During the six months ended June 30, 2021 and 2020, the Company granted 400,000 and 150,000 options for services, respectively. During the six months ended June 30, 2021 and 2020, the Company recognized expense of $13,874 and $12,078, respectively, for options that vested during the periods pursuant to ASC Topic 718. Total remaining amount of compensation expense to be recognized in future periods is $27,983.
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, 2021 the Company has a total of 75,000 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, 2021 the Company has a total of 1,915,556 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, 2021, the Company has a total of 1,008,333 options issued under the 2017 Plan.
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 outstanding at June 30, 2021 is presented below:
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 condensed financial statements and related notes to the condensed 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, 2021 and 2020
Revenues were $228,307 for the three months ended June 30, 2021 compared with $203,967 for the three months ended June 30, 2020, an increase of $24,340. The increase in revenues for the period relates primarily to an increase in filter sales.
Cost of sales was $161,572 for the three months ended June 30, 2021 compared with $144,860 for the three months ended June 30, 2020, an increase of $16,712. Our gross margin percentage was 29% for the three months ended June 30, 2021 compared with 29% in the same period in 2020.
Operating expenses for the three months ended June 30, 2021 were $149,659 compared with $186,469 in the same period in 2020, a decrease of $36,362 or 20%. General and administrative expense for the three months ended June 30, 2021 was $134,424 compared with $168,786 for the three months ended June 30, 2020. Major components of general and administrative expenses for the three months ended June 30, 2021 were professional fees of $6,998, rent expense of $32,218, and salary and wages of $53,088. This compares to professional fees of $13,713, rent expense of $39,283 and salaries and wages of $53,198 for the three months ended June 30, 2020. For the three months ended June 30, 2021 research and development outlays decreased to $17,099 compared with $17,547 for the three months ended June 30, 2020.
Our net loss for the three months ended June 30, 2021 was $89,181, or ($0.00) per share, compared with a net loss of $132,497, or ($0.01) per share, for the three months ended June 30, 2020. The decreased net loss was primarily due to lower general and administrative expense during the three months ended June 30, 2021 over the same period a year earlier.
Results for the three months ended June 30, 2021 reflect the impact of non-cash expenses, including the value of options granted in the amount of $2,591, depreciation and amortization of $136 and the inventory reserve adjustment of $27,813. For the three month period a year earlier non-cash expenses included options granted in the amount of $1,670, depreciation and amortization of $136 and the inventory reserve adjustment of $25,000.
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For the six months ended June 30, 2021 and 2020
Revenues increased to $446,420 for the six months ended June 30, 2021 from $434,904 for the six months ended June 30, 2020, an increase of $11,516 or 3%.
Our cost of sales increased to $290,883 for the six months ended June 30, 2021 from $279,980 for the six months ended June 30, 2020, an increase of $10,903. Our gross margin was 35% for the six months ended June 30, 2021 compared to 36% in 2020.
Our operating expenses for the six months ended June 30, 2021 were $332,703 compared to $404,707 in 2020, a decrease of $72,004 or 18%. General and administrative expense for the six months ended June 30, 2021 was $298,877 as compared to $354,750 for the six months ended June 30, 2020. Major components of general and administrative expenses for the six months ended June 30, 2021 were professional fees of $34,971, rent expense of $65,015 and salary and wages of $104,314. This compares to professional fees of $46,190, rent expense of $71,422, and salary and wages of $117,375 for the six months ended June 30, 2020. Research and development outlays were decreased to $33,555 for the six months ended June 30, 2021 compared to $49,686 for the six months ended June 30, 2020.
Our net loss for the six months ended June 30, 2021 was $89,576, or $0.00 per share, compared to a net loss of $259,202, or $0.01 per share, for the six months ended June 30, 2020. The decreased net loss was primarily due to the gain on extinguishment of liability income realized in the six months ended June 30, 2021 over the same period a year earlier.
Results for the six months ended June 30, 2021 reflect the impact of non-cash expenses, including the value of options and warrants granted in the amount of $13,874, depreciation and amortization of $271 and the inventory reserve adjustment of $50,542. For the six-month period a year earlier, non-cash expenses included the value of options and warrants granted of $12,078, depreciation and amortization of $271 and inventory reserve adjustment of $50,053.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash provided by financing 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, 2021, our current liabilities totaled $1,550,026 and our current assets totaled $867,014, resulting in negative working capital of $(683,012).
We have no firm commitments or obligations for capital expenditures. However, substantial discretionary expenditures may be required to enable us to conduct existing and planned product research, design, development, manufacturing, marketing and distribution of our products. We may need to raise additional capital to facilitate growth and support our long-term product development, manufacturing, and marketing programs. The Company has no established bank-financing arrangements. Therefore, it is possible that we need to seek additional financing through subsequent future public or private sales of our securities, including equity securities. We may also seek funding for the development, manufacturing, and marketing of our products through strategic partnerships and other arrangements with corporate partners. There can be no assurance, however, that such collaborative arrangements or additional funds will be available when needed, or on terms acceptable to us, if at all. If adequate funds are not available, we may be required to curtail one or more of our research and development programs.
We have historically incurred significant losses, which have resulted in a total accumulated deficit of $21,555,217 at June 30, 2021, 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 $189,751 for the six months ended June 30, 2021 compared with a negative operating cash flow of $201,204 during the six months ended June 30, 2020.
Included in the operating loss of $89,576 for the six months ended June 30, 2021 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 $13,874, depreciation and amortization of $271 and the inventory reserve adjustment of $88,956.
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Financing Activities
We realized a positive cash flow from financing activities of $149,674 for the six months ended June 30, 2021 compared with a positive cash flow of $288,000 for the six months ended June 30, 2020. The positive cash flow for the six months ended June 30, 2021 relates primarily to proceeds from long-term debt. The positive cash flow for the six months ended June 30, 2020 relates primarily to proceeds from long-term debt.
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.
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.
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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 0% and 0% of revenue for the periods ended June 30, 2021 and 2020, 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 100% and 100% of revenue for the periods ended June 30, 2021 and 2020, 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.
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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.
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.