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EX-31.1 - EXHIBIT 31.1 - M LINE HOLDINGS INCs101606_ex31-1.htm
EX-21 - EXHIBIT 21 - M LINE HOLDINGS INCs101606_ex21.htm
EX-32.1 - EXHIBIT 32.1 - M LINE HOLDINGS INCs101606_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - M LINE HOLDINGS INCs101606_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - M LINE HOLDINGS INCs101606_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2014

 

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

 

For the transition period from _______________ to _______________.

 

Commission File Number 000-53265

 

M LINE HOLDINGS, INC.

(Exact Name of Company as Specified in its Charter)

 

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

 

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 þ     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 August 19, 2015, there were 1,199,555,785 shares of common stock, par value $.001, issued and outstanding.

 

 
 

 

M LINE HOLDINGS, INC.

 

TABLE OF CONTENTS

 

      Page
         
PART I       3
         
Item 1.   Financial Statements (Unaudited)   3
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   18
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   22
         
Item 4.   Controls and Procedures   22
         
PART II        
         
Item 1.   Legal Proceedings    
         
Item 1A.   Risk Factors   27
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   27
         
Item 3.   Defaults Upon Senior Securities   27
         
Item 4.   (Removed and Reserved)   27
         
Item 5.   Other Information   27
         
Item 6.   Exhibits   27
         
    Signatures   30

 

-2-
 

 

PART 1—FINANCIAL INFORMATION

 

References in this document to “us,” “we” or the “Company” refer to M LINE HOLDINGS, INC. and our subsidiaries, E.M. Tool Company, Inc. and Precision Aerospace & Technologies, Inc., formerly Eran Engineering, Inc.

 

Item 1. Financial Statements.

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   As of September 30   As of June 30 
   2014   2014 
         
Assets        
Current assets:        
Cash and cash equivalents  $12,408   $46,925 
           
Accounts receivable, net   114,754    222,344 
           
Inventory, net   1,514,843    1,430,682 
    1,642,005    1,699,951 
           
Property and equipment, net   283,778    402,476 
           
Deposits and other   130,786    140,922 
Total assets  $2,056,569   $2,243,349 
           
Liabilities and Stockholders’ deficit          
           
Current liabilities:          
           
Bank overdraft  $311,171    149,699 
Accounts payable   1,641,652    1,350,157 
           
Accounts payable - related party   35,954    35,954 
           
Accrued expenses and other   2,623,861    2,594,616 
           
Litigation payable   287,500    287,500 
           
Derivative liability   549,003    634,769 
           
Line of credit   2,330,453    2,330,453 
Notes payable - current, net of debt discount of $314,663 and $317,977   810,676    1,018,755 
           
Current portion of capital lease obligations   53,901    53,901 
           
Total current liabilities   8,644,171    8,455,804 
           
Notes payable - net of current portion   124,023    124,023 
           
Capital lease obligation, net of current portion   46,426    46,426 
           
Total liabilities   8,814,620    8,626,253 
           
Commitments and contingencies   -    - 
           
Stockholders’ deficit:          
Preferential stock: $0.001 par value, 10,000,000 shares authorized, 200,000 and 200,000 shares issued and outstanding at September 30, 2014 and June 30, 2014 respectively   200    200 
           
Common stock: $0.001 par, 1,000,000,000 shares authorized, 942,437,603 and 243,178,484 shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively   942,437    243,178 
           
Additional paid in capital   13,310,109    12,846,981 
           
Accumulated deficit   (21,010,797)   (19,473,263)
           
Total Stockholders’  deficit   (6,758,051)   (6,382,904)
Total liabilities and Stockholders’ deficit  $2,056,569   $2,243,349 

 

The accompanying notes form part of these unaudited consolidated financial statements

 

-3-
 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

   Three months ended September 30, 
   2014   2013 
         
Net sales  $957,480   $2,727,194 
           
Cost of sales   1,018,891    1,718,080 
           
Gross Profit (loss)   (61,411   1,009,114 
           
Operating expenses:          
           
Selling, general and administrative   760,081    778,361 
           
Amortization of intangible assets   -    12,500 
           
Total operating expense   760,081    790,861 
           
Operating income (loss)   (821,492)   218,253 
           
Other income (expense):          
           
Interest expense   (64,781)   (112,492)
           
Loss on debt extinguishment   (165,526)   - 
           
Change in derivative liability   (485,735)   - 
           
Total other income (expenses)   (716,042)   (112,492)
           
Income (loss) before income tax   (1,537,534)   105,761 
           
Income tax provision   -    - 
Net income (loss)  $(1,537,534)  $105,761 
           
Net income (loss) per share:          
Basic and diluted  $(0.00)  $0.00 
Weighted average number of common shares - basic and diluted   533,400,881    73,292,696 

 

The accompanying notes form part of these unaudited consolidated financial statements

 

-4-
 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Three months ended September
30,
 
   2014   2013 
Cash flows from operating activities:         
Net loss  $(1,537,534)  $105,761 
Reconciliation of net loss to net cash provided by operations:          
Loss on disposition of assets   46,250    - 
Bad debt expense   24,277    - 
Depreciation   29,199    44,385 
Amortization of intangible assets   -    12,500 
Issuance of shares for services   -    47,916 
Amortization of debt discount   80,901    26,704 
Loss on debt extinguishment   165,526    - 
Change in derivative liabilities   485,735    - 
Changes in operating assets and liabilities:          
Accounts receivable   83,313    (22,754)
Inventory   (84,161)   (264,351)
Prepaid expenses and other assets   10,136    (7,801)
Due from related party   -    (25,000)
Accounts payable, accrued expenses and other   354,870    20,847 
Net cash used in operating activities   (341,488)   (61,793)
           
Cash flows from investing activities:          
Proceeds from disposal of assets   35,000    - 
Acquisition of property and equipment   -    (12,500)
Net cash provided by (used in) investing activities   35,000    (12,500)
           
Cash flows from financing activities:          
Net borrowings (repayments) on line of credit   -    (85,590)
Proceeds from notes payable   110,499    63,000 
Bank overdraft   161,472    57,492 
Payments to notes payable   -    (117,247)
Payments on capital leases   -    (8,983)
Net cash provided by (used in) financing activities   271,971    (91,328)
           
Net decrease in cash and cash equivalents   (34,517)   (165,621)
           
Cash and cash equivalents at beginning of period   46,925    182,305 
Cash and cash equivalents at end of period  $12,408   $16,684 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $-   $85,788 
Cash paid for income taxes  $-   $- 
           
Supplemental disclosure of non-cash financing activities:          
Debt discount resulting from derivative liability  $352,013    - 
Return of property and equipment   8,250    - 
Interest added to principal   34,031    - 
Shares issued for conversion of debt   347,773    - 

 

The accompanying notes form part of these unaudited consolidated financial statements

 

-5-
 

 

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.Business

 

M. Line Holdings, Inc. (the “Company”) and its subsidiaries currently are engaged in the following businesses, which also represent its business segments:

 

·E.M. Tool Company, Inc. dba Elite Machine Tool Company (“Elite”), its wholly owned subsidiary, acquires, refurbishes and sells pre-owned CNC machine tool equipment. This is the machine sales group.

 

·Precision Aerospace & Technologies, Inc., formerly Eran Engineering, Inc. (“Precision”), its wholly owned subsidiary, manufactures precision metal component parts and assemblies for the aerospace, medical and defense industries. This is the precision manufacturing group.

 

·M Line Business Services, Inc., its wholly owned subsidiary, provides advice and support in raising new capital, management support in relation to financial control and management of the business, advice and support in relation to stock listing, reverse mergers, listing on various US and European exchanges, and sales and support specifically relating to the aerospace industry.

 

2.Significant Accounting Policies

 

Basis of presentation

 

In the opinion of management, the accompanying interim consolidated balance sheets and 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, 2014 filed with the U.S. Securities and Exchange Commission (the “Commission”) on June 24, 2015.

 

Principles of consolidation

 

The accompanying consolidated financial statements include the accounts of M Line Holdings, Inc. and its wholly owned subsidiaries Elite and Precision.. All intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues 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. Actual results could materially differ from those estimates.

 

Recent accounting pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

-6-
 

 

3.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. The Company has an accumulated deficit of $21,010,797 as of September 30, 2014 and negative working capital.

 

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.

 

4.Inventories

 

Inventories are stated at the lower of cost or market, cost being determined using the first in first out (“FIFO”) method. The Company provides inventory reserves for obsolescence and other matters based on management’s review of current inventory levels. The Company includes inventory costs, labor and overhead costs directly associated with manufacturing its product.

 

Inventories as of September 30 and June 30 consist of the following:

 

   September 30,
2014
   June 30,
2014
 
Finished goods and components  $1,021,457   $1,112,647 
CNC machines held for sale   210,750    152,000 
Work in progress   446,781    327,620 
Raw materials and parts   11,776    14,336 
    1,690,764    1,606,603 
Less: Reserve for inventories   (175,921)   (175,921)
Inventories, net.  $1,514,843   $1,430,682 

 

5.Accrued Expenses

 

Accrued expenses and other as of September 30 and June 30 consist of the following:

 

   September 30,
2014
   June 30, 2014 
Compensation and related benefits  $2,156,849   $2,023,064 
Audit fees   50,000    46,000 
Other   417,012    525,552 
   $2,623,861   $2,594,616 

 

-7-
 

 

6.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, and June 30, 2014.

 

   September
30, 2014
   June 30,
2014
 
2014  $53,901   $53,901 
2015   46,426    46,426 
Total minimum lease payments   100,327    100,327 
Less amount representing interest   -    - 
Present value of future minimum lease payments   100,327    100,327 
Less current portion of capital lease obligations   (53,901)   (53,901)
Capital lease obligations, net of current portion  $46,426   $46,426 

 

7.Line of Credit

 

TCA Global Master Credit Fund LP (“TCA”):

 

The Company has an existing line of credit with TCA Global Credit Master Fund, LLC (“TCA”) in the amount of $10 million. As of September 30 and June 30, 2014, the Company has drawn $1,700,000 from the line of which $2,330,453 is outstanding as of September 30, 2014 and June 30, 2014. Amounts drawn from the line of credit are subject to interest and matured on October 31, 2013. The line was automatically renewed for a further six months and expired on April 30, 2014. There is no availability under the line of credit. The Company has entered into a settlement agreement with TCA and expects to repay the debt within 15 months. The line of credit with TCA is secured by the receivables and inventory and a second position on the equipment of Precision and the inventory and receivables of Elite together with a blanket lien over all of the Company’s assets.

 

-8-
 

 

8.Notes Payable

 

Notes payable as of September 30 and June 30 consist of :

 

   September 30, 2014    June 30, 2014  
CONVERTIBLE NOTES (DERIVATIVE).          
           
One unsecured  5% convertible notes payable to a  financial institution due March 4, 2015. This note can be converted to common stock at 55% of the lowest closing price in the 20 trading days prior to conversion.  $130,200   $110,000 
           
Two unsecured 8% convertible notes payable in the sum of $110,751 to a  financial institution due February 12, 2015. These notes can be converted to common stock after 180 days from the date of issuance at 55% of the lowest closing price in the last 7 trading days prior to conversion.   40,804    50,000 
           
An unsecured 12% convertible note payable to a financial institution due January 31, 2015. This note can be converted to common stock at 55% of the lowest closing price in the 5 trading days prior to conversion.   11,500    21,500 
           
An unsecured 12% convertible note payable to a financial institution due February 12, 2016. This note can be converted to common stock at $0.0235 or 60% of the lowest closing price in the last 25 trading days prior to conversion.   40,710    50,631 
           
Two unsecured convertible notes payable in the sum of $110,674 to a financial institution with $50,000 due on February 6, 2015 and $55,674 due on May 30, 2015. These notes can be converted to common stock after 180 days from the date of issuance at 55% of the lowest closing price in the last 7 to 10 trading days prior to conversion.   16,144    105,674 
           
Two unsecured 8% convertible notes payable to a financial institution both due May 30, 2015. These notes can be converted to common stock after 180 days from the date of issuance at 55% of the lowest closing price in the last 10 trading days prior to conversion.   83,855    160,674 
           
Four unsecured convertible notes with interest ranging from 8% to
12% payable to a financial institution with $50,000 due April 25,
2015, $75,000 due on December 25, 2014, $125,662 due October 3,
2014 and $37,500 due on February 18, 2015. These notes can be converted to common stock after maturity date at 40% - 55% of the lowest closing price in the last 10 to 20 trading days prior to conversion.
   220,109    225,562 
           
Three unsecured 8% convertible notes payable in the sum of $160,674 to a financial institution with $50,000 due on February 6, 2015 and $110,674 due on June 10, 2015. These notes can be converted to common stock after 180 days from the date of issuance at 50% - 55% of the lowest closing price in the last 7 to 15 trading days prior to conversion.   130,000    160,674 
           
An unsecured 8% convertible note payable to a financial institution due on June 10, 2015. This note can be converted to common stock after 180 days from the date of issuance at 55% of the lowest closing price in the last 10 trading days prior to conversion.   50,000    50,000 
    723,322    934,715 
OTHER NOTES (NON-CONVERTIBLE).          
Notes payable to a financial institution, secured by the underlying equipment in aggregate monthly installments of varying amounts, on a reducing balance method, with the balance due in October  2016.  $247,811   $247,811 
           
Two unsecured notes payable in the sum of $150,000 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.   75,459    75,459 
           
An  unsecured note payable to a corporation in weekday amounts of $700, increasing to $1,650, in September 2013 and ending in December 2013. This note is in default  but a settlement reached with monthly payments being made will pay off the note by June 25, 2015. The note was not paid by June 25 and the Company is currently negotiating a new pay-off schedule.   40,300    40,300 
           
An  unsecured note payable to a corporation in weekday amounts of $691 each through December 2013. This note is in default but a settlement reached with monthly payments being made will pay off the note by October 2015.   57,120    57,120 
           
An  unsecured note payable to a corporation in weekday amounts of $841 each through February 2014. This note is in default.   105,350    105,350 
    526,040    526,040 
Total of convertible and other notes   1,249,362    1,460,755 
Less Debt discount   (314,663)   (317,977)
TOTAL   934,699    1,142,778 
Less Current Portion   810,676    1,018,755 
Long Term Portion  $124,023   $124,023 
           
2016   124,023    124,023 
2017        
2018        
2019        
Thereafter        
   $124,023   $124,023 

 

Owing to the variable conversion rates of the convertible notes, the Company determined that the conversion feature met the definition of a liability under ASC 815-40. Consequently, the Company bifurcated the conversion feature and accounted for this as a derivative liability. See Note 11.

 

-9-
 

 

In connection with one of the notes issued during the quarter ended September 30, 2014, the Company issued 15,625,000 warrants that have a term of 5 years and an exercise price of $0.0016 per share. The exercise price on these warrants, contain a reset provision in the event shares are sold by the Company at a price lower than the exercise price. Consequently, the warrants were accounted for as derivatives and the fair value of such warrants amounting to $28,125 was recognized as a debt discount and amortized over the term of the note.

 

During the three months ended September 30, 2014, the Company converted total debt of $347,773 for 699,259,119 common shares and recognized a loss on debt extinguishment related to the conversion of $1,089,040.

  

9.Commitments and Contingencies

 

Leases

 

The Company leased its manufacturing and office facilities under non-cancellable operating lease arrangements.

 

Rent expense under operating leases was $99,276 and $138,749 for the three months ended September 30, 2014 and 2013, respectively .

 

Litigations

 

Litigation payable as of September 30 and June 30, 2014 consist of the following:

 

   September 30,
2014
   June 30,
2014
 
         
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly payments of $5,000.  $210,000    210,000 
           
Unsecured notes payable to various parties in settlement of lawsuits payable in full.   77,500    77,500 
           
TOTAL  $287,500    287,500 

 

The Company’s existing litigation proceedings are set forth below:

 

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

 

The Company 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 the Company pursuant to an agreement dated April 2, 2007 between the Company and the claimant. The Statement of Claim alleges that the Company breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs.

 

-10-
 

 

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.

 

No provision has been made in the September 30 and June 30, 2014 financial statements with respect to this matter because the Company has assessed the litigation as having no merit and the likelihood of any liability pursuant to this litigation to be extremely low.

 

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 that 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.

 

Abstract of Judgment and Writ were issued August 17, 2012.

 

The Company entered into a settlement agreement for a settlement in the total amount of $37,500. However, no payments have been made to date.

 

A provision has been made in the September 30 and June 30, 2014 financial statements with respect to this matter in the sum of $37,500.

 

3.Donald Yu v. M Line Holdings, Inc., et al.; Case No. 30-2012-00574019-CU-BC-CJC

 

This is an employment dispute asserted by a former employee against M Line Holdings and two corporate insiders, Jitu Banker and Anthony Anish, in their respective individual capacities. The action was filed in Orange County Superior Court on June 4, 2012. The parties entered into a settlement agreement and stipulation for judgment against M Line Holdings, only, on about May 12, 2013. Pursuant to the terms and conditions of the settlement agreement, M Line agreed to pay $21,450.00 in three (3) equal installments. M Line Holdings failed to make payment on a timely basis, and plaintiff filed a stipulated judgment against M Line Holdings on June 12, 2013. Plaintiff also filed default judgments against Messrs. Banker and Anish.

 

In response, defendants filed a motion to set aside the defaults and vacate the default judgments against Messers. Banker and Anish as well as renegotiate the terms of the prior settlement with Plaintiff. On or about September 30, 2013, the parties entered into a supplemental settlement agreement and mutual release wherein the Company agreed to pay plaintiff the sum of $24,000 in two (2) equal installments. The first installment of $12,000 has already been paid.

 

The final installment of $12,000 was due on or before October 30, 2013, and has not been paid at this time. A judgment remains outstanding against the Company in the sum of $12,000.

 

-11-
 

 

4.Subramani Srinivasan, et al. v. M Line Holdings, Inc., et al.; Case No. 30-2014-00724484-CU-CO-CJC

 

This is a breach of contract, fraud, and related causes of action against Defendants Eran Engineering, Inc., Bart Webb, Precision Aerospace and Technologies, Inc. (erroneously sued as "Precision Aerospace Technologies, Inc."); M-Line Holdings, Inc.; Anthony Anish; Jitu Banker; Larry Consalvi; and Elite Machine Tools (collectively, "Defendants").

 

The parties entered into a settlement agreement against the corporate defendants on or about January 22, 2015. Pursuant to the terms and conditions of the settlement agreement, the corporate defendants agreed to pay $20,000 in three (3) equal installments on or before April 30, 2015.

 

As of June 2, 2015, the corporate defendants have paid $20,000 and this case has been dismissed, which effectively terminates all litigation in its entirety.

 

5.Can Capital Asset Servicing, Inc. v. E.M. Tool Company, Inc., et al.; Case No. 30-2014-00727606- CU-CL-CJC

 

This is a breach of contract and related claims arising out of a business loan, and alleges that E.M. Tool failed to pay Can Capital all amounts due under the loan agreement in the principal sum of $58,313, plus interest, costs and attorneys’ fees.

 

On or about November 2014, the parties entered into a settlement agreement and stipulated judgment. Pursuant to the terms and conditions of the settlement agreement, the Company agreed to pay plaintiff the sum of $50,000 in installments on or before May 15, 2015.

 

As of May 13, 2015, the defendants have made partial payments, and still owe plaintiff $25,500. Plaintiff provided notice of its intent to file the stipulated judgment on May 7, 2015, and commence collection efforts if payment of $10,000 is not paid prior thereto and those payments have been made. Since May, a payment of $1,500 has been made. The balance as of August 17, 2015 is $24,000.

 

6.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 $163,579, 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.

 

The Company had made a provision in the sum of $210,000 in the financial statements as of September 30 and June 30, 2014 as no payments that were due under the settlement agreement have been made. Judgment was entered on June 16, 2011, and a Writ was issued on February 24, 2012.

 

7.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.

 

The parties reached a settlement. 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 Company has issued the 150,000 shares of common stock and made two payments to date. The Company has a provision in the sum of $50,000 in the financial statements as of September 30 and June 30, 2014.

 

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The Company currently is in default of its payment obligations under the settlement. Plaintiff currently is seeking to obtain a judgment as a result of the breach of the settlement agreement.

 

8.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 the Company, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated, and the Company has answered the complaint and has filed a motion for leave to file a cross complaint.

 

A settlement of $50,000 was reached in this case, requiring payments commencing on March 11, 2011 for 10 months. The first two month’s payments were made; however, the Company currently is in default of the terms of this settlement agreement. Mr. Consalvi filed his stipulated judgment on March 5, 2012. Abstract of judgment and Writ were issued on March 13, 2012.

 

A provision in the sum of $40,000 has been made in the financial statements as of September 30 and June 30, 2014.

 

To date there has been no further action on this case, and the Company plans to resolve this matter as soon as possible.

 

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

 

This case was settled as to Jitu Banker and the Company for $2,000 payable on February 25, 2013. We do not yet have sufficient information to determine what the potential outcome of this may be or whether or to what extent it would or could have a financial impact on the Company. A default judgment was entered on January 6, 2012.

 

To date there has been no further action on this case, and the Company plans to resolve this matter as soon as possible.

 

10.TCA Global Credit Master Fund, L.P. vs M LI ne Holdings, Inc. EM Tool Company, Inc. dba Elite Machine Tool, Precision Aerospace and Technologies, Inc., Anthony Anish and Jitendra Banker case # CACE-14-012871

 

Plaintiff filed this case on July 1, 2014 in Broward County, Florida.

 

The complaint alleges that the Company owes the Plaintiff the amount due under the revolving note, and is claiming foreclosure of the collateral, breach of the credit agreement and a claim against the individuals under the validity agreement due to the non-payment.

 

The Plaintiff obtained a default judgment however due to a settlement agreement reached on September 5, 2014 ceased any further legal activity. The Defendants were unable to honor the agreement and Plaintiff continued to obtain sister state judgments in California and Nevada.

 

On February 23, 2015 a new settlement agreement was signed between the parties under which plaintiff agreed to accept two methods of repayment, the first being $1,200,000 paid over a fifteen month period commencing as soon as the Company was up to date with its filings and the balance of funding would come from a new asset based lending program that Defendants were in the process of arranging.

 

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The Company has accrued $2,330,453 in the financial statements that includes all interest and fees due to Plaintiff through September 30, and June 30, 2014.

 

11.Global Vantage Ltd., a California Corporation vs Eran Engineering, Inc. Precision Aerospace and Technologies, Inc., M Line Holdings, Inc., Anthony Anish, Lawrence Consalvi and Kenneth Collini

 

Plaintiff filed this complaint on August 7, 2014 in Orange County, California.

 

The complaint alleges that the Company owes funds that are due for the lease of certain equipment or plaintiffs want repossession of the equipment.

 

The plaintiffs obtained judgment in February 2015 and the equipment has been returned to plaintiff. However, defendants are filing an appeal against this judgment.

 

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 the Company’s financial condition, results of operations or liquidity.

 

The related provisions for these litigations are reported under litigation payable, accounts payable and accrued expenses and other in the consolidated balance sheets.

 

10.Shareholders’ Equity

 

During the three months ended September 30, 2014, the Company issued the following shares of common stock:

 

·699,259,119 common shares were issued to financial institutions in connection with the conversion of debt and accrued interest totaling to $347,773.

 

11.Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

 

Level 1 - Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
Level 3 - Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

 

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The following table presents the derivative financial instrument. The Company’s only financial liability is measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level of hierarchy as of September 30, 2014:

 

   Amount   Level 1   Level 2   Level 3 
Embedded conversion derivative liability  $549,003   $-   $-   $549,003 
Total  $549,003   $-   $-   $549,003 

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:

 

Balance at June 30, 2014  $634,769 
Fair value of warrant derivative liabilities at issuance, recorded as debt discount   352,013 
Settlement of derivative liabilities to gain on debt extinguishment   (923,514)
Unrealized derivative loss resulting from marked to market fair values included in other expense   485,735 
Balance at September 30, 2014  $549,003 

 

The fair value of the derivative liability is calculated at the time of issuance and the Company records a derivative liability for the calculated value. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations.

 

The following are the assumptions used for derivative instrument valued using the Black Scholes option pricing model:

 

    At Issuance     September 30,
2014
 
Market value of stock on measurement date   $ 0.0012 - 0.0018     $ 0.001  
Risk-free interest rate     0.05 - 1.58 %     0.02 - 1.78 %
Dividend yield     0 %     0 %
Volatility factor     241 - 417 %     229 -414 %
Term     0.51 - 5 years       0.35 – 4.88 years  

 

12.Related Party Transactions

 

As of September 30, 2014, the amount due from related party was $0. As of September 30, 2014, the related party payable was $35,954, which represents the amount due to an officer of the Company for amounts charged to his personal credit card.

 

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. The revenue of the Precision Manufacturing group is down significantly compared to the comparable period last year as a result of rebuilding revenue following the Company’s move and subsequent delay before production could start again.

 

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Segment information is as follows for the three months ended September 30, 2014 and 2013:

 

Segment Information for the
three months ended September
30, 2014
  Machine
Sales
   Precision
Manufacturing
   Corporate   Total 
                 
Revenue  $730,227   $227,253   $-   $957,480 
Interest Expense   31,500    45,000    (11,719)   64,781 
Depreciation and Amortization   -    29,199    -    29,199 
Loss before taxes   (317,703)   (309,850)   (909,981)   (1,537,534)
Total Assets   274,809    1,535,701    246,059    2,056,569 
Capital Expenditure  $-   $-   $-   $- 

 

Segment Information for the
three months ended September
30, 2013
  Machine
Sales
   Precision
Manufacturing
   Corporate   Total 
Revenue  $1,759,558   $967,636   $-   $2,727,194 
Interest Expense   58,204    54,288    -    112,492 
Depreciation and Amortization   750    43,636    12,500    56,886 
Income (loss) before taxes   174,317    83,930    (152,486)   105,761 
Total Assets   1,079,295    2,476,208    251,486    3,806,989 
Capital Expenditure  $-   $-   $-   $- 

 

Sales are derived principally from customers located within the United States.

 

No segment information has been provided for M Line Business Services, Inc. (ML Machinery Funding, Inc.) as the company was incorporated subsequent to September 30, 2014.

 

14.Subsequent Events

 

·On January 15, 2015, the effective date, the Company entered into a settlement agreement with TCA. Under the terms of the agreement, TCA will receive $100,000 as soon as all of the Company’s filings are current and will then receive $80,000 per month for 13 months and $60,000 in the 15th month. These payments will be accelerated at any time. In addition the balance of the note TCA will be paid through financing being obtained from an asset based lender. TCA will release their liens on the Company at that time.

 

·Since October 1, 2014, the Company has raised funds through a 10% convertible note for $330,000 of which $257,000 has been funded. The note is convertible at the lower of $0.001 or 50% of the lowest trading price of the Company’s common stock during the 20 consecutive trading days prior to the date of conversion.

 

·In October 2014, M Line Holdings, Inc. formed a wholly owned subsidiary, M Line Machinery Funding, Inc. This Company which has not traded to date, will be used for machinery finance and also for any other financial services provided by the Company to prospective customers. The name has been changed to M Line Business Services, Inc.

 

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·On October 14, 2014, the Company issued to one of its officers 10 million shares of blank check preferred stock (designated as Series B Preferred Stock) which are non-convertible, zero divided and zero interest and carry a voting power equivalent to 50% of the Company’s outstanding common and preferred stock.

 

·On March 3, 2015, a total of 200,000,000 shares were issued to two officers in lieu of payroll.

 

·In March 2015, the Company issued 57,118,182 shares in connection with the conversion of debt amounting to $6,283.

 

·On April 1, 2015, the Company temporarily shut down the operations of Elite laying off all the staff. Management was dissatisfied with the manner in which the Company was being managed and decided to restart the business by the end of 2015 in a new location with new management.

 

·On August 7, 2015, The Company entered into a short term loan in the amount of $10,720. This amount is due for repayment together with interest and fees of $1,780 on September 1, 2015. In the event it is not paid the amount may be coverted to stock at 125% of the original note amount and converted at the lower of $0.0002 or a 50% discount to market based on the lowest price for the 20 consecutive days prior to conversion.

 

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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. (referred to herein as “us, “we” or the “Company”) for the three month period ended September 30, 2014 contains forward-looking statements, principally in this section and in the section herein titled “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 or 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

 

We currently conduct all of our operations through two of our two wholly-owned subsidiaries: E..M. Tool Company, Inc. dba Elite Machine Tool Company (“Elite”) and Precision Aerospace & Technologies, Inc. (“Precision”), (formerly Eran Engineering, Inc.). Through Elite we refurbish and sell pre-owned CNC (computer numerically controlled) machine tool equipment and service and rebuild CNC equipment for customers and Precision is a customer focused, industry leading aircraft and medical precision metal component manufacturer offering low cost build-to-print and assembly services for production and spare parts, with design, development and sustaining engineering support services for it’s customers.

 

Our services and products are primarily marketed and sold to the commercial aviation, defense, medical, and energy industries. Currently we manage the operations of these subsidiaries. In the future we hope to expand our business, both through the growing of our existing businesses and their client bases, as well as through acquisitions of companies that complement the products and services we currently offer.

 

In October 2014, we formed our new subsidiary M Line Business Services, Inc. that is providing corporate services and advice to various corporate clients. The revenue for this first client was included in the June 2014 10-K however the true value of the income derived was not included as the payment received in public stock could not be valued as the Company was not listed at that time. We expect the true value to be included in the June 2015 10-K as the Company is expected to be listed during August, 2015

 

Machine Sales Group

 

The Machine Sales Group is currently composed of one subsidiary, Elite, which is in the business of acquiring refurbishing and selling computer numerically controlled (“CNC”) machine tools, and providing service and machine rebuilds, to manufacturing customers.

 

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CNC machines use commands from an onboard computer to control the movement of cutting tools and the rotation speeds in order to cut precision metal parts. The computer controls enable the operator to program specific operations, such as part rotation and tooling selection and movement for a particular part and then store that program in memory for future use. Because CNC machines can manufacture parts unattended and operate at speeds faster than similar manually-operated machines, they can generate higher profits with less rework and scrap. Elite Machine specializes in selling refurbished Mori Seiki and other high end Japanese manufactured machine Tools.

 

In April 2015 we temporarily shut down operations of Elite. All the staff were laid off. We plan on restarting Elite shortly but certainly before the end of 2015 with a new management team and staff. The decision was made to stop the losses being incurred at Elite and we knew we needed new management.

 

Precision Manufacturing Group

 

The Precision Manufacturing Group is composed of Precision (formerly Eran Engineering), a wholly-owned subsidiary. Precision is a customer focused, industry leading aircraft and medical component manufacturer offering low cost build-to-print and assembly services for production and spare parts, with design, development and sustaining engineering support services for its customers. Precision, with an installed base of over forty CNC machines, manufactures parts and assemblies primarily for the aerospace and medical industries. Aerospace Customers include Panasonic Avionics Corporation (“Panasonic”), Rockwell Collins, UTC Aerospace, (formerly Goodrich Aerostructures), a division of the United Technologies Group and our largest medical customer, Beckman Coulter (part of the Danaher group).

 

Trends Affecting Our Business

 

Although the recent tightening of the capital markets has eased, customers’ limited access to capital still limits 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 Group during the three month period ended September 30, 2014 and 2013 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 Sales Group, as many of our customers that purchase machines from us do business with airline manufacturers.

 

Critical Accounting Policies

 

Use of Estimates

 

Our preparation, discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are in conformity with and have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles 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 at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. By their nature, these 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 on 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 Group, 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 Sales Group, we purchase machines held for resale based on 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 in 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.

 

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Abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) are recognized as current-period charges. Fixed production overhead is allocated to the costs of conversion into inventories based on normal capacity of the production facilities. We utilize an expected normal level of production within the Precision manufacturing segment, based on our plant capacity. To the extent we do not achieve normal expected productions levels, we charge such under-absorption of fixed overhead to operations.

 

Results of Operations for the Three Months Ended September 30, 2014 compared to the Three Months Ended September 30, 2013.

 

   For the three
months ended
September
30,
   For the three
months ended
September
30,
     
   2014   2013   Change 
             
Sales by segment:               
Machine Sales  $730,227   $1,759,558    (1,029,331)
Precision Engineering   227,253    967,636    (740,383)
    957,480    2,727,194    (1,769,714)
                
Gross Profit by segment:               
Machine Sales   (1,828)   527,269    (529,097)
Precision Engineering   (59,584)   481,845    (541,429)
    (61,412)   1,009,114    (1,070,526)
                
Gross Profit by segment: %               
Machine Sales   (2.98)   52.25      
Precision Engineering   (97.02)   47.75      

 

Sales

 

Sales in the three month period ended September 30, 2014 decreased 64.89% compared to the three month period ended September 30, 2013.

 

The change is attributable to the decrease in sales in both the Machine Sales Group and Precision Manufacturing Group. Sales decreased by 58.50% in the Machine Sales Group and decreased by 76.51% in the Precision Manufacturing Group.

 

Our 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 15 pieces of equipment sold in the three months ended September 30, 2014 was $47,033 compared to the comparable period in fiscal 2013 of 29 pieces of equipment sold at an average sale price of $56,738. In addition, service work for the three months ended September 30, 2014 was $23,658 compared to the comparable period in fiscal 2013 of $79,308.

 

Market conditions reflect not only the price that equipment can be purchased for but also the price at which 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 purchase 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.

 

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The decrease in sales in the Precision Manufacturing Group is primarily the result of a net decrease of $564,558 in sales of precision metal component parts from Panasonic Avionics Corporation in the three months ended September 30, 2014.

 

Gross Margin

 

Gross profit decreased by 106.03% in fiscal period ended September 30, 2014 compared to the comparable period in fiscal 2013. The gross profit for the Machine Sales Group decreased by 100.35% due to a decrease in the volume of machines sold during this three month period. The decrease within the Precision Manufacturing Group of 112.37% resulted from higher costs of goods in relation to lower sales due primarily to the move of our business from the Tustin location to our new location in Anaheim. .

 

Selling, General & Administrative

 

Selling, general and administrative costs increased by $18,280 to $760,081 for the three month period ended September 30, 2014 compared to $778,361 for the three months ended September 30, 2013. The change is due primarily to moving costs in the Precision engineering division.

 

Interest Expense

 

Interst expense has decreased by $47,711 for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The change is attributable to a reduction of the interest portion that relates to derivative liabilities.

  

Derivative Gain (Loss).

 

The derivative gain (loss) for the three month period ended September 30, 2014 was $(485,735) compared to that of the comparable period in 2013 amounting to $0. 

 

Loss on Debt Extinguishment

 

The loss on debt extinguishment for the three month period ended September 30, 2014 was $(165,526) compared to $0 for the comparable period three months ended September 30, 2013. This expense is related to the conversion of the convertible notes and settlement of the corresponding derivative liabilities.

 

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 repayment of debt by the issue of common stock. As of September 30, 2014, our working capital (current assets less current liabilities) totaled ($7,002,166) compared to $(6,755,853) as of June 30, 2014, a decrease of $246,313.

 

The Company has an accumulated deficit of $21,010,797 as of September 30, 2014 and negative working capital. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

As of September 30, 2014 we had $2,330,453 in debt outstanding under our Accounts Receivable and Inventory line of Credit with TCA Global Credit Master Fund, LP.

 

Our existing sources of liquidity, along with cash expected to be generated from sales, may not be sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements for the foreseeable future. If that is the case we may need to seek to obtain additional debt or equity financing, especially if we experience downturns or cyclical fluctuations in our business that are more severe or longer than anticipated, or if we fail to achieve anticipated revenue targets, or if we experience significant increases in the cost of raw material and equipment for resale, or lose a significant customer, or experience increases in our expense levels resulting from being a publicly traded company. If we attempt to obtain additional debt or equity financing, we cannot assure you that such financing will be available to us on favorable terms, or at all.

 

Cash Flows

 

The following table sets forth our cash flows for the three month period ended September 30, 2014 and 2013.

 

Provided by (used in)  2014   2013   Change 
             
Operating activities   (341,488)   (61,793)   279,695 
Investing activities   35,000    (12,500)   (47,500)
Financing activities   271,971    (91,328)   (363,299)
    (34,517)   (165,621)   (131,104)

 

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Operating Activities

 

Operating cash flows during the three month period ended September 30, 2014 and 2013, respectively, 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 three month period ended September 30, 2014, non-cash expenses included in our net income and in operating activities totaled $831,888 compared to $131,505 in three month period ended September 30, 2013.

 

The increase (decrease) in operating assets and liabilities for the three month period ended September 30, 2014 and 2013 were $364,158 and $(299,059), respectively. During the three month period ended September 30, 2014, the increase was primarily attributable to an increase in accounts receivable, and accounts payable and accrued expenses..

 

Investing Activities

 

We made disposals and (capital expenditures) of $35,000 and $(12,500) during the three month period of the fiscal 2014 and 2013 period, respectively.

 

Financing Activities

 

Net cash provided by (used in) financing activities was $271,191 for the three month ended September 30, 2014, compared to $(91,328)for the three months ended September 30, 2013.  

 

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 currently are 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.

 

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, 2014, 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 officer 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, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in this Item 4. The principal weakness is that we have limited staff due to the size of the Company. As a result the division of duties and responsibilities amongst staff and the lack of internal controls lead to the material weaknesses in these business areas.

 

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Changes in Internal Control over Financial Reporting

 

There have been no changes to our internal control over financial reporting during our nine month period ended March 31, 2014.

 

Litigation

 

The Company’s existing litigation proceedings are set forth below:

 

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

 

The Company 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 the Company pursuant to an agreement dated April 2, 2007 between the Company and the claimant. The Statement of Claim alleges that the Company 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.

 

No provision has been made in the September 30 and June 30, 2014 financial statements with respect to this matter because the Company has assessed the litigation as having no merit and the likelihood of any liability pursuant to this litigation to be extremely low.

 

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 that 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.

 

Abstract of Judgment and Writ were issued August 17, 2012.

 

The Company entered into a settlement agreement for a settlement in the total amount of $37,500. However, no payments have been made to date.

 

A provision has been made in the September 30 and June 30, 2014 financial statements with respect to this matter in the sum of $37,500.

 

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3.   Donald Yu v. M Line Holdings, Inc., et al.; Case No. 30-2012-00574019-CU-BC-CJC

 

This is an employment dispute asserted by a former employee against M Line Holdings and two corporate insiders, Jitu Banker and Anthony Anish, in their respective individual capacities. The action was filed in Orange County Superior Court on June 4, 2012. The parties entered into a settlement agreement and stipulation for judgment against M Line Holdings, only, on about May 12, 2013. Pursuant to the terms and conditions of the settlement agreement, M Line agreed to pay $21,450.00 in three (3) equal installments. M Line Holdings failed to make payment on a timely basis, and plaintiff filed a stipulated judgment against M Line Holdings on June 12, 2013. Plaintiff also filed default judgments against Messrs. Banker and Anish.

 

In response, defendants filed a motion to set aside the defaults and vacate the default judgments against Messers. Banker and Anish as well as renegotiate the terms of the prior settlement with Plaintiff. On or about September 30, 2013, the parties entered into a supplemental settlement agreement and mutual release wherein the Company agreed to pay plaintiff the sum of $24,000 in two (2) equal installments. The first installment of $12,000 has already been paid.

 

The final installment of $12,000 was due on or before October 30, 2013, and has not been paid at this time. A judgment remains outstanding against the Company in the sum of $12,000.

 

4.    Subramani Srinivasan, et al. v. M Line Holdings, Inc., et al.; Case No. 30-2014-00724484-CU-CO-CJC

 

This is a breach of contract, fraud, and related causes of action against Defendants Eran Engineering, Inc., Bart Webb, Precision Aerospace and Technologies, Inc. (erroneously sued as "Precision Aerospace Technologies, Inc."); M-Line Holdings, Inc.; Anthony Anish; Jitu Banker; Larry Consalvi; and Elite Machine Tools (collectively, "Defendants").

 

The parties entered into a settlement agreement against the corporate defendants on or about January 22, 2015. Pursuant to the terms and conditions of the settlement agreement, the corporate defendants agreed to pay $20,000 in three (3) equal installments on or before April 30, 2015.

 

As of June 2, 2015, the corporate defendants have paid $20,000 and this case has been dismissed, which effectively terminates all litigation in its entirety.

 

5.    Can Capital Asset Servicing, Inc. v. E.M. Tool Company, Inc., et al.; Case No. 30-2014-00727606- CU-CL-CJC

 

This is a breach of contract and related claims arising out of a business loan, and alleges that E.M. Tool failed to pay Can Capital all amounts due under the loan agreement in the principal sum of $58,313, plus interest, costs and attorneys’ fees.

 

On or about November 2014, the parties entered into a settlement agreement and stipulated judgment. Pursuant to the terms and conditions of the settlement agreement, the Company agreed to pay plaintiff the sum of $50,000 in installments on or before May 15, 2015.

 

As of May 13, 2015, the defendants have made partial payments, and still owe plaintiff $25,500. Plaintiff provided notice of its intent to file the stipulated judgment on May 7, 2015, and commence collection efforts if payment of $10,000 is not paid prior thereto and those payments have been made. Since May, a payment of $1,500 has been made. The balance as of August 17, 2015 is $24,000.

 

6.    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.

 

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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 $163,579, 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.

 

The Company had made a provision in the sum of $210,000 in the financial statements as of September 30, and June 30, 2014 as no payments that were due under the settlement agreement have been made. Judgment was entered on June 16, 2011, and a Writ was issued on February 24, 2012.

 

7.    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.

 

The parties reached a settlement. 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 Company has issued the 150,000 shares of common stock and made two payments to date. The Company has a provision in the sum of $50,000 in the financial statements as of September 30, and June 30, 2014.

 

The Company currently is in default of its payment obligations under the settlement. Plaintiff currently is seeking to obtain a judgment as a result of the breach of the settlement agreement.

 

8.    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 the Company, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated, and the Company has answered the complaint and has filed a motion for leave to file a cross complaint.

 

A settlement of $50,000 was reached in this case, requiring payments commencing on March 11, 2011 for 10 months. The first two month’s payments were made; however, the Company currently is in default of the terms of this settlement agreement. Mr. Consalvi filed his stipulated judgment on March 5, 2012. Abstract of judgment and Writ were issued on March 13, 2012.

 

A provision in the sum of $40,000 has been made in the financial statements as of September 30 and June 30, 2014.

 

To date there has been no further action on this case, and the Company plans to resolve this matter as soon as possible.

 

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

 

This case was settled as to Jitu Banker and the Company for $2,000 payable on February 25, 2013. We do not yet have sufficient information to determine what the potential outcome of this may be or whether or to what extent it would or could have a financial impact on the Company. A default judgment was entered on January 6, 2012.

 

To date there has been no further action on this case, and the Company plans to resolve this matter as soon as possible.

 

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10.   TCA Global Credit Master Fund, L.P. vs M LI ne Holdings, Inc. EM Tool Company, Inc. dba Elite Machine Tool, Precision Aerospace and Technologies, Inc., Anthony Anish and Jitendra Banker case # CACE-14-012871

 

Plaintiff filed this case on July 1, 2014 in Broward County, Florida.

 

The complaint alleges that the Company owes the Plaintiff the amount due under the revolving note, and is claiming foreclosure of the collateral, breach of the credit agreement and a claim against the individuals under the validity agreement due to the non-payment.

 

The Plaintiff obtained a default judgment however due to a settlement agreement reached on September 5, 2014 ceased any further legal activity. The Defendants were unable to honor the agreement and Plaintiff continued to obtain sister state judgments in California and Nevada.

 

On February 23, 2015 a new settlement agreement was signed between the parties under which plaintiff agreed to accept two methods of repayment, the first being $1,200,000 paid over a fifteen month period commencing as soon as the Company was up to date with its filings and the balance of funding would come from a new asset based lending program that Defendants were in the process of arranging.

 

The Company has accrued $2,330,453 in the financial statements that includes all interest and fees due to Plaintiff through September 30, and June 30, 2014.

 

11.   Global Vantage Ltd., a California Corporation vs Eran Engineering, Inc. Precision Aerospace and Technologies, Inc., M Line Holdings, Inc., Anthony Anish, Lawrence Consalvi and Kenneth Collini

 

Plaintiff filed this complaint on August 7, 2014 in Orange County, California.

 

The complaint alleges that the Company owes funds that are due for the lease of certain equipment or plaintiffs want repossession of the equipment.

 

The plaintiffs obtained judgment in February 2015 and the equipment has been returned to plaintiff. However, defendants are filing an appeal against this judgment.

 

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 the Company’s financial condition, results of operations or liquidity.

 

The related provisions for these litigations are reported under litigation payable, accounts payable and accrued expenses and other in the consolidated balance sheets. 

 

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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, 2014, as filed with the Commission on June 24, 2015.

 

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

 

The Company issued 699,699,259,119 shares of the Company's common stock for conversion of debt and to our investor relations and other consultants in payment of services to the Company. These shares were free trading and restricted in accordance with Rule 144. The issuance was exempt registration pursuant to Section 4 (2) of the Securities Act of 1933 and these financial institutions are sophisticated investors 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. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The following Exhibits required by Item 601 of Regulation S-K to be filed herewith are either filed herewith or incorporated by reference to previously filed documents, as indicated.

 

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

   
3.3 (2)   Amended By Laws 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 Anthony L. Anish dated January 1, 2015
     
10.6 (2)   Employment Agreement with Jitendra Banker dated January 1, 2015

 

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10.7 (1)   Settlement Agreement with TCA Global Credit Master Fund, LP
     
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
     
10.18 (8)   Commercial Real Estate Lease with SG&H Partners, L.P. for Anaheim Property dated July 1, 2015
     
10.19 (8)   Business Loan Agreement with Pacific Western Bank dated June 7, 2010
     
10.20 (8)   Loan and Security Agreement and Note with Utica Leaseco, LLC
   
10.21 (8)   Note and Stock Purchase Agreements with Spagus Capital Partners, LLC
     
10.19 (9)   Loan Agreements with TCA Global Master Credit Fund, LP
     
10.19(10)   Convertible note agreement with Gel Properties, LLC
     
10.20 (10)   Convertible Note agreement with LG Funding, LLC
     
10.21 (10)   Convertible Note agreements with Beaufort Capital, LLC
     
10.22 (10)   Convertible Note agreements with Union Capital, Inc.
     
10.23 (10)   Convertible Note agreements with Coventry Funding, Inc.
     
10.24 (10)   Convertible Note agreements with Iconic Holdings, Inc.
   
10.25 (10)   Convertible Note with Adar Bays, LLC
     
10.26 (10)   Convertible Note with JMJ Financial
     
10.23   Addendum No. 2 dated September 30, 2011 to Commercial Real Estate Lease dated February 15, 2007 for the office space located in Tustin, CA
     
10.24   Executive Employee Agreement with Barton Webb dated July 25, 2011

 

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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.

 

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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: August 19, 2015   /s/ Bruce Barren
  By: Bruce Barren
    President, Chief Executive
    Officer and a Director
     
Dated: August 19, 2015   /s/ Jitu Banker
  By: Jitu Banker
    Chief Financial Officer,
    and a Director

 

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