NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES | 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, 2021 and 2020 was $41,000 and $15,000, respectively. Additionally, bad debt expense for the years ended December 31, 2021 and 2020 was $26,000 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. 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, 2021 or 2020. 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 Contracts Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good 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 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 1% and 0% of revenue for the years ended December 31, 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 99% and 100% of revenue for the years ended December 31, 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. 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. Disaggregation of Revenue The following table presents Omnitek’s revenues disaggregated by region and product type: December 31, December 31, 2021 2020 Consumer Long-term Consumer Long-term Segments Products Contract Total Products Contract Total Domestic $ 396,750 - 396,750 $ 606,629 - 606,629 International 693,052 7,665 700,717 269,368 - 269,368 $ 1,089,802 7,665 1,097,467 $ 875,997 - 875,997 Filters 693,768 - 693,768 324,961 - 324,961 Components 395,176 - 395,176 551,036 - 551,036 Engineering Services 858 7,665 8,523 - - - $ 1,089,802 7,665 1,097,467 $ 875,997 - 875,997 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, 2021 and 2020, the Company incurred research and development expenses of $63,829 and $82,052, respectively. k. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. During the years ended December 31, 2021 and 2020, 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. 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, 2021, 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 3,065,556 vested stock options and warrants that were included in the fully diluted earnings per share computation as of December 31, 2021. As of December 31, 2020 the Company had 2,882,223 Stock Options and Warrants that would have been included in the fully diluted earnings per share computation. However, the common stock equivalents were not included in the computation because they were 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: NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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, 2021, eight customers accounted for approximately 84% of sales. During the year ended December 31, 2020, eight customers accounted for approximately 80% of sales. Suppliers During the year ended December 31, 2021, four suppliers accounted for 81% of products purchased. During the year ended December 31, 2020, eight suppliers accounted for 71% 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, 2021, the Company had an accumulated deficit of $21,448,232 and total stockholders’ deficit of ($807,692). At December 31, 2021, the Company had current assets of $803,724 including cash of $59,674, and current liabilities of $1,516,537, resulting in negative working capital of $712,813. For 2021, the Company reported net income of $17,409 and net cash used by operating activities of $130,146. Management believes that based on its operating plan, the projected sales for 2022, 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 substantial doubt upon the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. 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. 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. |