UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2012

 

¨	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 x     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 x     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  x
(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 x.

 

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 November 16, 2012, there were 56,846,145 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.		16
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.		20
ITEM 4.	Controls and Procedures.		21
PART II
ITEM 1.	Legal Proceedings.		22
ITEM 1A.	Risk Factors.		26
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		26
ITEM 3.	Defaults Upon Senior Securities.		26
ITEM 4.	(Removed and Reserved).		26
ITEM 5.	Other Information.		26
ITEM 6.	Exhibits.		27

 

 

PART I-FINANCIAL INFORMATION

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		As of September  30				As of June  30
		2012				2012
Current assets:
Cash and cash equivalents		$	52,329			$	5,212
Accounts receivable, net			536,028				794,317
Inventory, net			1,814,799				1,609,411
Due from related party			1,273,135				1,262,615
Total current assets			3,676,291				3,671,555
Property and equipment, net			517,733				543,050
Deposits and other			85,807				82,806
Total assets		$	4,279,831			$	4,297,411
Liabilities and shareholders' equity
Current liabilities:
Line of credit		$	848,546				1,083,879
Accounts payable			1,086,869				996,861
Accrued expenses and other			1,478,673				1,314,065
Notes payable - current			614,059				597,261
Capital Leases - current			53,793				71,558
Litigation payable			193,859				116,541
Total Current Liabilities			4,275,799				4,180,165
Notes payable - long term			19,750				19,749
Deferred income taxes			16,710				16,710
Total liabilities			4,312,259				4,216,624
Commitments and contingencies			-				-
Shareholders' equity:
Common stock: $0.001 par, 100,000,000 shares authorized, 56,846,145and 46,871,145 shares issued and outstanding at September  30, 2012 and June 30, 2012, respectively			56,846				46,871
Additional paid in capital			10,397,796				10,179,021
Related party receivable on issuance of shares			(94,000	)			(94,000	)
Accumulated deficit			(10,393,070	)			(10,051,106	)
Total shareholders' equity			(32,428	)			80,786
Total liabilities and shareholders' equity		$	4,279,831			$	4,297,411

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three months ended September 30,
		2012				2011
Net sales		$	1,980,590			$	2,409,893
Cost of sales			1,268,671				1,655,545
Gross profit			711,919				754,348
Operating expenses:
Selling, general and administrative			952,767				663,266
Amortization of intangible assets			-				18,188
Total operating expense			952,767				681,454
Operating profit (loss)			(240,848	)			72,894
Other income (expense):
Interest expense			(99,090	)			(48,564	)
Interest income			-				12,598
Gain on debt settlement			-				85,184
Total other income (expense)			(99,090	)			49,218
Income (loss) before income tax			(339,938	)			122,112
Income tax			(2,026	)			2,400
Net income (loss)		$	(341,964	)		$	119,712
Net income (loss) per share:
Basic and dilutive income (loss) per share:		$	(0.01	)		$	0.00
Weighted average number of common shares (basic and diluted)			48,341,797				44,282,258
* 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 unaudited condensed consolidated financial statements

 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three months ended September 30,
		2012				2011
Cash flows from operating activities:
Net loss		$	(341,964	)		$	119,712
Reconciliation of net loss to net cash provided by  operations:
Imputed interest			-				(12,598	)
Bad debt expense			-				(65,947	)
Depreciation			43,705				58,189
Amortization of intangible assets			-				18,189
Issuance of shares for services			228,750				368,750
Gain on debt settlement			-				(85,184	)
Changes in operating assets and liabilities:
Accounts receivable			258,290				(219,502	)
Inventory			(205,388	)			(275,450	)
Prepaid expenses and other assets			(3,001	)			9,149
Due from related party			(10,520	)			(121,078	)
Accounts payable, accrued expenses and other			254,614				31,338
Litigation payable			77,318				-
Net cash provided by (used in) operating activities			301,804				(174,432	)
Cash flows from investing activities:
Acquisition of property and equipment			(18,388	)			-
Cash flows from financing activities:
Net borrowings (repayments) on line of credit			(235,332	)			(40,445	)
Proceeds from notes payable			16,798				75,000
Payments on capital leases			(17,764	)			(13,375	)
Net cash provided by (used in) financing activities			(236,299	)			21,180
Net increase (decrease) in cash and cash equivalent			47,117				(153,253	)
Cash and cash equivalents at beginning of period			5,212				221,036
Cash and cash equivalents at end of period		$	52,329			$	67,783
Supplemental disclosure of cash flow information:
Cash paid for interest		$	99,090			$	48,564
Cash paid for income taxes		$	-			$	-

 

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements

 

 

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 (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, 2012 filed with the U.S. Securities and Exchange Commission (the “Commission”) on October 15, 2012.

 

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 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 September 2011 the FASB issued guidance on compensation, retirement benefits on a multiemployer plan. This guidance relates to disclosures about an employer’s participation in a multi-employee plan. For public entities, effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented.

 

 

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.

 

In December 2011 the FASB issued guidance on Property, Plant, and Equipment and the De-recognition of in Substance Real Estate—a Scope Clarification. The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities.

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.

 

3.

Inventories

 

Inventories consisted of the following:

 

		September  30, 2012				June 30, 2012
Finished Goods and Components		$	1,023,816			$	1,157,918
CNC Machines held for sale			218,395				116,000
Work in Progress			445,756				387,969
Raw Materials and Parts			126,832				5,632
			1,814,799				1,667,519
Less: Reserve for inventories			-				(58,108	)
Inventories, net.		$	1,814,799			$	1,609,411

 

 

 

4.

Accrued Expenses

 

Accrued expenses consisted of the following:

 

Compensation and related benefits		$	816,581			$	993,077
Audit Fees			67,500				77,500
Other			594,592				243,488
		$	1,478,673			$	1,314,065

 

 

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 September 30, 2012 and June 30, 2012.

 

		September  30, 2012				June 30, 2012
		$	53,793			$	71,558
Total minimum lease payments			53,793				71,558
Less amount representing interest			-				0
Present value of future minimum lease payments			53,793				71,558
Less current portion of capital lease obligations			53,793				71,558
Capital Lease obligations, net of current portion		$	-			$	-

 

6.

Line of Credit

 

As of September 30, 2012 the Company owed Pacific Western Bank $274,927, plus accrued interest and legal costs.

 

We are in default of our obligations with Pacific Western Bank. However, subsequent to September 30, 2012, the company paid off, on October 18, 2012, in full the amount due to Pacific Western Bank, and as a result all outstanding legal disputes between the parties have been settled.

 

7.

Notes Payable

 

Notes payable consisted of the following at September 30, 2012 and June 30, 2012:

 

		September  30, 2012				June 30, 2012
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		$	274,927			$	253,129
An unsecured note payable to a corporation in respect of  accounting software payable in monthly installments of $ 1,922.82. This note is now due and payable and is being negotiated with the company.			46,811				46,811
An unsecured note payable to a corporation in respect of machines sold to us payable in monthly installments of $5,000.00 per month. This agreement will expire in June 2012			12,070				17,070
Two unsecured notes payable in the sum of $150,000.00, each, to a financial institution in full in November 2011 and March 31, 2012. The company is currently in default and has negotiated to pay the notes in monthly installments of $20,000 commencing November 2012.			300,000				300,000
TOTAL			633,808				617,010
Less Current Portion			614,058				597,261
Long Term Portion		$	19,750			$	19,749

Interest expense on notes payable and capital leases for the period ended September 30, 2012 and September 30, 2011 were $99,090 and $48,564.

 

 

8.

Commitments

 

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

 

	2012				614,058				597,261
	2013				19,750				19,749
	2014				-				-
	2015				-				-
	Thereafter				-				-
					633,808				617,010

 

Future rent under lease agreements for the next five years are as follows:

 

	2012			$	438,217
	2013				451,361
	2014				464,900
	2015				478,848
	Thereafter				493,221
				$	2,326,547

 

9.

Contingencies & Litigation Payable

 

Litigation Payable

 

Litigation payable consisted of the following at September 30, 2012:

An unsecured note payable to a corporation in settlement of a lawsuit payable in full by December 31, 2011			48,316
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly payments of $5,000.			60,000
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly installments of $1,000			8,225
Unsecured notes payable to various parties in settlement of lawsuits payable in full.			77,318
TOTAL			193,859

 

 

10. Litigation:

 

1.

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

 

Our client was 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.

 

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. 

 

The abstract of Judgment and Writ were issued August 17, 2012.

 

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.

 

 

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.

 

Management has informed us that MLH has entered into a revised settlement agreement in the total amount of $105,000 with $70,000 being paid out of proceeds of an anticipated new loan and the balance being paid at the rate of $5,000 per month commencing December 15, 2012 reducing by $10,000 if paid in full by December 15, 2012.

 

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.

 

4.

Fadal Machining v. All American CNC Sales, et al., Los Angeles Superior Court, Los AngelesCalifornia, 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.

 

To our knowledge, MLH has not made payments that are due under the settlement agreement. Judgment was entered on June 16, 2011 and a Writ was issued on February 24, 2012.

 

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.

 

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 Court records show the case was dismissed on July 31, 2012. Further, the records show that a stipulated judgment was entered August 27, 2012; Writ was issued on September 9, 2012.

 

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.

 

 

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.

 

It is our understanding that the first three payments have been made but MLH is currently in default of its payments. Management has informed us that Plaintiff is in communication with MLH to work out an arrangement.

 

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.

 

7.

Pacific Western Bank v. M Line Holdings, Inc. Los Angeles 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.

 

On July 12, 2012 a Writ was issued and on September 24, 2012 an Abstract of Judgment was issued. Pacific Western Bank was paid in full in October and the satisfaction of judgment has been filed.

 

8.

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.

 

This matter has been settled and the case is being dismissed.

 

9. 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 on March 5, 2012. Abstract of judgment and Writ were issued on March 13, 2012.

 

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

 

 

10. Joe Gledhill v. M Line Holdings, Inc., et. al.- Orange County Superior Court Case No. 30-2011-00506723

 

Joseph Gledhill, a former officer and director of the company and its subsidiary Eran Engineering has filed suit 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. Trial has been set for April 8, 2013.

 

This case is being dismissed.

 

11. 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.

 

This case has been dismissed.

 

12. All Direct Travel Services, Inc. Vs Jitu Banker, M Line holdings, Inc., Airworks International, Inc., case number 30-2011-00472824-CL-CO-CJC

 

It has been settled as to Jitu and M Line for $2,000 payable on 25 February. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

 

Default Judgment entered on January 6, 2012.

 

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 client’s financial condition, results of operations or liquidity.

 

Our opinions expressed above are within the scope of clause (a) of Paragraph 5 of the Statement of Policy hereinafter defined. Our response is limited by, and provided in accordance with, the American Bar Association (the “ABA”) Statement of Policy Regarding Lawyer’s Responses to Auditors’ Request for Information (December 1975); without limiting the generality of the foregoing, the limitations set forth in such Statement on the scope and use of this response (Paragraphs 2 and 7) are specifically incorporated herein by this reference, and any description herein of any loss contingencies (as defined in Paragraph 5 of the Statement) is qualified in its entirety by Paragraph 5 of the Statement and the accompanying Commentary (which is an integral part of the Statement).

 

11.

Income Taxes

 

Our effective tax rates were approximately 1% for the three months ended September 30, 2012 and 2011, 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.

 

 

12.

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 September 30, 2012 or June 30, 2012.

 

During three months ended September 30, 2012, the Company issued the following shares of common stock:

 

7,975,000 shares of the company’s common stock to our investor relations and other consultants in payment of services to the company. The company valued the shares at the market price on the issuance date in the sum of $168,750.

 

2,000,000 shares of the company’s common stock in lieu of salaries due on behalf of related parties. These shares were valued at $60,000, being the market price on the issuance date.

 

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.

 

13.

Related Party Transactions

 

The related party transactions during the three months period ended September 30, 2012 were as follows:

 

Advances to an employee of the company and debt repayment $10,520

 

14.

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 September   30, 2012		Machine Sales				Precision Manufacturing				Corporate				Total
Revenue		$	902,067			$	1,078,523			$	-			$	1,980,590
Interest Income			-				-				-				-
Interest Expense			17,151				71,814				10,125				99,090
Depreciation and Amortization			750				39,712				3,242				43,704
Income (loss) before taxes			(113,832	)			261				(228,393	)			(341,964	)
Total Assets			333,395				2,715,073				1,231,363				4,279,831
Capital Expenditure		$	-			$	-			$	-			$	-
Segment Information for the three month period ended September   30, 2011			Machine Sales				Precision Manufacturing				Corporate				Total
Revenue		$	993,270			$	1,416,623			$	-			$	2,409,893
Interest Income			-				-				12,598				12,598
Interest Expense			-				37,188				11,376				48,564
Depreciation and Amortization			18,938				51,084				6,355				76,377
Income (loss) before taxes			(205,532	)			294,561				33,083				122,112
Total Assets			473,082				2,812,183				985,975				4,271,240
Capital Expenditure		$	-			$	61,674			$	-			$	61,674

 

 

15.

Going Concern and Management Plans

 

The Company's consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has an accumulated deficit of $10,393,070 as of September 30, 2012 and a net loss of $341,964 for the three month period ended September 30, 2011.

 

The Company recognizes that the very weak economy over the past few years and the difficulty in raising new funds has impacted the working capital needs of the Company.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to retain its current short term financing and ultimately to generate sufficient cash flow to meet its obligations on a timely basis in order to attain profitability.

 

To date the Company has funded its operations from both internally generated cash flow and external sources. The Company will pursue additional external capitalization opportunities, as necessary, to fund its long-term goals and objectives.

 

The Company has taken significant steps to resolve these issues.  The Company has pursued various sources of asset based lending in order to relieve its cash flow deficiencies.

 

16.

Subsequent Events

 

In October 2012, the company refinanced Eran Engineering’s equipment with Utica LeaseCo., L.L.C. resulting in the repayment of the company’s debt to Pacific Western Bank and other obligations. This refinance has resulted in long term debt replacing short term debt. Additional working capital resulted from this agreement.

 

The company is currently in negotiations for further lines of credit with institutional and private investors, details of which will be made available once they have closed.

 

 

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 three months ended September 30, 2012, 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.

 

The company added and upgraded its manufacturing base from mainly aircraft interiors to a combination which includes aircraft structures. The company - incurred considerable startup costs relating to the development and staff training, downtime in manufacturing and other costs, including newer materials, such as titanium, hard steels, etc. and overhead.

 

Management entered into agreements with Engineering services companies, in Canada and in India, upgrades in its software and new software, such as Catia. Our commitment to excellence and the new direction to make it an “Aerospace” company has helped us develop and solidify contact with Rohr, Inc., and its subsidiary Goodrich Aerostructures. We had, but did overcome the considerable problems with production, due staff knowledge limitation, additional training, engineering staff contracts, etc.

 

 

All costs relating to this development has been expensed under Research and Development costs in our financial statements for the fiscal year ended June 30, 2012.

 

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 September 30, 2012 and, 2011, were parts sold to Panasonic, a leading provider of in-flight entertainment systems for commercial aircraft. Although the market for in-flight 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 affect 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 September 30, 2012 Compared to the Three Months Ended September 30, 2011.

 

		For the three month period ended September 30, 2012				For the three month period ended September 30, 2011
		2012				2011				Change
Sales by segment:
Machine Sales		$	902,067			$	993,270				(91,203	)
Precision Engineering			1,078,523				1,416,623				(338,100	)
			1,980,590				2,409,893				(429,303	)
Gross Profit by segment:
Machine Sales			165,890				81,509				84,381
Precision Engineering			546,029				672,839				(126,810	)
			711,919				754,348				(42,429	)

 

 

Sales

 

Sales in the fiscal 2013 period decreased 18% compared to the comparable period in fiscal 2012.

 

The change is attributable to a decrease in sales in the Machine Sales and Precision Manufacturing Group.  Sales decreased by 9% in the Machine Sales Group and a decrease of 24% 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 affect the price that equipment can be sold for. The average sale price of the 16 pieces of equipment sold in the three months ended September 30, 2012 was $50,041 compared to the comparable period in fiscal 2012 of 14 pieces of equipment sold at an average sale price of $60,007. In addition service work for the three months ended September 30, 2012 was $11,090 compared to the comparable period in fiscal 2012 of $153,070.

 

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 decrease in sales in the Precision Manufacturing Group is the result of a decrease of $508,044 in sales of precision metal component parts from our major customer, Panasonic Avionics in the three months ended September 30, 2012, to $451,464 from $959,508 in fiscal 2012. New customer sales resulted in an increase of $80,859 during the three months ended September 30, 2012 as compared to $0 for new customers in the comparable period in fiscal 2012.

 

Our precision manufacturing group has approached a new major customer. We have upgraded our manufacturing operations from primarily interiors work to a combination of interior and structures and therefore are able to quote for work with manor new customers. We have manufactured parts for the aircraft structure segment and are hopeful that this move will help us obtain new customers and thus contribute to an increase in sales and profitability of the Precision Manufacturing Group. The addition of this and other 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 decreased by 6% in fiscal period ended September 30, 2012 compared to the comparable period in fiscal 2012. The gross profit for the Machine Sales Group increased by 104% due to an increase in margins as a result of lower prices paid for product and freight costs. The decrease within the Precision Manufacturing Group of 19% resulted from lower sales as a result of a weakness in the scheduling of work in the factory. Management has recognized this weakness and is taking steps to correct the relevant weakness in the production area.

 

 

Selling, General & Administrative

 

Selling, general and administrative costs increased by $289,501 to $952,767 for the fiscal period ended September 30, 2012 compared to $663,266 for the three months ended September 30, 2011. The change is due primarily to incurring approximately $194,000 in costs in the current quarter for consulting and financing fees for investor relations, public relations and loan fees.

 

Amortization of Intangible Assets

 

Amortization expense for intangible assets for the three months ended September 30, 2012 was $0 compared to $18,188 in the comparable period in fiscal 2012. There was no charge for amortization for the three months ended September 30, 2012 as the intangible asset had been fully amortized.

 

Interest Expense

 

Interest expense increased by $50,526 for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. 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.

 

Gain on Debt Settlement

 

During the three month period ended September 30, 2012, the gain on debt settlements was $0 compared to $85,184 during the three month period ended September 30, 2011.The company negotiated various settlements of debts due by the Company, which resulted in a net gain in the sum of $85,184 for the three month period ended September 30, 2011.

 

Interest Income

 

During the fiscal 2013 period, there was no interest income compared to the comparable fiscal period in 2012 of $12,598.

 

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 September 30, 2012, our working capital (current assets less current liabilities) totaled $373,898 compared to $(575,543) as of September 30, 2011, an increase of $949,441.

 

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.

 

The total of repayments during the three month period was $1,240,697and represented payments received from customers of Eran Engineering, Inc. Borrowings totaled $1,005,364for this period and represented cash borrowed from Main Credit on our line of credit with them including interest costs.

 

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 three month periods ended September 30:

 

Provided by (used in)		2012				2011				Change
Operating activities			301,806				(174,432	)			476,238
Investing activities			(18,388	)			-				(18,388	)
Financing activities			(236,299	)			21,180				(257,479	)
			47,119				(153,252	)			200,371

 

 

Operating Activities

 

Operating cash flows during the 2013 and 2012 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 period ended September 30, 2012, non-cash expenses included in our net income and in operating activities totaled $(69,509) compared to $401,111 in the 2012 fiscal period.

 

The increase (decrease) in operating assets and liabilities for the fiscal 2013 and 2012 periods were $371,314 and $(575,543), respectively. During the 2012 period, the increase was primarily attributable to an increase in accounts payable and accrued expenses and in litigation payable.

 

Investing Activities

 

We made capital expenditures of $(18,388) and $0 during the first three months of the fiscal 2013 and 2012 periods, respectively.

 

Financing Activities

 

During the three months of the fiscal 2013 and 2012 periods, our borrowings increased by (net of repayments) $236,299 and reduced our borrowings (net of repayments) by $21,180, respectively.

 

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 September 30, 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 September 30, 2012, 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, 2012. 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 September 30, 2012, 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 statement 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.  

 

Our client was 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.

 

 

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. 

 

The abstract of Judgment and Writ were issued August 17, 2012.

 

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.

 

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.

 

Management has informed us that MLH has entered into a revised settlement agreement in the total amount of $105,000 with $70,000 being paid out of proceeds of an anticipated new loan and the balance being paid at the rate of $5,000 per month commencing December 15, 2012 reducing by $10,000 if paid in full by December 15, 2012.

 

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.

 

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.

 

To our knowledge, MLH has not made payments that are due under the settlement agreement. Judgment was entered on June 16, 2011 and a Writ was issued on February 24, 2012.

 

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.

 

 

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 Court records show the case was dismissed on July 31, 2012. Further, the records show that a stipulated judgment was entered August 27, 2012; Writ was issued on September 9, 2012.

 

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.

 

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.

 

It is our understanding that the first three payments have been made but MLH is currently in default of its payments. Management has informed us that Plaintiff is in communication with MLH to work out an arrangement.

 

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.

 

7. Pacific Western Bank v. M Line Holdings, Inc. Los Angeles 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.

 

On July 12, 2012 a Writ was issued and on September 24, 2012 an Abstract of Judgment was issued. Pacific Western Bank was paid in full in October and the satisfaction of judgment has been filed.

 

8. 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.

 

This matter has been settled and the case is being dismissed.

 

9. 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 on March 5, 2012. Abstract of judgment and Writ were issued on March 13, 2012.

 

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

 

10. Joe Gledhill v. M Line Holdings, Inc., et. al.- Orange County Superior Court Case No. 30-2011-00506723

 

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. Trial has been set for April 8, 2013.

 

This case is being dismissed.

 

11. 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.

 

This case has been dismissed.

 

12. All Direct Travel Services, Inc. Vs Jitu Banker, M Line holdings, Inc., Airworks International, Inc., case number 30-2011-00472824-CL-CO-CJC

 

It has been settled as to Jitu and M Line for $2,000 payable on 25 February. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

 

Default Judgment entered on January 6, 2012.

 

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 client’s financial condition, results of operations or liquidity.

 

Our opinions expressed above are within the scope of clause (a) of Paragraph 5 of the Statement of Policy hereinafter defined. Our response is limited by, and provided in accordance with, the American Bar Association (the “ABA”) Statement of Policy Regarding Lawyer’s Responses to Auditors’ Request for Information (December 1975); without limiting the generality of the foregoing, the limitations set forth in such Statement on the scope and use of this response (Paragraphs 2 and 7) are specifically incorporated herein by this reference, and any description herein of any loss contingencies (as defined in Paragraph 5 of the Statement) is qualified in its entirety by Paragraph 5 of the Statement and the accompanying Commentary (which is an integral part of the Statement)

 

 

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, 2012, as filed with the Commission on October 15, 2011.

 

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

 

On July 6, 2012, we issued 1,000,000 shares to Anthony Anish, one of our officers and directors, in exchange for compensation equal to $30,000.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 6, 2012, we issued 1,000,000 shares to Jitu Banker, one of our officers and directors, in exchange for compensation equal to $30,000.  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. Banker is a sophisticated investor and familiar with our operations.

 

On July 6, 20112 we issued 3,300,000 shares to a four unrelated parties for various legal, financial and investor relations services rendered, which was valued at $99,000.  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 14 and 21, 2012, we issued 4,675,000 shares to five unrelated parties for various legal, financial and investor relation services rendered, which was valued at $69,750. 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

 

As part of that strategy, 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
10.17 (8)		Convertible Promissory Note with Asher Enterprises, Inc. dated May 25, 2010
10.18 (8)		Commercial Real Estate Lease with SG&H Partners, L.P. for Anaheim Property dated August 13, 2010
10.19 (8)		Business Loan Agreement with Pacific Western Bank dated June 7, 2010
10.20 (10)		Loan and security Agreement and Note with Utica leaseco, LLC

 

 

10.21 (10)		Note and Stock Purchase Agreements with Spagus Capital Partners, LLC
10.22		Addendum No. 2 dated September 30, 2011 to Commercial Real Estate Lease dated February 15, 2007 for the office space located in Tustin, CA
10.23 (9)		Executive Employee Agreement with Barton Webb dated July 25, 2011
10.24		Executive Employee Agreement with Anthony L. Anish dated July 1, 2011
10.25		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.

 

(10) Incorporated by reference from our Annual Report on Form 10-K for the period ended June 30, 2012, as filed with the Commission on October 15, 2012

 

 

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: November 16, 2012		/s/ George Colin
	By:	George Colin
		President, Chief Executive
		Officer and a Director
Dated: November 16, 2012		/s/ Jitu Banker
	By:	Jitu Banker
		Chief Financial Officer,
		and a Director