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 September 30, 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 X No
-------- --------
As of October 26, 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]
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ................................................ 2
Consolidated Unaudited Balance Sheet as of September 30, 2005 and
Audited Balance Sheet as of December 31, 2004................... 2
Consolidated Unaudited Statements of Operations for the Quarters &
First 9 months ended September 30, 2005 and September
30,2004......................................................... 4
Consolidated Unaudited Statements of Cash Flows for the First 9 months
ended September 30, 2005 and September
30,2004......................................................... 5
Notes to Consolidated Financial Statements........................... 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ...............................................17
Business Organization and Description ...............................17
Our Smog Check Test-Only Stations ...................................17
Results of Operations For The Quarter Ended September 30, 2005 Compared
To The Quarter Ended September 30, 2004.........................18
ITEM 3. CONTROLS AND PROCEDURES..............................................20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................20
INDEX TO EXHIBITS.............................................................20
SIGNATURES....................................................................20
1
ITEM 1. FINANCIAL STATEMENTS.
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
AS OF AS OF
SEPTEMBER 30, 2005 DECEMBER 31, 2004
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS
Cash $ 19,921 $ 31,414
Prepaid expenses 9,442 2,076
Accounts Receivable 100,000 0
------------ ------------
TOTAL CURRENT ASSETS 129,363 33,490
NET PROPERTY & EQUIPMENT 133,823 76,055
OTHER ASSETS
Deposits 10,896 12,123
------------ ------------
TOTAL OTHER ASSETS 10,896 12,123
------------ ------------
TOTAL ASSETS $ 274,082 $ 121,668
============ ============
The accompanying notes are an integral part of these statements.
2
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
AS OF AS OF
SEPTEMBER 30, 2005 DECEMBER 31, 2004
(Unaudited) (Audited)
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 825 $ 9,309
Accrued payroll and payroll related
Liabilities 29,062 0
Accrued state minimum franchise taxes 4,000 2400
Capitalized lease obligation
- current portion 19,529 6,372
Notes payable to related party 284,791 123,164
------------ ------------
TOTAL CURRENT LIABILITIES 338,208 141,245
LONG-TERM LIABILITIES
Capitalized lease obligation 81,370 25,238
------------ ------------
TOTAL LONG-TERM LIABILITIES 81,370 25,238
------------ ------------
TOTAL LIABILITIES 419,578 166,483
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, 100,000,000
shares authorized; 4,822,420 and 3,953,540
shares issued and outstanding as of September
30, 2005 and December 31, 2004, respectively) 4,822 3,953
Additional paid in capital 3,818,598 2,950,487
Retained earnings (deficit) (3,972,916) (3,003,255)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (145,496) (44,815)
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY (DEFICIT) $ 274,082 $ 121,668
============ ============
The accompanying notes are an integral part of these statements.
3
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRD QUARTER FIRST 9 MONTHS
ENDING SEPTEMBER 30 ENDING SEPTEMBER 30
(Unaudited) (Unaudited)
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
SALES REVENUES $ 76,775 $ 51,773 $ 197,322 $ 155,790
---------- ---------- ---------- ----------
Total Revenues 76,775 51,773 197,322 155,790
---------- ---------- ---------- ----------
COST OF REVENUES 70,335 27,036 176,213 77,868
---------- ---------- ---------- ----------
GROSS PROFIT 6,440 24,737 21,109 77,922
---------- ---------- ---------- ----------
OPERATING COSTS
Operating expenses 109,611 2,152,530 965,921 2,357,235
Depreciation expense 9,094 5,060 23,249 15,180
---------- ---------- ---------- ----------
Total Operating Costs 118,705 2,157,590 989,170 2,372,415
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (112,266) (2,132,853) (968,061) (2,294,493)
ORDINARY (NON-OPERATING)
INCOME (LOSS) 0 0 0 4,667
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES $ (112,266) $(2,132,853) (968,061) (2,289,826)
---------- ---------- ---------- ----------
INCOME TAX (PROVISION)
BENEFIT 0 0 1,600 1,600
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (112,266) $(2,132,853) (969,661) (2,291,426)
---------- ---------- ---------- ----------
BASIC EARNINGS
(LOSS) PER SHARE $ (0.02) $ (1.43) $ (0.21) $ (1.97)
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NO. OF
COMMON SHARES OUTSTANDING 4,822,420 1,490,202 4,705,486 1,164,593
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements.
4
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST 9 MONTHS FIRST 9 MONTHS
2005 2004
(Unaudited) (Unaudited)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $ (969,661) $ (2,291,426)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
COMMON SHARES ISSUED FOR NOTE PAY. 293,800
DEPRECIATION EXPENSE 23,249 15,180
COMMON STOCK ISSUED FOR SERVICES 637,480 2,055,000
Changes in assets and liabilities:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE (100,000) 0
(INCREASE) DECREASE IN PREPAID EXPENSES (7,367) (1,473)
(INCREASE) DECREASE IN DEPOSITS 1,227 (149)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE (8,484) (19,167)
INCREASE (DECREASE) IN ACCRUED PAYROLL 29,062 48,708
INCREASE (DECREASE) IN STATE TAXES 1,600 1,600
-------------- --------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (392,894) (191,728)
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 231,500 130,820
PAYMENTS ON (PROCEEDS FROM) CAPITALIZED
LEASE OBLIGATIONS 69,290 (4,025)
PAYMENTS ON NOTES PAYABLE TO RELATED PARTY 161,627 (141,977)
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 462,417 278,618
NET INCREASE (DECREASE) IN CASH (11,494) 86,890
CASH AT BEGINNING OF PERIOD 31,414 3,285
-------------- --------------
CASH AT END OF PERIOD $ 19,920 $ 90,175
============== ==============
5
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID DURING YEAR FOR INTEREST $ 7,219 $ 4,067
============== ==============
CASH PAID DURING YEAR FOR TAXES $ 579 $ 614
============== ==============
SUPPLEMENTAL NONCASH DISCLOSURES
COMMON STOCK ISSUED FOR SERVICES 637,480 2,055,000
COMMON STOCK ISSUED FOR LOAN PAYABLE 0 293,800
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
September 11, 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, Santee, and Vista, 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.
7
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 vehicle emissions
inspection facilities in the State of California under their Smog Check II
program. Smog Centers currently operates four "test-only" vehicles emissions
inspection facilities.
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 $40,873 and $21,856 for the quarters ended September 30, 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.
8
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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. 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 an 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.
9
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
K. 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.
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.
10
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS - CONINTUED:
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. 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, 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 September 30, 2005 and September 30, 2004 was $9,094 and $5,060,
respectively.
11
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the premises of the Santee location the second for our Vista location. These
two machines are have been personally guaranteed 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 September 30, 2005 and September 30, 2004
were $6,371 and $2,697 respectively. Interest expense on the lease obligation
for the quarters ending September 30, 2005 and September 30, 2004 was $2,843 and
$1,304, respectively.
Aggregate minimum future lease payments under capitalized leases are as follows
for the years ending subsequent to September 30, 2005:
Years ending December 31:
2005 (October through end of year) $ 8,208
2006 32,833
2007 32,833
2008 31,035
2009 (through May 2009) 11,022
Total minimum lease payments 115,931
Less amount representing interest (34,540)
----------
Present value of minimum lease payments $ 81,391
12
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 non-cancelable lease for the smog station premises
in Vista, California, which requires monthly payments of $1,500 through June 30,
2008; $1,700 from July 1, 2008 through June 30, 2009; and $1,800 from July 1,
2009 through June 30, 2010.
Aggregate minimum future lease payments for the smog stations as of September
30, 2005, are:
2005 (October through December) $ 18,000
2006 63,940
2007 57,692
2008 56,868
2009 41,256
2010 10,800
-----------------
Total minimum lease payments $ 248,556
=================
Lease expense for the smog stations for the quarters ending September 30, 2005
and September 30, 2004 were $19,228 and $9,000, respectively.
NOTE 6. TRANSACTIONS WITH RELATED PARTIES
Our President, Stephen D. Wilson, has advanced $284,791 to the company from
inception through September 30, 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.
13
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. BASIC & DILUTED INCOME (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share have 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) $ (968,061) $ (2,737,924)
BASIC EARNINGS (LOSS) PER SHARE $ (0.21) $ (2.48)
==================== ===================
WEIGHED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,705,486 1,103,445
==================== ===================
As of September 30, 2005 no dividends have been issued that would reduce
earnings available to common shareholders.
NOTE 8. INCOME TAXES
Deferred income taxes consist of the following:
September 30, DECEMBER 31,
2005 2004
(Unaudited) (Audited)
------------- -------------
Deferred tax asset:
Net operating loss carryover $ 3,972,916 $ 3,003,255
------------- -------------
3,972,916 3,003,255
Valuation allowance (3,972,916) (3,003,255)
------------- -------------
Net deferred income taxes 0 0
============= =============
14
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2005:
(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; 4,822,420
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 September 30,
2005, there were 4,822,420 shares of common stock issued and outstanding.
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.
15
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCKHOLDERS' EQUITY- CONTINUED
As of September 30, 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 September 30, 2005 there were no stock options
issued or outstanding.
16
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 four inspection facilities located in Lemon
Grove, Escondido, Santee, and Vista, 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
On November 26, 2003, Smog Centers opened its second smog check test-only
facility, located at 555 West Grand Avenue in Escondido, California.
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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.
On September 6, 2005 Smog Centers opened its fourth smog check test-only
facility, located at 485 N. Melrose Dr, Vista, California 97069. Smog Centers
entered into a five-year lease for approximately 600 square feet of space
comprised of one automotive bay in a gas station. The lease is for an term of
five years, commencing July 1, 2005 and continuing until June 30, 2010. Vista,
California has a population of approximately 94,000 and is located approximately
thirty five miles north of San Diego. At the present time, there are twelve
other "test-only" stations in the area.
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 location located at 1232 Los Vallecitos Blvd, Ste 104 in San Marcos,
California will not open because the city of San Marcos denied a variance
conditional use. This lease was terminated effective August 31, 2005.
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 JUNE 30, 2005 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2004:
Sales Revenues: For the third quarter of 2005, the Company had sales revenues of
$76,775, compared to $51,773 in sales revenues for the third quarter of 2004.
For the first nine months of 2005, the Company had sales revenues of $197,322,
compared to $155,790 in sales revenues for the first nine months of 2004. For
the third quarter 2005 same store sales of $62,824 compared to third quarter
2004 sales of $51,772. This shows a same store sales increase of 21.35%.
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 third quarter of 2005 totaled $70,335, as compared to $27,036
for the third quarter of 2004. The cost of revenues increased because of the
company trying to increase the number of station open and hiring technicians
prior to a new station opening, and in the third 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
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third quarter of 2005 equaled 92% of sales revenue. First nine months 2005 cost
of revenues totaled $176,213 compared to first nine months 2004 of $77,868. This
increase is because of the company's efforts to grow from three stations to four
stations.
Gross Profit: Gross profit is comprised of sales revenues less cost of revenues.
Gross profit for the third quarter of 2005 totaled $6440, or 8% of sales
revenue, as compared to $24,737 for the third quarter of 2004. First nine months
of 2005 totaled $21,109, as compared to $77,922 for the first nine months 2004.
Operating Costs: Operating costs consist of the Company's administrative
expenses, and smog station operating expenses including depreciation and
amortization. Operating costs totaled $109,611 for the third quarter of 2005 as
compared to $2,152,530 for the third quarter of 2004. The decrease in operating
costs is attributable to no consulting fees incurred in the third quarter of
2005. The first nine months of 2005 operating cost totaled $965,921 as compared
to $2,357,235 in the first nine months of 2004.
Operating Loss: The Company's operating loss for the third quarter of 2005 was
$112,266 as compared to $2,132,853 for the third quarter of 2004. The decrease
in operating loss is attributable to no consulting fees in the third quarter of
2005. The first nine months loss for 2005 is $989,170 as compared to a loss of
$2,372,415 in the first nine months of 2004.
Ordinary (Non-Operating) Income: The Company recognized ordinary (non-operating)
income of $0 in the third quarter of 2004 as compared to $0 in the third quarter
of 2005 and first nine months 2005 income of $0 as compared to $4667 in the
first nine months of 2004 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 second quarter of 2004.
Net Loss Before Income Taxes: Net loss before income taxes represents operating
loss plus ordinary (non-operating) income. For the third quarter of 2005, our
net loss was $112,266 as compared to $2,132,853 for the third quarter of 2004.
The first nine months of 2005 loss was $969,661 as compared to a loss of
$2,291,426 in the first nine months of 2004.
Income Tax Provision: Due to the Company's net loss of $112,266 for the third
quarter of 2005 and a loss of $2,132,853 for the third quarter of 2004, the
provision for income tax for each of these quarters was $0.
Liquidity And Capital Resources: During the first nine months of 2005, the
Company used cash in operations of $392,894, as compared to $191,728 for the
first nine months of 2004. The principal reason for the comparative first nine
months increase of $201,166 in cash used in operations is attributable to the
Company growing the number of stations. During the nine months of 2005, cash
provided by financing activities totaled $462,417, compared to $278,618 for the
first nine months of 2004. The comparative first nine months increase of
$183,799 in cash provided by financing activities is attributable the selling of
shares at $1 per share of $231,500, an increase in capitalized lease obligations
of $69,290 and an increase in notes payable of $161,627.
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ITEM 3. CONTROLS AND PROCEDURES.
Based on an evaluation of our disclosure controls and procedures as of September
30, 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 four 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 September 30, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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 September 30, 2005, pertaining to Item Nos.
1.01, 1.02 & 9.01 regarding the lease for 485 N Melrose Dr, Vista, California,
and the cancellation of 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: November 14, 2005 CALIFORNIA CLEAN AIR, INC.
By: /s/ STEPHEN D. WILSON
President, Chief Executive Officer,
Chief Financial Officer, Secretary
20