SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2005
[ ] Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from __________ to __________.
Commission File Number: 000-31451
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CALIFORNIA CLEAN AIR, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 75-3090496
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2434 Vineyard Ave, SUITE 101, Escondido, CALIFORNIA 92029
------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(760) 494-6497
----------------
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 XX No
-------- --------
As of April 12, 2005 , the number of outstanding shares of the issuer's common
stock, $0.001 par value, was 4,822,420 shares.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [x]
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ............................................... 3
Consolidated Unaudited Balance Sheet as of March 31, 2005
and Audited Balance Sheet as of December 31, 2004.......... 3
Consolidated Unaudited Statements of Operations for the
Quarters ended March 31, 2005 and March 31, 2004........... 5
Consolidated Unaudited Statements of Cash Flows for the
Quarters ended March 31, 2005 and March 31, 2004........... 6
Notes to Consolidated Financial Statements.......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 15
Business Organization and Description .............................. 15
Our Smog Check Test-Only Stations .................................. 15
Results of Operations For The Quarter Ended March 31, 2005
Compared To The Quarter Ended March 31, 2004 .............. 16
ITEM 3. CONTROLS AND PROCEDURES............................................. 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 18
INDEX TO EXHIBITS............................................................ 18
SIGNATURES................................................................... 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
AS OF AS OF
MARCH 31, 2005 DECEMBER 31, 2004
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS
Cash $ 123,532 $ 31,414
Prepaid expenses 3,355 2,076
------------ ------------
TOTAL CURRENT ASSETS 126,887 33,490
NET PROPERTY & EQUIPMENT 152,011 76,055
OTHER ASSETS
Deposits 11,696 12,123
------------ ------------
TOTAL OTHER ASSETS 11,696 12,123
------------ ------------
TOTAL ASSETS $ 290,595 $ 121,668
============ ============
The accompanying notes are an integral part of these statements.
3
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
AS OF AS OF
MARCH 31, 2005 DECEMBER 31, 2004
(Unaudited) (Audited)
-------------- -----------------
CURRENT LIABILITIES
Accounts payable $ 2 $ 9,309
Accrued payroll and payroll
related liabilities 0 0
Accrued state minimum franchise taxes 4,400 2400
Capitalized lease obligation
- current portion 18,599 6,372
Notes payable to related party 123,863 123,164
-------------- -----------------
TOTAL CURRENT LIABILITIES 146,464 141,245
LONG-TERM LIABILITIES
Capitalized lease obligation 88,328 25,238
-------------- -----------------
TOTAL LONG-TERM LIABILITIES 88,328 25,238
-------------- -----------------
TOTAL LIABILITIES 234,791 166,483
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock ($0.001 par value),
20,000,000 shares authorized;
4,000,000 shares issued & outstanding 4,000 4,000
Common stock ($0.001 par value),
Common stock ($0.001 par value,
100,000,000 shares authorized;
4,792,420 and 3,953,540 shares issued
and outstanding as of March 31, 2005
and December 31, 2004, respectively 4,792 3,953
Additional paid in capital 3,788,628 2,950,487
Retained earnings (deficit) (3,741,616) (3,003,255)
-------------- -----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 55,804 (44,815)
-------------- -----------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY (DEFICIT) $ 290,595 $ 121,668
============== =================
The accompanying notes are an integral part of these statements.
4
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDING QUARTER ENDING
MARCH 31, 2005 MARCH 31, 2004
(Unaudited) (Unaudited)
-------------- --------------
SALES REVENUES $ 54,809 $ 48,963
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Total Revenues 54,809 48,963
COST OF REVENUES 37,382 24,834
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GROSS PROFIT 17,427 24,129
OPERATING COSTS
Operating expenses 750,729 106,452
Depreciation expense 5,060 5,060
-------------- --------------
Total Operating Costs 755,789 111,512
-------------- --------------
OPERATING INCOME (LOSS) (738,362) (87,383)
ORDINARY (NON-OPERATING) INCOME (LOSS) 0 4,667
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES $ (738,362) $ (82,716)
-------------- --------------
INCOME TAX (PROVISION) BENEFIT 0 0
-------------- --------------
NET INCOME (LOSS) $ (738,362) $ (82,716)
-------------- --------------
BASIC EARNINGS (LOSS) PER SHARE $ (0.17) $ (0.08)
-------------- --------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,472,686 1,000,000
-------------- --------------
The accompanying notes are an integral part of these statements.
5
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDING QUARTER ENDING
MARCH 31, 2005 MARCH 31, 2004
(Unaudited) (Unaudited)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $ (738,362) $ (82,716)
DEPRECIATION EXPENSE 5,060 5,060
COMMON STOCK ISSUED FOR SERVICES 637,480 0
(INCREASE) DECREASE IN PREPAID EXPENSES (1,279) (1,421)
(INCREASE) DECREASE IN DEPOSITS 427 566
INCREASE (DECREASE) IN ACCOUNTS PAYABLE (9,307) (9,146)
INCREASE (DECREASE) IN ACCRUED PAYROLL 0 18,829
INCREASE (DECREASE) IN ACCRUED STATE
MINIMUM FRANCHISE TAXES 1,600 1,600
-------------- --------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (104,381) (67,228)
CASH FLOWS FROM INVESTING ACTIVITIES
NET SALE (PURCHASE) OF PROPERTY & EQUIPMENT (81,017) 0
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (81,017) 0
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM STOCK SALES 201,500
PAYMENTS ON (PROCEEDS FROM) CAPITALIZED
LEASE OBLIGATIONS 75,316 (1,291)
PAYMENTS ON NOTES PAYABLE TO RELATED PARTY 699 72,098
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 277,516 70,807
NET INCREASE (DECREASE) IN CASH 92,118 3,579
CASH AT BEGINNING OF PERIOD 31,414 3,285
-------------- --------------
CASH AT END OF PERIOD $ 123,532 $ 6,864
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID DURING YEAR FOR INTEREST $ 2,881 $ 1,407
CASH PAID DURING YEAR FOR TAXES $ 0 $ 0
The accompanying notes are an integral part of these statements.
6
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
GENERAL
- -------
California Clean Air, Inc. (the "Company") is incorporated under the laws of the
State of Nevada. From June 2, 2000, the date of original incorporation, until
August 21, 2003, the Company was seeking a merger, exchange of capital stock,
participate in an asset acquisition, or any other business combination with a
domestic or foreign private business and had not commenced any formal business
operations. The Company was considered to be in the development stage and
accounted and reported its activities using Statement of Financial Accounting
Standards No, 7, "Accounting and Reporting by Development Stage Enterprises". On
August 21, 2003, the Company's subsidiary began operating a test-only vehicles
emissions inspection facility.
The Company is in the business of owning and operating "test-only" vehicle
emissions inspection facilities under the Smog Check II program adopted in the
State of California. As a result of the federal Clean Air Act of 1990, the State
of California adopted its Smog Check II program designed to reduce vehicle
emissions pollution through the establishment of emissions inspection facilities
and mandating periodic emissions testing by all vehicle owners. "Test-Only"
vehicle emissions inspection facilities are privately owned and operated
stations, which are authorized to conduct only the emissions test but are not
permitted to make any vehicle repairs. The Company's current inspection
facilities are located in Lemon Grove, Escondido, and Santee, California,
respectively.
The Company conducts business through its wholly owned affiliate company, Smog
Centers of California LLC. As a wholly owned subsidiary, California Clean Air
(the parent Company) has complete control over the business and will
periodically receive distributions and allocations of cash flow and operating
profits.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ACCOUNTING METHOD
-----------------
The Company's policy is to use the accrual method of accounting to prepare and
present financial statements, which conform to generally accepted accounting
principles (GAAP). The Company has elected a December 31, year-end.
B. BASIS OF CONSOLIDATION
----------------------
On November 21, 2002, the Company organized Smog Centers of California, LLC
(`Smog Centers"), an Oregon limited liability company. California Clean Air,
Inc. is the sole owner of Smog Centers. California Clean Air, Inc. owns title to
all assets and liabilities of the consolidated financial statements. Smog
Centers was organized to acquire, own and operate test-only vehicles emissions
inspection facilities in the State of California under their Smog Check II
program. Smog Centers currently operates three test-only vehicles emissions
inspection facilities.
7
C. CASH EQUIVALENTS
----------------
The Company considers all highly liquid investments with maturity of three
months or less when purchased to be cash equivalents.
D. PROPERTY AND EQUIPMENT
----------------------
Property, equipment and leasehold improvements are stated at costs less
accumulated depreciation or amortization. Maintenance and repairs, as well as
renewals for minor amounts are charged to expenses. Renewals and betterments of
substantial amount are capitalized, and any replaced or disposed units are
written off.
E. ADVERTISING
-----------
The Company expenses the cost of advertising as it is incurred. Advertising
expense was $41,837 and $25,361 for the quarters ended March 31, 2005 and 2004,
respectively.
F. 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. In accordance with FASB 16 all
adjustments are normal and recurring.
G. REVENUE RECOGNITION AND DEFERRED REVENUE
----------------------------------------
Smog Centers generates revenue through vehicle test-only emissions facilities in
the State of California under their Smog Check II program. Revenue is recognized
when a sale is made.
H. BASIC EARNINGS PER SHARE
------------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
specifies the computation, presentation and disclosure requirements for earnings
(loss) per share for entities with publicly held common stock. SFAS No. 128
supersedes the provisions of APB No. 15, and requires the presentation of basic
earnings (loss) per share and diluted earnings (loss) per share. The Company has
adopted the provisions of SFAS No. 128 effective June 2, 2000 (inception).
Basic net loss per share amounts is computed by dividing the net income by the
weighted average number of common shares outstanding. Diluted earnings per share
are the same as basic earnings per share due to the lack of dilutive items in
the Company.
8
I. INCOME TAXES
------------
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
J. REPORTING CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------
The Company reports and displays consolidated comprehensive income (loss) and
Its components as separate amounts in the consolidated financial statements with
the same prominence as other financial statements. Consolidated comprehensive
income (loss) includes all changes in equity during the year that results from
recognized transactions and other economic events other than transactions with
owners. There were no components of consolidated comprehensive income to report
for the years ended December 31, 2004 and 2003.
K. SEGMENT REPORTING
-----------------
The Company reports information about operating segments and related disclosures
about products and services, geographic areas and major customer. Using
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of en Enterprise and Related Information". The Company views its operations and
manages its business in principally one segment, test-only vehicles emissions
inspection facilities in the State of California.
L. PRINCIPLES OF CONSOLIDATION
---------------------------
The Consolidated financial statements include the accounts of California Clean
Air, Inc., the parent company) and Smog Centers of California. The Subsidiary is
a wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
NEW ACCOUNTING PRONOUNCEMENTS:
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that "... under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges..." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
9
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate Projects, to
state that the guidance for (a) incidental operations and (b) costs incurred to
sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005, with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Shared-Based Payment ("SFAS 123R). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2005. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the consolidated financial
statements. Management is assessing the implications of this revised standard,
which may materially impact the Company's results of operations in the third
quarter of fiscal year 2005 and thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary transactions ("SFAS 153"). This statement amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception of exchanges of
nonmonetary assets that do not have commercial substance. Under SFAS 153, if a
nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
NOTE 3. PROPERTY & EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Additions, renovations, and improvements are capitalized. Maintenance and
repairs which do not extend asset lives are expensed as incurred. Depreciation
is provided on a straight-line basis over 5 years. Depreciation expense for the
quarters ending March 31, 2005 and March 31, 2004 was $5060 and $5060,
respectively.
10
NOTE 4. CAPITALIZED LEASE OBLIGATION
Smog Centers has a non-cancelable lease obligation for the purchase of vehicle
emission inspection equipment. Under the terms of the agreement, Smog Centers is
obligated to pay $899 per month through October 2008 For the equipment in
Escondido. Smog Centers has a non-cancelable lease for two more BAR 97 machines
on for Santee location the second for our San Marcos location. These two
machines are have been personally garanteed for by Mr. Wilson and the lease
payment per month is $1837. This new lease was entered into on march 18, 2005 .
Lease payments for the quarters ending March 31, 2005 and March 31, 2004 were
$6,371 and $2,697 respectively. Interest expense on the lease obligation for the
quarters ending March 31, 2005 and March 31, 2004 was $2,340 and $1,406,
respectively.
Aggregate minimum future lease payments under capitalized leases are as follows
for the years ending subsequent to December 31, 2004:
Years ending December 31:
2005 (April through end of year) $ 21,951
2006 32,833
2007 32,833
2008 31,035
2009 (through April 2009) 9,185
Total minimum lease payments 127,837
Less amount representing interest 39,398
-----------------
Present value of minimum lease payments $ 88,439
NOTE 5. OPERATING LEASE COMMITMENTS
Smog Centers entered into a non-cancelable assignment of lease for the smog
station premises in Lemon Grove, California which requires monthly lease
payments of $1,500 through July 1, 2006. Smog Centers entered into a
non-cancelable lease for the smog station premises in Escondido, California,
which requires monthly payments of $1,500 through November 15, 2006; $1,700 from
November 15, 2006 through November 14, 2007; and $1,800 from November 15, 2007
through November 14, 2008. The Company has an option to extend the lease terms
for both locations for an additional five (5) years. Smog Centers entered into a
5 year non-cancelable lease for the smog station premises in Santee, California,
which requires monthly payments of $1,500 through December 31, 2006; The next
four years of the lease can be increased by the cost of living index increase.
Smog Centers entered into a 3 year non-cancelable lease for the smog station
premises in San Marcos, California, which requires monthly payments of $1,295
through December 31, 2006; the next two years there can be a cost of living
index increase every year.
11
Aggregate minimum future lease payments for the smog stations as of March 31,
2005, are:
2005 (April through December) $ 52,155
2006 61,948
2007 56,180
2008 37,668
2009 20,256
-----------------
Total minimum lease payments $ 228,207
=================
Lease expense for the smog stations for the quarters ending March 31, 2005 and
March 31, 2004 were $16,090 and $9,000, respectively.
NOTE 6. TRANSACTIONS WITH RELATED PARTIES
Our President, Stephen D. Wilson, has advanced $123,863 on behalf of the company
from inception through March 31, 2005. These advances were used for
administrative expenses such as legal and accounting fees, smog station
operating expenses, and to acquire the smog station assets at the Company's
Lemon Grove facility. The advances are reflected as "Payable to Related Parties"
in the Company's financial statements and are non-interest bearing and due on
demand. Mr. Wilson has agreed not to demand repayment until sufficient funds are
available from proceeds from revenues derived from operations.
NOTE 7. BASIC & DILUTED INCOME (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share has been calculated based on the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings (loss) per common share has been calculated based on the weighted
average number of shares of common and preferred stock outstanding during the
period. The variance between basic and diluted weighted average is the addition
of preferred stock in the calculation of diluted weighted average per share.
MARCH 31, DECEMBER 31,
2005 2004
(Unaudited) (Audited)
------------------ -----------------
NET INCOME (LOSS) $ (738,362) $ (2,737,924)
BASIC EARNINGS (LOSS) PER SHARE $ (0.17) $ (2.48)
================== =================
WEIGHED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,472,686 1,103,445
================== =================
As of March 31, 2005 no preferred dividends have been issued that would reduce
earnings available to common shareholders.
12
NOTE 8. INCOME TAXES
Deferred income taxes consist of the following:
MARCH 31, DECEMBER 31,
2005 2004
(Unaudited) (Audited)
-------------- -------------
Deferred tax asset:
Net operating loss carryover $ 3,741,616 $ 3,004,055
-------------- -------------
3,741,616 3,004,055
Valuation allowance (3,741,616) (3,004,055)
-------------- -------------
Net deferred income taxes 0 0
============== =============
NOTE 9. ASSET PURCHASE
On March 18, 2005, Smog Centers entered into leases with National City
Commercial Capital for two bar 97 emission analyzers and other test-only related
equipment. The lease for the two smog machines is personally guaranteed by Mr.
Wilson:
Fair value of smog-testing & station equipment $ 81,017
----------------
Cash paid $ 5,343
================
NOTE 10. STOCKHOLDERS' EQUITY
The stockholders' equity section of the Company's financial statements contains
the following classes of capital stock as of March 31, 2004:
(A) Preferred stock, $0.001 par value; 20,000,000 shares authorized; 4,000,000
shares issued and outstanding;
(B) Common stock, $ 0.001 par value; 100,000,000 shares authorized; 1,000,000
shares issued and outstanding.
The Company is authorized to issue up to 100,000,000 shares of common stock. The
holders of common stock are entitled to one vote per share of common stock on
all matters to be voted on by the stockholders. There are no cumulative voting
rights. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive dividends,
if any, as may be declared by the board of directors out of funds legally
available for dividends. In the event of a liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in the net assets
remaining after payment in full of all of liabilities, subject to the prior
rights of preferred stock, if any, then outstanding. There are no redemption or
sinking fund provisions applicable to the common stock. As of April 12, 2005,
there were 4,822,420 shares of common stock issued and outstanding.
13
The Company is authorized to issue up to 20,000,000 shares of designated
preferred stock. The board of directors has the authority, without vote or
action by the stockholders, to designate and issue preferred stock in one or
more series and to designate the number of shares, and the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of the
issuance of any additional shares of preferred stock upon the rights of the
holders of common stock until the board of directors determines the specific
rights of the holders of the preferred stock. However, the effects might include
restricting dividends on the common stock, diluting the voting power of the
common stock, impairing liquidation rights of the common stock and delaying or
preventing a change in control of the Company.
As of March 31, 2005, there were 4,000,000 shares of Series A Convertible
Preferred Stock issued and outstanding. The holders of the Series A Convertible
Preferred Stock have the following rights and preferences: the Series A
Preferred Stock is convertible into common stock on a one-for-basis, subject to
adjustment for stock splits and similar extraordinary stock events; each share
of Series A Preferred Stock has ten (10) votes for each share of common stock
into which the preferred stock can be converted; the Series A Preferred Stock
votes with the common stock as a single class; and the Series A Preferred Stock
is entitled to receive dividends (1) upon the commencement of operations of no
less than ten (10) vehicle emissions test centers by Smog Centers; (2) 800,000
shares of the Series A Preferred Stock will be each entitled to receive
dividends as and when declared and paid on the common stock; (3) an additional
800,000 shares of Series A Stock will be each entitled to receive dividends as
and when declared and paid on the common stock for each additional ten (10)
vehicle emissions test centers for which operations have commenced, up to a
total of fifty (50) such vehicle test centers; and (4) the liquidation rights
will be subordinated to the outstanding common stock. The board of directors has
no present plans to issue any additional preferred stock in addition to the
Series A Stock.
NOTE 11. ISSUANCE OF SHARES FOR SERVICES - STOCK OPTIONS
The Company has a non-qualified stock option plan, which provides for the
granting of options to key employees, consultants, and non-employee directors of
the Company. These issuances shall be accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more readily determinable. The Company has elected to account for
the stock option plan in accordance with paragraph 30 of SFAS 123 where the
compensation to employees should be recognized over the period(s) in which the
related employee services are rendered. In accordance with paragraph 19 of SFAS
123 the fair value of a stock option granted is estimated using an
option-pricing model. As of March 31, 2005 there were no stock options issued or
outstanding.
12. SUBSEQUENT EVENT
On November 26, 2003, Smog Centers opened its second smog check test-only
facility, located at 555 West Grand Avenue in Escondido, California. Smog
Centers entered into a five-year lease for approximately 1,028 square feet of
space, comprised of two automotive bays, located within the All Star Gas
Station, which sits at a highly visible location bordering three streets. The
lease requires monthly payments of $1,500, with an increase of $100 per month in
November of 2006 and an increase of $100 per month in November of 2007. The
lease contains an option to extend the lease term for an additional five years.
Smog Centers also leased smog-testing equipment consisting of a BAR 97 Host
Emissions Analyzer and a Low Profile Maha Dynamometer for the facility. The
equipment lease requires monthly payments of $899 for 60 months and provides for
an option to purchase the equipment at lease expiration for one dollar. Mr.
Wilson has executed a personal guaranty with the equipment lessor.
On April 20, 2005, Smog Centers opened its third smog check test-only facility,
located at 8665 Mission Gorge Rd, Suite A-3 in Santee, California. Smog Centers
entered into a five-year lease for approximately 1,500 square feet of space,
comprised of one automotive bay. The lease requires monthly payments of $1,500,
with an increase of the cost of living index every year. The lease contains an
option to extend the lease term for an additional five years. Smog Centers also
leased smog-testing equipment consisting of a BAR 97 Host Emissions Analyzer and
a Maha Dynamometer for the facility. The equipment lease requires monthly
payments of $919 for 60 months and provides for an option to purchase the
equipment at lease expiration for one dollar. Mr. Wilson has executed a personal
guaranty with the equipment lessor.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
BUSINESS ORGANIZATION & DESCRIPTION
We are in the business of owning and operating "test-only" vehicle emissions
inspection facilities under the Smog Check II program adopted by the State of
California. As a result of the federal Clean Air Act of 1990, California adopted
the Smog Check II program, which was designed to reduce vehicle emissions
pollution through the establishment of emissions inspection facilities and
mandating periodic emissions testing by all vehicle owners. "Test-Only" vehicle
emissions inspection facilities are privately-owned and operated stations which
are authorized to conduct the emissions test and are not permitted to make any
vehicle repairs. We currently have three inspection facilities located in Lemon
Grove, Escondido, and Santee, California. There is a fourth station that is in
the licensing stage in San Marcos, California
California Clean Air, Inc. (the "Company") was originally incorporated in
Delaware on June 2, 2000 under the name of Breakthrough Technology Partners I,
Inc. We never commenced any business under our original name. Effective December
17, 2002, we reincorporated in Nevada under our current name pursuant to an
Agreement and Plan of Merger with California Clean Air, Inc. The sole purpose
for the merger was to change our legal domicile from Delaware to Nevada. Mr.
Stephen D. Wilson is our President, Chief Executive Officer and Chief Financial
Officer. We qualified to do business in California on August 26, 2003.
Smog Centers of California, LLC ("Smog Centers"), was organized as an Oregon
limited liability company on November 21, 2002, and registered to do business in
California on December 10, 2002. Through Smog Centers we intend to own and
operate smog check test-only stations, principally in Southern California and in
the Bay Area. The Company is the sole member of Smog Centers, and as such we
have complete control over the business. Mr. Wilson is the manager of Smog
Centers.
Our principal executive and administrative offices and those of Smog Centers are
located at 2434 Vineyard Ave, Suite 101, Escondido, California 92029.
OUR SMOG CHECK TEST-ONLY STATIONS
On September 11, 2003, Smog Centers opened its first smog check test-only
facility, located at 7310 Broadway in Lemon Grove, California. Smog Centers
assumed the seller's obligations under the existing lease, which has a remaining
initial term through July 1, 2006, with an option to renew for an additional
term of five years. The lease payments are $1,500 per month, subject to an
annual increase of 5%.
On November 26, 2003, Smog Centers opened its second smog check test-only
facility, located at 555 West Grand Avenue in Escondido, California. Smog
Centers entered into a five-year lease for approximately 1,028 square feet of
space, comprised of two automotive bays, located within the All Star Gas Station
which sits at a highly visible location bordering three streets. The lease
requires monthly payments of $1,500, with an increase of $100 per month in
November of 2006 and an increase of $100 per month in November of 2007. The
lease contains an option to extend the lease term for an additional five years.
Smog Centers also leased smog-testing equipment consisting of a BAR 97 Host
Emissions Analyzer and a Low Profile Maha Dynamometer for the facility. The
equipment lease requires monthly payments of $899 for 60 months and provides for
an option to purchase the equipment at lease expiration for one dollar. Mr.
Wilson has executed a personal guaranty with the equipment lessor.
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On April 20, 2005, Smog Centers opened its third smog check test-only facility,
located at 8665 Mission Gorge Rd, Suite A-3 in Santee, California. Smog Centers
entered into a five-year lease for approximately 1,500 square feet of space,
comprised of one automotive bay. The lease requires monthly payments of $1,500,
with an increase of the cost of living index every year. The lease contains an
option to extend the lease term for an additional five years. Smog Centers also
leased smog-testing equipment consisting of a BAR 97 Host Emissions Analyzer and
a Maha Dynamometer for the facility. The equipment lease requires monthly
payments of $919 for 60 months and provides for an option to purchase the
equipment at lease expiration for one dollar. Mr. Wilson has executed a personal
guaranty with the equipment lessor.
Our fourth location is not open for business yet, it is located at 1232 Los
Vallecitos Blvd, Ste 104 in San Marcos, California. Smog Centers entered into a
three-year lease for approximately 1,200 square feet of space, comprised of one
automotive bay. The lease requires monthly payments of $1,150, with an increase
of the cost of living index per year, and a monthly CAM fee of $145. Smog
Centers also leased smog-testing equipment consisting of a BAR 97 Host Emissions
Analyzer and a Maha Dynamometer for the facility. The equipment lease requires
monthly payments of $919 for 60 months and provides for an option to purchase
the equipment at lease expiration for one dollar. Mr. Wilson has executed a
personal guaranty with the equipment lessor. It is anticipated that this station
will be opened soon.
We charge a total of $58.60 for a smog test for a vehicle that passes the
emissions test, which includes $49.75 for the inspection fee, $8.25 for the smog
certificate (a pass-through cost) and $ .60 for the transmission fee to the
Vehicle Information Database (a pass-through cost). If the vehicle does not pass
the emissions test, we only charge $50.35, because the smog certificate is not
issued. The stations that have the room to test RV's we charge a total of
$108.60. We advertise extensively for all stations in a weekly publication with
discount coupons.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2005 COMPARED TO THE
QUARTER ENDED MARCH 31, 2004:
Sales Revenues: Sales revenues for the first quarter of 2005 totaled $54,809, as
compared to $48,963 for the first quarter of 2004. The Company attributes the
comparative quarterly increase in revenues to the operations of its two smog
test-only stations in Lemon Grove and Escondido. The Lemon Grove station
generated $28,178 in sales revenues for the first quarter of 2005, as compared
to $30,254 in sales revenues for the first quarter of 2004. This represents an
decrease of 7% in sales revenues for the Lemon Grove station comparing the first
quarter of 2004 to the first quarter of 2005. The Escondido station generated
$26,631 in sales revenues for the first quarter of 2005, as compared to $18,708
in sales revenues for the first quarter of 2004. This represents an increase of
42% in sales revenues for the Escondido station comparing the first quarter of
2004 to the first quarter of 2005.
Cost of Revenues: Cost of revenues is comprised of smog technician expenses,
Vehicle Information Database transmission fees, and smog certificates. Cost of
revenues for the first quarter of 2005 totaled $37,382, as compared to $24,834
for the first quarter of 2004. The cost of revenues increased because of same
reclassifications into cost of goods sold, and in the first quarter of 2004 the
stations were open for a total of 46 hours a week now they are open for at least
60 a week. Cost of revenues for the first quarter of 2005 equaled 68% of sales
revenue.
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Gross Profit: Gross profit is comprised of sales revenues less cost of revenues.
Gross profit for the first quarter of 2005 totaled $17,249, or 32% of sales
revenue, as compared to $24,129 for the first quarter of 2004.
Operating Costs: Operating costs consist of the Company's administrative
expenses, and smog station operating expenses including depreciation and
amortization. Operating costs totaled $755,789 for the first quarter of 2005 as
compared to $108,549 for the first quarter of 2004. The increase in operating
costs is attributable to consulting fees in the amount of $637,480 which was not
present in the first quarter of 2004.
Operating Loss: The Company's operating loss for the first quarter of 2005 was
$738,362 as compared to $82,716 for the first quarter of 2004. The increase in
operating loss is attributable consulting fees which were not incurred when in
the first quarter of 2004.
Ordinary (Non-Operating) Income: The Company recognized ordinary (non-operating)
income of $4,667 in the first quarter of 2004 as compared to $0 in the first
quarter of 2005, due to the write-off of accounts payable of $6,153 and
adjustments to income of ($1,486) to accurately reflect asset balances during
the first quarter of 2004.
Net Loss Before Income Taxes: Net loss before income taxes represents operating
loss plus ordinary (non-operating) income. For the first quarter of 2005, our
net loss was $738,362 as compared to $82,716 for the first quarter of 2004. The
increase in the Company's net loss is attributable to the consulting fees during
the first quarter of 2005.
Income Tax Provision: Due to the Company's net loss of $738,362 for the first
quarter of 2005 and $79,753 for the first quarter of 2004, the provision for
income tax for each of these quarters was $0.
Liquidity And Capital Resources: During the first quarter of 2005, the Company
used cash in operations of $104,381, compared to $67,228 for the first quarter
of 2004. The principal reason for the comparative first quarter increase of
$37,153 in cash used in operations is attributable to the Company growing the
number of stations. During the first quarter of 2005, cash provided by financing
activities totaled $277,516, compared to $70,807 for the first quarter of 2004.
The comparative first quarter increase of $206,709 in cash provided by financing
activities is attributable the selling of shares at $1 per share of $201,500, an
increase in capitalized lease obligations of $75,316 and an increase in notes
payable of $699.
ITEM 3. CONTROLS AND PROCEDURES.
Based on an evaluation of our disclosure controls and procedures as of March 31,
2005, we are satisfied as to the effectiveness of our disclosure controls and
procedures, as Stephen D. Wilson, our President, is responsible for the
day-to-day operations of our two smog check stations and also serves as our
Chief Financial Officer.
There was no significant change in the Company's internal control over financial
reporting that occurred during the fiscal quarter ending March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
Exhibits.
INDEX TO EXHIBITS:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Rules 13a-14 and 15d-14 of the Exchange Act)
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
Reports on Form 8-K.
Form 8-K filed by the Company on January 5, 2005, pertaining to Item Nos. 1.01 &
9.01 regarding the lease for 1232 Los Valliciotos, San Marcos, California.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 10, 2005 CALIFORNIA CLEAN AIR, INC.
By: /s/ STEPHEN D. WILSON
President, Chief Executive Officer,
Chief Financial Officer, Secretary
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