Projects with
Page
8
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 2018
(unaudited)
NOTE 3 – CONTRACT ASSETS AND LIABILITIES (Continued)
performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of of cumulative billings, are reported on our Balance Sheets as contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date, are reported on our Balance Sheets as contract liabilities.
The two tables below set forth thet costs incurred and earnings accrued on uncompleted contracts compared with the billings on those contracts through March 31, 2018 and December 31, 2017 and reconcile the net excess billings to the amounts included in the balance sheets at those dates.
|
March 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Cost incurred on uncompleted contracts
|
|
$
|
-
|
|
|
$
|
-
|
Estimated earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Billings on uncompleted contracts
|
|
|
(30,000)
|
|
|
|
(30,000)
|
Contract liabilities
|
|
|
(30,000)
|
|
|
|
(30,000)
|
Included in the accompanying balance sheets under the following captions:
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Contract assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Contract liabilities
|
|
|
(30,000)
|
|
|
|
(30,000)
|
|
Net contract liabilities
|
|
$
|
(30,000)
|
|
|
$
|
(30,000)
|
|
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 March 31, 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 March 31, 2018 and December 31, 2017, the Company was owed $7,752 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 March 31, 2018 and December 31, 2017, the Company owed related parties for such expenses, goods and services in the amounts of $125,836 and $114,321, respectively.
Page
9
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 2018
(unaudited)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
Accrued Management Expenses
For the periods ended March 31, 2018 and December 31, 2017, the Company’s president and chief financial officer were due amounts for services performed for the Company.
As of March 31, 2018 and December 31, 2017 the accrued management fees consisted of the following:
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Amounts due to the president
|
|
$
|
343,912
|
|
|
$
|
321,796
|
|
Amounts due to the chief financial officer
|
|
|
88,172
|
|
|
|
85,045
|
|
Total
|
|
$
|
432,084
|
|
|
$
|
406,841
|
|
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 March 31, 2018.
As of March 31, 2018 and December 31, 2017 Convertible Notes – Related Party consisted of the following:
|
March 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Convertible note, related party
|
|
$
|
15,000
|
|
|
$
|
15,000
|
Total
|
|
$
|
15,000
|
|
|
$
|
15,000
|
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 March 31, 2018 and December 31, 2017 Note Payable – Related Party consisted of the following:
|
March 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Note payable, related party
|
|
$
|
15,000
|
|
|
$
|
15,000
|
Total
|
|
$
|
15,000
|
|
|
$
|
15,000
|
Page
10
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 2018
(unaudited)
NOTE 6 - STOCK OPTIONS AND WARRANTS
During the three months ended March 31, 2018 and 2017, the Company granted 590,000 and 350,000 options for services, respectively. During the three months ended March 31, 2018 and 2017, the Company recognized expense of $21,971 and $69,533, respectively, for options and warrants that vested during the periods pursuant to ASC Topic 718. As of March 31, 2018 total remaining amount of compensation expense to be recognized in future periods is $40,409. During the three months ended March 31, 2018 and 2017, the Company granted -0- and 555,556 options to the CEO for accrued compensation, respectively. As of March 31, 2018 and 2017, the total instrinsic value of ouststanding stock options was $-0- and $-0-, 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 March 31, 2018 the Company has a total of 815,000 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 March 31, 2018 the Company has a total of 2,165,556 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 March 31, 2018, the Company has a total of 300,000 options issued under the 2017 Plan. During the three months ended March 31, 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.
The following table presents the assumptions used to estimate the fair values of the stock options granted:
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
Expected volatility
|
150 %
|
|
105 %
|
Expected dividends
|
0 %
|
|
0 %
|
Expected term
|
7 Years
|
|
7 Years
|
Risk-free interest rate
|
2.46 %
|
|
2.22 %
|
Page
11
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 2018
(unaudited)
NOTE 6 - STOCK OPTIONS AND WARRANTS (continued)
A summary of the status of the options and warrants granted at March 31, 2018 and December 31, 2017 and changes during the periods then ended is presented below:
|
March 31,
|
|
December 31,
|
|
2018
|
|
2017
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Weighted-Average
|
|
Shares
|
|
|
Exercise Price
|
|
Shares
|
|
|
Exercise Price
|
Outstanding at beginning of year
|
2,600,556
|
|
$
|
0.82
|
|
4,510,313
|
|
$
|
2.81
|
Granted
|
590,000
|
|
|
0.07
|
|
905,556
|
|
|
0.18
|
Exercised
|
-
|
|
|
-
|
|
-
|
|
|
-
|
Expired or cancelled
|
-
|
|
|
-
|
|
(2,815,313)
|
|
|
3.81
|
Outstanding at end of period
|
3,190,556
|
|
|
0.68
|
|
2,600,556
|
|
|
0.82
|
Exercisable
|
2,690,973
|
|
$
|
0.75
|
|
2,354,723
|
|
$
|
0.84
|
A summary of the status of the options and warrants outstanding at March 31, 2018 is presented below:
Range of Exercise Prices
|
|
Number Outstanding
|
|
Weighted-Average Remaining Contractual Life
|
|
|
Number Exercisable
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
$0.01-0.99
|
|
2,540,556
|
|
5.55 years
|
|
|
2,040,973
|
|
0.24
|
$1.00-1.99
|
|
125,000
|
|
1.30 years
|
|
|
125,000
|
|
1.18
|
$2.00-2.99
|
|
525,000
|
|
1.51 years
|
|
|
525,000
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
$0.01-3.99
|
|
3,190,556
|
|
4.72 years
|
|
|
2,690,973
|
|
$0.73
|
|
|
|
|
|
|
|
|
|
|
Page
12
OMNITEK ENGINEERING CORP.
Notes to Condensed Financial Statements
March 31, 2018
(unaudited)