Notes to Financial Statements
December 31, 2019 and 2018
NOTE 1 – ORGANIZATION AND BUSINESS ACTIVITY
Omnitek Engineering, Corp. (“Omnitek” or “the Company”) was incorporated on October 9, 2001 under the laws of the State of California. Omnitek develops and sells a proprietary technology to convert diesel engines to an alternative fuel, new natural gas engines, and complementary products. Omnitek products are available for stationary applications and the global transportation markets, which includes light commercial vehicles, minibuses, heavy-duty trucks, municipal buses, as well as rail and marine applications. The technology can be applied for compressed natural gas (“CNG”), liquefied natural gas (“LNG”), or renewable natural gas (“Biogas” or “RNG”), as well as liquid petroleum gas (“Propane” or “LPG”). Omnitek began operations on October 10, 2001, and was a spin-off from Nology Engineering, Inc.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Methods
The Company's financial statements are prepared using the accrual method of accounting. The Company has elected a December 31, year-end.
b. Use of Estimates in Preparing Financial Statements
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. The Company also regularly evaluates estimates and assumptions related to deferred income tax asset valuation allowances, inventory valuation allowances, allowance for doubtful receivables and valuations of equity-based payments.
c. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
d. 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. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Allowance for doubtful accounts for the years ended December 31, 2019 and 2018 was $15,000 and $15,000, respectively. Additionally, bad debt expense for the years ended December 31, 2019 and 2018 was $-0- and $-0-, respectively.
e. Inventories
Inventories are stated at the lower of cost or market, cost determined on an average cost basis. Market value for raw materials is based on replacement costs. Inventory costs include material, labor and manufacturing overhead. The Company reviews inventories on hand at least annually and records provisions for estimated excess, slow moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value. The regular and systematic inventory valuation reviews include a current assessment of future product demand, historical experience and product expiration.
Page 38
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. 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 will recognize the impairment immediately. No impairment expense was
recognized as of December 31, 2019 or 2018.
g. Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are calculated on the straight-line method over the shorter of the lease term or the estimated useful lives of the assets ranging from three to five years.
h. 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
Page 39
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 5% and 1% of revenue for the years ended December 31,2019 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 95% and 99% of revenue for the years ended December 31, 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.
Page 40
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Disaggregation of Revenue
The following table presents Omnitek’s revenues disaggregated by region and product type:
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
Consumer
|
Long-term
|
|
|
|
|
Consumer
|
Long-term
|
|
Segments
|
|
|
Products
|
Contract
|
Total
|
|
|
|
Products
|
Contract
|
Total
|
Domestic
|
|
$
|
450,986
|
-
|
450,986
|
|
|
$
|
484,604
|
-
|
484,604
|
International
|
|
|
468,949
|
44,474
|
513,423
|
|
|
|
788,310
|
12,772
|
801,082
|
|
|
$
|
919,935
|
44,474
|
964,409
|
|
|
$
|
1,272,914
|
12,772
|
1,285,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Filters
|
|
|
561,560
|
-
|
561,560
|
|
|
|
819,517
|
-
|
819,517
|
Components
|
|
|
358,375
|
-
|
358,375
|
|
|
|
453,397
|
-
|
453,397
|
Engineering Services
|
|
|
-
|
44,474
|
44,474
|
|
|
|
-
|
12,772
|
12,772
|
|
|
$
|
919,935
|
44,474
|
964,409
|
|
|
$
|
1,272,914
|
12,772
|
1,285,686
|
i. Cost of Goods Sold
The Company includes product costs (i.e. material, direct labor and overhead costs), shipping and handling expense, production-related depreciation expense and product license agreement expense in cost of goods sold.
j. Research and Development
The Company expenses the costs of researching and developing its products during the period incurred. During the years ended December 31, 2019 and 2018, the Company incurred research and development expenses of $106,916 and $106,896, respectively.
k. Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. During the years ended December 31, 2019 and 2018, the Company expensed $-0- and $-0-, respectively.
l. Provision 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.
Page 41
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 December 31, 2019, 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.
m. 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 2,672,223 and 2,556,390 stock options and warrants that would have been included in the fully diluted earnings per share as of December 31, 2019 and 2018, respectively. However, the common stock equivalents were not included in the loss per share computation because they are anti-dilutive.
n. Fair Value Measurements
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
Level 3 – Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
o. Stock-based Compensation
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.
p. Concentration of Risks
Customers
During the year ended December 31, 2019, seven customers accounted for approximately 74% of sales.
During the year ended December 31, 2018, seven customers accounted for approximately 73% of sales.
Page 42
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Suppliers
During the year ended December 31, 2019, five suppliers accounted for 86 % of products purchased.
During the year ended December 31, 2018, four suppliers accounted for 82% of products purchased.
q. Liquidity and Going Concern
Historically, the Company has incurred net losses and negative cash flows from operations. As of December 31, 2019, the Company had an accumulated deficit of $20,975,929 and total stockholders’ deficit of ($430,877). At December 31, 2019, the Company had current assets of $1,082,497 including cash of $20,236, and current liabilities of $1,530,608, resulting in negative working capital of $448,111. For 2019, the Company reported a net loss of $720,422 and net cash used by operating activities of $83,824. Management believes that based on its operating plan, the projected sales for 2020, combined with funds available from its working capital will be sufficient to fund operations for the next twelve months from the date these financial statements were issued. 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.
r. Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued its new lease accounting guidance in ASU 2016-2, Leases (Topic 842). Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The standard is effective for the interim and annual reporting periods beginning after December 15, 2018. ASU 2016-2 allows companies to adopt the new standard by either applying a modified retrospective method to the beginning of the earliest period presented in the financial statements or an optional transition method to initially apply the standard on January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the standard using the optional transition method and will apply the new guidance prospectively to leases that exist and those entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements.
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. Management has
assessed the impact that ASU 2018-07 will have on the Company and determined that it will not have a material impact on the Company’s financial statements and related disclosures.
Page 43
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
The Company has evaluated recent accounting pronouncements and their adoption has not had or is expected to have a material impact on the Company’s financial position, or statements.
NOTE 3 – CONTRACT ASSETS AND LIABILITIES
Contract Balances
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:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Contract assets
|
$
|
13,221
|
|
$
|
12,772
|
Contract liabilities
|
$
|
(75,000)
|
|
$
|
(84,496)
|
Net amount of contract liabilities in excess of contract assets
|
$
|
(61,779)
|
|
$
|
(71,724)
|
NOTE 4 – INVENTORIES
Inventories are located in Vista, California and at December 31, 2019 and 2018 consisted of the following:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Raw materials
|
$
|
935,834
|
|
$
|
948,060
|
Finished goods
|
|
1,073,623
|
|
|
1,147,052
|
Work in progress
|
|
1,800
|
|
|
-
|
Inventory in transit
|
|
-
|
|
|
10,611
|
Allowance for obsolete inventory
|
|
(988,892)
|
|
|
(746,045)
|
Total
|
$
|
1,022,365
|
|
$
|
1,359,678
|
The Company has established an allowance for obsolete inventory. Expense for obsolete inventory was $242,846 and $97,436, for the years ended December 31, 2019 and December 31, 2018, respectively.
Page 44
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment at December, 2019 and 2018 consisted of the following:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Production equipment
|
$
|
64,673
|
|
$
|
64,673
|
Computers/Office equipment
|
|
28,540
|
|
|
28,540
|
Tooling equipment
|
|
12,380
|
|
|
12,380
|
Leasehold Improvements
|
|
42,451
|
|
|
42,451
|
Less: accumulated depreciation
|
|
(146,235)
|
|
|
(145,668)
|
Total
|
$
|
1,809
|
|
$
|
2,376
|
Depreciation expense for the years ended December 31, 2019 and 2018 was $567 and $7,590, respectively.
NOTE 6 – CUSTOMER DEPOSITS
The Company may require a customer deposit from domestic and international customers. As of December 31, 2019 and 2018 the Company had customer deposits of $163,681 and $140,338, respectively.
NOTE 7 – NOTES PAYABLE – RELATED PARTIES
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 was due and payable on or before December 11, 2019. Under the terms of a Promissory Note Extension, the principal amount of the note and all accrued interest is due and payable on or before the extended maturity date of June 30, 2020.
On May 28, 2019 the Company issued a Working Capital Promissory Note to the Company’s CEO for loans made to the Company during the calendar year 2019. The note has an annual interest rate of 5%, is unsecured and had an original maturity date of December 31, 2019. During 2019 the Company’s CEO made cumulative loans to the Company of $15,000. Under the terms of a Promissory Note Extension, the principal amount of the note and all accrued interest is due and payable on or before the extended maturity date of December 31, 2020.
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, 2020.
As of December 31, 2019 and December 31, 2018 Note Payable – Related Party consisted of the following:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Note payable, related party, current portion
|
$
|
27,000
|
|
$
|
15,000
|
Note payable, related party, net of current portion
|
|
15,000
|
|
|
-
|
Total
|
$
|
42,000
|
|
$
|
15,000
|
NOTE 8 – DEBT
Note payable
The Convertible Note Payable (see Note 9) matured on December 11, 2019, with an outstanding principal balance of $40,000. The Lender elected to convert $25,000 of the outstanding principal to restricted common stock. Under the
Page 45
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
terms of the Allonge to Senior Secured Convertible Promissory Note and Agreement, the remaining principal balance of $15,000 is due and payable with an extended maturity date of May 11, 2020. As of December 31, 2019 and December 31, 2018 Note Payable consisted of the following:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Notes payable
|
$
|
15,000
|
|
$
|
-
|
Total
|
$
|
15,000
|
|
$
|
-
|
Convertible Notes 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 $.0025 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”.
In accordance with the terms of the Secured Convertible Promissory Note, the lender elected to convert $25,000 of the outstanding principal balance (totaling $40,000) of the note on the maturity date to restricted shares of the Company’s Common Stock at five cents ($0.05) per share. The remaining $15,000 of the principal balance was due and payable on the maturity date. Under the Allonge to Senior Convertible Promissory Note and Agreement entered into between the lender and the Company, the due date for the remaining $15,000 principal balance was extended to March 11, 2020. As of December 31, 2019 the outstanding principal balance of $15,000 has been reclassified to Note Payable since there is no longer a conversion feature associated with this balance.
As of December 31, 2019 and December 31, 2018 Convertible Note Payable consisted of the following:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Convertible note payable
|
$
|
-
|
|
$
|
100,000
|
Total
|
$
|
-
|
|
$
|
100,000
|
NOTE 9 – COMMITMENTS
As of December 31, 2019 and 2018, the Company had outstanding purchase commitments for inventory totaling $152,583 and $133,141, respectively. Of these amounts, the Company had made prepayments of $18,645 as of December 31, 2019 and $21,956 as of December 31, 2018 and had commitments for future cash outlays for inventory totaling $133,938 and $111,185, respectively.
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. The current lease payment is $14,161 per month, plus common area maintenance expenses (CAM). Under the amended lease, past due rent is payable at monthly installments of $10,000, until such time as the past due rent has been paid in full. The lease is not subject to the right-of-use asset rules under ASU 2016-2 because it qualifies for the short-term lease exception under that pronouncement.
Page 46
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
As of December 31, 2019 the outstanding balance was $62,529.
The security deposit of $14,000 remained the same.
NOTE 10 – 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 December 31, 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 December 31, 2019 and December 31, 2018, the Company was owed $16,712 and $6,666, respectively, by related parties for the purchase of products and services.
Accrued Management Expenses
During the periods ended December 31, 2019 and December 31, 2018, the Company’s president and chief financial officer were due amounts for services performed for the Company. As of December 31, 2019 and December 31, 2018 the accrued management fees consisted of the following:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Amounts due to the president
|
$
|
541,504
|
|
$
|
399,296
|
Amounts due to the chief financial officer
|
|
165,326
|
|
|
106,807
|
Total
|
$
|
706,830
|
|
$
|
506,103
|
NOTE 11 – STOCKHOLDERS’ EQUITY
Common Stock
On July 7, 2018 the Company issued 139,320 shares of its restricted common stock in consideration of a capital contribution via the conversion by a board member of $15,799, constituting unpaid principal of $15,000 and accrued interest of $799, owing under that certain Promissory Note dated November 7, 2017.
On September 6, 2019 the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a purchaser wherein the purchaser agreed to buy an aggregate of 3,579,014 restricted shares of common stock of the Company at a price of $.1788 per share for an aggregate purchase price of $640,000. Subject to the default and penalty provisions in the Purchase Agreement, the sale and purchase of the restricted shares and
payment of the purchase price shall be made in 20 tranches as follows: (a) $75,000 payable on or before September 30, 2019 (tranche 1), (b) the balance of the purchase price paid in 18 monthly tranches, at a minimum of $10,000 per month with a total quarterly payment of no less than $90,000, and (c) a final payment of $25,000 on or before April 1, 2021(tranche 20). In accordance with these terms, purchaser paid $75,000 on September 30, 2019 and was issued 419,463 restricted shares of the Company’s restricted common stock. Between October 1, 2019 and December 31, 2019 the purchaser made cumulative payments of $20,000 towards the $90,000 required under the agreement and was therefore in default under the terms of the agreement. In accordance with a provision in the agreement the Company elected to waive the default but assess a $.03 per share penalty for all future installment payments, increasing the purchase price to $.2033 per share. The $20,000 paid by the purchaser as of December 31, 2019 has been classified as Common Stock Subscribed on the balance sheet.
Additionally, subject to the payment by the purchaser of the additional sum of $25,000 by September 30, 2019, the Company shall grant to the purchaser, an option to purchase an additional 3,579,014 restricted shares of
Page 47
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 11 – STOCKHOLDERS’ EQUITY (Continued)
common stock for an additional $640,000. The $25,000 option purchase price is consideration for the option and shall be non-refundable and shall not be applied to the purchase of any restricted shares. The purchaser may exercise the option within six months of the initial (tranche 1) payment (i.e., September 30, 2019) by paying the initial option tranche exercise payment of $75,000. If the purchaser has not exercised and paid the initial option exercise payment of $75,000 by March 31, 2020 the option to purchase the option shares shall expire and be terminated. The purchaser made a timely payment of $25,000 on September 30, 2019 to purchase the option but did not make the initial option tranche exercise payment of $75,000 by March 31, 2020. Therefore, the option to purchase the option shares has expired.
On December 31, 2019 the Company issued 500,000 shares of its restricted common stock in consideration of a capital contribution via the conversion of $25,000 of unpaid principal owing under that certain Convertible Note dated June 11, 2018 (see Note 9).
Options and Warrants
During the years ended December 31, 2019 and 2018, the Company granted 450,000 and 590,000 options for services, respectively. During the years ended December 31, 2019 and 2018, respectively, the Company recognized expense of $49,786 and $37,730 related to options that vested during the years, pursuant to ASC Topic 718. The total remaining amount of compensation expense to be recognized in future periods is $7,014. No future compensation expense has been calculated for 150,000 options that were granted in 2015 due to the low probability that any of these options will vest before maturity.
In April 2007, the Company’s shareholders approved its 2006 Long-Term Incentive Plan (“the 2006 Plan”). Under the 2006 plan, the Company may issue up to 10,000,000 shares of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. As of December 31, 2014 the remaining 2,590,000 options previously issued under the plan expired. On August 3, 2011 the Board of Directors adopted the Omnitek Engineering Corp. 2011 Long-term Incentive Plan (the “2011 Plan”), under which 1,000,000
shares of Company’s Common Stock were reserved for issuance of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. As of December 31, 2019 the Company has a total of 600,000 options issued under the plan. On September 11, 2015 the Board of Directors adopted the Omnitek Engineering Corp. 2015 Long Term Incentive Plan (the “2015 Plan”), under which 2,500,000 shares of the Company’s Common Stock were reserved for issuance of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. As of December 31, 2019 the Company has a total of 2,065,556 options issued under the 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 December 31, 2019, the Company has a total of 750,000 options issued under the plan. During the twelve months ended December 31, 2019 and 2018 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.
Page 48
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 11 – STOCKHOLDERS’ EQUITY (Continued)
The following table presents the assumptions used to estimate the fair values of the stock options granted:
|
December 31,
2019
|
|
December 31,
2018
|
Expected volatility
|
142%
|
|
150%
|
Expected dividends
|
0%
|
|
0%
|
Expected term
|
7 Years
|
|
7 Years
|
Risk-free interest rate
|
2.01%
|
|
2.46%
|
A summary of the status of the options granted at December 31, 2019 and December 31, 2018 and changes during the years then ended is presented below:
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Weighted-Average
|
|
Shares
|
|
|
Exercise Price
|
|
Shares
|
|
|
Exercise Price
|
Outstanding at beginning of year
|
2,965,556
|
|
$
|
0.63
|
|
2,600,556
|
|
$
|
0.82
|
Granted
|
450,000
|
|
|
0.08
|
|
590,000
|
|
|
0.07
|
Exercised
|
-
|
|
|
-
|
|
-
|
|
|
-
|
Expired or cancelled
|
(475,000)
|
|
|
2.49
|
|
(225,000)
|
|
|
1.33
|
Outstanding at end of year
|
2,940,556
|
|
|
0.25
|
|
2,965,556
|
|
|
0.63
|
Exercisable
|
2,672,223
|
|
$
|
0.23
|
|
2,556,390
|
|
$
|
0.67
|
A summary of the status of the options outstanding at December 31, 2019 is presented below:
Range of Exercise Prices
|
|
Number Outstanding
|
|
Weighted-Average Remaining Contractual Life
|
|
|
Number Exercisable
|
|
Weighted-Average Exercise Price
|
$0.01-1.00
|
|
2,890,556
|
|
4.18 years
|
|
|
2,622,223
|
|
$0.21
|
$1.01-2.00
|
|
50,000
|
|
0.36 years
|
|
|
50,000
|
|
1.13
|
$0.01-2.00
|
|
2,940,556
|
|
4.12 years
|
|
|
2,672,223
|
|
$0.23
|
A summary of the status of the options and warrants outstanding at December 31, 2018 is presented below:
Range of Exercise Prices
|
|
Number Outstanding
|
|
Weighted-Average Remaining Contractual Life
|
|
Number Exercisable
|
|
Weighted-Average Exercise Price
|
$0.01 - 1.00
|
|
2,440,556
|
|
4.80 years
|
|
2,031,390
|
|
$0.24
|
$1.01 - 2.00
|
|
75,000
|
|
1.18 years
|
|
75,000
|
|
1.37
|
$2.01 - 3.00
|
|
450,000
|
|
0.81 years
|
|
450,000
|
|
2.53
|
$0.01 - 3.00
|
|
2,965,556
|
|
4.11 years
|
|
2,556,390
|
|
$0.67
|
Page 49
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 12 – INCOME TAXES
The provision for income taxes for the year ended December 31, 2019 and 2018 consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
Federal
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
800
|
|
|
$
|
800
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Income tax expense
|
|
$
|
800
|
|
|
$
|
800
|
|
Net deferred tax assets consist of the following components as of December 31, 2019 and 2018:
|
|
December 31,
|
|
|
December 31,
|
|
Deferred tax assets:
|
|
2019
|
|
|
2018
|
|
Net operating loss carryover
|
|
$
|
6,821,469
|
|
|
|
6,560,622
|
|
Research and development carry forward
|
|
|
131,088
|
|
|
|
131,088
|
|
Inventory reserve
|
|
|
237,334
|
|
|
|
179,051
|
|
Allowance for doubtful accounts
|
|
|
3,600
|
|
|
|
3,600
|
|
Warranty allowance
|
|
|
3,068
|
|
|
|
3,068
|
|
Accrued compensation
|
|
|
169,639
|
|
|
|
121,465
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(47,001)
|
|
|
|
(97,331)
|
|
Valuation allowance
|
|
|
(7,319,197)
|
|
|
|
(6,901,563)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
|
-
|
|
The income tax provision differs from the amount of income tax determined by applying the estimated U.S. federal and state income tax rate of 24% as of December 31, 2019 and December 31, 2018 to pretax income
from continuing operations for the year ended December 31, 2019 and 2018 due to the following:
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
|
2018
|
Book loss
|
|
$
|
(172,902)
|
|
|
|
(112,418)
|
Meals and entertainment
|
|
|
16
|
|
|
|
16
|
State tax deduction
|
|
|
-
|
|
|
|
-
|
Deferred rent
|
|
|
-
|
|
|
|
(926)
|
Stock/Options for services
|
|
|
11,949
|
|
|
|
9,055
|
Officer’s life ins premium
|
|
|
1,181
|
|
|
|
1,181
|
Depreciation
|
|
|
(8,784)
|
|
|
|
(7,593)
|
Accrued compensation
|
|
|
48,174
|
|
|
|
23,823
|
Inventory reserve
|
|
|
58,283
|
|
|
|
23,385
|
Valuation allowance
|
|
|
124,964
|
|
|
|
127,753
|
Net operating loss carryover
|
|
|
(62,081)
|
|
|
|
(63,476)
|
Income Tax Expense
|
|
$
|
800
|
|
|
|
800
|
On December 21, 2017, the TCJA was enacted. Among other things, the TCJA reduces the U.S. federal corporate tax rate from 35 percent to 21 percent beginning January 1, 2018, requires companies to pay a one-time transition tax on certain previously unremitted earnings on non-U.S. subsidiaries, creates new taxes on certain foreign sourced
earnings and imposes additional limitations on certain deductions, including interest expense and net operating losses arising after 2017. The Company has assessed the impact of the TCJA and is not subject to the one-time
Page 50
OMNITEK ENGINEERING CORP.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 12 – INCOME TAXES (continued)
transition tax. The Company remeasured certain deferred tax assets and liabilities based on the rates that they are expected to reverse in the future, which is generally 21 percent under TCJA. The decrease in the Company’s net deferred tax assets was offset by a corresponding decrease in its valuation allowance.
At December 31, 2019, the Company had net operating loss carry forwards of approximately $6,821,469 through 2034. No tax benefit has been reported in the December 31, 2019 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.
NOTE 13 – SUBSEQUENT EVENTS
On January 7, 2020, Richard Miller notified the Company of his resignation as a director and the Chief Financial Officer of the Company, effective February 7, 2020.
On January 7, 2020, the Company issued 500,000 restricted shares of Common Stock to Jack Ferraro upon the conversion of $25,000 of the unpaid principal owing under that certain Senior Secured Promissory Note dated June 11, 2018 (the “Note”). The shares were issued at a price of $0.05 per 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. Mr. Ferraro 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.
On January 19, 2020 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, 2021.
On March 11, 2020 the Company executed the Amendment and Agreement to the Allonge to the Secured Senior Convertible Promissory Note (the “Agreement”). The Agreement amended the original Allonge to Senior Convertible Promissory Note and Agreement by extending the due date from March 11, 2020 to May 15, 2020.
On March 27, 2020 the Company granted a total of $150,000 Non-Qualified Stock Options pursuant to the 2017 Long-Term Incentive Plan. The Options were allocated as follows: 50,000 Options to the CEO for past and continued services (vest and exercisable immediately) and 50,000 Options each to two outside directors (total of 100,000 Options) for past and continued services (vest and exercisable immediately).
In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The extent of COVID-19’s impact on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company’s business. However, if the pandemic continues to evolve into a severe worldwide health crisis, the disease could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
Page 51