Attached files
file | filename |
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EX-31.2 - M LINE HOLDINGS INC | v166384_ex31-2.htm |
EX-32.1 - M LINE HOLDINGS INC | v166384_ex32-1.htm |
EX-32.2 - M LINE HOLDINGS INC | v166384_ex32-2.htm |
EX-31.1 - M LINE HOLDINGS INC | v166384_ex31-1.htm |
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, 2009
¨
|
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 6, 2009,
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.
|
16
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
20
|
ITEM
4T.
|
Controls
and Procedures.
|
20
|
PART
II
|
||
ITEM
1.
|
Legal
Proceedings.
|
23
|
ITEM
1A.
|
Risk
Factors.
|
26
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
26
|
ITEM
3.
|
Defaults
Upon Senior Securities.
|
26
|
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders.
|
26
|
ITEM
5.
|
Other
Information.
|
26
|
ITEM
6.
|
Exhibits.
|
27
|
2
PART
I-FINANCIAL INFORMATION
M
LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY
GATEWAY INTERNATIONAL HOLDINGS, INC.)
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
September
30, 2009
|
June 30,
2009
|
|||||||
Assets
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 414,580 | $ | 438,030 | ||||
Accounts
receivable, net
|
773,943 | 892,718 | ||||||
Inventories
|
1,120,440 | 1,301,421 | ||||||
Due
from related party
|
49,001 | |||||||
Prepaid
and other current assets
|
46,399 | 80,250 | ||||||
Deferred
Income Taxes
|
95,617 | 95,617 | ||||||
Current
Assets - Discontinued Operations
|
59,673 | 116,869 | ||||||
Total
current assets
|
2,559,653 | 2,924,905 | ||||||
Property
and equipment, net
|
1,059,334 | 1,160,318 | ||||||
Intangible
Assets, net
|
337,747 | 348,192 | ||||||
Deposits
and other
|
61,145 | 66,146 | ||||||
Deferred
Income Taxes
|
182,505 | 182,505 | ||||||
Non
Current Assets - Discontinued Operations
|
63,704 | 63,704 | ||||||
Total
Assets
|
$ | 4,264,088 | $ | 4,745,770 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
Liabilities:
|
||||||||
Line
of Credit
|
$ | 440,000 | $ | 440,000 | ||||
Accounts
Payable
|
861,375 | 502,745 | ||||||
Accrued
Expenses and other
|
278,730 | 486,951 | ||||||
Notes
payable
|
238,974 | 265,969 | ||||||
Note
payable, related party
|
69,400 | - | ||||||
Capital
Leases - current
|
57,853 | 70,747 | ||||||
Current
Liabilities - Discontinued Operations
|
720,439 | 717,899 | ||||||
Total
Current Liabilities
|
2,666,771 | 2,484,311 | ||||||
Notes
Payable
|
111,798 | 167,165 | ||||||
Capital
Leases - long term
|
86,191 | 97,351 | ||||||
Deferred
Income Taxes
|
168,373 | 168,373 | ||||||
Deferred
Rent
|
59,278 | 65,849 | ||||||
Long
Term Liabilities - discontinued operations
|
27,211 | 29,751 | ||||||
Total
Liabilities
|
3,119,622 | 3,012,800 | ||||||
Shareholders'
Equity
|
||||||||
Common
Stock, $0.001: 100,000,000 shares
|
||||||||
Authorized;
30,861,956 shares issued and outstanding at September 30, 2009 and June
30, 2009
|
30,862 | 30,862 | ||||||
Additional
paid in capital
|
9,505,812 | 9,505,812 | ||||||
Accumulated
deficit
|
(8,392,208 | ) | (7,803,704 | ) | ||||
Total
stockholders' equity
|
1,144,466 | 1,732,970 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 4,264,088 | $ | 4,745,770 |
See
accompanying Notes to Consolidated Financial Statements.
3
M
LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY
GATEWAY INTERNATIONAL HOLDINGS, INC.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
September
30, 2009
|
September
30, 2008
|
|||||||
Net
sales
|
$ | 1,648,159 | $ | 1,797,384 | ||||
Cost
of sales
|
1,345,434 | 911,009 | ||||||
Gross
Profit
|
302,725 | 886,375 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
867,595 | 434,123 | ||||||
Amortization
of intangible assets
|
10,445 | - | ||||||
Total
operating expense
|
878,040 | 434,123 | ||||||
Operating
income (loss)
|
(575,315 | ) | 452,252 | |||||
Other
income (expense):
|
||||||||
Interest
Expense
|
(13,189 | ) | (33,251 | ) | ||||
Interest
Income
|
- | 2,375 | ||||||
Total
other income (expense)
|
(13,189 | ) | (30,876 | ) | ||||
Income
(Loss) from continuing operations before income tax
|
(588,504 | ) | 421,376 | |||||
Income
tax provision
|
- | (35,496 | ) | |||||
Income/(loss)
from continuing operations after income taxes
|
(588,504 | ) | 385,880 | |||||
Loss
from discontinued operations , net of income taxes
|
- | (337,913 | ) | |||||
NET
INCOME (LOSS)
|
$ | (588,504 | ) | $ | 47,967 | |||
NET INCOME (LOSS) PER
SHARE:
|
||||||||
Basic
net income (loss) per share:
|
||||||||
- | - | |||||||
- | - | |||||||
Diluted
net income (loss) per share:
|
||||||||
Continuing
operations
|
$ | (0.02 | ) | $ | 0.01 | |||
Discontinued
Operations
|
- | (0.01 | ) | |||||
Net
income (loss)
|
$ | (0.02 | ) | $ | 0.00 | |||
Weighted
average number of common shares under in per share
calculations
|
||||||||
Basic
|
30,861,956 | 28,305,012 | ||||||
Diluted
|
30,861,956 | 28,311,313 |
See
accompanying Notes to Consolidated Financial Statements.
4
M
LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY
GATEWAY INTERNATIONAL HOLDINGS, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
September
30, 2009
|
September
30, 2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income(loss)
|
$ | (588,504 | ) | $ | 47,967 | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Gain
on disposition of assets
|
- | - | ||||||
Depreciation
|
100,984 | 111,933 | ||||||
Amortization
of intangible assets
|
10,445 | 10,445 | ||||||
Stock-based
compensation
|
- | 12,493 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Account
receivable
|
69,774 | 457,813 | ||||||
Inventory
|
180,981 | (184,961 | ) | |||||
Prepaid
expenses and other assets
|
96,048 | 163,063 | ||||||
Account
payable and accrued expenses
|
219,809 | 169,153 | ||||||
Customer
deposit
|
- | 23,340 | ||||||
Income
taxes payable
|
- | (187,954 | ) | |||||
Deferred
rent
|
(6,571 | ) | (3,322 | ) | ||||
Deferred
income taxes
|
- | 24,233 | ||||||
Net
cash provided by operating activities
|
82,966 | 644,203 | ||||||
Cash
flows from investing activities:
|
||||||||
Deposits
and other
|
- | (2,500 | ) | |||||
Net
cash used in investing activities:
|
- | (2,500 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Net
borrowings (repayments) on line of credit
|
- | (83,000 | ) | |||||
Payments
on notes payable
|
(82,362 | ) | (60,122 | ) | ||||
Payments
on related party notes payable
|
- | (36,364 | ) | |||||
Payments
on capital leases
|
(24,054 | ) | (16,190 | ) | ||||
Net
cash used in financing activities
|
(106,416 | ) | (195,676 | ) | ||||
Net increase
(decrease) in cash and cash equivalent
|
(23,450 | ) | 446,027 | |||||
Cash
and cash equivalents at beginning of period
|
438,030 | 901,707 | ||||||
Cash
and cash equivalents at end of period
|
$ | 414,580 | $ | 1,347,734 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 13,189 | $ | 23,389 | ||||
Cash
paid for income taxes
|
$ | - | $ | 280,000 | ||||
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||
Stock
retired upon cancellation of note payable
|
$ | - | $ | 417 |
See
accompanying Notes to Consolidated Financial Statements.
5
M
LINE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY
GATEWAY INTERNATIONAL HOLDINGS, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(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 the company 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).
|
6
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, 2009 and 2008 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, 2009.
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, 2009 and June 30, 2009,
respectively.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which
replaces FAS No. 141. SFAS No. 141(R) (ASC 805) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is to be applied prospectively to business
combinations. The company is evaluating this statement for the impact, if any,
on its consolidated financial statements, however, the Company will be required
to expense cost related to any acquisition after June 30, 2009
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (ASC
810-10-65-1). This statement amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest (minority interest) in a subsidiary
and for the deconsolidation of a subsidiary. Upon its adoption, effective for us
in the fiscal year beginning July 1, 2009, noncontrolling interests will be
classified as equity in the Company’s balance sheet and income and comprehensive
income attributed to the noncontrolling interest will be included in the
Company’s income and comprehensive income, respectively. The provisions of this
standard must be applied prospectively upon adoption except for the presentation
and disclosure requirements. We do not expect the adoption of SFAS No. 160 to
have an impact on our consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133” (ASC 810-10-65-1). SFAS
No. 161 amends and expands the disclosure requirements of SFAS No. 133 for
derivative instruments and hedging activities. SFAS No. 161 requires qualitative
disclosure about objectives and strategies for using derivative and hedging
instruments, quantitative disclosures about fair value amounts of the
instruments and gains and losses on such instruments, as well as disclosures
about credit-risk features in derivative agreements. We do not expect the
adoption of SFAS No. 161 to have a significant impact on our consolidated
financial statements.
7
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (ASC 105). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS will become effective 60 days following the Security and
Exchange Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”. We do not expect the adoption of SFAS
No. 162 to have a significant impact on our consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" (“SFAS 165”) (ASC 855).
SFAS 165 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 will be effective for interim or
annual period ending after June 15, 2009 and will be applied prospectively. The
Company will adopt the requirements of this pronouncement for the year ended
June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will
have an impact on its consolidated results of operations or consolidated
financial position.
3.
|
Inventories
|
Inventories
consist of the following at:
September 30,
2009
|
June 30, 2009
|
|||||||
Finished
Goods and components
|
$ | 838,617 | $ | 843,305 | ||||
CNC
Machines held for sale
|
112,500 | 183,500 | ||||||
Work
in progress
|
141,666 | 233,773 | ||||||
Raw
Materials and Parts
|
27,657 | 40,843 | ||||||
$ | 1,120,440 | $ | 1,301,421 |
4.
|
Accrued
Expenses
|
Accrued
expenses consist of the following at:
September 30,
2009
|
June 30, 2009
|
|||||||
Compensation
and related benefits
|
$ | 170,738 | $ | 170,518 | ||||
Other
|
107,992 | 316,433 | ||||||
$ | 278,730 | $ | 486,951 |
8
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, 2009 and June 30, 2009.
September
30, 2009
|
June 30,
2009
|
|||||||
2010
|
$ | 70,904 | $ | 82,519 | ||||
2011
|
52,953 | 53,830 | ||||||
2012
|
40,036 | 50,329 | ||||||
2013
|
1,769 | 3,038 | ||||||
2014
|
- | - | ||||||
Total
minimum lease payments
|
165,662 | 189,716 | ||||||
Less
amount representing interest
|
21,618 | 21,618 | ||||||
Present
value of future minimum lease payments
|
144,044 | 168,098 | ||||||
Less
current portion of capital lease obligations
|
57,853 | 70,747 | ||||||
Capital
Lease obligations, net of current portion
|
86,191 | 97,351 |
6.
|
Line of Credit and Notes
Payable
|
Pacific
Western Bank Credit Agreement
On August
21, 2006, the Company entered into credit agreement with Pacific Western Bank
(“PWB”). The credit agreement provides for borrowings of up to $1,500,000
through a line of credit which is secured by substantially all of the Company’s
assets and personal guarantees by two of the executive officers, Joseph Gledhill
and Larry Consalvi. On November 15, 2007, the credit agreement was amended to
reduce the amount available under the line of credit to $1,000,000 and to
convert $500,000 of outstanding principal into a term loan. On September 29,
2008, the credit agreement was renewed through September 21, 2009, and Timothy
Consalvi replaced Larry Consalvi as a guarantor.
Pacific
Western Bank has subsequently renewed the credit line through November 21, 2009.
The Company is making arrangements to repay the line of credit to Pacific
Western Bank.
The line
of credit has a stated interest rate equal to the lender's referenced prime rate
plus 1.5%, or 9.75% and 6.5% per annum at June 30, 2009 and September
30, 2009, respectively. Interest is payable monthly with the
outstanding principal balance due on November, 2009. The amount available for
borrowings is determined based on a monthly basis based on 80% of eligible
accounts receivable, as defined. The Company also has an irrevocable letter of
credit outstanding of $100,000. The proceeds are used for general working
capital needs.
The term
loan provides for borrowings of up to $500,000. The loan has a stated interest
rate equal to the lender's referenced prime rate plus 1.5%, or 9.75% and 6.5%
per annum at June 30, 2009 and 2008, respectively. Principal and interest
payments are payable monthly.
9
The
company is in the process of making arrangements to repay the line of credit to
Pacific Western Bank.
Notes
payable consist of the following at September 30 and June 30, 2009:
September 30, 2009
|
June 30, 2009
|
|||||||
Notes
payable to financial institutions, secured by the underlying equipment
payable in aggregate
monthly installments of $7,292, including interest rates between 7.2% and
9.75% per
annum for a period of 50 and 60 months
|
$ | 138,315 | $ | 151,608 | ||||
Unsecured
Loan to an individual in respect of the acquisition of
a former subsidiary
|
$ | 18,012 | $ | 31,526 | ||||
Term
loan to PWB payable in monthly installments of $17,120 including
interest at a rate of Prime plus 1.50% per annum due
November 25, 2010
|
194,445 | $ | 250,000 | |||||
Total
|
350,772 | 433,134 | ||||||
Less
current portion
|
238,974 | 265,949 | ||||||
Long
Term portion
|
$ | 111,798 | $ | 167,185 |
2009
|
||||
2009
|
$ | - | ||
2010
|
$ | 238,974 | ||
2011
|
111,978 | |||
2012
|
- | |||
2013
|
- | |||
Thereafter
|
- | |||
$ | 350,772 |
7.
|
Litigation
|
1. Onofrio Saputo and Christopher
Frisco v. Gateway International Holdings, Inc., Lawrence Consalvi, Timothy
Consalvi and Joe Gledhill, Court of the State of California, County of
Orange, Case No. 30-2008-00110905. Plaintiffs filed this action on
August 21, 2008. A Dismissal with Prejudice was filed with the Court
on or about April 24, 2009.
10
The
Complaint, which had causes of action for securities fraud, breach of fiduciary
duties, fraud and deceit, and rescission, alleged that the defendants
intentionally misrepresented, or failed to disclose, certain facts regarding the
company prior to the plaintiffs purchasing Gateway International Holdings, Inc.
(now M Line Holdings, Inc.) common stock. The Complaint sought total
monetary damages of approximately $188,415, plus interest, and punitive
damages. We filed an Answer to the Complaint on October 17, 2008,
denying the allegations of the Complaint, denying that plaintiffs are entitled
to any relief whatsoever and asserting various affirmative defenses. On
January 22, 2009, the parties signed a Settlement Agreement, whereby a party
unrelated to the lawsuit, Money Line Capital, Inc., our largest shareholder,
agreed to purchase the plaintiffs’ shares of our common stock for the purchase
price, or $289,000. This settlement closed on April 22,
2009. Of the $289,000 settlement money, $189,000 was paid to
plaintiffs and we received $100,000 in exchange for the cancellation of a
promissory note for $100,000 owed to us by one of the plaintiffs. Per
the settlement agreement, a Dismissal with Prejudice was filed by the plaintiffs
with the Court on or about April 24, 2009, for the purpose of dismissing this
lawsuit.
2. 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. The Court has set a trial date for
March 22, 2010. Management believes we have meritorious defenses to
plaintiff’s claims and plan to vigorously defend against the lawsuit and pursue
Mori Seiki, and possibly other entities or individuals, for any damages we
incur. However, there can be no assurance as to the outcome of the
lawsuit. No provision has been made in our financial statements as we
believe that the responsibility for liability, if any, is with the
manufacturer.
3. 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.
The
company has a provision in the sum of $5,000.00 at September 30, 2009. No
further provision is necessary as we feel that the litigation has no
merit.
4. 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.
11
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 paid Elite Machine Tool
Company $4,000 in full and final settlement.
5. 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 Case Management Conference for
March 29, 202010. 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.
6. Elite Machine Tool Co. v. Sunbelt
Machine, Orange County Superior Court, Case No.
0-2008-00112502. All American filed the Complaint on September 25,
2008. No trial date has been set.
This case involves a dispute between
Elite Machine and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by
Elite Machine to Sunbelt. Sunbelt has claimed that it received a
machine that does not conform to the specifications it ordered. The
amount at issue is approximately $140,000 at this
stage. Subsequent to filing of the above-referenced suit,
Sunbelt has filed a similar action in Federal District Court in Houston,
Texas. As a result, this case was dismissed and the case is being
heard in Federal District Court.
A
provision has been made in the attached financial statements in the sum of
$139,000 at September 30, 2009.
7. 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 in the amount of $153,000. Management for All American
maintains the claim has no merit and intends to appeal the
Judgment.
12
A
provision has been made in the attached financial statements in the sum of
$153,000 at September 30, 2009.
8. 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. We denied the allegations in the Complaint and plan to
vigorously defend the Complaint. No trial date has been
set.
A
provision has been made in the financial statement of All American CNC
Sales,
Inc. in the sum of $362,328 at September 30, 2009.
9. 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 Court has scheduled a hearing the demurrer for October
15, 2009. This hearing has been continued until November 24, 2009.
Management intends to aggressively defend itself against this
claim. No trial date has been set.
A
provision has been made in the financial statement of All American
CNC Sales, Inc. in the sum of $163,578.00 at September 30, 2009.
10. 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. No trial date has been set.
No
provision has been made in the financial statement at September 30, 2009 as we
believe the litigation has no merit due manufacturer’s liability.
11. 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.
13
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.
A
provision has been made in the financial statements at September 30, 2009 in the
sum of $14,540.
12. 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, 2009. The Company’s management believes that payment(s), if any,
will be the responsibility of the Workers Compensation Board.
13. 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. However, the parties have 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.
Management
intends to finalize the settlement and dispose of the claim in due
course.
We are
considering settling this case at this time. Therefore, no provision
has been made in the financial statement for this sum as of September 30,
2009.
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.
|
Common
Stock
|
During
the quarter ended September 30, 2009, the Company did not have any transactions
relating to common stock.
9.
|
Related Party
Transaction
|
There was
no related party transaction during the quarter ended September 30, 2009 as all
related party notes were repaid or settled during the fiscal year ended June 30,
2009.
14
10. 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.
Machine Sales
|
Precision Manufacturing
|
Corporate
|
TOTAL
|
|||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
Revenues
$
|
876,045 | $ | - | $ | 772,114 | $ | 1,797,384 | $ | - | $ | - | $ | 1,650,674 | $ | 1,797,384 | |||||||||||||||||
Income
(Loss) before taxes
|
(283,018 | ) | - | (338,824 | ) | 421,376 | 33,338 | - | (588,504 | ) | 421,376 |
Sales are
derived principally from customers located within the United
States.
11.
|
Subsequent
Events
|
None.
15
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, 2009, 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. We also serve as a manufacturer sales representative firm selling new
CNC machines we purchase from third party manufacturers into certain geographic
territories.
16
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, 2009
and, 2008, 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.
17
Results
of Operations for the Three Months Ended September 30, 2009 Compared to the
Three Months Ended September 30, 2008
Three Months ended
September 30,
|
||||||||||||||||
2009
|
2008
|
Change ($)
|
Change (%)
|
|||||||||||||
Sales
by segment
|
||||||||||||||||
Machine
Sales
|
$ | 876,045 | $ | - | $ | 876,045 | 100 | % | ||||||||
Precision
Manufacturing
|
772,114 | 1,797,384 | 1,025270 | -57 | % | |||||||||||
1,648,159 | 1,797,384 | (149,225 | ) | -8 | % | |||||||||||
Gross
profit by segment
|
||||||||||||||||
Machine
Sales
|
82,563 | - | 82,563 | 100 | % | |||||||||||
Precision
Manufacturing
|
220,162 | 911,009 | (690,847 | ) | -76 | % | ||||||||||
302,725 | 886,375 | (583,650 | ) | -66 | % |
Sales
Sales in
the fiscal 2009 period decreased 8% compared to the comparable period in fiscal
2008. The change is attributable to a decrease in sales in the
Precision Manufacturing Group. Sales declined by 57% in the Precision
Manufacturing Group. Sales in the Machine Sales Group are not
comparable to that of the prior period as all sales in the prior period were
from a discontinued subsidiary.
Gross
Margin
Gross
profit decreased by 66% compared to the comparable period in fiscal 2008. The
gross profit for the Machine Sales Group is not comparable to that of the prior
period as all gross profit for this period was from the discontinued
subsidiary. The decrease within the Precision Manufacturing Group
resulted from lower customer demand for product in the 2009 period.
Selling,
General & Administrative
Selling,
general and administrative costs increased by $443,917 compared to the
comparable period in fiscal 2008. The changes are due to increases in personnel
costs and insurance. Personnel costs increased by approximately $97,000 or 32%
primarily attributable to a higher head count, and insurance by approximately
$26,000 or 23%, due to a cost increase during the fiscal 2009 period. In
addition, the prior periods lower costs were attributable to a sum of $233,000
being contributed by the discontinued subsidiary.
18
Amortization
of Intangible Assets
Amortization
expense for intangible assets remained the same of $10,445 compared to the
comparable period in fiscal 2009.
Interest
Expense
Interest
expense decreased by $20,062 compared to the comparable period in fiscal 2009.
The change is attributable to lower average debt balances and decreases in the
interest rates on our debt obligations.
Gain
on Sale of Assets
During
the fiscal 2009 period, there was no gain or loss as no assets were sold during
the period.
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, 2009, our cash and cash equivalents and working
capital decreased by $23,450 and $556,830, respectively to June 30, 2009
amounts.
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)
|
2009
|
2008
|
Change
|
|||||||||
Operating
activities
|
$ | 82,966 | $ | 644,203 | $ | 561,237 | ||||||
Investing
activities
|
- | (2,500 | ) | (2,500 | ) | |||||||
Financing
activities
|
(106,416 | ) | (195,676 ) | (89,260 | ) | |||||||
$ | (23,450 | ) | $ | 446,027 | $ | 469,477 |
Operating
Activities
Operating
cash flows during the fiscal 2009 and 2008 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 2009 period, non-cash expenses included in our net income and in operating
activities totaled $111,429 compared to $134,871 in the 2008
period.
The
increase in operating assets and liabilities for the 2009 and 2008 periods were
$86,153 and $813,102, respectively. During the 2009 period, the increase was
primarily attributable to collections of accounts receivable which resulted in a
decrease of $69,774 from the June 30, 2009 balance.
19
The
changes in operating assets for the 2008 period were primarily attributable a
$573,431 reduction in accounts receivable. The reduction in accounts receivable
was primarily attributable to a decline in sales in the 2008 period as a result
of the relocation of our Precision Manufacturing facility.
Investing
Activities
We made
capital expenditures of $0 and $0 during the first three months of the fiscal
2009 and 2008 periods, respectively.
Financing
Activities
During
the first three months of the fiscal 2009 and 2008 periods, we repaid (net of
borrowings) $106,416 and $195,676, respectively of outstanding debt and capital
lease obligations. During the 2009 period, we repaid $0 on our line of credit in
the 2009 period, as compared to $5,500 of net borrowings during the 2008
period.
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
4T. 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, 2009, our disclosure controls and procedures were not effective at
the reasonable assurance level due to the material weaknesses identified and
described in Item 4T.
20
(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, 2009. 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, 2009, 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.
21
2. We
have not documented our internal controls. We have limited policies
and procedures that cover the recording and reporting of financial
transactions. Although providing this report in this Annual Report is
optional for us at this time, written documentation of key internal controls
over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley
Act. We will be required to provide written documentation of key
internal controls over financial reporting beginning with our fiscal year ending
June 30, 2009. 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.
22
PART
II – OTHER INFORMATION
ITEM
1. Legal
Proceedings.
1. Onofrio Saputo and Christopher
Frisco v. Gateway International Holdings, Inc., Lawrence Consalvi, Timothy
Consalvi and Joe Gledhill, Court of the State of California, County of
Orange, Case No. 30-2008-00110905. Plaintiffs filed this action on
August 21, 2008. A Dismissal with Prejudice was filed with the Court
on or about April 24, 2009.
The
Complaint, which had causes of action for securities fraud, breach of fiduciary
duties, fraud and deceit, and rescission, alleged that the defendants
intentionally misrepresented, or failed to disclose, certain facts regarding the
company prior to the plaintiffs purchasing Gateway International Holdings, Inc.
(now M Line Holdings, Inc.) common stock. The Complaint sought total
monetary damages of approximately $188,415, plus interest, and punitive
damages. We filed an Answer to the Complaint on October 17, 2008,
denying the allegations of the Complaint, denying that plaintiffs are entitled
to any relief whatsoever and asserting various affirmative defenses. On
January 22, 2009, the parties signed a Settlement Agreement, whereby a party
unrelated to the lawsuit, Money Line Capital, Inc., our largest shareholder,
agreed to purchase the plaintiffs’ shares of our common stock for the purchase
price, or $289,000. This settlement closed on April 22,
2009. Of the $289,000 settlement money, $189,000 was paid to
plaintiffs and we received $100,000 in exchange for the cancellation of a
promissory note for $100,000 owed to us by one of the plaintiffs. Per
the settlement agreement, a Dismissal with Prejudice was filed by the plaintiffs
with the Court on or about April 24, 2009, for the purpose of dismissing this
lawsuit.
2. 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. The Court has set a trial date for
March 22, 2010. Management believes we have meritorious defenses to
plaintiff’s claims and plan to vigorously defend against the lawsuit and pursue
Mori Seiki, and possibly other entities or individuals, for any damages we
incur. However, there can be no assurance as to the outcome of the
lawsuit.
3. 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.
23
4. 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, the
parties settled this matter and the lawsuits were dismissed on August 13,
2009. Under the terms of the settlement, Aram paid Elite Machine Tool
Company $4,000 in full and final settlement.
5. 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 Case Management Conference for
March 29, 2010. Management intends to aggressively defend itself
against this claim. No trial date has been set.
6. Elite Machine Tool Co. v. Sunbelt
Machine, Orange County Superior Court, Case No.
0-2008-00112502. All American filed the Complaint on September 25,
2008. No trial date has been set.
This case involves a dispute between
Elite Machine and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by
Elite Machine to Sunbelt. Sunbelt has claimed that it received a
machine that does not conform to the specifications it ordered. The
amount at issue is approximately $140,000 at this
stage. Subsequent to filing of the above-referenced suit,
Sunbelt has filed a similar action in Federal District Court in Houston,
Texas. As a result, this case was dismissed and the case is being
heard in Federal District Court.
7. 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 in the amount of
$153,000. Management for All American maintains the claim has no
merit and intends to appeal the Judgment.
8. 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.
24
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. We denied the allegations in the Complaint
and plan to vigorously defend the Complaint. No trial date has been
set.
9. 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 Court has scheduled a hearing the demurrer for October
15, 2009. This hearing has been continued until November 24, 2009.
Management intends to aggressively defend itself against this
claim. No trial date has been set.
10. 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. No trial date has
been set.
11. 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.
12. 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.
13. 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 us seeking
payment on an alleged severance obligation by us. The Complaint does not specify
the damages sought. However, the parties have reached a settlement in the
principal sum of $40,000 to be documented in due course. Meanwhile a default was
entered against us, which management believes was in error because a settlement
was already reached by the principal parties involved.
25
Management
intends to finalize the settlement and dispose of the claim in due
course.
Litigation
is subject to inherent uncertainties, and unfavorable rulings could
occur. If an unfavorable ruling were to occur in any of the above
matters, there could be a material adverse effect on our financial condition,
results of operations or liquidity.
ITEM
1A. Risk
Factors.
As a
smaller reporting company we are not required to provide the information
required by this Item. However, we did include risk factors in our
Annual Report on Form 10-K for the year ended June 30, 2009, as filed with the
Commission on October 13, 2009.
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. Submission
of Matters to a Vote of Security Holders.
There
have been no events required to be reported under this Item.
ITEM
5. Other
Information.
Money Line Capital Letter of
Intent
On June
30, 2009, we entered into a binding Letter of Intent (the “LOI”) with Money Line
Capital, Inc., a California corporation (“MLCI”), and our largest
shareholder. Under the LOI the parties agreed to complete a
transaction whereby all the MLCI shareholders will exchange their shares of MLCI
stock for shares of our stock. The parties agreed to negotiate in
good faith to close the transaction on or before January 29,
2010. The LOI is predicated on us being current in our reporting
obligations under the Securities and Exchange Act of 1934, as amended, and being
publicly-traded at the time of the closing; and MLCI having its financial
statements (and its subsidiaries, as applicable) audited for the period ended
June 30, 2009, as well as completing a valuation by a qualified third-party
company.
On
November 5, 2009, we agreed with MLCI to amend the LOI to reset the anticipated
closing date of the transaction from January 29, 2010 to April 30, 2010, as well
as some other preliminary dates in the LOI. We agreed to reset the
anticipated closing date of the transaction in order to allow MLCI time to
complete the audit of its financial statements, and certain of its subsidiaries,
for the period ended June 30, 2009, as well the review of the financial
statements for the interim quarters.
26
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)
|
Amendment
No. 1 to Letter of Intent by and between M Line Holdings, Inc. and Money
Line Capital, Inc. dated June 30,
2009
|
27
21
(8)
|
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 Current Report on Form 8-K filed with the Commission on
November 6, 2009.
(8) 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.
28
SIGNATURES
In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
M
Line Holdings, Inc.
|
|||
Dated:
November 16, 2009
|
/s/
George Colin
|
||
By:
|
George
Colin
|
||
President,
Chief Executive
|
|||
Officer
and a Director
|
|||
Dated:
November 16, 2009
|
/s/
Jitu Banker
|
||
By:
|
Jitu
Banker
|
||
Chief
Financial Officer,
|
|||
Secretary
and a
Director
|
29