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, 2006
[ ] 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 April 1, 2006, 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 ............................................. 3
Consolidated Unaudited Balance Sheet as of March 31, 2006
and Audited Balance Sheet as of December 31, 2005........ 3
Consolidated Unaudited Statements of Operations for the
First Quarters ended March 31, 2006 and March 31, 2005... 5
Consolidated Unaudited Statements of Cash Flows for the
First Quarters ended March 31, 2006 and March 31, 2005......... 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 ................................ 16
Results of Operations For The Quarter Ended March 31, 2006
Compared To The Quarter Ended March 31, 2005............. 17
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
ITEM 1. FINANCIAL STATEMENTS.
CALIFORNIA CLEAN AIR, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
------
AS OF AS OF
March 31, December 31,
2006 2005
(unaudited) (Audited)
--------------- ---------------
CURRENT ASSETS
Cash $ 12,351 $ 13,458
Prepaid expenses 14,498 14,878
Loans receivable 100,000 100,000
--------------- ---------------
TOTAL CURRENT ASSETS 126,849 128,336
NET PROPERTY & EQUIPMENT 153,324 164,402
OTHER ASSETS
Deposits 12,533 12,532
--------------- ---------------
TOTAL OTHER ASSETS 12,533 12,532
--------------- ---------------
TOTAL ASSETS $ 292,706 $ 305,270
=============== ===============
The accompanying notes are an integral part of these statements.
3
CALIFORNIA CLEAN AIR, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
AS OF AS OF
March 31, DECEMBER 31,
2006 2005
(unaudited) (Audited)
-------------- --------------
CURRENT LIABILITIES
Accounts payable $ 216,668 $ 139,590
Accrued payroll and payroll related liabilities 82,880 46,285
Accrued state minimum franchise taxes 4,800 4,000
Capitalized lease obligation - current portion 33,138 32,034
Loans payable to related party 280,022 255,172
-------------- --------------
TOTAL CURRENT LIABILITIES 617,508 477,081
LONG-TERM LIABILITIES
Capitalized lease obligation 99,529 107,439
-------------- --------------
TOTAL LONG-TERM LIABILITIES 99,529 107,439
-------------- --------------
TOTAL LIABILITIES 717,037 584,520
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock ( $0.001 par value,
20,000,000 shares authorized;
4,000,000 shares issued and outstanding as of
March 31, 2006 and 2005) 4,000 4,000
Common stock ($0.001 par value,
100,000,000 shares authorized;
4,822,420 and 4,822,420 shares issued and
outstanding as of March 31, 2006 and 2005,
respectively) 4,822 4,822
Additional paid-in capital 3,818,598 3,818,598
Retained earnings (deficit) (4,251,751) (4,106,670)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (424,331) (279,250)
-------------- --------------
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY (DEFICIT) $ 292,706 $ 305,270
============== ==============
The accompanying notes are an integral part of these statements.
4
CALIFORNIA CLEAN AIR, INC.
STATEMENTS OF OPERATIONS
First Quarter First Quarter
Ending Ending
March 31, March 31,
2006 2005
(unaudited) (unaudited)
--------------- ---------------
SALES REVENUES $ 122,481 $ 54,809
--------------- ---------------
Total Revenues 122,481 54,809
--------------- ---------------
COST OF REVENUES 90,729 37,382
--------------- ---------------
GROSS PROFIT 31,752 17,427
--------------- ---------------
OPERATING COSTS
Operating expenses 156,697 749,129
Depreciation expense 11,078 5,060
--------------- ---------------
Total Operating Costs 167,775 754,189
--------------- ---------------
OPERATING INCOME (LOSS) (136,024) (736,762)
--------------- ---------------
OTHER INCOME &(Expenses)
Interest expense (8,257) -
--------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES $ (144,281) $ (736,762)
--------------- ---------------
INCOME TAX (PROVISION) BENEFIT (800) (1,600)
--------------- ---------------
NET INCOME (LOSS) $ (145,081) $ (738,362)
--------------- ---------------
BASIC EARNINGS (LOSS) PER SHARE $ (.03) $ (0.17)
--------------- ---------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,822,420 4,472,686
=============== ===============
The accompanying notes are an integral part of these statements.
5
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter First Quarter
Ending Ending
March 31, March 31,
2006 2005
(unaudited) (unaudited)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $ (136,824) $ (738,362)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
COMMON STOCK ISSUED FOR SERVICES - 637,480
DEPRECIATION EXPENSE 11,078 5,060
Changes in assets and liabilities:
(INCREASE) DECREASE IN LOAN RECEIVABLE - -
(INCREASE) DECREASE IN PREPAID EXPENSES 380 (1,279)
(INCREASE) DECREASE IN DEPOSITS (1) 427
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 77,078 (9,307)
INCREASE (DECREASE) IN ACCRUED PAYROLL 36,595 -
INCREASE (DECREASE) IN STATE INCOME TAXES 800 1,600
------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (10,893) (104,381)
CASH FLOWS FROM INVESTING ACTIVITIES
NET SALE (PURCHASE) OF PROPERTY & EQUIPMENT - -
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - -
PAYMENTS ON (PROCEEDS FROM) CAPITALIZED
LEASE OBLIGATIONS (6,806) 75,316
PAYMENTS ON NOTES PAYABLE TO RELATED PARTY 24,850 699
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM STOCK SALES - 201,500
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,043 277,516
NET INCREASE (DECREASE) IN CASH 7,150 92,118
CASH AT BEGINNING OF PERIOD 13,458 31,414
------------- -------------
CASH AT END OF PERIOD $ 20,608 $ 123,532
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID DURING YEAR FOR INTEREST $ 8,257 $ 2,881
============= =============
CASH PAID DURING YEAR FOR TAXES $ 800 $ 1,600
============= =============
SUPPLEMENTAL NONCASH DISCLOSURES
COMMON STOCK ISSUED FOR SERVICES - 637,480
COMMON STOCK ISSUED FOR LOAN PAYABLE - -
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.
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
7
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 $65,756 and $41,837 for the quarters ended March 31, 2006 and 2005,
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).
8
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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
9
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
10
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2006 and March 31, 2005 was $11,078 and $5,060,
respectively.
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,
payments per month for these two machines is $1837. December of 2005 a fourth
BAR 97 machine was leased on a three year contract with payments of $1631 .
Lease payments for the quarters ending March 31, 2006 and March 31, 2005 were
$11,3471 and $6,371 respectively. Interest expense on the lease obligation for
the quarters ending March 31, 2006 and March 31, 2005 was $4,665 and $2340,
respectively.
Aggregate minimum future lease payments under capitalized leases are as follows
for the years ending subsequent to March 31, 2006:
Years ending December 31:
------------------------
2006 (April 1-December 31) 39,308
2007 52,411
2008 49,881
2009 22,045
2010 (through May 2009) 7,348
Total minimum lease payments 170,993
Less amount representing interest (38,571)
-----------------
Present value of minimum lease payments $ 132,422
11
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. 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, 2005; 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. Smog Centers entered into a non-cancelable lease for the
smog station premises in El Cajon, California, which requires monthly payments
of $1,750 through November 30, 2008; $2,000 from December 1, 2008 through
November 30, 2009; and $2,100 from December 1, 2009 through November 30, 2010.
The Company has an option to extend the lease terms for all locations for an
additional five (5) years.
Aggregate minimum future lease payments for the smog stations as of March 31,
2006, are:
2006 61,825
2007 78,500
2008 77,350
2009 64,100
2010 33,900
-----------------
Total minimum lease payments $ 315,675
=================
Lease expense for the smog stations for the quarters ending March 31, 2006 and
March 31, 2005 were $23,475 and $16,090, respectively.
NOTE 6. TRANSACTIONS WITH RELATED PARTIES
Our President, Stephen D. Wilson, has advanced $280,022 to the company from
inception through March 31, 2006. 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.
12
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.
2006 2005
March 31, 2006 March 31, 2005
(Unaudited) (Unaudited)
-------------------- -------------------
NET INCOME (LOSS) $ (145,081) $ (736,362)
BASIC EARNINGS (LOSS) PER SHARE $ (0.03) $ (.17)
==================== ===================
WEIGHED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,822,420 4,472,686
==================== ===================
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:
March 30, DECEMBER 31,
2006 2005
(Unaudited) (Audited)
-------------- --------------
Deferred tax asset:
Net operating loss carryover $ 4,251,751 $ 4,106,670
-------------- --------------
4,251,751 4,106,670
Valuation allowance (4,251,751) (4,106,670)
-------------- --------------
Net deferred income taxes 0 0
============== ==============
13
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY
The stockholders' equity section of the Company's financial statements contains
the following classes of capital stock as of March 31, 2006:
(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.
As of March 31, 2006, 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
14
CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY- CONTINUED
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 10. 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.
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,
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CALIFORNIA CLEAN AIR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS ORGANIZATION & DESCRIPTION- CONTINUED
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.
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.
On September 6, 2005 Smog Centers opened its fourth smog check test-only
facility, located at 485 N. Melrose Dr, Vista, California.
On February 1, 2006 Smog Centers opened its fifth smog check test-only facility,
located at 710 N. 2nd St, El Cajon, California 92021. 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 a term of five years,
commencing Dec. 1, 2005 and continuing until Nov. 30, 2010. El Cajon, California
has a population of approximately 96,000 and is located approximately twelve
miles east of San Diego. At the present time, there are twelve other "test-only"
stations in the area. The equipment lease requires monthly payments of $1637 for
36 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.
We charge a total of $60.00 for a smog test for a vehicle that passes the
emissions test, which includes $50.00 for the inspection fee, $8.25 for the smog
certificate (a pass-through cost) and $ 1.75 for the transmission fee to the
Vehicle Information Database. If the vehicle does not pass the emissions test,
we only charge $50.00, because the smog certificate is not issued. The stations
that have the room to test RV's we charge a total of $110.00. We advertise
extensively for all stations in a weekly publication with discount coupons.
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RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2006 COMPARED TO THE
QUARTER ENDED MARCH 31, 2005:
Sales Revenues: For the first quarter of 2006, the Company had sales revenues of
$122,481, compared to $54,809 in sales revenues for the first quarter of 2005.
For the first quarter 2006 same store sales of $74,110 compared to first quarter
2005 sales of $54,793. This shows a same store sales increase of 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 first quarter of 2006 totaled $90,729, as compared to $37,382
for the first quarter of 2005. The cost of revenues increased because of the
company increasing the number of station open and hiring technicians. Cost of
revenues for the first quarter of 2006 equaled 74% of sales revenue. This
increase is because of the company's efforts to grow from two stations to five
stations.
Gross Profit: Gross profit is comprised of sales revenues less cost of revenues.
Gross profit for the first quarter of 2006 totaled $31,752, or 16% of sales
revenue, as compared to $17,427 for the first quarter of 2005.
Operating Costs: Operating costs consist of the Company's administrative
expenses, and smog station operating expenses including depreciation and
amortization. Operating costs totaled $167,775 for the first quarter of 2006 as
compared to $754,189 for the first quarter of 2005. The decrease in operating
costs is attributable to no consulting fees incurred in the first quarter of
2006.
Operating Loss: The Company's operating loss for the first quarter of 2006 was
$136,024 as compared to $736,762 for the first quarter of 2005. The decrease in
operating loss is attributable to no consulting fees in the first quarter of
2006.
Other (Non-Operating) Loss: The Company recognized other (non-operating) loss of
$0 in the first quarter of 2005 as compared to $8,257 in the first quarter of
2006.
Net Loss Before Income Taxes: Net loss before income taxes represents operating
loss plus other (non-operating) loss. For the first quarter of 2006, our net
loss was $144,281 as compared to $736,762 for the first quarter of 2005.
Income Tax Provision: For the first quarter of 2006 $800 was recognized as
minimum franchise tax fee as compared to $1600 for the first quarter of 2005.
Liquidity And Capital Resources: During the first three months of 2006, the
Company used cash in operations of $10,893, as compared to $104,381 for the
first three months of 2005. The principal reason for the comparative three
months decrease of $93,488 in cash used in operations is attributable to the
Company owing more to accounts payable, an increase in notes payable of $77,078.
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.
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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
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)
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 15, 2006 CALIFORNIA CLEAN AIR, INC.
By: /s/ STEPHEN D. WILSON
------------------------------------
President, Chief Executive Officer,
Chief Financial Officer, Secretary
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