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, 2010
o | 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) |
Gateway International Holdings, Inc. |
(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 22, 2010 , there were 30,861,956 shares of common stock, par value $0.001, issued and outstanding.
M LINE HOLDINGS, INC.
TABLE OF CONTENTS
PART I | ||
ITEM 1. | Financial Statements (unaudited). | 3 |
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 17 |
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. | 21 |
ITEM 4. | Controls and Procedures. | 21 |
PART II | ||
ITEM 1. | Legal Proceedings. | 24 |
ITEM 1A. | Risk Factors. | 28 |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 28 |
ITEM 3. | Defaults Upon Senior Securities. | 28 |
ITEM 4. | Removed and Reserved. | 28 |
ITEM 5. | Other Information. | 28 |
ITEM 6. | Exhibits. | 29 |
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PART I-FINANCIAL INFORMATION
M LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY GATEWAY INTERNATIONAL HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of September 30, | As of June 30, | |||||||
2010 | 2010 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 247,851 | $ | 50,410 | ||||
Accounts receivable, net | 683,524 | 613,642 | ||||||
Inventories | 737,557 | 751,300 | ||||||
Due from related party | 418,332 | 352,333 | ||||||
Prepaid and other current assets | 62,916 | 53,723 | ||||||
Current Assets - Discontinued Operations | 8,113 | 8,113 | ||||||
Total current assets | 2,158,293 | 1,829,521 | ||||||
Property and equipment, net | 708,793 | 813,203 | ||||||
Intangible Assets, net | 118,222 | 136,409 | ||||||
Deposits and other | 60,077 | 60,077 | ||||||
Non Current Assets - Discontinued Operations | 23,377 | 23,377 | ||||||
Total Assets | $ | 3,068,761 | $ | 2,862,587 | ||||
Liabilities and Shareholders' Equity | ||||||||
Current Liabilities: | ||||||||
Line of Credit | $ | 218,889 | $ | 218,889 | ||||
Accounts Payable | 869,483 | 720,565 | ||||||
Accrued Expenses and other | 696,244 | 557,095 | ||||||
Derivative liability | 93,488 | 98,289 | ||||||
Notes payable - current | 229,239 | 272,941 | ||||||
Convertible notes payable | 100,000 | 100,000 | ||||||
Capital Leases - current | 46,866 | 46,527 | ||||||
Current Liabilities - Discontinued Operations | 704,361 | 704,061 | ||||||
Total Current Liabilities | 2,958,570 | 2,718,367 | ||||||
Notes Payable - long term | 19,750 | 19,750 | ||||||
Capital Leases - long term | 35,306 | 44,310 | ||||||
Deferred Income Taxes | 16,710 | 16,710 | ||||||
Deferred Rent - long term | 29,675 | 39,566 | ||||||
TOTAL LIABILITIES | 3,060,011 | 2,838,703 | ||||||
Commitments and contingencies | ||||||||
Shareholders' Equity | ||||||||
Common Stock, $0.001: 100,000,000 shares | ||||||||
Authorized; 30,861,956 shares issued and outstanding | ||||||||
at September 30, 2010 and June 30, 2010, respectively | 30,862 | 30,862 | ||||||
Additional paid in capital | 9,505,812 | 9,505,812 | ||||||
Accumulated deficit | (9,527,925 | ) | (9,512,790 | ) | ||||
Total stockholders' equity | 8,749 | 23,884 | ||||||
Total Liabilities and Shareholders' Equity | $ | 3,068,761 | $ | 2,862,587 |
The accompanying notes form an integral part of these unaudited consolidated financial statements
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M LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY GATEWAY INTERNATIONAL HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Net sales | $ | 1,656,599 | $ | 1,648,159 | ||||
Cost of sales | 930,024 | 1,345,434 | ||||||
Gross Profit | 726,575 | 302,725 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 716,485 | 866,795 | ||||||
Amortization of intangible assets | 18,188 | 10,445 | ||||||
Total operating expense | 734,673 | 877,240 | ||||||
Operating Loss | (8,098 | ) | (574,515 | ) | ||||
Other income (expense): | ||||||||
Interest Expense | (12,418 | ) | (13,189 | ) | ||||
Interest Income | 6,182 | - | ||||||
Gain on sale of assets | - | - | ||||||
Total other expense | (6,236 | ) | (13,189 | ) | ||||
Loss before income tax | (14,334 | ) | (587,704 | ) | ||||
Income tax provision | (800 | ) | ( 800 | ) | ||||
NET LOSS | (15,134 | ) | (588,504 | ) | ||||
NET INCOME (LOSS) PER SHARE: | ||||||||
Basic and dilutive loss per share: | ||||||||
Net Loss | $ | (0.00 | ) | $ | (0.02 | ) | ||
Weighted average number of common shares under in per share calculations (basic and diluted) | ||||||||
Basic | 30,861,956 | 30,861,956 | ||||||
Diluted | 30,861,956 | 30,861,956 |
The accompanying notes form an integral part of these unaudited consolidated financial statements
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M LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY GATEWAY INTERNATIONAL HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
September 30, 2010 | September 30, 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (15,134 | ) | $ | (588,504 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 104,410 | 100,984 | ||||||
Amortization of intangilbe assets | 18,188 | 10,445 | ||||||
Imputed interest on related party notes | (6,182 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Account receivable | (69,882 | ) | 69,774 | |||||
Inventory | 13,743 | 180,981 | ||||||
Prepaid expenses and other assets | (9,193 | ) | 96,048 | |||||
Due from related party | (59,817 | ) | 219,809 | |||||
Account payable and accrued expenses | 288,067 | - | ||||||
Deferred rent | (9,891 | ) | (6,571 | ) | ||||
Cash provided by operating activities | 254,309 | 82,966 | ||||||
Cash used in operating activities of discontinued operations | 300 | - | ||||||
Net Cash provided by operating activities | 254,609 | 82,966 | ||||||
Cash flows from financing activities: | ||||||||
Payments to notes payable | (43,702 | ) | (82,362 | ) | ||||
Change in derivative liability | (4,801 | ) | - | |||||
Payments on capital leases | (8,665 | ) | (24,054 | ) | ||||
Net cash used in financing activities | (57,168 | ) | (106,416 | ) | ||||
Net increase (decrease) in cash and cash equivalent | 197,441 | (23,450 | ) | |||||
Cash and cash equivalents at beginning of period | 50,410 | 438,030 | ||||||
Cash and cash equivalents at end of period | $ | 247,851 | $ | 414,580 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 10,418 | $ | 13,189 | ||||
Cash paid for income taxes | $ | - | $ | - |
-
The accompanying notes form an integral part of these unaudited consolidated financial statements
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M LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY GATEWAY INTERNATIONAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
1. Business
M. Line Holdings, Inc. (the “Company”) was incorporated in Nevada on September 24, 1997, under the name Gourmet Gifts, Inc. (“Gourmet Gifts”). On December 11, 2001, Gourmet Gifts acquired 100% of the issued and outstanding capital stock of Elite Machine Tool Company (“Elite”). Immediately prior to the merger, the Company had 100,000,000 shares of stock authorized, of which 6,768,000 shares were outstanding. Pursuant to the merger, all of the outstanding shares of Elite, aggregating 21,262 shares, were exchanged for shares of common stock of Gourmet Gifts on a 1 to 1,274 basis or into 27,072,000 (net of 600,000 shares subsequently cancelled) shares of common stock leaving a total of 33,240,000 shares of common stock issued and outstanding after the merger. Immediately after the merger, the officers and directors of Gourmet Gifts resigned and the executive officers and directors of Elite were elected and appointed to such positions, thereby effecting a change of control.
Due to the change in voting control and change in senior management in Gourmet Gift as a result of the merger, the transaction was recorded as a “reverse-merger” whereby Elite was considered to be the acquirer for accounting purposes. At the closing of the reverse merger, Elite became a wholly-owned subsidiary and the company changed its corporate name to Gateway International Holdings, Inc., effective January 28, 2002. After the merger, through Elite, the Company became engaged in the acquisition, refurbishment, distribution and sales of pre-owned Computer Numerically Controlled (“CNC”) machine tools to manufacturing customers across the United States of America. This was the Company’s sole business until the acquisition of the additional businesses described below.
Gateway International Holdings, Inc. changed its corporate name to M Line Holdings, Inc. effective March 25, 2009.
The Company and its subsidiaries are engaged in the following businesses which represent is 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). |
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2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of M Line Holdings, Inc. are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for the three month periods ended September 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year. All accounts and intercompany transactions have been eliminated in consolidation. In the opinion of management, the consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position, results of operations and cash flows. These statements should be read in conjunction with the financial statements and related notes which are part of the Company's Annual Report on Form 10-K for the year ended June 30, 2010.
Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution to basic EPS that could occur upon conversion or exercise of securities, options or other such items to common shares using the treasury stock method, based upon the weighted average fair value of our common shares during the period. There were no potentially dilutive securities as of September 30, 2010 and June 30, 2010, respectively.
Reclassification
Certain reclassification has been made to the previous year’s financial statements to conform to current year presentation with no effect on previously reported net loss.
Recent Accounting Pronouncements
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements (“ASU 2010-06”) was issued in January 2010. This ASU amends ASC Subtopic 820-10, Fair Value Measurements and Disclosures—Overall, to require new disclosures regarding transfers in and out of Level 1 and Level 2, as well as activity in Level 3, fair value measurements. This ASU also clarifies existing disclosures over the level of disaggregation in which a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. This ASU further requires additional disclosures about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The Company does not believe that the adoption will have a material impact on the Company’s consolidated financial position or results of operations.
In January 2010, the FASB issued new accounting guidance which requires new disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring presentation on a gross basis of information about purchases, sales, issuances and settlements in Level 3 fair value measurements. The guidance also clarifies existing disclosures regarding level of disaggregation, inputs and valuation techniques. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010. As this guidance requires only additional disclosure, there should be no impact on the consolidated financial statements of the Company upon adoption.
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3. Inventories
Inventories consist of the following at:
September 30, 2010 | June 30, 2010 | |||||||
Finished Goods and Components | $ | 579,685 | $ | 568,695 | ||||
CNC Machines held for sale | 117,000 | 134,500 | ||||||
Work in Progress | 151,866 | 140,773 | ||||||
Raw Materials and Parts | 11,648 | 12,416 | ||||||
860,199 | 856,384 | |||||||
Less reserve for inventories | (122,642 | ) | (105,084 | ) | ||||
$ | 737,557 | $ | 751,300 |
4. Accrued Expenses
Accrued expenses consist of the following at:
September 30, 2010 | June 30, 2010 | |||||||
Compensation and related benefits | $ | 444,056 | $ | 336,597 | ||||
Audit Fees | 15,000 | 70,000 | ||||||
Other | 237,188 | 150,500 | ||||||
$ | 696,244 | $ | 557,097 |
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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, 2010 and June 30, 2010.
September 30, 2010 | June 30, 2010 | |||||||
2011 | $ | 48,492 | $ | 48,454 | ||||
2012 | 39,673 | 45,693 | ||||||
2013 | 8,025 | 13,900 | ||||||
Total minimum lease payments | 96,190 | 108,047 | ||||||
Less amount representing interest | 14,018 | 17,210 | ||||||
Present value of future minimum lease payments | 82,172 | 90,837 | ||||||
Less current portion of capital lease obligations | (46,866 | ) | (46,527 | ) | ||||
Capital Lease obligations, net of current portion | $ | 35,306 | $ | 44,310 |
6. Line of Credit and Notes Payable
Pacific Western Bank Credit Agreement
We are in default under our agreement with Pacific Western Bank. If Pacific Western Bank files a lawsuit for our default we may be forced to sell assets to pay this obligation, which would have a material, negative impact on our business.
As of September 21, 2009, our credit agreement with Pacific Western Bank terminated. During the quarter ended June 30, 2010 we repaid Pacific Western Bank the sum of $360,000.00 leaving a balance as follows
Line of Credit | $ | 218,889 | ||
Term Loan | - | |||
Total | $ | 218,889 |
We reached an agreement with Pacific Western Bank for an extension until August 31, 2010 to repay this balance,$218,889, at a stated interest rate equal to the lender’s referenced prime rate plus 1.50%. We did not pay the outstanding balance by August 31, 2010, and have not received an additional extension. As a result we are in default under the terms of our line of credit. This line of credit is secured by certain of our assets. If Pacific Western Bank filed a lawsuit as a result of our default we may be required to sell some assets to repay this obligation. Per our agreement to extend time for repayment with Pacific Western Bank, at the time of repayment of the line of credit we also agreed to repay any balance due on the equipment loans to Eran Engineering, Inc. As of September 30, 2010, the balance on these equipment loans totaled $84,341.
As of September 30, 2010, we owed $218,889 under the line of credit with Pacific Western Bank. At September 30, 2010, the Company was in violation of certain covenants with the bank and the Company has not been able to obtain a waiver from the bank.
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Notes payable consist of the following at September 30, 2010.
September 30, 2010 | June 30, 2010 | |||||||
Notes payable to financial institutions, secured by the underlying equipment in aggregate monthly installments of $7,292 including interest rates between 7.2% ansd 9.75% per annum for a period of 50 and 60 months. | $ | 84,344 | $ | 98,046 | ||||
Unsecured loan to an individual in respect of the acquisition of a former subsidiary. | 27,061 | 27,061 | ||||||
Term loan to Pacific Western Bank payable in monthly installments of $17,120 including interest at a rate of Prime plus 1.50% per annum due November 2010. | 19,750 | 19,750 | ||||||
An unsecured note payable to a corporation in respect of machines sold to us payable in monthly installments of $5,000.00 per month. | 71,070 | 86,070 | ||||||
An unsecured note payable to a corporation in settlement of a lawsuit payable in monthly installments of $5,000.00 per month | 46,764 | 61,764 | ||||||
Note payable to a financial institution secured by common stock of the company and payable in full on demand. | 100,000 | 100,000 | ||||||
TOTAL | 348,989 | 392,691 | ||||||
Less Current Portion | 329,239 | (372,941 | ) | |||||
Long Term Portion | $ | 19,750 | $ | 19,750 | ||||
2011 | $ | 329,239 | $ | 372,941 | ||||
2012 | 19,750 | 19,750 | ||||||
2013 | - | - | ||||||
2014 | - | - | ||||||
Thereafter | - | - | ||||||
$ | 348,989 | $ | 392,691 |
7. Litigation
1. Voicu Belteu v. Mori Seiki Co., Ltd.; Mori Seiki U.S.A., Inc.; All American CNC Sales, Inc. dba Elite Machine Tool Company; Ellison Manufacturing Tech., Superior Court for the State of California, County of Orange, Case No. 30-2008-00103710. Plaintiff filed this action on March 7, 2008.
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The Complaint, which has causes of action for strict products liability and negligence, alleges that a CNC machine manufactured by Mori Seiki and sold through our subsidiary, All American CNC Sales, Inc. dba Elite Machine Tool Company, was defective and injured the plaintiff. The Complaint seeks damages in excess of $6,300,000 for medical expenses, future medical expenses, lost wages, future lost wages and general damages. All American CNC Sales filed its Answer and Cross-complaint on July 1, 2008 against several individuals and entities involved in the machine purchase and sales transaction, seeking indemnity and contribution.
Plaintiff and All American CNC Sales have both responded to discovery requests and are engaged in the meet and confer process to resolve outstanding discovery issues. Several depositions have been taken and we anticipate more going forward. Plaintiff and All American have agreed to a settlement in principal providing for a dismissal of the case against All American for a waiver of costs. No provision has been made in our financial statements as we believe that the responsibility for liability, if any, is with the manufacturer.
2. James M. Cassidy v. Gateway International Holdings, Inc., American Arbitration Association, Case No. 73-194-32755-08.
We were served with a Demand for Arbitration and Statement of Claim, which was filed on September 16, 2008.
The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant. The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs. We deny 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 a provision in our financial statements at September 30, 2010, for this lawsuit. No provision is necessary as we feel that the litigation has no merit.
3. Elite Machine Tool Company v. ARAM Precision Tool and Die, Avi Amichai, Superior Court for the State of California, County of Orange, Case No. 30-2008-00090891.
Elite Machine filed this action on August 8, 2008.
The Complaint alleged breach of contract for the defendants failing to pay Elite Machine for a machine the defendants purchased from Elite Machine, and sought damages totaling $16,238. ARAM Precision Tool and Die filed its Answer and Cross-Complaint on October 1, 2008. The Cross-Complaint alleged that Elite Machine failed to deliver certain parts of the machine per the sales contract and seeks damages totaling $25,000. In late June 2009, the parties settled this matter and the lawsuits were dismissed on August 13, 2009. Under the terms of the settlement, Aram is expected to pay Elite Machine Tool Company $4,000 in full and final settlement. To date this amount has not been received.
4. 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. Discovery has commenced in this matter but is not expected to be concluded for several months. The Court has set a Trial Setting Conference for October 13, 2010. Management intends to aggressively defend itself against this claim. No trial date has been set. No provision has been made in the attached financial statements as we believe that the litigation has no merit.
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5. Sunbelt Machine Works Corp. v. All American CNC Sales, Inc., United States District Court, Southern District of Texas, Case No. 4:09-cv-108.
Sunbelt filed the Complaint on January 16, 2009.
This case involved a dispute between All American and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by All American to Sunbelt. Sunbelt claimed that it received a machine that does not conform to the specifications it ordered. The amount sought in the Complaint was approximately $139,000. All American filed its Answer on April 13, 2009. Sunbelt filed a Motion for Summary Judgment, which was granted by the Court. As a result a Judgment has been entered against All American and M Line Holdings in the amount of $153,000.
A satisfaction of judgment agreement was entered into by the parties on January 25, 2010. The settlement amount was $152,802.49 to be paid by a Mori Seki MH-50 machine valued at $59,000, with the balance being paid in 13 monthly installments of $5,000.00 commencing February 15, 2010 with interest at the rate of approximately .44% per annum, the remaining balance being paid in March 2011. This amount is being paid according to schedule.
A provision has been made in the attached financial statements in the sum of $46,764 at September 30, 2010.
6. 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.
7. M Line Holdings, Inc. v. Hwacheon Machinery, Orange County Superior Court, Orange County, California, Case No. 30-2010-00369532. The Complaint was filed on May 4, 2010
The Complaint against Hwacheon seeks declaratory relief from the Court relieving M Line Holdings from having to respond to Hwacheon’s harassing, burdensome and voluminous requests for documents relating to Hwacheon’s judgment against All American CNC Sales, Inc. No answer has been filed by Hwacheon and no trial date has been set. Management does not expect a significant financial impact as a result of this lawsuit.
8. 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 $163,578.88, 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. On or about August 11, 2009, the Court heard oral argument on Fadal’s Motion for Right to Attach Order and Writ of Attachment. The Court granted this Motion in part, issuing a Right to Attach Order against All American CNC in the amount of approximately $164,000. The Court denied the Motion as to M Line Holdings, Inc. On August 12, 2009, All American CNC filed an Answer to the Complaint, and M Line Holdings, Inc., filed a demurrer to the Complaint. The hearing on M Line Holdings, Inc.’s demurrer is not currently set. Management intends to aggressively defend itself against this claim. No trial date has been set and a provision has been made in the financial statement of All American CNC Sales, Inc. in the sum of $163,578 at September 30, 2010, but not in M Line Holdings, Inc. financial statements where All American CNC Sales, Inc. is recorded as discontinued operations as a result the business shutting down..
9. Do v. E.M. Tool Company, Orange County Superior Court, Orange County, California, Case No. 30-2009-00123879.
The Complaint was filed on June 1, 2009.
The Complaint alleges causes of action for negligence, product liability and breach of warranty, and seeks damages to be determined at time of trial. This lawsuit was tendered by E.M. Tool Company to its insurance company, which is currently providing a defense. We filed an Answer and a Cross-complaint against the manufacturer of the equipment the Mori Seiki Company, Ltd. To the best of our knowledge no trial date has been set and no provision has been made in the financial statement at September 30, 2010 as we believe the litigation has no merit and any liability is that of the manufacturer, not E.M. Tool Company.
10. 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 not less than $30,000. The Defendants filed an Answer on June 5, 2009. Management intends to aggressively defend itself against this claim. No trial date has been set and no provision has been made in the financial statements at September 30, 2010.
11. Laureano v. Eran Engineering, State of California Worker’s Compensation Appeals Board, no case number.
Mr. Laureano has filed a claim with the Worker’s Compensation Appeals Board against Eran Engineering. At this time, Eran Engineering has only been served with a subpoena for business records, requesting Mr. Laureano’s employment file, personnel file, claim file, and payroll documents. Management intends to aggressively defend this claim.
No provision has been made in the financial statements of the company at September 30, 2010. The Company’s management believes that payment(s), if any, will be the responsibility of Workers Compensation Insurance.
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12. 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 for allegedly failing to pay him his entire severance payment. 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 Company has answered the Complaint and has filed a motion for leave to file a cross complaint.
We are negotiating a settlement in this case at this time. Therefore, no provision has been made in the financial statement for this sum as of September 30, 2010.
13. 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 us seeking damages for failure to pay legal fees in the amount of $120,166.30. The response is not due yet as of the date of this Annual Report but will be filed in a timely manner.
Management believes that the amount of the charges by Plaintiff is overstated and intends to defend the action for the amount sought by Plaintiff.
Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity.
8. Income Taxes
The provision (benefit) for income taxes is comprised of the following for the quarters ended September 30:
QUARTER ENDED SEPTEMBER 30, | ||||||||
2010 | 2009 | |||||||
Current Federal | $ | - | $ | - | ||||
Current State | - | - | ||||||
Deferred Federal | 4,194 | 199,820 | ||||||
Deferred State | 740 | 35,262 | ||||||
Valuation Allowance | (4,934 | ) | (235,082 | ) | ||||
$ | 0 | $ | 0 |
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The benefit for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The differences between the federal statutory tax rate of 34% and the effective tax rates are primarily due to state income tax provisions, net operating loss (“NOL”) carry forwards, deferred tax valuation allowance and permanent differences as follows for the quarters ended September 30:
QUARTER ENDED SEPTEMBER 30, | ||||||||
2010 | 2009 | |||||||
Federal tax at statutory rate | 34 | % | 34 | % | ||||
Permanent differences: | ||||||||
State Income Taxes, net of federal benefit | 6 | % | 6 | % | ||||
Change in valuation allowance/Other | (37 | ) % | (36 | ) % | ||||
Other | (3 | ) % | (4 | ) % | ||||
0 | % | 0 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
QUARTER ENDED SEPTEMBER 30, | ||||||||
2010 | 2009 | |||||||
DEFERRED TAX ASSETS & LIABILITIES: | ||||||||
CURRENT: | ||||||||
Allowances for bad debt | $ | 33,246 | $ | 64,674 | ||||
Reserve for inventories | 41,859 | |||||||
Accrued expenses | 74,606 | 39,044 | ||||||
Other | 14,311 | 33,896 | ||||||
164,022 | 137,614 | |||||||
NON-CURRENT: | ||||||||
Net Operating loss carryforwards | 364,964 | 770,209 | ||||||
Depreciation | (28,322 | ) | (168,373 | ) | ||||
Amortization of intangibles | (16,710 | ) | - | |||||
319,932 | 601,836 | |||||||
GROSS TAX ASSET | 483,954 | 739,450 | ||||||
VALUATION ALLOWANCE | (483,954 | ) | (461,328 | ) | ||||
$ | 0 | $ | 278,122 |
9. Common Stock
During the quarter ended September 30, 2010, the Company did not have any transactions relating to common stock.
10. Related Party Transaction
There was no related party transaction during the quarter ended September 30, 2010 as all related party notes were repaid or settled during the fiscal year ended June 30, 2009.
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11. 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
Segment information for the three months ended September 30, 2010
Machine | Precision | Corporate | Total | |||||||||||||
sales | Manufacturing | |||||||||||||||
Revenue | $ | 788,896 | $ | 867,703 | $ | - | $ | 1,656,599 | ||||||||
Interest Income | - | - | 6,182 | 6,182 | ||||||||||||
Interest expense | 74 | 12,344 | 12,418 | |||||||||||||
Depreciation and Amortization | 18,938 | 97,799 | 5,861 | 122,598 | ||||||||||||
Income (loss) before taxes | 67,704 | (92,950 | ) | 10,912 | (14,334 | ) | ||||||||||
Total Assets | 239,180 | 1,973,512 | 856,069 | 3,068,761 | ||||||||||||
Capital Expenditure | $ | - | $ | - | $ | - | $ | - |
Segment information for the three months ended September 30, 2009
Machine | Precision | Corporate | Total | |||||||||||||
sales | Manufacturing | |||||||||||||||
Revenue | $ | 876,045 | $ | 772,114 | $ | - | $ | 1,648,159 | ||||||||
Interest Income | - | - | - | - | ||||||||||||
Interest expense | 224 | - | 12,965 | 13,189 | ||||||||||||
Depreciation and Amortization | 13,150 | 97,984 | 295 | 111,429 | ||||||||||||
Income (loss) before taxes | (283,018 | ) | (338,824 | ) | 33,338 | (588,504 | ) | |||||||||
Total Assets | 223,944 | 1,863,927 | 2,007,844 | 4,095,715 | ||||||||||||
Capital Expenditure | $ | - | $ | - | $ | - | $ | - |
Sales are derived principally from customers located within the United States.
12. Going Concern and Management Plans
The company has reached an agreement with Pacific Western Bank for an extension until August 31, 2010 to repay this balance, $218,889, at a stated interest rate equal to the lender’s referenced prime rate plus 1.50%. We did not pay the outstanding balance by August 31, 2010, and have not received an additional extension. As a result we are in default under the terms of our line of credit. This line of credit is secured by certain of our assets. If Pacific Western Bank filed a lawsuit as a result of our default we may be required to sell some assets to repay this obligation. Per our agreement to extend time for repayment with Pacific Western Bank, at the time of repayment of the line of credit we also agreed to repay any balance due on the equipment loans to Eran Engineering, Inc. As of September 30, 2010, the balance on these equipment loans totaled $84,341.
13. Subsequent Events
The company has concluded an agreement to refinance the equipment of Eran Engineering, Inc. in order to repay Pacific Western Bank and provide working capital for the group.
The company has received a letter of demand from Asher to repay the note receivable for $100,000 and management expects to repay the note in full shortly.
The Company has appointed Island Stock Transfer as its new transfer agent and this agreement became effective on November 16, 2010. 40,000 shares of M Line Holdings, Inc, stock was issued to Island Stock Transfer as part of the fees due.
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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. (formerly known as Gateway International Holdings, Inc., and referred to herein as “MLH”, “we,” “us” or “Company”) for the three months ended September 30, 2010, 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 this filing, 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.
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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 15 years and we believe our relationship is good.
Trends Affecting Our Business
The recent tightening of the capital markets may 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. Any impact on our customers’ ability to purchase machines could negatively impact our business.
The primary components sold by our Precision Manufacturing segment during the quarters ended September 30, 2010 and, 2009, were parts sold to Panasonic, a leading provider of in-flight entertainment systems for commercial aircraft. The decline in economic activity has an adverse effect on our business. This has had an effect on Panasonic’s orders to us, and, therefore, there has been an adverse effect on our business. In addition, any further decrease 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.
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Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Three month period ended September 30, 2010 and 2009. | |||||||||
2010 | 2009 | ||||||||
Sales by segment: | |||||||||
Machine Sales | $ | 788,896 | $ | 876,045 | |||||
Precision Engineering | 867,703 | 772,114 | |||||||
1,656,599 | 1,648,159 | ||||||||
Gross Profit by segment: | |||||||||
Machine Sales | 339,324 | 82,563 | |||||||
Precision Engineering | 387,251 | 220,162 | |||||||
726,575 | 302,725 |
Sales
Sales in the fiscal 2010 period increased 1% compared to the comparable period in fiscal 2009. The change is attributable to increase in sales in the Precision Manufacturing Group. Sales increased by 11% in the Precision Manufacturing Group. Sales in the Machine Sales Group decreased by 10%. The sales decrease in this group was primarily due to fewer customers purchasing equipment during this period.
Gross Margin
Gross profit increased by 140% compared to the comparable period in fiscal 2009. The gross profit for the Machine Sales Group increased by 311% due to an increase in margins as a result of customer demand for machines and the ability to purchase better equipment at lower prices. The economy has resulted in better priced equipment being available for purchase. The increase within the Precision Manufacturing Group resulted from better margins as a result of customer demand for product in the 2010 period.
Selling, General & Administrative
Selling, general and administrative costs decreased by $150,310 compared to the comparable period in fiscal 2009. The change is due to decreases in personnel costs and cost savings throughout the Company. The greatest savings came from personnel layoffs and salary reductions during the fiscal 2010 period.
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Amortization of Intangible Assets
Amortization expense for intangible assets for the period ended September 2010 was $18,188 to $10,445 in the comparable period in fiscal 2009.
Interest Expense
Interest expense decreased by $771 compared to the comparable period in fiscal 2009. The change is attributable to lower average debt balances.
Gain on Sale of Assets
During the fiscal 2010 period, there was no gain or loss as no assets were sold during the period.
Net Loss
Net losses have reduced from ($588,504) for the quarter ended September 30, 2009 to ($15,134) for the quarter ended September 30, 2010. This very significant reduction in losses totaling $573,370 was due to better profit margins obtained on revenues together with significant overhead savings.
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 Pacific Western Bank. At September 30, 2010 and June 30, 2010, our cash and cash equivalents and working capital decreased by $23,450 and $556,830, respectively.
The term loan provides for borrowings of up to $500,000. The loan bears interest at the lender's referenced prime rate plus 1.5% with principal and interest payments due monthly.
Cash Flows
The following table sets forth our cash flows for the three months ended September 30:
Provided by (used in) | 2010 | 2009 | Change | |||||||||
Operating activities | 254,609 | 82,966 | (171,643 | ) | ||||||||
Investing activities | - | - | ||||||||||
Financing activities | (57,168 | ) | (106,416 | ) | (49,248 | ) | ||||||
197,441 | (23,450 | ) | (220,891 | ) |
Operating Activities
Operating cash flows during the fiscal 2010 and 2009 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 2010 period, non-cash expenses included in our net income and in operating activities totaled $122,598 compared to $111,429 in the 2009 period.
The increase in operating assets and liabilities for the 2010 and 2009 periods were $142,845 and $86,153, respectively. During the 2010 period, the increase was primarily attributable to an increase in accounts payable and accrued expenses.
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The changes in operating assets for the 2010 period were primarily attributable to a reduction of $284,067 in accounts payable and accrued expenses.
Investing Activities
We made capital expenditures of $0 and $0 during the first three months of the fiscal 2010 and 2009 periods, respectively.
Financing Activities
During the first three months of the fiscal 2010 and 2009 periods, we repaid (net of borrowings) $52,367 and $106,416, respectively of outstanding debt and capital lease obligations. During the 2010 and 2009 periods, we repaid $0 on our line of credit.
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. We also have a floating interest rate credit agreement with Pacific Western Bank. 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, 2009, 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, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 4T.
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(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, 2010. 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, 2010, 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.
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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 Quarterly Report, it 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.
3. Prior to Spring/Summer 2008, we did not have adequate internal controls, or policies and procedures, with respect to our travel and expense reports. As a result, it was discovered that certain expense reimbursements were paid to our officers and directors even though complete expense reimbursement paperwork had not been submitted with adequate documentation surrounding the nature of the expense. These expenses reimbursements were paid based on the incomplete paperwork. To the extent these expenses could not subsequently be substantiated we requested reimbursement from that officer and director.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this Quarterly Report.
(c) Remediation of Material Weaknesses
Being aware of these material weaknesses our management will be vigilant about ensuring they do not affect our reporting obligations and will seek to remedy these issues when it is financially feasible to do so.
(d) Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during our most recently completed fiscal quarter.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
1. Voicu Belteu v. Mori Seiki Co., Ltd.; Mori Seiki U.S.A., Inc.; All American CNC Sales, Inc. dba Elite Machine Tool Company; Ellison Manufacturing Tech., Superior Court for the State of California, County of Orange, Case No. 30-2008-00103710. Plaintiff filed this action on March 7, 2008.
The Complaint, which has causes of action for strict products liability and negligence, alleges that a CNC machine manufactured by Mori Seiki and sold through our subsidiary, All American CNC Sales, Inc. dba Elite Machine Tool Company, was defective and injured the plaintiff. The Complaint seeks damages in excess of $6,300,000 for medical expenses, future medical expenses, lost wages, future lost wages and general damages. All American CNC Sales filed its Answer and Cross-complaint on July 1, 2008 against several individuals and entities involved in the machine purchase and sales transaction, seeking indemnity and contribution.
Plaintiff and All American CNC Sales have both responded to discovery requests and are engaged in the meet and confer process to resolve outstanding discovery issues. Several depositions have been taken and we anticipate more going forward. Plaintiff and All American have agreed to a settlement in principal providing for a dismissal of the case against All American for a waiver of costs. No provision has been made in our financial statements as we believe that the responsibility for liability, if any, is with the manufacturer.
2. James M. Cassidy v. Gateway International Holdings, Inc., American Arbitration Association, Case No. 73-194-32755-08.
We were served with a Demand for Arbitration and Statement of Claim, which was filed on September 16, 2008.
The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant. The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs. We deny 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 a provision in our financial statements at September 30, 2010, for this lawsuit. No provision is necessary as we feel that the litigation has no merit.
3. Elite Machine Tool Company v. ARAM Precision Tool and Die, Avi Amichai, Superior Court for the State of California, County of Orange, Case No. 30-2008-00090891.
Elite Machine filed this action on August 8, 2008.
The Complaint alleged breach of contract for the defendants failing to pay Elite Machine for a machine the defendants purchased from Elite Machine, and sought damages totaling $16,238. ARAM Precision Tool and Die filed its Answer and Cross-Complaint on October 1, 2008. The Cross-Complaint alleged that Elite Machine failed to deliver certain parts of the machine per the sales contract and seeks damages totaling $25,000. In late June 2009, the parties settled this matter and the lawsuits were dismissed on August 13, 2009. Under the terms of the settlement, Aram is expected to pay Elite Machine Tool Company $4,000 in full and final settlement. To date this amount has not been received.
4. 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. Discovery has commenced in this matter but is not expected to be concluded for several months. The Court has set a Trial Setting Conference for October 13, 2010. Management intends to aggressively defend itself against this claim. No trial date has been set. No provision has been made in the attached financial statements as we believe that the litigation has no merit.
5. Sunbelt Machine Works Corp. v. All American CNC Sales, Inc., United States District Court, Southern District of Texas, Case No. 4:09-cv-108.
Sunbelt filed the Complaint on January 16, 2009.
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This case involved a dispute between All American and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by All American to Sunbelt. Sunbelt claimed that it received a machine that does not conform to the specifications it ordered. The amount sought in the Complaint was approximately $139,000. All American filed its Answer on April 13, 2009. Sunbelt filed a Motion for Summary Judgment, which was granted by the Court. As a result a Judgment has been entered against All American and M Line Holdings in the amount of $153,000.
A satisfaction of judgment agreement was entered into by the parties on January 25, 2010. The settlement amount was $152,802.49 to be paid by a Mori Seki MH-50 machine valued at $59,000, with the balance being paid in 13 monthly installments of $5,000.00 commencing February 15, 2010 with interest at the rate of approximately .44% per annum, the remaining balance being paid in March 2011. This amount is being paid according to schedule.
A provision has been made in the attached financial statements in the sum of $46,764 at September 30, 2010.
6. 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.
7. M Line Holdings, Inc. v. Hwacheon Machinery, Orange County Superior Court, Orange County, California, Case No. 30-2010-00369532. The Complaint was filed on May 4, 2010
The Complaint against Hwacheon seeks declaratory relief from the Court relieving M Line Holdings from having to respond to Hwacheon’s harassing, burdensome and voluminous requests for documents relating to Hwacheon’s judgment against All American CNC Sales, Inc. No answer has been filed by Hwacheon and no trial date has been set. Management does not expect a significant financial impact as a result of this lawsuit.
8. 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. On or about August 11, 2009, the Court heard oral argument on Fadal’s Motion for Right to Attach Order and Writ of Attachment. The Court granted this Motion in part, issuing a Right to Attach Order against All American CNC in the amount of approximately $164,000. The Court denied the Motion as to M Line Holdings, Inc. On August 12, 2009, All American CNC filed an Answer to the Complaint, and M Line Holdings, Inc., filed a demurrer to the Complaint. The hearing on M Line Holdings, Inc.’s demurrer is not currently set. Management intends to aggressively defend itself against this claim. No trial date has been set and a provision has been made in the financial statement of All American CNC Sales, Inc. in the sum of $163,578 at September 30, 2010, but not in M Line Holdings, Inc. financial statements where All American CNC Sales, Inc. is recorded as discontinued operations as a result the business shutting down..
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9. Do v. E.M. Tool Company, Orange County Superior Court, Orange County, California, Case No. 30-2009-00123879.
The Complaint was filed on June 1, 2009.
The Complaint alleges causes of action for negligence, product liability and breach of warranty, and seeks damages to be determined at time of trial. This lawsuit was tendered by E.M. Tool Company to its insurance company, which is currently providing a defense. We filed an Answer and a Cross-complaint against the manufacturer of the equipment the Mori Seiki Company, Ltd. To the best of our knowledge no trial date has been set and no provision has been made in the financial statement at September 30, 2010 as we believe the litigation has no merit and any liability is that of the manufacturer, not E.M. Tool Company.
10. 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 not less than $30,000. The Defendants filed an Answer on June 5, 2009. Management intends to aggressively defend itself against this claim. No trial date has been set and no provision has been made in the financial statements at September 30, 2010.
11. Laureano v. Eran Engineering, State of California Worker’s Compensation Appeals Board, no case number.
Mr. Laureano has filed a claim with the Worker’s Compensation Appeals Board against Eran Engineering. At this time, Eran Engineering has only been served with a subpoena for business records, requesting Mr. Laureano’s employment file, personnel file, claim file, and payroll documents. Management intends to aggressively defend this claim.
No provision has been made in the financial statements of the company at September 30, 2010. The Company’s management believes that payment(s), if any, will be the responsibility of Workers Compensation Insurance.
12. 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 for allegedly failing to pay him his entire severance payment. 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 Company has answered the Complaint and has filed a motion for leave to file a cross complaint.
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We are negotiating a settlement in this case at this time. Therefore, no provision has been made in the financial statement for this sum as of September 30, 2010.
13. 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 us seeking damages for failure to pay legal fees in the amount of $120,166.30. The response is not due yet as of the date of this Annual Report but will be filed in a timely manner.
Management believes that the amount of the charges by Plaintiff is overstated and intends to defend the action for the amount sought by Plaintiff.
Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity.
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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 have included risk factors in our Annual Report on Form 10-K for the year ended June 30, 2010, as filed with the Commission on .November 12, 2010
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There have been no events required to be reported under this Item.
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
Letter of Intent with Money Line Capital, Inc.
On June 30, 2009, we entered into a binding Letter of Intent (the “LOI”) with Money Line Capital,Inc., a California corporation (“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 agree 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 his 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 economyMLCI’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, 2010, as well as completing a valuation by a qualified third-party company,.
Assignment of Gledhill Note.
On March 25, 2009, we entered into an Assignment of Promissory Note and Consent Thereto (the “Assignment”) with MLCI, under which MLCI agreed to assume our repayment obligations to Joseph Gledhill and Joyce Gledhill under that certain $650,000 principal amount Promissory Note dated December 8, 2008 (the “Gateway Note”) in exchange for the issuance of 3,250,000 shares of our common stock (the “Shares”). Mr. Gledhill, one of our former directors, and Joyce Gledhill consented to the Assignment. Pursuant to the Assignment, MLCI and the Gledhill’s entered into a new $650,000 principal amount secured promissory note, a security agreement and a pledge agreement. We issued the 3,250,000 shares of our common stock to MLCI on June 30, 2009.
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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, 2009 | |
10.16 (7) | Securities Purchase Agreement and Convertible Promissory Note with Asher Enterprises, Inc. dated April 26, 2010 (filed herewith) | |
10.17 (7) | Convertible Promissory Note with Asher Enterprises, Inc. dated May 25, 2010 (filed herewith) | |
10.18 (7) | Commercial Real Estate Lease with SG&H Partners, L.P. for Anaheim Property dated August 13, 2010 (filed herewith) | |
10.19 (7) | Business Loan Agreement with Pacific Western Bank dated June 7, 2010 (filed herewith) | |
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, 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: November 22, 2010 | /s/ George Colin | ||
By: | George Colin | ||
President, Chief Executive | |||
Officer and a Director | |||
Dated: November 22, 2010 | /s/ Jitu Banker | ||
By: | Jitu Banker | ||
Chief Financial Officer, | |||
Secretary and a Director |
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