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 June 30, 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 XX No
-------- --------
As of July 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 June 30, 2006
and Audited Balance Sheet as of December 31, 2005.......... 3
Consolidated Unaudited Statements of Operations for the
Quarters & Half ended June 30, 2006 and June 30, 2005...... 5
Consolidated Unaudited Statements of Cash Flows for the
Half ended June 30, 2006 and June 30, 2005................. 6
Notes to Consolidated Financial Statements.......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 14
Business Organization and Description .............................. 14
Our Smog Check Test-Only Stations .................................. 14
Results of Operations for the Quarter Ended June 30, 2006
Compared to the Quarter Ended June 30,2005................. 14
ITEM 3. CONTROLS AND PROCEDURES............................................. 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 15
INDEX TO EXHIBITS............................................................ 15
SIGNATURES................................................................... 15
2
ITEM 1. FINANCIAL STATEMENTS.
CALIFORNIA CLEAN AIR, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
------
AS OF AS OF
June 30, December 31,
2006 2005
(unaudited) (Audited)
-------------- --------------
CURRENT ASSETS
Cash $ 8,201 $ 13,458
Prepaid expenses 12,812 14,878
Loans receivable 100,000 100,000
-------------- --------------
TOTAL CURRENT ASSETS 121,013 128,336
NET PROPERTY & EQUIPMENT 142,246 164,402
OTHER ASSETS
Deposits 12,467 12,532
-------------- --------------
TOTAL OTHER ASSETS 12,467 12,532
-------------- --------------
TOTAL ASSETS $ 275,726 $ 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
June 30, DECEMBER 31,
2006 2005
(unaudited) (Audited)
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 3,810 $ 139,590
Accrued payroll and payroll related liabilities 119,476 46,285
Accrued state minimum franchise taxes 4,800 4,000
Capitalized lease obligation - current portion 34,473 32,034
Loans payable to related party 626,545 255,172
------------- -------------
TOTAL CURRENT LIABILITIES 789,104 477,081
LONG-TERM LIABILITIES
Capitalized lease obligation 90,100 107,439
------------- -------------
TOTAL LONG-TERM LIABILITIES 90,100 107,439
------------- -------------
TOTAL LIABILITIES 879,204 584,520
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock ( $0.001 par value,
20,000,000 shares authorized;
4,000,000 shares issued and outstanding as of
June 30, 2006 and Dec. 31, 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 June 30, 2006 and Dec. 31,
2005,respectively) 4,822 4,822
Additional paid-in capital 3,818,598 3,818,598
Retained earnings (deficit) (4,430,898) (4,106,670)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (603,478) (279,250)
------------- -------------
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY (DEFICIT) $ 275,726 $ 305,270
============= =============
The accompanying notes are an integral part of these statements.
4
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SECOND QUARTER FIRST HALF
ENDING JUNE 30 ENDING JUNE 30
(Unaudited) (Unaudited)
----------------------------------- -----------------------------------
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
SALES REVENUES $ 134,137 $ 65,737 $ 256,618 $ 120,546
---------------- ---------------- ---------------- ----------------
Total Revenues 134,137 65,737 256,618 120,546
---------------- ---------------- ---------------- ----------------
COST OF REVENUES 111,397 68,496 202,127 105,878
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 22,740 (2,758) 54,492 14,669
---------------- ---------------- ---------------- ----------------
OPERATING COSTS
Operating expenses 177,317 107,181 334,015 856,310
Depreciation expense 11,078 9,094 22,156 14,154
---------------- ---------------- ---------------- ----------------
Total Operating Costs 188,395 116,275 356,171 870,464
---------------- ---------------- ---------------- ----------------
OPERATING INCOME (LOSS) (165,655) (119,034) (301,679) (855,796)
OTHER INCOME & (EXPENSE)
Interest expense (13,493) (2,881) (21,750) (4,917)
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE
INCOME TAXES $ (179,148) $ (119,034) (323,428) (855,796)
---------------- ---------------- ---------------- ----------------
INCOME TAX (PROVISION)
BENEFIT 0 0 (800) (1,600)
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ (179,148) $ (119,034) (324,228) (857,396)
---------------- ---------------- ---------------- ----------------
BASIC EARNINGS
(LOSS) PER SHARE $ (0.04) $ (0.02) $ (0.07) $ (0.18)
---------------- ---------------- ---------------- ----------------
WEIGHTED AVERAGE NO. OF
COMMON SHARES OUTSTANDING 4,822,420 4,818,753 4,822,420 4,645,720
---------------- ---------------- ---------------- ----------------
The accompanying notes are an integral part of these statements.
5
CALIFORNIA CLEAN AIR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Half First Half
Ending Ending
June 30, 2006 June 30, 2005
(unaudited) (unaudited)
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $ (324,228) $ (857,396)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
COMMON STOCK ISSUED FOR SERVICES - 637,480
DEPRECIATION EXPENSE 22,156 14,154
Changes in assets and liabilities:
(INCREASE) DECREASE IN LOAN RECEIVABLE - (100,000)
(INCREASE) DECREASE IN PREPAID EXPENSES 2,067 (1,849)
(INCREASE) DECREASE IN DEPOSITS 65 (1,073)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE (135,780) 15,762
INCREASE (DECREASE) IN ACCRUED PAYROLL 73,191 11,840
INCREASE (DECREASE) IN STATE INCOME TAXES 800 1,600
--------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (361,729) (279,482)
CASH FLOWS FROM INVESTING ACTIVITIES
NET SALE (PURCHASE) OF PROPERTY & EQUIPMENT - (81,017)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - (81,017)
PAYMENTS ON (PROCEEDS FROM) CAPITALIZED
LEASE OBLIGATIONS (14,900) 72,818
PAYMENTS ON NOTES PAYABLE TO RELATED PARTY 371,373 32,699
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM STOCK SALES - 231,500
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 356,473 337,017
NET INCREASE (DECREASE) IN CASH (5,257) (23,481)
CASH AT BEGINNING OF PERIOD 13,458 31,414
--------------- ---------------
CASH AT END OF PERIOD $ 8,201 $ 7,933
=============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID DURING YEAR FOR INTEREST $ 21,750 $ 4,917
=============== ===============
CASH PAID DURING YEAR FOR TAXES $ 0 $ 0
=============== ===============
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, Vista, and El Cajon,
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 vehicle emissions
inspection facilities in the State of California under their Smog Check II
program.
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 $84,270 and $32,266 for the quarters ended June 30, 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).
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.
8
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 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).
9
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 June 30, 2006 and June 30, 2005 was $11,078 and $9,094,
respectively.
NOTE 4. CAPITALIZED LEASE OBLIGATION
Smog Centers has a non-cancelable lease obligation for the purchase of vehicle
emission inspection equipment in Escondido, Santee, Vista, and El Cajon. Lease
payments for the quarters ending June 30, 2006 and June 30, 2006 were $13,103
and $4,534 respectively. Interest expense on the lease obligation for the
quarters ending June 30, 2006 and June 30, 2005 was $5,008 and $2036,
respectively.
Aggregate minimum future lease payments under capitalized leases are as follows
for the years ending subsequent to June 30, 2006:
Years ending December 31:
-------------------------
2006 (July 1-December 31) 26,205
2007 52,411
2008 49,881
2009 22,045
10
2010 (through May 2009) 7,348
Total minimum lease payments 157,890
Less amount representing interest (33,533)
--------------
Present value of minimum lease payments $ 124,357
NOTE 5. OPERATING LEASE COMMITMENTS
Smog Centers entered into non-cancelable leases for all stations.
Aggregate minimum future lease payments for the smog stations as of June 30,
2006, are:
2006 38,350
2007 78,500
2008 77,350
2009 64,100
2010 33,900
-----------------
Total minimum lease payments $ 292,200
=================
Lease expense for the smog stations for the quarters ending June 30, 2006 and
June 30, 2005 were $24,567 and $18,435, respectively.
NOTE 6. TRANSACTIONS WITH RELATED PARTIES
Our President, Stephen D. Wilson, has advanced $626,545 to the company from
inception through June 30, 2006. These advances were used for administrative
expenses such as legal and accounting fees, smog station operating expenses, and
to acquire and start smog stations. The advances are reflected as "Payable to
Related Parties" in the Company's financial statements and are interest bearing
and due on demand.
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.
June 30, 2006 June 30, 2005
(Unaudited) (Unaudited)
-------------------- -------------------
NET INCOME (LOSS) $ (179,147) $ (857,396)
BASIC EARNINGS (LOSS) PER SHARE $ (0.04) $ (.18)
==================== ===================
WEIGHED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,822,420 4,645,720
==================== ===================
As of June 30, 2006 no dividends have been issued that would reduce earnings
available to common shareholders.
11
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 $ 4,430,898 $ 4,106,670
-------------- -------------
4,430,898 4,106,670
Valuation allowance (4,430,898) (4,106,670)
-------------- -------------
Net deferred income taxes 0 0
============== =============
NOTE 9. STOCKHOLDERS' EQUITY
The stockholders' equity section of the Company's financial statements contains
the following classes of capital stock as of June 30, 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 June 30, 2006,
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,
12
impairing liquidation rights of the common stock and delaying or preventing a
change in control of the Company.
As of June 30, 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 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.
13
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. Mr. Stephen D. Wilson is our President, Chief Executive Officer and Chief
Financial Officer. Smog Centers of California, LLC ("Smog Centers"), was
organized as an Oregon limited liability company. Through Smog Centers we intend
to own and operate smog check test-only stations, principally in Southern
California. 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.
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 and $1.75 for the transmission fee to the Vehicle Information
Database.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2006 COMPARED TO THE
QUARTER ENDED JUNE 30, 2005:
Sales Revenues: For the second quarter of 2006, the Company had sales revenues
of $134,137, compared to $65,737 in sales revenues for the second quarter of
2005. Same store sales increased 27%.
Cost of Revenues: Cost of revenues for the second quarter of 2006 totaled
$134,137, as compared to $65,737 for the second quarter of 2005.
14
Gross Profit: Gross profit is comprised of sales revenues less cost of revenues.
Gross profit for the second quarter of 2006 totaled $22,740, as compared to
$(2,758) for the second 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 $188,395 for the second quarter of 2006 as
compared to $116,275 for the second quarter of 2005.
Operating Loss: The Company's operating loss for the second quarter of 2006 was
$165,655 as compared to $119,034 for the second quarter of 2005.
Net Loss Before Income Taxes: Net loss before income taxes represents operating
loss plus other (non-operating) loss. For the second quarter of 2006, our net
loss was $179,148 as compared to $119,034 for the second quarter of 2005.
Liquidity And Capital Resources: During the first six months of 2006, the
Company used cash in operations of $361,729, as compared to $279,482 for the
first six months of 2005.
ITEM 3. CONTROLS AND PROCEDURES.
Based on an evaluation of our disclosure controls and procedures as of June 30,
2006, 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
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: August 14, 2006 CALIFORNIA CLEAN AIR, INC.
By: /s/ Stephen D. Wilson
--------------------------------------
President, Chief Executive Officer,
Chief Financial Officer, Secretary
15