UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

(Mark One)

£	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2011

 

£	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from _______________ to _______________.

 

Commission file number 0-32341

 

M Line Holdings, Inc.

(Exact Name of Company as Specified in its Charter)

 

Nevada (State or other jurisdiction of incorporation or organization)	88-0375818 (I.R.S. Employer Identification No.)
2672 Dow Avenue Tustin, CA (Address of principal executive offices)	92780 (Zip Code)

 

(714) 630-6253 

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  £		Accelerated filer  £
Non-accelerated filer  £		Smaller reporting company  S
(Do not check if a smaller reporting company)

 

  

 

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

 

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years

 

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes £  No £.

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of February 14, 2012, there were 46,871,145 shares of common stock, par value $0.001, issued and outstanding.

 

  

M LINE HOLDINGS, INC.

 

TABLE OF CONTENTS

 

PART I			Page
ITEM 1.	Financial Statements (unaudited).		3
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.		25
ITEM 4.	Controls and Procedures.		25
PART II
ITEM 1.	Legal Proceedings.		27
ITEM 1A.	Risk Factors.		31
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		31
ITEM 3.	Defaults Upon Senior Securities.		31
ITEM 4.	(Removed and Reserved).		31
ITEM 5.	Other Information.		31
ITEM 6.	Exhibits.		32

 

 

PART I -FINANCIAL INFORMATION

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

Assets
	December 31, 2011			June 30, 2011
Current assets:
Cash and cash equivalents	$	113,536		$	221,036
Accounts receivable, net		604,706			894,197
Inventory, net		1,931,314			1,199,422
Due from related party		1,170,537			769,499
Prepaid expenses and other current assets		—			14,148
Total current assets		3,820,092			3,098,302
Property and equipment, net		521,212			537,256
Intangible assets, net		—			31,952
Deposits and other		82,807			80,653
Total assets	$	4,424,112		$	3,748,163
Liabilities and shareholders' equity
Current liabilities:
Line of credit	$	620,382		$	627,045
Accounts payable		777,429			901,230
Accrued expenses and other		920,653			839,574
Notes payable - current		666,824			305,939
Capital Leases - current		76,076			44,998
Litigation payable		210,725			494,446
Total Current Liabilities		3,272,090			3,213,232
Notes payable - long term		—			13,428
Capital leases - long term		19,750			29,770
Deferred income taxes		16,710			16,710
Total liabilities		3,308,550			3,273,140
Commitments and contingencies
Shareholders' equity:
Common stock: $0.001 par, 100,000,000 shares authorized, 46,608,345 and 38,570,845 shares issued and outstanding at December 31, 2011 and June 30, 2011, respectively		46,608			38,571
Additional paid in capital		10,174,028			9,813,315
Related party receivable on issuance of shares		(94,000	)		(94,000	)
Accumulated deficit		(9,011,074	)		(9,282,863	)
Total shareholders' equity		1,115,562			475,023
Total liabilities and shareholders' equity	$	4,424,112		$	3,748,163

 

The accompanying notes form an integral part of these financial statements

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

	Three months ended December 31,						Six months ended December 31,
	2011			2010			2011			2010
Net sales	$	2,795,591		$	2,528,795		$	5,205,484		$	4,185,394
Cost of sales		1,950,183			1,817,611			3,605,728			2,747,635
Gross profit		845,408			711,184			1,599,756			1,437,759
Operating expenses:
Selling, general and administrative		647,820			823,303			1,311,086			1,539,788
Amortization of intangible assets		13,764			18,188			31,952			36,376
Total operating expense		661,584			841,491			1,343,038			1,576,164
Operating profit (loss)		183,824			(130,307	)		256,718			(138,405	)
Other income (expense):
Interest expense		(45,836	)		(25,536	)		(94,400	)		(37,954	)
Interest income		16,553			4,637			29,151			10,819
Rental income		—			73,699			—			73,699
Change in derivative liability		—			35,919			—			35,919
Gain on debt settlement		—			—			85,184			—
Loss on sale of assets		(2,507	)		—			(2,507	)		—
Total other income (expense)		(31,790	)		88,719			17,428			82,483
Income (loss) before income tax		152,034			(41,588	)		274,146			(55,922	)
Income tax		—			—			(2,400	)		(800	)
Net income (loss)	$	152,034		$	(41,588	)	$	271,746		$	(56,722	)
Net income (loss) per share:
Basic and dilutive income (loss) per share:	$	0.00		$	(0.00	)	$	0.01		$	(0.00	)
Weighted average number of common shares (basic and diluted)		46,608,345			30,893,260			48,934,432			30,877,608

 

* Weighted average number of shares used to compute basic and diluted loss per share is the same as the effect of potential dilutive securities is anti-dilutive.

 

The accompanying notes form an integral part of these financial statements

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

	Six months ended December 31,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	271,746		$	(56,722	)
Reconciliation of net income (loss) to net cash provided by (used in) operations:
Imputed interest		(29,151	)		—
Bad debt expense		(65,947	)		—
Depreciation		116,379			166,319
Amortization of intangible assets		31,952			36,376
Issuance of shares for services		368,750			2,000
Gain on debt settlement		(85,184	)		—
Reserve for inventories		50,099			—
Change in derivative liabilities		—			(35,919	)
Changes in operating assets and liabilities:
Accounts receivable		355,439			(35,902	)
Inventory		(781,991	)		(74,672	)
Prepaid expenses and other assets		11,994			44,224
Due from related party		(371,887	)		(301,275	)
Accounts payable, accrued expenses and other		314,963			403,046
Litigation payable		(283,721	)		—
Deferred rent		—			(19,783	)
Cash provided by operating activities		(96,559	)		127,692
Cash used in operating activities of discontinued operations		—			300
Net cash provided by operating activities		(96,559	)		127,992
Cash flows from financing activities:
Net borrowings (repayments) on line of credit		(6,663	)		—
Proceeds from notes payable		75,000			—
Payments to notes payable		—			(81,795	)
Payments on capital leases		(79,277	)		(18,351	)
Net cash used in financing activities		(10,940	)		(100,146	)
Net (decrease) increase in cash and cash equivalent		(107,500	)		27,846
Cash and cash equivalents at beginning of period		221,036			50,410
Cash and cash equivalents at end of period	$	113,536		$	78,256
Supplemental disclosure of cash flow information:
Cash paid for interest	$	48,564		$	37,954
Cash paid for income taxes	$	—		$	—

 

The accompanying notes form an integral part of these financial statements

 

  

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Business

 

M. Line Holdings, Inc. (the “Company”) was incorporated in Nevada on September 24, 1997, under the name Gourmet Gifts, Inc. (“Gourmet Gifts”).

 

The Company and its subsidiaries are currently engaged in the following businesses,which also, represent its business segments:

 

£

Acquiring, refurbishing and selling new and used CNC machine-tool equipment and servicing of machine-tool equipment (Machine Sales segment).

 

£

Manufacturing precision metal component parts for the defense, automotive, aerospace and medical industries through its Eran Engineering, Inc. (“Eran”) subsidiary (Precision Manufacturing segment).

 

2.

Accounting Policies

 

Accounting Principles

 

In the opinion of management, the accompanying balance sheets and related interim statements of operations, and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2011 filed with the U.S. Securities and Exchange Commission (the “Commission”) on October 13, 2011.

 

Principles of Consolidation

 

The financial statements include the accounts of M Line Holdings and its subsidiaries. Intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain 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. Significant estimates include collectability of accounts receivable, sales returns, and recoverability of long-term assets.

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013.

 

In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is not required. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.

  

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portion of this guidance.

 

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance is effective for annual periods beginning after December 15, 2011.

 

3.

Inventories

 

Inventories consisted of the following:

 

	December 31, 2011			June 30, 2011
Finished goods and components	$	1,388,787		$	740,078
Work in progress		583,666			505,108
Raw materials and parts		8,960			9,216
		1,981,413			1,254,402
Less: Reserve for inventories		(50,099	)		(54,980	)
Inventories, net	$	1,931,314		$	1,199,422

 

4.

Accrued Expenses

 

Accrued expenses consisted of the following:

 

	December 31, 2011			June 30, 2011
Compensation and related benefits	$	672,839		$	738,650
Other		247,814			100,924
	$	920,653		$	839,574

 

  

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

5.

Capital Leases

 

The Company leases certain equipment under capital leases with terms ranging from four to five years. Future annual minimum lease payments are as follows as of December 31, 2011 and June 30, 2011.

 

	December 31, 2011			June 30, 2011
Due in 2011	$	78,616		$	70,058
Due in 2012		20,041			11,318
Total minimum lease payments		98,657			81,376
Less amount representing interest		2,831			6,608
Present value of future minimum lease payments		95,826			74,768
Less current portion of capital lease obligations		76,076			44,998
Capital Lease obligations, net of current portion	$	19,750		$	29,770

 

6.

Line of Credit

 

On September 1, 2011, the Company settled the dispute with Pacific Western Bank that not only settles all outstanding legal disputes between the parties but agrees monthly payments that will pay off the balance due to Pacific Western Bank.  The monthly payments continue as follows:

 

January 1, 2012 through March 31, 2012	$	21,799
April 30 through May 31, 2012		26,799
June, 2012		Balance due in full

 

Interest accrues at 6% per annum.  These payments will not only pay off the remainder of the Company’s line of credit but also the balance due from Eran Engineering on the remaining equipment loan with Pacific Western Bank.

 

Under the terms of the agreement the Company can pay off any balance due to Pacific Western bank at any time without penalty.  If we fail to timely payoff the balance owed to Pacific Western Bank we will be in default and default penalties will apply.

 

As of December 31, 2011 the Company owed Pacific Western Bank $274,930 and at June 30, 2011, $218,889.

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7.

Notes Payable

 

Notes payable consisted of the following.

 

	December 31, 2011			June 30, 2011
Notes payable to financial institutions, secured by the underlying equipment in aggregate monthly installments of $21,799 for January and February and $26,799 for March, April and May with the balance due in June 2012. Interest accrues at 6% per annum.	$	274,930		$	44,472
An unsecured note payable to a corporation in respect of accounting software payable in monthly installments of $1,923. This note is now due and payable and is being negotiated with the company		27,061			27,061
An unsecured note payable to a corporation in respect of machines sold to us payable in monthly installments of $5,000 per month.  This agreement will expire in June 2012		43,069			66,070
An unsecured note payable to a corporation in monthly installments of $5,000 per month.  This balance is due to be paid in six monthly payments ending December 31, 2011		21,764			31,764
An unsecured note payable in the sum of $150,000 to a financial institution payable in full on November 2011. The company has negotiated an extension of the term to December 15, 2011.		150,000			150,000
This note is currently in default and the company has requested an extension to repay the note over four months commencing March 2012 at the rate of $30,000 in March and $40,000 per month until fully paid. This proposal has not been finalized yet. Interest at present is running at a default rate of 13% per annum
An unsecured note payable in the sum of $150,000, of which $75,000 was received end September 2011, with the balance received in October 2011, to a financial institution, payable in full on March 31, 2012. We have requested an extension to repay this note over four months commencing June 2012 at the rate of $30,000 in June, $70,000 in July and the balance in August 2012		150,000			—
	$	666,824		$	319,367
Less Current Portion		666,824			305,939
Long Term Portion		—			13,428
Due in 2012		666,824			305,939
Due in 2013		—			13,428
Thereafter		—			—
	$	666,824		$	319,367

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

8.

Commitments

 

Our estimated future lease payments for the next five years are as follows:

 

Due in 2012	$	441,377
Due in 2013		449,624
Due in 2014		463,110
Due in 2015		477,003
Thereafter		363,756
	$	2,194,869

 

9.

Litigation

 

Litigation Payable

 

Litigation payable consisted of the following:

 

	December 31, 2011			June 30, 2011
An unsecured note payable to a corporation in settlement of a lawsuit payable in full by December 20, 2011.	$	65,000		$	377,621
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly payments of $5,000.00		60,000			60,000
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly installments of $1,000.00		8,225			11,225
An unsecured note payable to an ex employee of the Company.  Due to be paid in 10 monthly payments that commenced in March 2011		40,000			45,600
A Provision in the sum of $27,500.00 for an unsecured note payable, agreed verbally, subject to a formal agreement anticipated shortly		27,500			—
A provision in the sum of $10,000.00 in settlement of a lawsuit, subject to agreement anticipated shortly		10,000			—
	$	210,725		$	494,446

 

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.

James M. Cassidy v. Gateway International Holdings, Inc., American Arbitration Association, Case No. 73-194-32755-08.

 

We were served with a Demand for Arbitration and Statement of Claim, which was filed on September 16, 2008. 

 

The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant.  The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs.  Management denies the allegations of the Statement of Claim and will vigorously defend against these allegations.  An arbitrator has not yet been selected, and a trial date has not yet been scheduled. 

 

We do not have sufficient information to render an opinion as to the potential outcome of this matter or any potential financial impact on the company.

 

No provision has been made in the financial statements as management feels that the case has no merit.

 

2.

CNC Manufacturing v. All American CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC Repos, Superior Court for the State of California, County of Riverside, Case No. RIC 509650.

 

Plaintiff filed this Complaint on October 2, 2008.

 

The Complaint alleges causes of action for breach of contract and rescission and claims All American breached the agreement with CNC Manufacturing by failing to deliver a machine that conforms to the specifications requested by CNC Manufacturing, and requests damages totaling $138,750. Elite Machine filed an Answer timely, on January 15, 2009.  This case was settled on September 12, 2011 in an amount of $27,500. This amount is to be paid in three monthly payments commencing on October 25, 2011.

 

No payments have been made at this time as council for plaintiff has not completed the final settlement agreement.

 

A provision of $27,500 has been made in the financial statements for the six months ended December 31, 2011.

 

3.

Hwacheon Machinery v. All American CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County, Illinois, Case No. 09L544.

 

The Complaint was filed on June 8, 2009.

 

The Complaint alleges causes of action for account stated, and arises from a claim by Hwacheon that All American CNC has not paid it for machines sold to All American CNC.  The Complaint seeks damages of approximately $362,000.  All American filed an answer on or about July 15, 2009. Default has been entered against All American CNC Sales, Inc.

 

In a hearing in the Superior Court of California Hwacheon filed an alter ego case against Eran Engineering, Inc., Elite Machine Too and M Line Holdings, Inc. The judge granted the summary judgment against all three defendants in the amount of $403,860.91 including interest through February 8, 2011. Post judgment proceedings have been initiated by Hwacheon. MLH and Eran Engineering filed an appeal which was dismissed pursuant to settlement.

 

MLH has not made payments that are due under the settlement agreement. We do not have sufficient information to render an opinion as to the potential outcome of this matter beyond the above information, nor any potential financial impact on the company resulting from the judgment or settlement.

 

A provision of $65,000 has been made in the financial statements for the six months ended December 31, 2011.

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4.

Fadal Machining v. All American CNC Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case No. BC415693.

 

The Complaint was filed on June 12, 2009.

 

The Complaint alleges causes of action for breach of contract and common counts against All American CNC seeking damages in the amount of at least $163,578.88, and arises from a claim by Fadal that All American failed to pay amounts due.  On June 26, 2009, Fadal amended the Complaint to include M Line Holdings, Inc. as a Defendant.  

 

A settlement agreement in the amount of $60,000 was signed on May 31, 2011.

 

MLH has not made payments that are due under the settlement agreement. We do not have sufficient information to render an opinion as to the potential outcome of this matter beyond the above information, nor any potential financial impact on the company resulting from the judgment or settlement.

 

A provision of $60,000 was made in the financial statements for the year ended June 30, 2011 and at December 31, 2011.

 

5.

Fox Hills Machining v. CNC Repos, Orange County Superior Court, Orange County, California, Case No. 30-2009-00121514.

 

The Complaint was filed on April 14, 2009.

  

The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos.  The damages sought in the Complaint are estimated to be approximately $30,000.  The Defendants filed an Answer on June 5, 2009.  

  

Recently the parties agreed to settle in principle but a final agreement has yet to be completed. We do not have sufficient information to render an opinion as to the potential outcome of this matter or any potential financial impact on the company.

 

A provision in the amount of $10,000 was made in the financial statements for the six months ended December 31, 2011.

 

6.

C. William Kircher Jr. V M Line Holdings, Inc. Orange County Superior Court Case No. 00397576

 

A former attorney for M Line Holdings, Inc. has sued seeking damages for failure to pay legal fees in the amount of $120,166.30.

 

This case has settled. The terms of the settlement call for 12 payments of $5,000 per month commencing August 25, 2011 and the issuance of 150,000 shares of common stock.

 

The first three payments have been made but MLH is currently in default of its payments. Plaintiff is in communication with MLH to work out an arrangement.

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7.

M Line Holdings, Inc. V Pacific Western Bank Orange County Superior Court Case No BC448012. The case was filed on 10/21/2010.

 

The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to fund against the line of credit when funds were available and also failed to remove two of the personal guarantors after agreeing in writing to do so and MLH is seeking unspecified damages.

 

This case has settled based on payment terms as agreed between the parties. Management has informed us that MLH has recently complied with the settlement terms.

8.

Pacific Western Bank V M Line Holdings, Inc. Orange County Superior Court Case No BC448012. The case was filed as a cross-complaint on 11/12/2010.

 

The Cross-complaint alleges causes of action basically for breach of written agreement and related claims. Defendant failed to repay a credit line when it became due and is also claiming that defendant must repay two equipment loans even though these loans are current due to the terms of the credit line agreement. Cross-complaint is seeking damages of $300,616.

 

This case has settled based on payment terms as agreed between the parties. Management has informed us that MLH has recently complied with the settlement terms.

 

9.

Neal Kohlhaas v. M Line Holdings, INC. Orange County Superior Court Case No. 30-2011-00442075.

 

Plaintiff has filed suit against M Line alleging a breach of a consulting agreement and seeking damages in the amount of approximately $20,000. Company has decided to defend the action on the basis that services were not provided as agreed or expected. The case is currently in the discovery phase of litigation. We do not have sufficient information at this time to render an opinion regarding a potential outcome or possible financial impact on the company.

 

A settlement in this matter has been agreed in principle for the amount of $3,000.

 

10.

Timothy D. Consalvi v. M Line Holdings, Inc. et.al., Orange County Superior Court Case No, 00308489.

 

A former president of All American CNC Sales, Inc. has filed suit against the Company seeking payment on an alleged severance obligation by the Company. The Complaint does not specify the damages sought. The parties then reached a settlement in the principal sum of $40,000 to be documented in due course. Meanwhile a default was entered against MLH, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the complaint and has filed a motion for leave to file a cross complaint.

 

Recently a settlement of $50,000 has been reached in this case, requiring payments commencing on March 11, 2011 for ten months. The first two month’s payment have been made however the Company is currently in default of the terms of this settlement agreement. Mr. Consalvi has filed his stipulated judgment. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

11. Joe Gledhill v. M Line Holdings, Inc., et. al.- Los Angeles Superior Court Case No. BC 448012

 

Joseph Gledhill, a former officer and director of the company and its subsidiary Eran Engineering has filed suit within the Pacific Western case seeking indemnity of the Pacific Western claim and various other causes of action. Management has decided to vigorously defend these claims and believes Mr. Gledhill’s suit has no merit. We do not have sufficient information at this time to render an opinion regarding a potential outcome or possible financial impact on the company.

 

12. M Line Holdings, Inc., v. Timothy Consalvi, et. al.- Orange County Superior Court Case No. 30-201100493329

 

M Line has recently filed suit against two of its former directors alleging that they breached their fiduciary duty to the company by mismanaging the corporate affairs of the company and its subsidiaries resulting in damages to the company and its subsidiaries. Defendants have not yet been served or have not answered the complaint at this time. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

 

Litigation is subject to inherent uncertainties, and unfavorable rulings could occur.  If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity.

  

10.

Income Taxes

 

Our effective tax rates were approximately 1% for the six months ended December 31, 2011 and 2010, respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to differences between financial and income tax basis amounts and the fact that we currently record a valuation allowance against our deferred tax assets.

 

11.

Common Stock

 

Common Stock

 

The Company’s articles of incorporation authorize up to 100,000,000 shares of $0.001 par value preferred stock. Shares of preferred stock may be issued in one or more classes or series at such time as the Board of Directors determine. The Company had no shares of preferred stock issued and outstanding as of December 31, 2011 or June 30, 2011.

 

During six months ended December 3l, 2011, the Company issued the following shares of common stock:

 

The Company issued 4,387,500 shares of its common stock in lieu of salaries and expenses due. The shares were valued at $239,750, based on the market price prevailing on the issuance date, and recorded in the Company’s financial statements as of September 30, 2011

 

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company issued 3,650,000 shares of its common stock to various note holders and consultants in settlement of loans and services rendered to the company. The shares were valued at $129,000, based on the market price, prevailing on the issuance date and recorded in the Company’s financial statement as of September 30, 2011.

 

Non-Qualified Stock Option Plan

 

In November 2006, the Board of Directors approved a Non-Qualified Stock Option Plan for key managers, which, among other provisions, provides for the granting of options by the board at strike prices at or exceeding market value, and expiration periods of up to ten years. No stock options have been granted under this plan.

 

12.

Related Party Transactions

 

The related party transactions during the six month period ended December 31, 2011 were as follows:

 

Shares issued for services	$	104,730
Recharge of telephone service costs		3,750
Imputed Interest re loan		29,751

 

13.

Segments and Geographic Information

 

The Company’s segments consist of individual companies managed separately with each manager reporting to the Board. “Other” represents corporate functions. Sales, and operating or segment profit, are reflected net of inter-segment sales and profits. Segment profit is comprised of net sales less operating expenses and interest. Income taxes are not allocated and reported by segment since they are excluded from the measure of segment performance reviewed by management.

 

Segment Information for the three month period ended December 31, 2011		Machine Sales			Precision Manufacturing			Corporate			Total
Revenue		$	1,867,885		$	927,706		$	—		$	2,795,591
Interest income			—			—			16,553			16,553
Interest expense			4,482			37,488			3,866			45,836
Depreciation and amortization			14,514			51,084			6,355			71,953
Income (loss) before taxes			118,410			(102,463	)		136,087			152,034
Total assets			262,854			2,954,163			1,207,095			4,424,112
Capital expenditures		$	—		$	—		$	—		$	—

 

Segment information for the three month period ended December 31, 2010		Machine Sales			Precision Manufacturing			Corporate			Total
Revenue		$	1,805,568		$	723,227		$	0		$	2,528,795
Interest income			—			—			4,637			4,637
Interest expense			—			21,634			3,902			25,536
Depreciation and amortization			18,938			55,298			5,861			80,097
(Loss) income before taxes			(46,217	)		33,792			(29,163	)		(41,588	)
Total assets			625,115			1,807,154			623,095			3,055,364
Capital expenditure		$	—		$	—		$	—		$	—

 

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Segment Information for the six month period ended December 31, 2011		Machine Sales			Precision Manufacturing			Corporate			Total
Revenue		$	2,861,155		$	2,344,329		$	0		$	5,205,484
Interest income			—			—			29,151			29,151
Interest expense			4,482			74,676			15,242			94,400
Depreciation and amortization			33,452			102,168			12,711			148,331
(Loss) income before taxes			(87,922	)		191,298			168,370			274,146
Total assets			262,854			2,954,163			1,207,095			4,424,112
Capital expenditure		$	—		$	—		$	—		$	—

 

Segment information for the six month period ended December 31, 2010		Machine Sales			Precision Manufacturing			Corporate			Total
Revenue		$	2,594,464		$	1,590,930		$	0		$	4,185,394
Interest Income			—			—			10,819			10,819
Interest Expense			94			33,996			3,864			37,954
Depreciation and Amortization			37,876			153,097			11,722			202,695
Income (loss) before taxes			21,487			(57,170	)		(20,239	)		(55,922	)
Total Assets			625,115			1,807,154			623,095			3,055,364
Capital Expenditure		$	—		$	—		$	—		$	—

 

14.

Subsequent Events

 

The company issued 262,800 shares of common stock to its employees in the Precision Manufacturing Group as part of a bonus to its employees. These shares were valued based on the market price prevailing on the issuance date.

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This quarterly report on Form 10-Q of M Line Holdings, Inc. (formerly known as Gateway International Holdings, Inc., and referred to herein as “MLH”, “we,” “us” or “Company”) for the six months ended December 31, 2011, contains forward-looking statements, principally in this Section and “Business.” Generally, you can identify these statements because they use words like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described in this filing. You should not place undue reliance on these forward-looking statements which apply only as of the date of this quarterly report. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbors created thereby. To the extent that such statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation of belief will be accomplished.

 

We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. The risk factors listed in our Annual Report on Form 10-K, as well as any cautionary language in our Annual Report on Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results or events to differ materially from those anticipated, include, but are not limited to: our ability to successfully develop new products; the ability to obtain financing for product development; changes in product strategies; general economic, financial and business conditions; changes in and compliance with governmental healthcare and other regulations; changes in tax laws; and the availability of key management and other personnel.

 

Overview

 

Our business comprises of two segments, our Machine Sales Group and our Precision Manufacturing Group.

 

Our Machine Sales Group is in the business of acquiring and selling computer numerically controlled (“CNC”) machines, and related tools, to manufacturing customers. We specialize in the purchase, refurbishment and sales of used CNC machines. We also serve as a manufacturer sales representative firm selling new CNC machines we purchase from third party manufacturers into certain geographic territories.

 

Our Precision Manufacturing Group is a manufacturer of precision components used in equipment and machinery in the commercial aviation, medical, aerospace and defense industries. Sales within this segment are highly concentrated within one customer, Panasonic Avionics Corporation (“Panasonic”). The loss of all or a substantial portion of sales to this customer would cause us to lose a substantial portion of our sales within this segment and on a consolidated basis, and have a corresponding negative impact on our operating profit margin due to operation leverage this customer provides. This could lead to sales volumes not being high enough to cover our current cost structure or provide adequate operating cash flows. Panasonic has been a customer of ours for approximately 19 years and we believe our relationship is good.

 

Trends Affecting Our Business

 

Although the recent tightening of the capital markets has eased it may still hurt our ability to sell used CNC machines. Historically, as capital markets tighten, companies that purchase large machines on credit, such as CNC machines, have more difficulty in obtaining credit and, therefore, are unable to purchase machines that they may be able to purchase in better financial times. The credit markets have improved slightly but may have an impact on our customers’ ability to purchase machines which could negatively impact our business.

 

The primary components sold by our Precision Manufacturing segment during the quarters ended December 31, 2011 and, 2010, were parts sold to Panasonic, a leading provider of in-flight entertainment systems for commercial aircraft. Although the market for inflight entertainment systems has improved and is expected to continue to improve over the next two to three years business is still inconsistent and this may effect our business over the next several months. In addition, if there is a  decrease in work this may have an impact with the Machine Tools Group, as many of our customers that buy machines from us do business with airline manufacturers.

 

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of sales and expenses during the reporting period. Significant estimates made by management are, among others, realization of inventories, collectability of accounts receivable, litigation, impairment of goodwill, and long-lived assets other than goodwill. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from these estimates; our future results of operations may be affected.

 

Inventories

 

Within our Precision Manufacturing segment, we seek to purchase and maintain raw materials at sufficient levels to meet lead times based on forecasted demand. We generally manufacture parts based on purchase orders. Within our Machine Tools segment, we purchase machines held for resale based upon management’s judgment of current market conditions and demand for both new and used machines. If forecasted demand exceeds actual demand, we may need to provide an allowance for excess or obsolete quantities on hand. We also review our inventories for changes demand patterns and in the market prices of machines held in inventory and provide reserves as deemed necessary. If actual market conditions are less favorable than those projected by management, additional inventory reserves for CNC machines and parts may be required. We state our inventories at the lower of cost, using the first-in, first-out method on an average costs basis, or market.

 

Results of Operations for the Three Months Ended December 31, 2011 Compared to the Three Months Ended December 31, 2010

 

	For the three month period ended December 31,			For the three month period ended December 31,
	2011			2010			Change			%
Sales by segment:
Machine Sales	$	1,867,885		$	1,805,568			62,317			3
Precision Engineering		927,706			723,227			204,479			28
		2,795,591			2,528,795			266,796			11
Gross Profit by segment:
Machine Sales		431,492			253,030			178,462			71
Precision Engineering		413,916			458,155			(44,239	)		-10
		845,408			711,185			134,193			19

 

 

Sales

 

Sales in the fiscal 2012 period increased 11% compared to the comparable period in fiscal 2011.

 

The change is attributable to an increase in sales in the Machine Sales and Precision Manufacturing Group.  Sales increased by 3% in the Machine Sales Group and by 28% in the Precision Manufacturing Group.  

 

The machine sales group primarily sells pre-owned CNC machinery manufactured by Mori Seiki. The average sale price of the machinery changes based on the equipment that is available to purchase in the market place and the prevailing market conditions that effect the price that equipment can be sold for. The average sale price of the 27 pieces of equipment sold in the three months ended December 31, 2011 was $68,700 compared to the comparable period in fiscal 2011 of 23 pieces of equipment sold at an average sale price of $74,800, In addition repair work for the three months ended December 31, 2011 was $3.600 compared to the comparable period in fiscal 2011 of $60,300.

 

Market conditions reflect not only the price that equipment can be purchased for but also the price that equipment may be sold. During good economic times when the business climate is improving, particularly in areas such as aerospace, the demand for equipment can result in a change in the buying price, however the need for that equipment by customers is generally reflected in the sale price, therefore as a general rule margins are reasonably consistent even though average sale prices may change. As a result we do not expect future results to be materially impacted by these conditions.

 

The increase in sales in the Precision Manufacturing Group is the result of an increase of $126,674 to $484,488 in sales of precision metal component parts from our major customer, Panasonic Avionics in the three months ended December 31, 2011, compared to $357,814 for the comparable period in fiscal 2011. Furthermore new customer sales resulted in an increase of $174,361 during the three months ended December 31, 2011 as compared to $0 for new customers in the comparable period in fiscal 2011.

  

Our precision manufacturing group has recently received orders from another new major customer. We are hopeful that this customer’s orders will continue to increase and together with other new customers will result in an increase in sales and profitability of the Precision Manufacturing Group. The addition of new customers should result in a positive effect on the future results of the Company.

 

We anticipate that, as a result of an increase in activity in the aerospace industry, we will continue to grow the revenues of both the Machine Tool Group and the Precision Manufacturing Group.

 

Gross Margin

 

Gross profit increased by 19% compared to the comparable period in fiscal 2011. The gross profit for the Machine Sales Group increased by 71% due to an increase in margins as a result of higher prices received for product and lower freight costs. The decrease within the Precision Manufacturing Group of 10% resulted from lower margins due to more competition within the aircraft interiors manufacturing marketplace.

 

 

Selling, General & Administrative

 

Selling, general and administrative costs decreased by $175,483 compared to the comparable period for the three months ended December 31, 2010. The change is due to decreases in personnel costs and other overheads.

 

Amortization of Intangible Assets

 

Amortization expense for intangible assets for the three months ended December 31, 2011 was $13,764, compared to $18,188 in the comparable period for the three months ended December 31, 2010. The decrease is attributable to the fact that the amount charged for three months ended December 31, 2011 is the final charge remaining at the end of the life of the intangible asset.

  

Interest Expense

 

Interest expense increased by $20,300 for the three months ended December 31, 2011 compared to the comparable period for the three months ended December 31, 2010. The change is attributable to a higher usage of our credit line for accounts receivable finance and interest payable on a new inventory line of credit.

 

Change in derivative liability

 

The derivative liability for the three month period ended December 31, 2011 was $0 compared to that of the comparable period in 2010 amounting to $35,919.

 

The change in derivative liability arises as a result of the repayment of a convertible loan from Asher Enterprises, Inc. in fiscal 2010. The loan was a convertible promissory note with the ability to convert to shares at a discount from the market price. Until the loan was repaid a charge was included on our financial statements that reflected the possible derivative liability that could result if the loan was converted to shares in the Company. The derivative liability was calculated using the Black Schole method.

 

The loan was repaid in May 2011 and as a result the charge for the derivative liability is no longer necessary.

 

Gain on Debt Settlement

 

During the six month period ended December 31, 2011 the Company negotiated various settlements of debts due by the Company, which resulted in a gain in the sum of $85,184. This compares with $0 for the comparable period in December 2010.

 

This settlement was a one time gain for the company and resulted from settlements of various lawsuits including Hwacheon Machinery, Fadal Machining and C William Kircher.

 

Rental Income

 

During the fiscal 2012 period there was rental income of $0 compared with $73,699 for the comparable period in fiscal 2010. The rental income for 2011 was rent received by our subsidiary Eran Engineering and was for a period of months in fiscal 2011 only.

 

 

 

The rental income received in fiscal 2011 was from Airworks International, an entity that we were considering acquiring. However after careful review and due diligence, we decided not to proceed with the transaction, and and as a result Airworks ceased renting space from us.

 

We do not expect to rent space in our location in future as we believe we will need all the space for growth.

 

Gain on Sale of Assets

 

During the fiscal 2012 period, there was a loss in the sale of assets sold in the sum of $2,507 compared to $0 for the comparable period in fiscal 2011.

  

Results of Operations for the Six Months Ended December 31, 2011 Compared to the Six Months Ended December 31, 2010

 

	For the six month period ended December 31,			For the six month period ended December 31,
	2011			2010			Change			%
Sales by segment:
Machine Sales	$	2,861,155		$	2,594,464			266,691			10
Precision Engineering		2,344,329			1,590,930			753,399			47
		5,205,484			4,185,394			1,020,090			24
Gross Profit by segment:
Machine Sales		513,001			592,354			(79,353	)		(13	)
Precision Engineering		1,086,755			845,405			241,350			29
		1,599,756			1,437,759			161,997			11

 

Sales

 

Sales in the fiscal 2012 period increased 24% compared to the comparable period in fiscal 2011.

 

The change is attributable to an increase in sales in the Machine Sales and Precision Manufacturing Group.  Sales increased by 10% in the Machine Sales Group and by 47% in the Precision Manufacturing Group.  

 

 

The machine sales group primarily sells pre-owned CNC machinery manufactured by Mori Seiki. The average sale price of the machinery changes based on the equipment that is available to purchase in the market place and the prevailing market conditions that effect the price that equipment can be sold for. The average sale price of the 41 pieces of equipment sold in the six months ended December 31, 2011 was $65,800 compared to the comparable period in fiscal 2011 of 36 pieces of equipment sold at an average sale price of $65,800. In addition repair work for the six months ended December 31, 2011 was $153,070 compared to the comparable period in fiscal 2011 of $81,660 and commissions received for the six months ended December 31, 2011 were $15,000 compared to $117,500 in the comparable period in fiscal 2011.

 

Market conditions reflect not only the price that we can purchase equipment but also the price that equipment may be sold for. During good economic times when the business climate is improving, particularly in areas such as aerospace, the demand for equipment can result in a change in the buying price, however the need for that equipment by customers is generally reflected in the sale price, therefore as a general rule margins are reasonably consistent even though average sale prices may change. As a result we do not expect future results to be materially impacted by these conditions.

 

The increase in sales in the Precision Manufacturing Group is the result of an increase of $560,561 to $1,443,996 in sales of precision metal component parts to our major customer, Panasonic Avionics in the six months ended December 31, 2011, compared to revenue of $883,435 for the comparable period in fiscal 2011. Furthermore new customer sales resulted in an increase of $308,942 during the six months ended December 31, 2011 as compared to $0 for new customers in the comparable period in fiscal 2011.

  

Our Precision Manufacturing Group has recently received orders from another new major customer. We are hopeful that this customer’s orders will continue to increase and together with other new customers will result in an increase in sales and profitability of the Precision Machine Group. The addition of new customers should result in a positive effect on the future results of the Company.

 

We anticipate that, as a result of an increase in activity in the aerospace industry, we will continue to grow the revenues of both the Machine Tool Group and the Precision Manufacturing Group.

  

Gross Margin

 

Gross profit increased by 11% in the six months ended December 31, 2011 compared to the comparable period in 2010. The gross profit for the Machine Sales Group decreased by 13% due to an decrease in the quantity of machines sold in the first two months of fiscal 2012. Although the machine sales group had a much stronger second quarter, the group was unable to fully recover from the weak sales in the first quarter of fiscal 2012. As a result the overall impact for the six month period was an adverse 13% in gross margin.  The increase within the Precision Manufacturing Group of 29% resulted from better margins and higher sales during the first quarter which were impacted by lower margins in the second quarter of fiscal 2012.

 

Selling, General & Administrative

 

Selling, general and administrative costs decrease by $228,702 compared to the comparable period in fiscal 2011. The change is due to decreases in personnel costs and other overheads.

 

Amortization of Intangible Assets

 

Amortization expense for intangible assets for the period ended December 31, 2011 was $31,952, compared to $36,376 in the comparable period in December 2010. The decrease is attributable to the fact that the amount charged for six months ended December 31, 2011 is the final charge remaining at the end of the life of the intangible asset.

 

 

Interest Expense

 

Interest expense increased by $56,446 in the six months ended December 31, 2011 compared to the comparable period in fiscal 2011. The change is attributable to a higher usage of our credit line for accounts receivable finance and a new inventory line of credit.

 

Change in derivative liability

 

The derivative liability for the three month period ended December 31, 2011 was $0 compared to that of the comparable period in 2010 amounting to $35,919.

 

The change in derivative liability arises as a result of the repayment of a convertible loan from Asher Enterprises, Inc. in fiscal 2010. The loan was a convertible promissory note with the ability to convert to shares at a discount from the market price. Until the loan was repaid a charge was included on our financial statements that reflected the possible derivative liability that could result if the loan was converted to shares in the Company. The derivative liability was calculated using the Black Schole method.

 

The loan was repaid in May 2011 and as a result the charge for the derivative liability is no longer necessary.

  

Gain on Debt Settlement

 

During the six month period ended December 31, 2011 the Company negotiated various settlements of debts due by the Company, which resulted in a gain in the sum of $85, 184. This compares with $0 for the comparable period in December 2010.

 

This settlement was a one time gain for the company and resulted from settlements of  various lawsuits including Hwacheon Machinery, Fadal Machining and C William Kircher.

 

Rental Income

 

During the fiscal 2012 period there was rental income of $0 compared with $73,699 for the comparable period in fiscal 2010. The rental income for 2011 was rent received by our subsidiary Eran Engineering and was for a period of months in fiscal 2011 only.

 

The rental income received in fiscal 2011 was from Airworks International, an entity that we were considering acquiring. However after careful review and due diligence, we decided not to proceed with the transaction, and and as a result Airworks ceased renting space from us.

 

We do not expect to rent space in our location in future as we believe we will need all of the space for our growth.

 

Gain on Sale of Assets

 

During the fiscal 2012 period, there was a loss in the sale of assets sold in the sum of $2,507 compared to $0 for the comparable period in fiscal 2011.

 

 

Liquidity and Capital Resources

 

Our principal sources of liquidity consist of cash and cash equivalents, cash generated from operations and borrowing from various sources, including Main Credit, our accounts receivable lender. As of December 31, 2011, our working capital (current assets less current liabilities) totaled $548,002 compared to $(114,930) as of June 30, 2011, an increase of $662,932.

 

Main Credit provides a $750,000 accounts receivable line of credit with advances up to 80% of the outstanding receivables of Eran Engineering, Inc.  This finance bears loan interest at the lender's rate at 2% per month with the loan being paid on a revolving basis when our customers make their payments against their outstanding receivable balances.

 

In addition, Main Credit has provided a line of credit in the sum of $250,000 against inventory. This finance bears loan interest at lender’s rate at 2% per month.

 

Cash Flows

 

The following table sets forth our cash flows for the six month period(s) ended December 31:

 

Provided by (used in)	2011			2010			Change
Operating activities		(96,559	)		127,992			(224,551	)
Financing activities		(10,941	)		(100,146	)		89,205
		(107,500	)		27,845			(135,346	)

 

Operating Activities

 

Operating cash flows during the fiscal 2012 and 2011 fiscal periods reflect our results of operations, offset by net cash provided by operating assets and liabilities and non-cash items (depreciation, amortization and stock-based compensation). During the 2012 period, non-cash expenses included in our net income and in operating activities totaled $386,898 compared to $112,054 in the 2011 period.

 

The increase (decrease) in operating assets and liabilities for the fiscal 2012 and 2011 periods were $(755,203) and an increase of $15,638, respectively. During the 2012 period, the decrease was primarily attributable to an increase in inventory, a decrease in accounts receivable and an increase in accounts payable and accrued expenses.

 

Investing Activities

 

We made capital expenditures of $0 and $0 during the first six months of the fiscal 2012 and 2011 periods, respectively. However equipment was sold during the first six months of fiscal 2012. There were no sales during the comparable period in fiscal 2011.

 

Financing Activities

 

During the six months of the fiscal 2012 and 2011 periods, our borrowings decreased by (net of repayments) $10,940 and reduced our borrowings (net of repayments) by $(100,146) respectively of outstanding debt and capital lease obligations.

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

 

 

ITEM 3.                Quantitative and Qualitative Disclosures about Market Risk.

 

As a smaller reporting company we are not required to provide the information required by this Item. However, we opted to include the following information.

 

The only financial instruments we hold are cash and cash equivalents. Changes in market interest rates will impact our interest costs.

 

We are currently billed by the majority of our vendors in U.S. dollars and we currently bill the majority of our customers in U.S. dollars. However, our financial results could be affected by factors such as changes in foreign currency rates or changes in economic conditions.

 

ITEM 4.                Controls and Procedures.

 

(a) Disclosure Controls and Procedures

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2011, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in this Item 4T.

 

(b) Management Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

 

•	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management has identified the following two material weaknesses that have caused management to conclude that, as of December 31, 2011, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

 

 

1.           We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2.           We have not documented our internal controls.  We have limited policies and procedures that cover the recording and reporting of financial transactions.  Although providing this report in this Annual Report is optional for us at this time, written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act.  Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this Quarterly Report.

 

 (c) Remediation of Material Weaknesses 

Being aware of these material weaknesses our management will be vigilant about ensuring they do not affect our reporting obligations and will seek to remedy these issues when it is financially feasible to do so. 

 

(d) Changes in Internal Control over Financial Reporting

 

There have been no changes to our internal control over financial reporting during our most recently completed fiscal quarter.

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.                Legal Proceedings.

 

1.

James M. Cassidy v. Gateway International Holdings, Inc., American Arbitration Association, Case No. 73-194-32755-08.

 

We were served with a Demand for Arbitration and Statement of Claim, which was filed on September 16, 2008. 

 

The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant.  The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs.  Management denies the allegations of the Statement of Claim and will vigorously defend against these allegations.  An arbitrator has not yet been selected, and a trial date has not yet been scheduled. 

 

We do not have sufficient information to render an opinion as to the potential outcome of this matter or any potential financial impact on the company.

 

No provision has been made in the financial statements as management feels that the case has no merit.

 

2.

CNC Manufacturing v. All American CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC Repos, Superior Court for the State of California, County of Riverside, Case No. RIC 509650.

 

Plaintiff filed this Complaint on October 2, 2008.

 

The Complaint alleges causes of action for breach of contract and rescission and claims All American breached the agreement with CNC Manufacturing by failing to deliver a machine that conforms to the specifications requested by CNC Manufacturing, and requests damages totaling $138,750. Elite Machine filed an Answer timely, on January 15, 2009.  This case was settled on September 12, 2011 in an amount of $27,500. This amount is to be paid in three monthly payments commencing on October 25, 2011.

 

No payments have been made at this time as council for plaintiff has not completed the final settlement agreement.

 

A provision of $27,500 has been made in the financial statements for the six months ended December 31, 2011.

 

3.

Hwacheon Machinery v. All American CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County, Illinois, Case No. 09L544.

 

The Complaint was filed on June 8, 2009.

 

The Complaint alleges causes of action for account stated, and arises from a claim by Hwacheon that All American CNC has not paid it for machines sold to All American CNC.  The Complaint seeks damages of approximately $362,000.  All American filed an answer on or about July 15, 2009. Default has been entered against All American CNC Sales, Inc.

 

 

In a hearing in the Superior Court of California Hwacheon filed an alter ego case against Eran Engineering, Inc., Elite Machine Too and M Line Holdings, Inc. The judge granted the summary judgment against all three defendants in the amount of $403,860.91 including interest through February 8, 2011. Post judgment proceedings have been initiated by Hwacheon. MLH and Eran Engineering filed an appeal which was dismissed pursuant to settlement.

 

MLH has not made payments that are due under the settlement agreement. We do not have sufficient information to render an opinion as to the potential outcome of this matter beyond the above information, nor any potential financial impact on the company resulting from the judgment or settlement.

 

A provision of $65,000 has been made in the financial statements for the six months ended December 31, 2011

 

4.

Fadal Machining v. All American CNC Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case No. BC415693.

 

The Complaint was filed on June 12, 2009.

 

The Complaint alleges causes of action for breach of contract and common counts against All American CNC seeking damages in the amount of at least $163,578.88, and arises from a claim by Fadal that All American failed to pay amounts due.  On June 26, 2009, Fadal amended the Complaint to include M Line Holdings, Inc. as a Defendant.  

 

A settlement agreement in the amount of $60,000 was signed on May 31, 2011.

 

MLH has not made payments that are due under the settlement agreement. We do not have sufficient information to render an opinion as to the potential outcome of this matter beyond the above information, nor any potential financial impact on the company resulting from the judgment or settlement.

 

A provision of $60,000 was made in the financial statements for the year ended June 30, 2011 and at December 31, 2011.

 

5.

Fox Hills Machining v. CNC Repos, Orange County Superior Court, Orange County, California, Case No. 30-2009-00121514.

 

The Complaint was filed on April 14, 2009.

 

The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos.  The damages sought in the Complaint are estimated to be approximately $30,000.  The Defendants filed an Answer on June 5, 2009.  

 

Recently the parties agreed to settle in principle but a final agreement has yet to be completed. We do not have sufficient information to render an opinion as to the potential outcome of this matter or any potential financial impact on the company.

 

A provision in the amount of $10,000 was made in the financial statements for the six months ended December 31, 2011.

 

 

 

6.

C. William Kircher Jr. V M Line Holdings, Inc. Orange County Superior Court Case No. 00397576

 

A former attorney for M Line Holdings, Inc. has sued seeking damages for failure to pay legal fees in the amount of $120,166.30.

 

This case has settled. The terms of the settlement call for 12 payments of $5,000 per month commencing August 25, 2011 and the issuance of 150,000 shares of common stock.

 

The first three payments have been made but MLH is currently in default of its payments. Plaintiff is in communication with MLH to work out an arrangement.

 

7.

M Line Holdings, Inc. V Pacific Western Bank Orange County Superior Court Case No BC448012. The case was filed on 10/21/2010.

 

The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to fund against the line of credit when funds were available and also failed to remove two of the personal guarantors after agreeing in writing to do so and MLH is seeking unspecified damages.

 

This case has settled based on payment terms as agreed between the parties. Management has informed us that MLH has recently complied with the settlement terms.

 

8.

Pacific Western Bank V M Line Holdings, Inc. Orange County Superior Court Case No BC448012. The case was filed as a cross-complaint on 11/12/2010.

 

The Cross-complaint alleges causes of action basically for breach of written agreement and related claims. Defendant failed to repay a credit line when it became due and is also claiming that defendant must repay two equipment loans even though these loans are current due to the terms of the credit line agreement. Cross-complaint is seeking damages of $300,616.

 

This case has settled based on payment terms as agreed between the parties. Management has informed us that MLH has recently complied with the settlement terms.

 

9.

Neal Kohlhaas v. M Line Holdings, INC. Orange County Superior Court Case No. 30-2011-00442075.

 

Plaintiff has filed suit against M Line alleging a breach of a consulting agreement and seeking damages in the amount of approximately $20,000. Company has decided to defend the action on the basis that services were not provided as agreed or expected. The case is currently in the discovery phase of litigation. We do not have sufficient information at this time to render an opinion regarding a potential outcome or possible financial impact on the company.

 

A settlement in this matter has been agreed in principle for the amount of $3,000.

 

 

10.

Timothy D. Consalvi v. M Line Holdings, Inc. et.al., Orange County Superior Court Case No, 00308489.

 

A former president of All American CNC Sales, Inc. has filed suit against the Company seeking payment on an alleged severance obligation by the Company. The Complaint does not specify the damages sought. The parties then reached a settlement in the principal sum of $40,000 to be documented in due course. Meanwhile a default was entered against MLH, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the complaint and has filed a motion for leave to file a cross complaint.

 

Recently a settlement of $50,000 has been reached in this case, requiring payments commencing on March 11, 2011 for ten months. The first two month’s payment have been made however the Company is currently in default of the terms of this settlement agreement. Mr. Consalvi has filed his stipulated judgment. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

 

11.

Joe Gledhill v. M Line Holdings, Inc., et. al.- Los Angeles Superior Court Case No. BC 448012

 

Joseph Gledhill, a former officer and director of the company and its subsidiary Eran Engineering has filed suit within the Pacific Western case seeking indemnity of the Pacific Western claim and various other causes of action. Management has decided to vigorously defend these claims and believes Mr. Gledhill’s suit has no merit. We do not have sufficient information at this time to render an opinion regarding a potential outcome or possible financial impact on the company.

 

12.

M Line Holdings, Inc., v. Timothy Consalvi, et. al.- Orange County Superior Court Case No. 30-201100493329

 

M Line has recently filed suit against two of its former directors alleging that they breached their fiduciary duty to the company by mismanaging the corporate affairs of the company and its subsidiaries resulting in damages to the company and its subsidiaries. Defendants have not yet been served or have not answered the complaint at this time. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

 

Litigation is subject to inherent uncertainties, and unfavorable rulings could occur.  If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity.

 

 

ITEM 1A.             Risk Factors.

 

As a smaller reporting company we are not required to provide the information required by this Item.  However, we did include risk factors in our Annual Report on Form 10-K for the year ended June 30, 2011, as filed with the Commission on October 13, 2011.

 

ITEM 2.                Unregistered Sales of Equity Securities and Use of Proceeds.

 

On July 27, 2011, we issued 1,000,000 shares to Anthony Anish, one of our officers and directors, in exchange for compensation equal to $99,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mr. Anish is a sophisticated investor and familiar with our operations.

 

On July 27, 2011, we issued 800,000 shares to Jitu Banker, one of our officers and directors, in exchange for compensation equal to $79,200.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mr. Banker is a sophisticated investor and familiar with our operations.

 

On July 27, 2011, we issued 500,000 shares to a four unrelated parties for various legal, financial and investor relations services rendered, which was valued at $49,500.  The shares were restricted in accordance with Rule 144.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors are sophisticated investors and familiar with our operations.

 

On August 22, 2011, we issued 600,000 shares to Mass Media 77, Inc. in exchange for investor relations services and were valued at $35,400.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mass Media 77, Inc. is a sophisticated investor and familiar with our operations.

 

ITEM 3.                Defaults upon Senior Securities.

 

There have been no events required to be reported under this Item.

 

ITEM 4.                (Removed and Reserved).

 

ITEM 5.                Other Information.

 

Money Line Capital Letter of Intent

 

On June 30, 2010, we entered into a binding Letter of Intent (the “LOI”) with Money Line Capital, Inc. (“MLCI”).  MLCI is our largest shareholder and specializes in business financing transactions and holds equity in a number of operating subsidiaries in various fields, including financing, aerospace, real estate, media, beverage, and technology.  Under the LOI the parties agreed to complete a transaction whereby all the MLCI shareholders will exchange their shares of MLCI stock for shares of our stock.  No cash will be exchanged in this transaction.  The parties had agreed to negotiate in good faith to close the transaction on or before January 29, 2010, however due to the downturn in the economy, MLCI’s inability to complete the required audits, and the desire of our Board of Directors to get as favorable a valuation for our common stock as possible, the parties have put the merger transaction on hold indefinitely.  In order for us to finalize the transaction we must be current in our reporting obligations under the Securities and Exchange Act of 1934, as amended, and be publicly-traded at the time of the closing; and MLCI must have its financial statements (and its subsidiaries, as applicable) audited for the period ended June 30, 2011, as well as completing a valuation by a qualified third-party company.  We have re-evaluated the acquisition of MLCI as a whole and we now plan on acquiring certain subsidiaries of MLCI one at a time in order to reduce the costs associated with this transaction.

 

 

ITEM 6.                Exhibits.

 

(a)           Exhibits

 

Item No.		Description
3.1 (1)		Articles of Incorporation of M Line Holdings, Inc., a Nevada corporation, as amended
3.2 (5)		Certificate of Amendment of Articles of Incorporation
3.3 (1)		Bylaws of M Line Holdings, Inc., a Nevada corporation
10.1 (1)		Asset Purchase Agreement with CNC Repos, Inc. and certain of its shareholders dated October 1, 2007
10.2 (1)		Commercial Real Estate Lease dated February 15, 2007 for the office space located in Tustin, CA
10.3 (1)		Commercial Real Estate Lease dated November 15, 2007 for the office space located in Anaheim, CA
10.4 (1)		Employment Agreement with Timothy D. Consalvi dated February 1, 2007
10.5 (1)		Employment Agreement with Joseph T.W. Gledhill dated February 5, 2007
10.6 (2)		Employment Agreement with Lawrence A. Consalvi dated February 5, 2007
10.7 (1)		Share Exchange Agreement with Gledhill/Lyons, Inc. dated March 26, 2007
10.8 (1)		Share Exchange Agreement with Nu-Tech Industrial Sales, Inc. dated March 19, 2007
10.9 (1)		Fee Agreement with Steve Kasprisin dated April 30, 2008
10.10 (3)		Separation Agreement by and between Gateway International Holdings, Inc., and Mr. Lawrence A. Consalvi dated September 26, 2008
10.11 (4)		Sales Agent Agreement by and between Gateway International Holdings, Inc., and Mr. Lawrence A. Consalvi dated September 30, 2008
10.12 (4)		Loan Agreements with Pacific Western Bank dated September 20, 2008
10.13 (5)		Assignment of Promissory Note and Consent Thereto by and between M Line Holdings, Inc. and Money Line Capital, Inc. dated March 24, 2009
10.14 (5)		M Line Holdings, Inc. Demand Note for up to $500,000 dated March 25, 2009
10.15 (6)		Letter of Intent by and between M Line Holdings, Inc. and Money Line Capital, Inc. dated June 30, 2010
10.16 (8)		Securities Purchase Agreement and Convertible Promissory Note with Asher Enterprises, Inc. dated April 26, 2010 (filed herewith)

 

 

 

10.17 (8)		Convertible Promissory Note with Asher Enterprises, Inc. dated May 25, 2010 (filed herewith)
10.18 (8)		Commercial Real Estate Lease with SG&H Partners, L.P. for Anaheim Property dated August 13, 2010 (filed herewith)
10.19 (8)		Business Loan Agreement with Pacific Western Bank dated June 7, 2010 (filed herewith)
10.20 (9)		Addendum No. 2 dated September 30, 2011 to Commercial Real Estate Lease dated February 15, 2007 for the office space located in Tustin, CA
10.21 (9)		Executive Employee Agreement with Barton Webb dated July 25, 2011
10.22		Executive Employee Agreement with Anthony L. Anish dated July 1, 2011
10.23		Executive Employee Agreement with Jitu Banker dated July 1, 2011
21 (7)		List of Subsidiaries
31.1		Rule 13a-14(a)/15d-14(a) Certification of George Colin (filed herewith).
31.2		Rule 13a-14(a)/15d-14(a) Certification of Jitu Banker (filed herewith).
32.1		Section 1350 Certification of George Colin (filed herewith).
32.2		Section 1350 Certification of Jitu Banker (filed herewith).

 

(1) Incorporated by reference from our Registration Statement on Form 10-12G filed with the Commission on May 16, 2008.

 

(2) Incorporated by reference from our Registration Statement on First Amended Form 10-12G/A filed with the Commission on July 16, 2008.

 

(3) Incorporated by reference from our First Amended Current Report on Form 8-K/A filed with the Commission on October 10, 2008.

 

(4)  Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended September 30, 2008, as filed with the Commission on November 13, 2008.

 

(5)  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 24, 2009.

 

(6)  Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 6, 2009.

 

(7)  Incorporated by reference from our Annual Report on Form 10-K for the period ended June 30, 2009, as filed with the Commission on October 13, 2009.

 

(8)  Incorporated by reference from our Annual Report on Form 10-K for the period ended June 30, 2010, as filed with the Commission on November 12, 2010.

 

(9)  Incorporated by reference from our Annual Report on Form 10-K for the period ended June 30, 2011, as filed with the Commission on October 13, 2011.

 

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	M Line Holdings, Inc.
Dated: February 14, 2012		/s/ George Colin
	By:	George Colin
		President, Chief Executive
		Officer and a Director
Dated: February 14, 2012		/s/ Jitu Banker
	By:	Jitu Banker
		Chief Financial Officer,
		and a Director