Omnitek Engineering (OMTK) 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  September 30, 2018

Commission File Number     000-53955

OMNITEK ENGINEERING CORP.

 (Exact name of Registrant as specified in its charter)

California	330984450
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1333 Keystone Way, #101, Vista, California 92081

 (Address of principal executive offices, Zip Code)

(760) 591-0089

 (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☒   No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer,"  "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

As of November 13, 2018, the Registrant had 20,420,402 shares of its no par value Common Stock outstanding.

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TABLE OF CONTENTS

Page

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

OMNITEK ENGINEERING CORP.
Condensed Balance Sheets
			September 30,		December 31,
			2018		2017
			(unaudited)
ASSETS
CURRENT ASSETS
	Cash		$	5,498	$	23,279
	Accounts receivable, net			15,293		7,984
	Accounts receivable - related parties			6,313		3,440
	Inventory, net			1,451,896		1,554,656
	Deposits			28,583		17,385
		Total Current Assets		1,507,583		1,606,744
FIXED ASSETS, net				2,672		7,253
OTHER ASSETS
	Other noncurrent assets			14,280		14,280
		Total Other Assets		14,280		14,280
		TOTAL ASSETS	$	1,524,535	$	1,628,277
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable and accrued expenses		$	373,379	$	358,032
	Accrued management compensation			512,103		406,841
	Accounts payable - related parties			142,819		114,321
	Notes payable - related parties			15,000		15,000
	Convertible notes payable - related parties			-		15,000
	Convertible notes payable, current portion			45,000		-
	Billings in excess of costs and estimated earnings			-		30,000
	Customer deposits			141,279		212,410
		Total Current Liabilities		1,229,580		1,151,604
LONG-TERM LIABILITIES
	Convertible notes payable, net of current portion			55,000		-
		Total Liabilities		1,284,580		1,151,604
STOCKHOLDERS’ EQUITY
	Common stock, 125,000,000 shares authorized no par value 20,420,402   and 20,281,082 shares issued and outstanding, respectively			8,427,210		8,411,411
	Additional paid-in capital			11,917,784		11,852,363
	Accumulated deficit			(20,105,039)		(19,787,101)
		Total Stockholders' Equity		239,955		476,673
		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,524,535	$	1,628,277
The accompanying notes are an integral part of these condensed unaudited financial statements.

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OMNITEK ENGINEERING CORP.

Condensed Statements of Operations (unaudited)

			For the Three		For the Three		For the Nine		For the Nine
			Months Ended		Months Ended		Months Ended		Months Ended
			September 30		September 30		September 30		September 30
			2018		2017		2018		2017
REVENUES			$	265,999	$	263,572	$	995,085	$	795,018
REVENUES, related parties				14,568		12,669		14,568		19,192
	Total revenues			280,567		276,241		1,009,653		814,210
COST OF GOODS SOLD (exclusive of  depreciation shown below)				170,108		158,358		575,088		456,765
GROSS MARGIN				110,459		117,883		434,565		357,445
OPERATING EXPENSES
	General and administrative			184,374		240,477		618,680		789,618
	Research and development			29,315		18,978		81,885		92,667
	Depreciation and amortization			1,568		6,147		7,294		18,594
		Total Operating Expenses		215,257		265,602		707,859		900,879
LOSS FROM OPERATIONS				(104,798)		(147,719)		(273,294)		(543,434)
OTHER INCOME (EXPENSE)
	Other income			-		-		950		-
	Loss on settlement of debt			(32,963)		-		(32,963)		-
	Interest expense			(5,544)		(2,130)		(11,831)		(6,245)
		Total Other Income (Expense)		(38,507)		(2,130)		(43,844)		(6,245)
LOSS BEFORE INCOME TAXES				(143,305)		(149,849)		(317,138)		(549,679)
INCOME TAX EXPENSE				-		-		800		800
NET LOSS			$	(143,305)	$	(149,849)	$	(317,938)	$	(550,479)
BASIC AND DILUTED LOSS PER SHARE			$	(0.01)	$	(0.01)	$	(0.02)	$	(0.03)
WEIGHTED AVERAGE NUMBER  OF COMMON SHARES OUTSTANDING  -BASIC AND DILUTED				20,411,316		20,281,082		20,324,970		20,281,082
The accompanying notes are an integral part of these condensed unaudited financial statements.

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OMNITEK ENGINEERING CORP.

Condensed Statements of Cash Flows (unaudited)

			For the Nine		For the Nine
			Months Ended		Months Ended
			September 30,		September 30,
			2018		2017
OPERATING ACTIVITIES
	Net loss		$	(317,938)	$	(550,479)
	Adjustments to reconcile net loss to  net cash used in operating activities:
		Amortization and depreciation expense		7,294		18,594
		Options and warrants		32,458		120,209
		Inventory reserve		50,000		-
		Loss on extinguishment of debt		32,963		-
	Changes in operating assets and liabilities:
		Accounts receivable		(7,308)		(298)
		Accounts receivable–related parties		(2,873)		(649)
		Costs and estimated earnings in excess of billings		-		30,973
		Deposits		(11,198)		(19,614)
		Prepaid expense		-		5,325
		Inventory		52,760		(28,855)
		Accounts payable and accrued expenses		16,146		(37,070)
		Customer deposits		(71,131)		178,479
		Accounts payable-related parties		28,498		56,938
		Billings in excess of costs and estimated earnings		(30,000)		30,000
		Accrued management compensation		105,262		223,109
		Net Cash Provided by (Used in) Operating Activities		(115,067)		26,662
INVESTING ACTIVITIES
	Purchase of fixed assets			(2,714)		-
		Net Cash Used in Investing Activities		(2,714)		-
FINANCING ACTIVITIES
	Proceeds from convertible note payable			100,000		-
		Net Cash Provided by Financing Activities		100,000		-
		NET INCREASE (DECREASE) IN CASH		(17,781)		26,662
		CASH AT BEGINNING OF YEAR		23,279		17,782
		CASH AT END OF PERIOD	$	5,498	$	44,444
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
	CASH FLOW INFORMATION
	CASH PAID FOR:
		Interest	$	7,583	$	5,721
		Income taxes	$	800	$	800
NON CASH INVESTING AND FINANCING ACTIVITIES
	NON CASH FINANCING ACTIVITIES:
		Options issued for accrued salary	$	-	$	100,000
		Common stock issued for convertible note	$	15,799	$	-
The accompanying notes are an integral part of these unaudited financial statements.

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 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 September 30, 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 September 30, 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.

Recent Accounting Pronouncements

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 5 for additional discussion of our revenue recognition accounting policies and expanded disclosures required by the new standard.

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NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 2,563,473 and 2,379,723 stock options  that would have been included in the fully diluted earnings per share as of September 30, 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.  

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 September 30, 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 September 30, 2018, the Company had an accumulated deficit of $20,105,039 and total stockholders’ equity of $239,955.  At September 30, 2018, the Company had current assets of $1,507,583 including cash of $5,498, and current liabilities of $1,229,580, resulting in working capital of $278,003. For the nine months ended September 30, 2018, the Company reported a net loss of $317,938 and net cash used by operating activities of $115,067. 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 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.     

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2018

(unaudited)

NOTE 3 – INVENTORY

Inventory is stated at the lower of cost or market.  The Company’s inventory consists of finished goods, determined on an average cost basis and raw material, determined on a standard cost basis, and is located in Vista, California, consisting of the following:

	September 30,		December 31,
Location : Vista, CA	2018		2017
Raw materials	$	962,684	$	990,945
Finished goods		1,187,821		1,185,888
Work in progress		-		26,432
Allowance for obsolete inventory		(698,609)		(648,609)
Total	$	1,451,896	$	1,554,656

The Company has established an allowance for obsolete inventory.  Expense for obsolete inventory was $50,000 and $-0-, for the periods ended September 30, 2018 and September 30, 2017, respectively.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2018 and December 31, 2017 consisted of the following:

	September 30,		December 31,
	2018		2017
Production equipment	$	64,673	$	61,960
Computers/Office equipment		28,540		28,540
Tooling equipment		12,380		12,380
Leasehold Improvements		42,451		42,451
Less: accumulated depreciation		(145,372)		(138,078)
Total	$	2,672	$	7,253

Depreciation expense for the periods ended September 30, 2018 and September 30, 2017 was $7,294 and $18,594, respectively.

NOTE 5 – COSTS AND ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS

Billing practices for our contracts are governed by the contract terms of each project based on progress toward completion approved by the owner, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. The current liability, “Billings in excess of costs and estimated earnings,” represents billings in excess of revenues recognized. The current asset, “Costs and estimated earnings in excess of billings,” represents revenues recognized in excess of amounts billed to the customer, which are usually billed during normal billing processes following achievement of contractural requirements.  

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2018

(unaudited)

NOTE 5 – COSTS AND ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS (CONTINUED)

The two tables below set forth thet costs incurred and earnings accrued on uncompleted contracts compared with the billings on those contracts through September 30, 2018 and December 31, 2017 and reconcile the net excess billings to the amounts included in the balance sheets at those dates.

	September 30,			December 31,
	2018			2017
Cost incurred on uncompleted contracts		$	-		$	-
Estimated earnings			-			-
			-			-
Billings on uncompleted contracts			-			(30,000)
Costs incurred and estimated earnings under billings on uncompleted contracts			-			(30,000)

Included in the accompanying balance sheets under the following captions:

	September 30,			December 31,
	2018			2017
Costs and estimated earnings in excess of billings on uncompleted contracts		$	-		$	-
Billings in excess of costs and estimated earnings on uncompleted contracts			-			(30,000)
Net amount of costs and estimated earnings on uncompleted contracts above billings		$	-		$	(30,000)

NOTE 6 - RELATED PARTY TRANSACTIONS

Accounts Receivable – Related Parties

The Company holds a non-controlling interest in various distributors in exchange for use of the Company’s name and logo. As of September 30, 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 September 30, 2018 and December 31, 2017, the Company was owed $6,313 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 September 30, 2018 and December 31, 2017, the Company owed related parties for such expenses, goods and services in the amounts of $142,819 and $114,321, respectively.

Accrued Management Expenses

For the periods ended September 30, 2018 and December 31, 2017, the Company’s president and chief financial officer were due amounts for services performed for the Company.  

As of September 30, 2018 and December 31, 2017 the accrued management fees consisted of the following:

	September 30,			December 31,
	2018			2017
Amounts due to the president		$	410,854		$	321,796
Amounts due to the chief financial officer			101,249			85,045
Total		$	512,103		$	406,841

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2018

(unaudited)

NOTE 7 – 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 embedded 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 September 30, 2018 and December 31, 2017 Convertible Notes – Related Party consisted of the following:

	September 30,			December 31,
	2018			2017
Convertible note, related party		$	-		$	15,000
Total		$	-		$	15,000

On July 6, 2018, pursuant to the lender’s election, the Company issued 139,320 restricted shares of Common Stock upon the conversion of $15,799, constituting unpaid principal of $15,000 and accrued interest of $799. The shares were issued at a price of $0.1134 per share, representing 90% of the average closing price of the Common Stock for the five (5) trading days (between days 15 and 10 days) before the maturity date. As a result of this conversion a loss on settlement of debt of $32,963 was recognized. The recorded loss is the difference between the fair value of the common shares on the date of conversion ($.35) and the face value of the note payable and accrued interest.

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 September 30, 2018 and December 31, 2017 Note Payable – Related Party consisted of the following:

	September 30,			December 31,
	2018			2017
Note payable, related party		$	15,000		$	15,000
Total		$	15,000		$	15,000

NOTE 8 – CONVERTIBLE NOTE PAYABLE

On June 15, 2018 the Company entered into a Securities Purchase Agreement with an accredited investor, under which the investor purchased a Secured Convertible Promissory Note from the Company in the principal amount of $100,000. Under the terms of the Note simple interest will accrue at a rate of 10% per annum. The note will automatically mature and be due and payable on the eighteen (18) month anniversary. The Company shall make principal payments under the Note in the amount of $5,000 per month, beginning on the seventh month anniversary and continuing each month thereafter through the maturity date. Also commencing on the seventh month anniversary of the Note, the Company shall make interest payments under this Note based on the unpaid principal balance. The Note is secured by the inventory of the Company in accordance with a Security Agreement executed concurrently with the Note and UCC-1 Financing Statement perfecting said security interest.  The Note includes a

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OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2018

(unaudited)

NOTE 8 – CONVERTIBLE NOTE PAYABLE (CONTINUED)

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 $0.0025 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”.

As of September 30, 2018 and December 31, 2017 Convertible Note Payable consisted of the following:

	September 30,			December 31,
	2018			2017
Convertible note payable		$	100,000		$	-
Less current portion			(45,000)			-
Convertible note payable, net of current portion		$	55,000		$	-

NOTE 9 -  STOCK OPTIONS

During the nine months ended September 30, 2018 and 2017, the Company granted 590,000 and 350,000 options for services, respectively. During the nine months ended September 30, 2018 and 2017, the Company recognized expense of $32,458 and $120,209, respectively, for options and warrants that vested during the periods pursuant to ASC Topic 718. Total remaining amount of compensation expense to be recognized in future periods is $29,922. During the nine months ended September 30, 2018 and 2017, the Company granted -0- and 555,556 options to the CEO for accrued compensation, 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 September 30, 2018 the Company has a total of 625,000 options issued under the 2011 P lan. On September 11, 2015 the Board of Directors adopted the Omnitek Engineering Corp. 2015 Long Term Incentive Plan (the “2015 Plan”), under which 2,500,000 shares of the Company’s Common Stock were reserved for issuance of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. As of September 30, 2018 the Company has a total of 2,065,556 options issued under the 2015 Plan.  In October 2017, the Company’s shareholders approved its 2017 Long-Term Incentive Plan (the “2017 Plan”). Under the 2017 plan, the Company may issue up to 5,000,000 shares of both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion.  As of September 30, 2018, the Company has a total of 300,000 options issued under the 2017 Plan.  During the nine months ended September 30, 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.

11

OMNITEK ENGINEERING CORP.

Notes to Condensed Financial Statements

September 30, 2018

(unaudited)

NOTE 9 -  STOCK OPTIONS (CONTINUED)

The following table presents the assumptions used to estimate the fair values of the stock options granted:

	September 30, 2018	September 30, 2017
Expected volatility	150 %	105 %
Expected dividends	0 %	0 %
Expected term	7 Years	7 Years
Risk-free interest rate	2.46 %	2.22 %

A summary of the status of the options granted at September 30, 2018 and December 31, 2017 and changes during the periods then ended is presented below:  

	September 30,			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	(200,000)		1.21	(2,815,313)		3.81
Outstanding at end of period	2,990,556		0.65	2,600,556		0.82
Exercisable	2,563,473	$	0.69	2,354,723	$	0.84

A summary of the status of the options outstanding at September 30, 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	2,440,556	5.06 years	2,013,473	0.24
$1.00-1.99	75,000	1.43 years	75,000	1.37
$2.00-2.99	475,000	1.01 years	475,000	2.52
$0.01-2.99	2,990,556	4.32 years	2,563,473	$0.69

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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 financial statements and related notes to the financial statements included elsewhere in this periodic report.  Some of the statements under “Management’s Discussion and Analysis,” “Description of Business” and elsewhere herein may include forward-looking statements which reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and the alternative fuels engines industry in general. Statements which include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “will,” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. The safe harbor provisions of the federal securities laws do not apply to any forward-looking statements contained in this registration statement. 

All forward-looking statements address such matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read herein reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our written and oral forward-looking statements attributable to us or individuals acting on our behalf and such statements are expressly qualified in their entirety by this paragraph.

Results of Operations

For the three months ended September 30, 2018 and 2017

Revenues were $280,567 for the three months ended September 30, 2018 compared with $276,241 for the three months ended September 30, 2017, an increase of $4,326.

Cost of sales was $170,108 for the three months ended September 30, 2018 compared with $158,358 for the three months ended September 30, 2017, an increase of $11,750. Our gross margin percentage was 39% for the three months ended September 30, 2018 compared with 43% in the same period in 2017. The lower margin for the three months ended September 30, 2018 relates primarily to an increased allocation of manufacturing overhead costs during the period.  

Operating expenses for the three months ended September 30, 2018 were $215,257 compared with $265,602 in the same period in 2017, a decrease of $50,345 or 19%. General and administrative expense for the three months ended September 30, 2018 was $184,374 compared with $240,477 for the three months ended September 30, 2017.  Major components of general and administrative expenses for the three months ended September 30, 2018 were professional fees of $11,195, rent expense of $36,818, and salary and wages of $64,124. This compares to professional fees of $14,730, rent expense of $25,746 and salaries and wages of $104,018 for the three months ended September 30, 2017.  The increase in rent expense for the current period is due to a rent escalation for the current lease term. The decrease in salaries and wages is due primarily to a reduction in officers’ salaries. For the three months ended September 30, 2018 research and development outlays were increased to $29,315 compared with $18,978 for the three months ended September 30, 2017. The increase is due to a quarter-over-quarter increase in research and development wage expense.

Our net loss for the three months ended September 30, 2018 was $143,305, or ($0.01) per share, compared with a net loss of $149,849, or ($0.01) per share, for the three months ended September 30, 2017.  The decreased net loss was primarily due to decreased general and administrative, as noted above, during the three months ended September 30, 2018 over the same period a year earlier.

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Results for the three months ended September 30, 2018 reflect the impact of non-cash expenses, including the value of options granted in the amount of $5,272, depreciation and amortization of $1,568 and loss on settlement of debt of $32,963.  For the three month period a year earlier non-cash expenses included options and warrants granted in the amount of $25,476 and depreciation and amortization of $6,147.

For the nine months ended September 30, 2018 and 2017

Revenues increased to $1,009,653 for the nine months ended September 30, 2018 from $814,210 for the nine months ended September 30, 2017, an increase of $195,443 or 24%. The increase is primarily attributable to increased sales of conversion kits to international customers.  

Our cost of sales increased to $575,088 for the nine months ended September 30, 2018 from $456,765 for the nine months ended September 30, 2017, an increase of $118,323. Our gross margin was 43% for the nine months ended September 30, 2018 compared to 44% in 2017.

Our operating expenses for the nine months ended September 30, 2018 were $707,859 compared to $900,879 in 2017, a decrease of $193,020 or 21%.  General and administrative expense for the nine months ended September 30, 2018 was $618,680 as compared to $789,618 for the nine months ended September 30, 2017. Major components of general and administrative expenses for the nine months ended September 30, 2018 were professional fees of $53,324, rent expense of $93,900 and salary and wages of $214,525. This compares to professional fees of $45,629, rent expense of $83,538, and salary and wages of $308,187 for the nine months ended September 30, 2017. The decrease in salary and wages for the current period is due primarily to a reduction in officers’ salaries. Research and development outlays were decreased to $81,885 for the nine months ended September 30, 2018 compared to $92,667 for the nine months ended September 30, 2017. The decrease was due primarily to lower research and development wage expense for the current period.

Our net loss for the nine months ended September 30, 2018 was $317,938, or $(0.01) per share, compared to a net loss of $550,479, or $(0.03) per share, for the nine months ended September 30, 2017. The decreased net loss was primarily due to higher revenues and a decrease in general and administrative expenses, as noted above, during the nine months ended September 30, 2018 over the same period a year earlier.  

Results for the nine months ended September 30, 2018 reflect the impact of non-cash expenses, including the value of options granted in the amount of $32,458, depreciation and amortization of $7,294, inventory reserve adjustment of $50,000 and loss on settlement of debt of $32,963. For the nine-month period a year earlier, non-cash expenses included the value of options granted of $120,209 and depreciation and amortization of $18,594.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash provided by operating activities and available working capital. Additionally, from time to time we may raise funds from the equity capital markets to fund our research and development programs, expansion of our business and general operations.

At September 30, 2018, our current liabilities totaled $1,229,580 and our current assets totaled $1,507,583, resulting in positive working capital of $278,003 and a current ratio of 1.23.  

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

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funding for the development, manufacturing, and marketing of our products through strategic partnerships and other arrangements with corporate partners. There can be no assurance, however, that such collaborative arrangements or additional funds will be available when needed, or on terms acceptable to us, if at all. If adequate funds are not available, we may be required to curtail one or more of our research and development programs.

We have historically incurred significant losses, which have resulted in a total accumulated deficit of $20,105,039 at September 30, 2018, of which $5,604,135 is a direct result of derivative expense and change in fair value of derivative liability, which occurred during the year ended December 31, 2013, and is unrelated to our operations or cash flow.

Operating Activities

We realized a negative cash flow from operations of $115,067 for the nine months ended September 30, 2018 compared with a positive cash flow of $26,662 during the nine months ended September 30, 2017.  

Included in the operating loss of $284,975 for the nine months ended September 30, 2018 are non-cash expenses, which are not a drain on our capital resources.  During the period, these non-cash expenses include the value of options  granted in the amount of $32,458, depreciation and amortization of $7,294,  the inventory reserve adjustment of $50,000 and loss on settlement of debt of $32,963. 

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Accounting Method and Use of Estimates

The Company's financial statements are prepared using the accrual method of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas where significant estimates are required include the following:

Accounts Receivable

Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts.

Inventory

Inventory is stated at the lower of cost or market. The Company’s inventory consists of finished goods and raw materials. The Company identifies items in its inventory that have not been sold in a timely manner. Accordingly, the Company has established an allowance for the cost of such obsolete inventory.

Long-lived assets

The Company assesses the recoverability of its long lived assets annually and whenever circumstances would indicate that there may be an impairment. The Company compares the estimated undiscounted future cash flows to the carrying value of the long lived assets to determine if an impairment has occurred. In the event that an impairment has occurred, the Company recognizes the impairment immediately.

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Costs and Estimated Earnings and Billings on Completed Contracts

Billing practices for our contracts are governed by the contract terms of each project based on progress toward completion approved by the owner, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. The current liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized. The current asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed to the customer, which are usually billed during normal billing processes following achievement of contractual requirements.

Revenue Recognition

Products - The Company recognizes revenue from the sale of new engines for use with compressed natural gas, engine components to convert existing engines to compressed natural gas use and components for the maintenance of natural gas engines.  In accordance with the new revenue recognition standards under ASC Topic 606, revenues are recognized when all of the following steps have been satisfied: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) performance obligations are satisfied. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.

Contracts – Under ASC Topic 606, the same five steps that apply to our sales of products also apply to our long-term contracts. For long-term contract revenue recognition, the concept of performance obligations is of particular significance. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We generally 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 significant factor in accounting for such performance obligations. See “Contract assets and liabilities” for a description of the balance sheet accounts used for long-term contract accounting.        

Accounting 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 September 30, 2018, the Company had no accrued interest or penalties related to uncertain tax positions.

The Company files an income tax return in the U.S. federal jurisdiction and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2008.

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At September 30, 2018, the Company had net operating loss carry forwards of approximately $6,239,260 through 2034. No tax benefit has been reported in the September 30, 2018 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.

Recently Issued 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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as a result of the material weakness described below, our disclosure controls and procedures were not effective as of September 30, 2018. The material weakness, which relates to internal control over financial reporting, that was identified is: due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.

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Changes in Internal Controls

  There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are not a party to any pending legal proceeding.  No federal, state or local governmental agency is presently contemplating any proceeding against the Company.  No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

ITEM 1A.  RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2.  UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the period covered by this report.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 5.  OTHER INFORMATION

Entry Into a Material Definitive Agreement

On July 6, 2018 the Company issued 139,320 restricted shares of Common Stock to John Palumbo a Director of the Company, upon the conversion of $15,798.90, constituting unpaid principal of $15,000 and accrued interest of $798.90, owing under that certain Promissory Note dated November 7, 2017.  The shares were issued at a price of $0.1134 per share representing 90% of the average five (5) trading days pursuant to 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. As a Director of the Company, Mr. Palumbo was familiar with the Company’s business, financial condition and possessed the necessary information to make an informed investment decision.

ITEM 6.  EXHIBITS

(a)Documents filed as part of this Report. 

1. Financial Statements.  The condensed unaudited Balance Sheet of Omnitek Engineering Corp. as of September 30, 2018 and the audited balance sheet as of December 31, 2017, the condensed unaudited Statements of Operations for the three and nine month periods ended September 30, 2018 and 2017, and the condensed unaudited Statements of Cash Flows for the nine month periods ended September 30, 2018 and 2017, together with the notes thereto, are included in this Quarterly Report on Form 10-Q. 

3. Exhibits. The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers correspond to the numbering system in Item 601 of Regulation S-K. 

Exhibit
Number	Description of Exhibit
3.1	Amended and Restated Articles of Incorporation(1)
3.2	Amended and Restated By-Laws Adopted July 12, 2012 (2)
31.01	CEO certification pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 (3)
31.02	CFO certification pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 (3)
32.01	CEO and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3)
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 formatted in Extensible Business Reporting Language ("XBRL"): (i) the balance sheets (unaudited); (ii) the statements of operations (unaudited); (iii) the statements of cash flows (unaudited); and, (iv) related notes.

(1)Previously filed on Form on Form 10 on April 27, 2010 

(2)Previously filed on Form 8-K on August 2, 2012 

(3)Filed herewith 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Omnitek Engineering Corp.
Dated: November 13, 2018
		By: Werner Funk
		Its: Chief Executive Officer Principal Executive Officer
Dated: November 13, 2018			/s/ Richard L. Miller
			By: Richard L. Miller
			Its: Chief Financial Officer Principal Financial Officer

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