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EX-31.1 - EXHIBIT 31.1 - M LINE HOLDINGS INCv237047_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - M LINE HOLDINGS INCv237047_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - M LINE HOLDINGS INCv237047_ex32-1.htm
EX-10.20 - EXHIBIT 10.20 - M LINE HOLDINGS INCv237047_ex10-20.htm
EX-10.21 - EXHIBIT 10.21 - M LINE HOLDINGS INCv237047_ex10-21.htm
EX-32.2 - EXHIBIT 32.2 - M LINE HOLDINGS INCv237047_ex32-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-K

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

For the fiscal year ended June 30, 2011

OR

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_____________ to _____________.

Commission file number 000-53265

M LINE HOLDINGS, INC.
(Exact name of registrant 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)

Registrant’s telephone number, including area code    (714) 630-6253

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
     
None
 
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨      No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes x    No  ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

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

Aggregate market value of the voting stock held by non-affiliates: $1,695,512 as based on last reported sales price of such stock.  The voting stock held by non-affiliates on that date consisted of 16,955,124 shares of common stock.

Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ¨     No ¨

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of September 30, 2011, there were 41,470,845 shares of common stock, par value $0.001, issued and outstanding.

Documents Incorporated by Reference

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to rule 424(b) or (c) of the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).  None.

 
 

 

M Line Holdings, Inc.

TABLE OF CONTENTS

PART I
     
ITEM 1 – BUSINESS
 
1
ITEM 1B – UNRESOLVED STAFF COMMENTS
 
17
ITEM 2 - PROPERTIES
 
18
ITEM 3 - LEGAL PROCEEDINGS
 
18
ITEM 4 – (REMOVED AND RESERVED)
 
21
     
PART II
     
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
23
ITEM 6 – SELECTED FINANCIAL DATA
 
26
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
27
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
35
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
35
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
36
ITEM 9A – CONTROLS AND PROCEDURES
  36
     
ITEM 9B – OTHER INFORMATION
 
37
     
PART III
     
ITEM 10 – DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
 
38
ITEM 11 – EXECUTIVE COMPENSATION
 
40
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
44
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
45
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
 
46
     
PART IV
     
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
48

 
i

 

PART I

Explanatory Note

This Annual Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”).  These statements are based on management’s beliefs and assumptions, and on information currently available to management.  Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management's Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,”  “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

Forward-looking statements are not guarantees of future performance.  They involve risks, uncertainties and assumptions.  The Company's future results and shareholder values may differ materially from those expressed in these forward-looking statements.  Readers are cautioned not to put undue reliance on any forward-looking statements.

ITEM 1 – BUSINESS

Corporate History

M Line Holdings, Inc. (“We,” “M Line” or “Company”) was incorporated in Nevada on September 24, 1997, under the name Gourmet Gifts, Inc. Prior to December 11, 2001, we were engaged in the business of catalogue retail gifts. At the time, our principal business activity entailed the packaging, sale and delivery of seasonal gourmet food and beverage items. However, due to difficulty in raising additional working capital to execute our business plan, we ceased operations, and subsequently completed a reverse merger with E.M. Tool Company, Inc., a California corporation d.b.a. Elite Machine Tool Company (“Elite Machine”).

Acquisition of Elite Machine and Reverse Acquisition Accounting

On December 11, 2001, we finalized an agreement to acquire 100% of the issued and outstanding capital stock of E.M. Tool Co., Inc. dba Elite Machine Tool . Immediately prior to the merger, we had 100,000,000 shares authorized, of which 6,768,000 shares were outstanding. Pursuant to the merger, all of the outstanding shares of Elite Machine, aggregating 21,262 shares, were exchanged for shares of our common stock on a 1 to 1,274 basis or into 27,072,000 (net of 600,000 shares subsequently cancelled) shares of our common stock leaving a total of 33,240,000 shares of common stock issued and outstanding after the merger. Immediately after the merger, our previous officers and directors resigned and the executive officers and directors of Elite Machine 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 Gateway as a result of the merger, the transaction was recorded as a “reverse-merger” whereby Elite Machine was considered to be the acquirer for accounting purposes. At the closing of the reverse merger, Elite Machine became our wholly-owned subsidiary and we changed our corporate name to -Gateway International Holdings, Inc., effective January 28, 2002.

Gateway International Holdings, Inc. changed its name to M Line Holdings, Inc. effective March 25, 2009.

After the merger, through Elite Machine, we were a company 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 our sole business from this point until we acquired the additional businesses listed herein.

 
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Acquisition of Eran Engineering, Inc.

In October, 2003, pursuant to a Stock Purchase Agreement, dated June 17, 2003, we acquired all the issued and outstanding shares of Eran Engineering, a California corporation, from its two shareholders, Hans B. Thallmayer and Alice Thallmayer, for an aggregate purchase price of $1,250,000. In addition to a cash payment of $650,000, which was credited to the purchase price, we executed a promissory note in favor of the sellers in the principal amount of $600,000, payable in three equal annual installments of $200,000 and accruing simple interest at the rate of six percent (6%) per annum. Our obligation under the promissory note was secured by the pledge by Lawrence A. Consalvi, a former Director and former President and Chief Executive Officer, and Joseph T.W. Gledhill, a former Vice President and Director, of a security interest in certain shares of our common stock worth approximately $4,285,716 as of the date of the pledge. Concurrently with the closing of the acquisition, Eran Engineering purchased from R & H Investments, a partnership owned by the two selling shareholders of Eran Engineering, the building in which Eran Engineering operates its business. The purchase price for the building was $1,250,000, and was paid as follows:

 
·
$650,000 in cash and;

 
·
A promissory note in the principal amount of $600,000, bearing simple interest at the rate of 6% per annum.

The cash portion of the purchase price paid by us for Eran Engineering and the building was financed pursuant to a term loan from Financial Federal Credit (“FFC”), in the principal amount of $1,300,000. The loan from FFC was primarily secured by a deed of trust on the building acquired by Eran Engineering and a security interest in all the equipment owned by Eran Engineering.  This note has been paid in full.

Further, in connection with the acquisition, Eran Engineering entered into employment agreements with Erich Thallmayer to serve as the President and Chief Executive Officer of Eran Engineering at an annual base salary of $105,600 and with Hans Thallmayer to serve as its Operating Manager at an annual base salary of $90,000. Our former Director and Vice President, Joseph T.W. Gledhill, subsequently replaced Erich Thallmayer as the company's President and Chief Executive Officer. Hans Thallmayer is no longer employed as the company's Operating Manager. We have no obligation to either Erich Thallmayer or Hans Thallmayer in connection with their past employment agreements.

As discussed below, Eran Engineering manufactures and assembles specialized, precision components used in the commercial aviation, medical, aerospace and defense industries. Joseph T.W. Gledhill, a former Director and Executive Vice President of the Company, currently serves as the President of Eran Engineering.

Acquisition of CNC Sales, Inc.

All American CNC Sales, Inc. (“All American”) is a California corporation and was incorporated on November 4, 1993. All American was founded by our former Chief Executive Officer, Timothy D. Consalvi, and his wife. In October, 2004, pursuant to a share exchange agreement, we acquired all the outstanding shares of All American from Mr. Consalvi and his wife in exchange for 1,000,000 shares of our common stock. On December 21, 2005, we issued an additional 500,000 shares to the original shareholders pursuant to the earn-out provisions of the share exchange agreement, which provided that if All American’s gross profit exceeded the stated goal of $300,000 for each of fiscal year 2005 and fiscal year 2006, we would issue to the shareholders an aggregate of 250,000 shares for each year such target was reached.  During the year ended September 2005, shortly after the first target measurement period, for which period the gross profit threshold was achieved for the issuance of 250,000 shares, our Board of Directors agreed to issue the second traunch of 250,000 shares even though the gross profit threshold had not been achieved.

 
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In connection with the acquisition, we entered into an employment agreement with Timothy Consalvi, the President and CEO of All American at the time of the exchange, for him to continue as President of All American. The agreement was superseded on November 20, 2006 with the execution of a new employment agreement under which Mr. Consalvi became our President and Chief Executive Officer. Timothy Consalvi was elected to our Board of Directors in March, 2005. Timothy Consalvi is the brother of Lawrence A. Consalvi, formerly the President of Elite Machine and formerly both one of our Directors and an Executive Vice President.  Timothy Consalvi resigned from our Board of Directors effective March 25, 2009, and is no longer with the company in any capacity effective June 30, 2009.

All American was involved in selling new CNC machine tools but we elected to cease operations of All American effective June 30, 2009 since it was  not economically feasible to continue to with its operations.

The Enforcement Action

Our common stock was previously registered with the Securities and Exchange Commission (the “Commission”) under Section 12(g) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our stock was originally registered on or around September 1999. From September 1999 through our quarterly report for the quarter ended December 31, 2002, we filed the required quarterly and annual reports with the Commission as a reporting company under Exchange Act. However, beginning with our quarterly report for the quarter ended March 31, 2003 through our quarterly report for the quarter ended March 31, 2005 we failed to timely file compliant annual and quarterly reports. Our failure to file these reports was primarily caused by our failure to obtain financial documentation from two companies we acquired in late 2002, Bechler Cams, Inc. and Nelson Engineering, Inc. Our inability to obtain this financial information led to our auditors being unable to adequately review and audit our financial statements, as required under the Exchange Act. Although we requested this information from Bechler Cams, Inc. and Nelson Engineering, Inc., in hindsight there may have been additional actions our previous management and consultants could have taken to obtain this information. Additionally, with proper due diligence, our previous management and consultants should have obtained the financial statements and determined their ability to be audited prior to closing the acquisitions. These are two areas our new management and consultants have looked at closely since that time to ensure this does not occur in the future.

As a result of not getting the required reports on file, the Commission instituted an enforcement proceeding against us in April 2005. Although we were able to eventually file our delinquent reports by unwinding certain acquisitions, the Commission ruled that our audit reports and review were still non-compliant and after a hearing in front of an administrative law judge and a subsequent appeal heard by the Commission, on May 31, 2006, the Commission entered an Order finding the following: i) our conduct with respect to our reporting obligations was “serious, egregious, recurrent, and evidenced a high degree of culpability” as evidenced by our knowledge, through our then Chief Executive Officer, Lawrence A. Consalvi, of our reporting obligations and our failure to file a total of seven annual and quarterly reports due between May 2003 and December 2004; ii) our failure to notify the Commission of our inability to file our periodic reports; iii) our failure to terminate the registration of our common stock; iv) our failure to hire new auditors to replace Squar Milner after they resigned until eighteen months had passed; v) our continuation of an aggressive growth strategy during a time when we were not complying with our Exchange Act reporting requirements; vi) our failure to offer credible assurances against future violations of our reporting obligations under the Exchange Act; and vii) our failure to accept responsibility for our failure to meet our reporting obligations under the Exchange Act, and not taking all measures available to us to obtain the necessary financial information from Bechler Cams, Inc. and Nelson Engineering.

Based on these findings the Commission entered an Order Imposing Remedial Sanctions which revoked the registration of our common stock pursuant to Section 12(j) of the Exchange Act and ordered our then President and Chief Executive Officer, Lawrence A. Consalvi, to cease and desist from causing any violations or future violations of the Exchange Act.

 
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Due to the Commission’s decision to deregister our common stock we were de-listed from the OTC Bulletin Board and Pink Sheets. Our common stock is not currently listed on any national stock exchange or over-the-counter securities market.  As discussed below, we are planning to get re-listed on the OTC Bulletin Board at some point in the future and have re-registered our common stock as the first step in this process.

The Remedial Measures and Re-Registration of our Common Stock

We have new and different management since our common stock was deregistered and de-listed.  As a result of the Commission’s action, our management underwent a comprehensive review of the primary causes for our delinquent reports, and our inability to timely remedy these issues. Although the primary cause of our inability to file timely compliant reports was the breach of the acquisition agreements by the companies we acquired, there was also inadequate internal financial personnel in place to properly review these acquisitions and perform the day-to-day accounting functions necessary for a reporting company under the Exchange Act. In order to remedy these issues we have undergone numerous changes. With respect to our management, we have undergone the following changes: i) Lawrence A. Consalvi stepped down as our President, Chief Executive Officer , ii) Timothy D. Consalvi was appointed as our President and Chief Executive Officer, and was from November, 2006 until December 2008 when he resigned from those positions; and iii) Stephen M. Kasprisin, who has a long public company accounting background, was our full-time Chief Financial Officer from November 2006 until October 2007, and then was our part-time Chief Financial Officer until March 31, 2009, when he resigned and we hired Mr. Jitu Banker as our full time Chief Financial Officer. With respect to our board of directors, in early 2009 we appointed George Colin, Jitu Banker and Robert Sabahat to our board of directors.

Our management, together with our advisors, have discussed the due diligence review, and legal and financial preparations, that must occur prior to closing any future acquisitions. These preparations include full legal review of any letters of intent and acquisition agreements prior to execution, and review of any target company’s financial statements and information by our Chief Financial Officer, controller and outside financial consultants, if any, to ensure the target company’s financial information can be fully audited prior to completing any acquisition. Additionally, as a reporting company under the Exchange Act, we conduct quarterly and annual evaluations, 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 Exchange Act 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 officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As part of this process we have worked with our executives at the subsidiary level to ensure proper communication with our Controller and Chief Financial Officer, and have provided our Controller and Chief Financial Officer with outside financial consultants to assist as needed to ensure accurate and timely reporting of our financial information.

With these changes in place, on May 16, 2008, we filed a registration statement on Form 10 to re-register our common stock under Section 12 of the Exchange Act.  As a result, on July 15, 2008, we became subject to the reporting requirements under the Exchange Act.  Effective November 23, 2009, our common stock was re-listed on the OTC Bulletin Board under the symbol “MLHC.”

Business Overview

We currently conduct all of our operations through two of our two wholly-owned subsidiaries: Elite Machine and Eran Engineering. We ceased operations of our third subsidiary, All American, effective June 30, 2010. Through our two operating subsidiaries we provide services and products to the machine tool industry, including the sale of refurbished CNC machines and the manufacture of precision metal components.

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

Money Line Capital Letter of Intent

As part of that strategy, on June 30, 2010, we entered into a binding Letter of Intent (the “LOI”) with Money Line Capital, Inc. (“MLCI”).  MLCI is our largest shareholder and specializes in business financing transactions and holds equity in a number of operating subsidiaries in various fields, including financing, aerospace, real estate, media, beverage, and technology.  Under the LOI the parties 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 this transaction.  The parties had agreed to negotiate in good faith to close the transaction on or before January 29, 2010, however due to the downturn in the economy, MLCI’s inability to complete the required audits, and the desire of our Board of Directors to get as favorable a valuation for our common stock as possible, the parties have put the merger transaction on hold indefinitely.  In order for us to finalize the transaction we must be current in our reporting obligations under the Securities and Exchange Act of 1934, as amended, and be publicly-traded at the time of the closing; and MLCI must have its financial statements (and its subsidiaries, as applicable) audited for the period ended June 30, 2011, as well as completing a valuation by a qualified third-party company.  We have re-evaluated the acquisition of MLCI as a whole and we now plan on acquiring certain subsidiaries of MLCI one at a time in order to reduce the costs associated with this transaction.

Machine Sales Group

The Machine Sales Group is currently composed of one of our subsidiaries, Elite Machine, which is in the business of acquiring and selling computer numerically controlled (“CNC”) machines, and related tools, to manufacturing customers. The operations of this group also include the business generated from our purchase of certain assets of CNC Repos, Inc.

CNC machines use commands from an onboard computer to control the movement of cutting tools and the rotation speeds of the part being produced. The computer controls enable the operator to program specific operations, such as part rotation and tooling selection and movement for a particular part and then store that program in memory for future use. Because CNC machines can manufacture parts unattended and operate at speeds faster than similar manually-operated machines, they can generate higher profits with less rework and scrap. Elite Machines specializes in selling used, refurbished CNC machines.

For the years ended June 30, 2011, and 2010, the Machine and Tools Group accounted for $6,179,472 (62%) and $2,843,436 (46%) of our total sales, respectively. This segment of our business also accounted for 41% and 57% of our gross profits for the years ended June 30, 2011, and 2010, respectively.

(a)           Company Overview
 
Elite Machine is a California corporation and was founded in 1990 by our former Director and Executive Vice President, Lawrence A. Consalvi. Mr. Consalvi was also the President of Elite Machine. Through the reverse merger transaction described above, Elite Machines became our wholly-owned subsidiary, which today specializes in the sale of previously-owned CNC machine tools from CNC machine manufacturers including Mori Seiki, Matsuura and Kitamura. Elite Machine is a leading dealer of pre-owned CNC machines in the Western United States. Elite Machine purchases high-quality used CNC machinery from Japan, Europe, and the United States, and then inspects and where necessary repairs and refurbishes them prior to resale. Elite Machine’s refurbishments on CNC machines it purchases typically include painting, replacing parts, and servicing the machine.

 
 
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(b)           Principal Products and Services.

Elite Machines is in the business of selling CNC machines. However, the company does not manufacture its own CNC machines. Elite Machines buys used CNC machines, refurbishes them and sells them.  CNC machines use commands from an onboard computer to control the movement of cutting tools and the rotation speeds of the part being produced. The computer controls enable the operator to program specific operations, such as part rotation and tooling selection and movement, for a particular part and then store that program in memory for future use. The machines are then typically used to mass produce a particular part. This helps ensure all the same parts are identical. The machine can then be reprogrammed to manufacture a different part depending on the needs of the customer.

Elite Machines purchases all the used machines it sells, bears the risk of reselling the machines, and is responsible for all costs incurred in order to resell the machines. Normally the machines sold by Elite Machines are sold “as is.” However, Elite Machines does offer a limited warranty to the purchasers of the used CNC machines it sells, but the company is planning on moving away from this practice. Currently, approximately 80% of Elite Machines’ customers are under some type of warranty with Elite Machines with most on a 30-day warranty.

(c)           Product Manufacturing.

Elite Machines does not manufacture any of its own products.

Elite Machine locates CNC machines for resale through relationships with past customers and through its marketing efforts, the monitoring of both internet and direct mail sale boards, and personal relationships with machine tool companies. Elite Machine purchases the machines on credit terms or cash on delivery. Machines are purchased based upon the desirability of the model and make and the age and condition of the machine. Refurbishment generally entails cleaning the machine, spot painting and testing for basic functionality. All machines are either sold on an “as is” or a warranty basis, typically with 30-day expiration, and Elite generally provides installation of the machine in the customer’s facility.

(d)           Sales, Marketing and Distribution.

 
The Elite Machine product line consists primarily of used CNC machines. These machines are predominately marketed through our in-house sales staff. Sales personnel are assigned regions and sell the machines in their territory.  Used machines are sold on a warranty basis, typically with a 30-day expiration, and generally include installation of the machine at the customer’s location. We also sell machine tools through alternative channels such as the internet and auctions.
 
On September 24, 2008, Lawrence A. Consalvi resigned from his position as President of Elite Machine.  After his resignation we contracted with Mr. Consalvi for him to be an independent sales agent, whereby Mr. Consalvi is involved in selling CNC machines on behalf of Elite Machine.

Mr. Lawrence A. Consalvi was re-appointed as President of Elite Machine Tool effective July 1, 2009.

(e)           New Product Development.

Due to Elite Machine selling machines manufactured by third parties, as opposed to being a manufacturing company, the company does not engage in new product development. However, the company does advise the CNC machine manufacturers regarding customer needs and requirements to assist with their future machine development.

 
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(f)           Competition.

Our competitors in the machine tools industry consist of a large fragmented group of companies, including certain business units or affiliates of our customers. Our management believes that competition within the industry will increase substantially as a result of industry consolidations and trends toward favoring greater outsourcing of components and reducing the number of preferred suppliers. Certain of our competitors may have substantially greater financial, production and other resources and may have (i) the ability to adapt more quickly to changes in customer requirements and industry conditions or trends, (ii) stronger relationships with customers and suppliers, and (iii) greater name recognition.

(g)          Sources and Availability of Raw Materials.

All of the machines and parts sold by Machine Sales Group are manufactured by third parties so we do not directly purchase any raw materials. However, the third party companies that manufacture CNC machines rely on the availability of a variety of raw materials, primarily metals such as steel and aluminum, but none of the primary raw materials are scarce and we do not anticipate the third party manufacturers will have any problems obtaining these raw materials.

(h)          Dependence on Major Customers.

Our Machines and Tools Group does not depend on one or two major customers. In fact, the largest single customer of this group accounted for less than 10% of the total revenue for this group.

(i)           Patents, Trademarks and Licenses.

Elite Machines does not have any patents or licenses, or other intellectual property.

(j)           Need for Government Approval.

As noted above, Elite Machine does not manufacture its own products, it merely sells used CNC machines. As sellers of used CNC machines, Elite Machine does not need government approval to operate its business.

(k)          Effect of Government Regulation on Business.

As noted above, Elite Machine does not manufacture its own products, they merely sell used CNC machines. As sellers of used CNC machines, Elite Machine is not subject to onerous government regulation.

However, inasmuch as Elite Machines refurbishes used CNC machines to resell, it maintains strict control standards on the maintenance and use of its equipment to ensure employee safety during the refurbishing process.

(l)           Research and Development.

Because Elite Machine sells products manufactured by third parties this business segment does not spend a material amount on research and development.

(m)         Effects of Compliance with Environmental Laws.

The machine tool industry is subject to environmental laws and regulations concerning emissions into the air, discharges into waterways, and the generation, handling, storage and disposal of waste materials, some of which may be hazardous. CNC machines contain coolants which are deemed as hazardous waste and must be disposed of according to the laws of specific jurisdictions. In addition, we perform spot painting of machines during the re-furbishing process. As required we provide for waste containers for coolants and cleaning products and contract with a hazardous waste company for proper disposal.

 
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We strive to comply with all applicable environmental, health and safety laws and regulations. We believe that our operations are in compliance with all applicable laws and regulations on environmental matters. These laws and regulations, on federal, state and local levels, are evolving and frequently modified and we cannot predict accurately the effect, if any, they will have on its business in the future. In many instances, the regulations have not been finalized, or are frequently being modified. Even where regulations have been adopted, they are subject to varying and contradicting interpretations and implementation. In some cases, compliance can only be achieved by capital expenditure and we cannot accurately predict what capital expenditures, if any, may be required.

Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violations. As a generator of hazardous materials, we are subject to financial exposure with regard to intentional or unintentional violations. In addition, we utilize facilities located in industrial areas with lengthy operating histories and it is possible that historical or neighboring activities could impact our facilities. Any present or future noncompliance with environmental laws or future discovery of contamination could have a material adverse effect on our results of operations or financial condition.

(n)           Employees.

As of June 30, 2011, we, with our subsidiaries, employ a total of 65 full-time employees, including 2 executive employees. Of these employees our Machine Sales Group employs 2 managerial employees, and 9 employees engaged in the sales and processing of CNC machine sales and the precision manufacturing group employs 5 managerial employees and 47 machinists and support personnel.

We are not aware of any problems in our relationships with our employees. Our employees are not represented by a collective bargaining organization and we have never experienced any work stoppage.

Precision Manufacturing Group

The Precision Manufacturing Group is composed of Eran Engineering, a wholly-owned subsidiary, which is in the business of manufacturing and assembling specialized, precision components used in equipment and machinery in the commercial aviation, medical, aerospace and defense industries.

For the years ended June 30, 2011 and 2010, the Precision Manufacturing Group accounted for $3,721,228 (38%) and $3,370,750 (54%) of our sales, respectively.  This segment of our business also accounted for 59% and 44% of our gross profits for the years ended June 30, 2011 and 2010, respectively.

(a)           Company Overview.

(1)            Eran Engineering, Inc.

In October, 2003, pursuant to a Stock Purchase Agreement, dated June 17, 2003, we acquired all the issued and outstanding shares of Eran Engineering, a California corporation, from its two shareholders for an aggregate purchase price of $1,250,000. In addition to a cash payment of $650,000, which was credited to the purchase price, we executed a promissory note in favor of the sellers in the principal amount of $600,000, payable in three equal annual installments of $200,000 and accruing simple interest at the rate of six percent (6%) per annum. Our obligation under the promissory note was secured by the pledge by Lawrence A. Consalvi, our then President and Chief Executive Officer, and Joseph T.W. Gledhill, our former Vice President and Director, of a security interest in certain shares of our common stock worth approximately $4,285,716 as of the date of the pledge. Concurrently with the closing of the acquisition, Eran Engineering purchased from R & H Investments, a partnership owned by the two selling shareholders of Eran Engineering, the building in which Eran Engineering operated its business. The purchase price for the building was $1,250,000, and was paid as follows:

 
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·
$650,000 in cash and;

 
·
A promissory note in the principal amount of $600,000, bearing simple interest at the rate of 6% per annum.

Concurrently with the acquisition of Eran Engineering, we purchased the Santa Ana, California, building in which Eran Engineering operated. The purchase price for the building was $1,250,000, of which we paid $600,000 by a promissory note in the amount of $600,000 and the remainder in cash financed pursuant to a term loan in the principal amount of $1,300,000. On February 23, 2007, we completed the sale of the building and property for a sales price of $2,017,000 resulting in a net gain to us of over $600,000.

(b)           Product Manufacturing.

Eran Engineering manufactures and assembles specialized, precision components used in equipment and machinery in the commercial aviation, medical, aerospace and defense industries. The primary components sold by Eran during the years ended June 30, 2011 and 2010, were parts sold to Panasonic Avionics Corporation, a leading provider of in-flight entertainment systems for commercial aircraft. The other components were parts manufactured for, and sold to, medical companies and general commercial aircraft companies. Eran Engineering maintains approximately 39 CNC machines for use in its specialized manufacturing processes. Joseph T.W. Gledhill, one of our former Directors and Executive Vice Presidents, serves as the President of Eran Engineering.

(c)           Sales, Marketing and Distribution.

Eran maintains an in-house sales staff that solicits orders from customers. Solicitation of orders is generally based upon relationships with buyers versus the use of advertising or other forms of solicitation. Orders are received via a bid process and Eran prepares costs estimates and submits a bid for the manufacturing order. Once an order is received, generally through a binding purchase order, Eran programs its machines to manufacture the part. Parts are manufactured internally and then in most cases, assembled at Eran’s facility. Some assemblies require the receipt of parts manufactured by other companies and as a result, delays in shipment could be encountered as a result of delays in manufacturing by contractors retained by the customer. Eran has no control or liability for these parts manufactured by other manufacturers used in the assembly’s delivered by Eran.

(d)           New Product Development.

Eran does not develop any proprietary products. Instead, Eran works with principal manufacturers to machine the components they require for the development of their products.

(e)           Competition.

 
The market for precision part manufacturing is extremely competitive. There are no substantial barriers to entry, and we continue to face competition from domestic and international manufacturers. We believe that our ability to compete successfully depends upon a number of factors, including market presence, connections in the industry, reliability, low error rate, technical expertise and functionality, performance and quality of our parts, on time deliveries, customization, the pricing policies of our competitors, customer support, our ability to support industry standards, and industry and general economic trends.
 
 
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Many of our competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to us. As a result, they may be able to develop and expand more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing of their services than we can.

The competition for design, manufacturing and service in precision machining and machine tools consists of independent firms, many of which, however, are smaller than our collective group of wholly-owned subsidiaries. We believe that this allows us to bring a broader spectrum of support to its customers.

In addition to similar companies, we compete against the in-house manufacturing and service capabilities of our larger customers. We believe these large manufacturers are increasingly outsourcing activities that are outside their core competency to increase their efficiencies and reduce their costs. This outsourcing provides an opportunity for us to grow with our current clients and the addition of new clients.

Although there are numerous domestic and foreign companies which compete in the markets for the products and services offered by us, our management believes that it will be able to compete effectively with these firms on price, ability to meet customer deadlines and the stringent quality control standards. We strive to develop a competitive advantage by providing high quality, high precision and quick turnaround support to customers from design to delivery.

(f)           Sources and Availability of Raw Materials.

Our precision equipment group utilizes a variety of raw materials in its specialized manufacturing processes, however, the primary raw materials it uses are widely available and we believe they will be readily available for our use as needed.

(g)           Dependence on Major Customers.

Eran has two major customers:  Panasonic Avionics Corp., which accounted for 23.8% and 37% of our total revenue for the years ended June 30, 2011 and 2010, respectively, and Iris Diagnostics, which accounted for 4.7% and 10% of our total revenue for the years ended June 30, 2011 and 2010, respectively.

(h)           Patents, Trademarks and Licenses.

Eran does not have any patents or licenses, or other intellectual property.

(i)           Need for Government Approval.

As a manufacturer of precision parts, Eran’s business is not subject to government approval for its operations or its end products. .

(j)           Effect of Government Regulation on Business.

As a manufacturer of precision parts there are certain regulations that relate to the conduct of our business in general, such as regulations and standards established by the Occupational Safety and Health Act or similar state laws relating to employee health and safety. As such we maintain strict control standards on the maintenance and use of its equipment to ensure employee safety. We comply with all guidelines and recommendations regarding the use of safety equipment such as safety goggles, protective gloves and aprons, ventilators or air guards as may be required. Employees are specifically trained, including emphasis on safety procedures, for each machine used. Management maintains and reviews a schedule of maintenance and safety check for all the equipment used in its operations.

 
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Although there are not many regulations on the manufacturing of precision parts, there are certifications companies can receive in the industry. Eran is ISO 9001-2008 and AS9100 rev. C registered.

(k)           Research and Development.

Our precision manufacturing group does not engage in research and development. Eran purchases manufactured CNC machines and receives a purchase order with detailed instructions from its customers regarding the specifications for the parts it wishes to have Eran manufacture.

(l)           Effects of Compliance with Environmental Laws.

The precision manufacturing industry is subject to environmental laws and regulations concerning emissions into the air, discharges into waterways, and the generation, handling, storage and disposal of waste materials, some of which may be hazardous.

The precision manufacturing division utilizes various coolants and lubricants that could be considered hazardous waste. Care is taken to prevent accidental discharge and all coolants and lubricants removed from machines are contained and disposed of by an outside waste disposal company. In addition, our Tustin facility is subject to certain local waste water regulations and is required annually to have its waste water and backflow prevention equipment tested by an outside testing agency. The last test was performed in July 2011 and we passed without exception.

Eran strives to comply with all applicable environmental, health and safety laws and regulations. Eran believes that its operations are in compliance with all applicable laws and regulations on environmental matters. These laws and regulations, on federal, state and local levels, are evolving and frequently modified and we cannot predict accurately the effect, if any, they will have on its business in the future. In many instances, the regulations have not been finalized, or are frequently being modified. Even where regulations have been adopted, they are subject to varying and contradicting interpretations and implementation. In some cases, compliance can only be achieved by capital expenditure and we cannot accurately predict what capital expenditures, if any, may be required.

Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violations. As a generator of hazardous materials, we are subject to financial exposure with regard to intentional or unintentional violations. In addition, we utilize facilities located in industrial areas with lengthy operating histories and it is possible that historical or neighboring activities could impact our facilities. Any present or future noncompliance with environmental laws or future discovery of contamination could have a material adverse effect on our results of operations or financial condition.

(m)           Employees.

As of June 30, 2011, we, with our subsidiaries, employ a total of 65 full-time employees, including 2 executive employees. For the precision manufacturing group, we employ 4 managerial employees, 1 sales manager, and 47 employees engaged in precision metal parts manufacturing related positions  and the machinery sales group employs 2 managerial employees and 9 sales and support personnel.

We are not aware of any problems in its relationships with its employees.  The Company’s employees are not represented by a collective bargaining organization and the Company has never experienced any work stoppage.

 
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Discontinued Operations

 
Effective June 30, 2009, our Board of Directors elected to cease the operations of All American because the business was no longer economically feasible.  During the year ended June 30, 2009, All American was part of our machine tools group.  The company sold new CNC machines it purchased from third party manufacturers.  As a result of All American shutting down its operations on June 30, 2009, the operations of All American are no longer included in the accompanying financial statements.
 
Prior to  being shut down and for our fiscal year ended June 30, 2009, All American specialized in the sale of new CNC machines throughout the Orange County, California market and had a customer base of over 530 companies, representing approximately a 10% market share in that area. The primary product lines offered through All American included: Fadal Vertical Machining Centers, Hwacheon CNC Turning Centers and Vertical Machining Centers, Visionwide CNC Bridge Mills, and Clausing Industrial CNC Vertical Machining Centers. The primary industry segments in which All American sold machines was in the aerospace, military and medical fields.  However, on or about March 31, 2009, Fadal, one of All American’s primary suppliers of CNC machines, ceased manufacturing CNC machines.

Typically, All American purchased a machine once a customer ordered and purchased the machine from All American. However, at times, All American purchased a CNC machine when it did not have a prospective customer to purchase the machine. This normally occurred when All American either needed a CNC machine for a showroom, management believed it was getting a good deal on the machine from the manufacturer, and/or it needed one or more machines on hand to meet future customer demand. Normally, the original manufacturer of the machine, not All American, was responsible for any problems or issues with the machine, since the machines are typically under warranty.  As of June 30, 2009, when we ceased operations of All American, we had no machines in our inventory, and current assets totaling $116,868, consisting entirely of accounts receivable and non-current assets totaling $63,704, consisting of company vehicles and office equipment.  These assets are listed accordingly on our balance sheet in the accompanying financial statements.

Industry Overview

CNC Machines

Since the introduction of CNC tooling machines, continual advances in computer control technology have allowed for easier programming and additional machine capabilities. A vertical turning machine permits the production of larger, heavier and more oddly-shaped parts on a machine that uses less floor space when compared to the traditional horizontal turning machine because the spindle and cam are aligned on a vertical plane, with the spindle on the bottom. Horizontal turning machines have become faster and more accurate with the ability to perform more functions i.e. milling of the parts and cross milling both on and off center line of the part. The vertical turning machines have additionally increased thru-put for part production through increase spindle RPM’s (rotations per minute), with the ability to accomplish high speed machining and increased accuracy through new electronics. Finally, the horizontal machines through the same features mentioned above and with the expansion of more tools and the ability to add multiple pallets out in the field gives the customer the ability to grow into the machine as his work flow increases.

Historically, CNC machines had been sold by the manufacturer, however, more recently many manufacturers are utilizing third party manufacturing representation companies, like All American, to sell their machines in order to cut down on internal overhead expenses related to a sales staff.

 
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Precision Tools

The precision tools industry, as it relates to Eran and our business, deals with the manufacturing of specific, specialized parts for use in several different industries, including, but not limited to, the commercial aviation, medical, aerospace and defense industries. Since the introduction of Computer Numerical Control (CNC) machines into the manufacturing arena, the process of taking raw material and producing a product have had a significant impact in today’s highly competitive manufacturing environment. Precision tool manufacturing companies operate by receiving a purchase order from a customer, then with a blueprint drawing from engineering, and produce a part program which is then loaded into the on board memory of the CNC machine tool. The machine tool follows the part program and cuts the material into the desired shape which the engineers have designed. The CNC Machine tool benefits are: a more consist end product as well as a closer tolerance product on a consistent part-over-part process. In today’s competitive market all types of raw materials are used from a varied type of steel, aluminum, brass, copper as well as plastics.

The precision manufacturing business is an ever changing segment and to remain competitive companies must be prepared to constantly maintain their quality programs, equipment and train their personnel. Manufacturing in today’s work environment is extremely competitive and, therefore, maintaining ISO registration is almost certainly a requirement. To become a first tier supplier to major aerospace and defense contractors a company must become AS9100 compliant with a Continuous Improvement Operation with an eye on the future. All of these programs in conjunction with a competitive price point and on time delivery commitment will make a significant impact to a company’s ability to maintain their business and grow.

 
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ITEM 1A. – RISK FACTORS.

As a smaller reporting company we are not required to provide a statement of risk factors. However, we believe this information may be valuable to our shareholders for this filing. We reserve the right to not provide risk factors in our future filings. Our primary risk factors and other considerations include:

If we are unable to maintain relationships with our suppliers, our business could be materially adversely affected.

Substantially all of our products are manufactured by third parties. To the extent that a manufacturer is unwilling to do business with us, or to continue to do business with us once we enter into formal agreements with it, our business could be materially adversely affected. In addition, to the extent that the manufacturer modifies the terms of any contract it may enter into with us (including, without limitation, the terms regarding price, rights of return, or other terms that are favorable to us), or extend lead times, limit supplies due to capacity constraints, or other factors, there could be a material adverse effect on our business.

We operate in a competitive industry and continue to be under the pressure of eroding gross profit margins, which could have a material adverse effect on our business.

The market for the products we sell is very competitive and subject to rapid technological change. The prices for our intended products tend to decrease over their life cycle, which can result in decreased gross profit margins for us. There is also substantial and continuing pressure from customers to reduce their total cost for products. We expend substantial amounts on the value creation services required to remain competitive, retain existing business, and gain new customers, and we must evaluate the expense of those efforts against the impact of price and margin reductions. Further, our margins will be lower in certain geographic markets and certain parts of our business than in others. If we are unable to effectively compete in our industry or are unable to maintain acceptable gross profit margins, our business could be materially adversely affected.

Products sold by us may be found to be defective and, as a result, warranty and/or product liability claims may be asserted against us, which may have a material adverse effect on the company.

We may face claims for damages as a result of defects or failures in the products we intend to sell to our customers. Although many of our products are sold under a third-party warranty or are sold “as is” our ability to avoid liabilities, including consequential damages, may be limited as a result of differing factors, such as the inability to exclude such damages due to the laws of some of the locations where we do business. Our business could be materially adversely affected as a result of a significant quality or performance issue in the products developed by us, if we are required to pay for the damages that result.

Our share ownership is concentrated.

Money Line Capital, Inc., our largest shareholder, controls approximately 38% of our outstanding common stock.  Our officers and directors, as a group, own a majority of Money Line Capital, Inc.’s common stock and own an additional 16.5% of our common stock as a group.  As a result, these stockholders can exert significant influence over all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation or sale of all or substantially all of assets, as well as any charter amendment and other matters requiring stockholder approval. In addition, these stockholders may dictate the day to day management of the business. This concentration of ownership may delay or prevent a change in control and may have a negative impact on the market price of our common stock by discouraging third party investors. In addition, the interests of these stockholders may not always coincide with the interests of our other stockholders.

 
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If we acquire other companies or assets, we may not be able to successfully integrate them or attain the anticipated benefits.

We intend to acquire other businesses that are synergistic with ours. If we are unsuccessful in integrating our acquisitions, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business. In addition, we may not realize all of the anticipated benefits from our acquisitions, which could result in an impairment of goodwill or other intangible assets.

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on our business.

An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. We will be required to periodically evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications or changes to internal controls are necessary or desirable. While management will evaluate the effectiveness of our internal controls on a regular basis, and although we have recently undergone substantial changes to address any weaknesses, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls, or if management or our independent registered public accounting firm discovers material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which could have a material adverse effect on our business. In addition, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or limit our access to capital.

We rely on third-party suppliers and manufacturers to provide our CNC machines, and we will have limited control over these suppliers and manufacturers and may not be able to obtain quality products on a timely basis or in sufficient quantity.

All of our CNC machines are manufactured by third-party manufacturers. We do not have any long-term contracts with these suppliers or manufacturing sources.  We expect we will have to compete with our competitors for production capacity and availability at these third-party manufacturers.

There can be no assurance that there will not be a significant disruption in the supply of CNC machines from our intended sources or, in the event of a disruption, that we would be able to locate alternative suppliers of equipment of comparable quality at an acceptable price, or at all. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Any delays, interruption or increased costs in the manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.

In addition, there can be no assurance that our suppliers and manufacturers will continue to manufacture products that are consistent with our standards. We may receive shipments of product that fail to conform to our quality control standards. In that event, unless we are able to obtain replacement products in a timely manner, we risk the loss of revenues resulting from the inability to sell those products and related increased administrative and shipping costs. In addition, because we do not control our manufacturers, products that fail to meet our standards or other unauthorized products could end up in the marketplace without our knowledge, which could harm our reputation in the marketplace.

 
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We have two customers that account for greater than 24% of our total sales for the year ended June 30, 2011.

Panasonic Avionics Corp. account for 24% of our total sales for the years ended June 30, 2011 and 2010, respectively.  We do not have a long term, exclusive agreement with these customers. If either of these customers reduced or stopped ordering precision parts from Eran it would have a material adverse impact on our consolidated sales, results of operations and cash flows.

Our Machine Sales Group relies on the availability of used CNC machines for resale, if no used machines are available for purchase our business will suffer.

The primary business of our Machine Sales Group is to purchase and resell used CNC machines.  If there are no or limited CNC machines available for purchase, our Machine Sales Group sales will suffer.  Likewise, if there is a slow down in the economy and the current owners of CNC machines opt not to sell their used CNC machines to purchase new ones, or our customers hold on to their existing CNC machines longer and do not purchase additional used CNC machines our sales will suffer.

The current crisis in the credit markets may adversely affect our customers’ ability to finance the purchase of new and used CNC machines.  This would result in a significant reduction in our sales.

Most of our customers that purchase used CNC machines do so utilizing credit.  The current crisis in the credit markets may adversely affect our customers’ ability to finance the purchase of a used CNC machine from us.  If this were to occur it would result in a significant reduction in our sales.

 
As of June 30, 2011 the Company owed Pacific Western Bank $236,400, $218,889 at June 30, 2010).
 
Since the year end on September 1, 2011, the Company settled the dispute with Pacific Western Bank that not only settles all outstanding legal disputes between the parties but agrees monthly payments that will pay off the balance due to Pacific Western Bank.  The first payment of $15,000 was due on September 30  and has been paid by the Company.  The monthly payments continue as follows:

October 30, 2011
  $ 15,000  
November 30 through March 31, 2012
  $ 20,000  
April 30 through May 31, 2012
  $ 25,000  
June, 2012
 
Balance due in full
 

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

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

New governmental regulation relating to greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.

 
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Climate change is receiving increasing attention worldwide.  Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.  There are bills pending in Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas.  In addition, several states are considering various greenhouse gas registration and reduction programs.  Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in our costs of raw materials, any one of which could significantly increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect our business, operations or financial results.  While future emission regulation appears likely, it is too early to predict how this regulation will affect our business, operations or financial results.

The Commission previously revoked the registration of our common stock pursuant to Section 12(j) of the Exchange Act due to our failure to timely file our periodic reports under the Exchange Act. If we fail to timely file these reports in the future, we could be delisted from an exchange and/or the Commission could delist our common stock again, which could negatively impact our business and cause a significant decrease in our stock price.

On May 31, 2006, the Commission entered an Order Imposing Remedial Sanctions which revoked the registration of our common stock pursuant to Section 12(j) of the Exchange Act and ordered our then president and chief executive officer, Lawrence A. Consalvi, to cease and desist from causing any violations or future violations of the Exchange Act. This deregistration was the result of our inability to obtain financial information from acquisitions we completed in the past. Although we have since divested ourselves of those acquisitions, and taken numerous remedial measures to ensure this does not occur in the future, there can be no assurance that future acquisitions by us will not have issues or cause us to be delinquent with our required filings under the Exchange Act. Any delinquent filings could have an adverse effect on our business and our stock price, if we are publicly-traded. These adverse effects include being delisted from any exchange where our common stock may be listed, such as the OTC Bulletin Board, which could cause our stock price to decrease. Additionally, if we are unable to timely file our periodic reports under the Exchange Act, the Commission could again revoke the registration of our common stock pursuant to Section 12(j) of the Exchange Act, prohibiting us from listing our stock on any public marketplace, including the OTC Bulletin Board and Pink Sheets, which would have the effect of our common stock not being publicly-traded and greatly reduce the liquidity of our common stock and greatly reduce the ability of our stockholders to sell or trade our common stock. Regarding our business, if we were delinquent in our filings and/or had the registration of our common stock revoked, we may be unable to effectuate our business plan to acquire other companies in our industry since we likely would not be able to structure these acquisitions using our common stock or other securities. This could negatively impact our business and cause a significant decrease in our stock price.

ITEM 1B – UNRESOLVED STAFF COMMENTS

This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we have not received written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 within the last 180 days before the end of our last fiscal year.

 
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ITEM 2 – PROPERTIES

In July, 2007, we entered into a 5-year triple net lease for approximately 48,600 square feet of manufacturing and office space in a free-standing industrial building at 2672 Dow Avenue, Tustin, California 92780 for a average monthly rental of $28,390 for the first 12 months, $35,090 for the second 12 months, $36,143 for the third 12 months, $37,227 for the fourth 12 months and $38,334 for the final 12 months. We recently finalized an amendment to the lease agreement that extends the lease under new terms that commences on October 1, 2011 and continues until June 30, 2017.  The rent for month 1(October 2011) through month 21 is $27,741, month 22 to 33 $28,573, month 34 to 45, $29,430, month 46 to 57, $30,313 and month 58 to 69, $31,223

We also have a five year lease for approximately 13,820 square feet of office and warehouse space located at 3840 East Eagle Drive, Anaheim, California at a monthly rental rate of $8,777 for the first year, $9,040 for the second year, $9,311 for the third year, $9,591 for the fourth year, and $9,879 for the fifth year.  The lease for this property began September 1, 2010 and expires on August 31, 2015.  The Machines Sales Group resides at this location.

ITEM 3 - LEGAL PROCEEDINGS

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

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

The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant.  The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs.  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. 

No provision has been made in the June 30, 2011 financial statements as we feel that the litigation has no merit and the likelihood of any liability is extremely low.
  
2.           CNC Manufacturing v. All American CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC Repos, Superior Court for the State of California, County of Riverside, Case No. RIC 509650.  

Plaintiff filed this Complaint on October 2, 2008.

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

A provision has been made for $27,500 in the June 30, 2011 financial statements.
 
3.           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.
 
 
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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 commencing February 15, 2010 with interest at the rate of approximately .44% per annum, the remaining balance being paid in March 2011.
 
A provision has been made in the June 30, 2011 financial statements in the amount of $31,174.

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

The Complaint was filed on June 8, 2009. The Complaint alleges causes of action for account stated, and arises from a claim by Hwacheon that All American CNC has not paid it for machines sold to All American CNC.  The Complaint seeks damages of approximately $362,000.  All American filed an answer on or about July 15, 2009.  Default has been entered against All American CNC Sales, Inc.

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

Currently MLH and Hwacheon are negotiating a settlement.  The settlement agreement is expected to be signed shortly. A provision has been made in the June 30, 2011 financial statements. Subsequent to the year end the Company has paid $277,363

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

The Complaint was filed on June 12, 2009.
 
The Complaint alleges causes of action for breach of contract and common counts against All American CNC seeking damages in the amount of at least $163,578.88, and arises from a claim by Fadal that All American failed to pay amounts due.  On June 26, 2009, Fadal amended the Complaint to include M Line Holdings, Inc. as a Defendant.  

A settlement agreement in the amount of $60,000 was signed on May 31, 2011.  This amount is to be paid in 12 monthly installments starting on January 1, 2012.

A provision for $60,000 has been made in the June 30, 2011 financial statements.

 
 
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6.           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 case against Elite Machine Tool has been settled in 2010 and a settlement amount was paid by the insurance carrier. There are remaining issues of indemnity between the carrier and other parties but Elite is no longer involved in the case.

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

The Complaint was filed on April 14, 2009.
  
The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos.  The damages sought in the Complaint are estimated to be approximately $30,000.  The Defendants filed an Answer on June 5, 2009.  

Recently the parties agreed to settle but the final numbers have still to be finalized. .   A provision of $10,000 has been made in the June 30, 2011  financial statements.

8.           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.

The Company’s management believes that payment(s), if any, will be the responsibility of the Workers Compensation Board.
  
9.           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.

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

A provision for $60,000 has been made in the June 30, 2011 financial statements.

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

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

This case has settled based on payment terms as agreed between the parties.
 
 
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11.           Pacific Western Bank  V  M Line Holdings, Inc.   Orange County Superior Court Case No BC448012. The case was filed as a cross-complaint on 11/12/2010.

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

This case has settled based on payment terms as agreed between the parties.

A provision has been provided for in the June 30, 2011 financial statements
 
12.            Neal Kohlhaas v. M Line Holdings, INC.  Orange County Superior Court Case No. 30-2011-00442075.

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

No provision has been made in the June 30, 2011 financials as we believe that the case has no merit, and there is little  likelihood of any liability to  the Company.

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.  The parties then reached a settlement in the principal sum of $40,000 to be documented in due course.  Meanwhile a default was entered against MLH, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the complaint and has filed a motion for leave to file a cross complaint.

Recently a settlement of $50,000 has been reached in this case, requiring payments commencing on March 11, 2011 for ten months. The first two month’s payment have been made however the Company is currently in default of the terms of this settlement agreement.  Mr. Consalvi has filed his stipulated judgment.

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

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

No provision has been made in the June 30, 2011 financials as the company has settled the case with Pacific Western Bank therefore the Company believes that the case merit with little likelihood of any liability being incurred by the Company.
 
15.           M Line Holdings, Inc., v. Timothy Consalvi, et. al.-  Orange County  Superior Court Case No. 30-201100493329
 
 
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M Line has recently filed suit against two of its former directors alleging that they breached their fiduciary duty to the company by mismanaging the corporate affairs of the company and its subsidiaries resulting in damages to the company and its subsidiaries.  Defendants have not yet been served or have not answered the complaint at this time.   We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

Litigation is subject to inherent uncertainties, and unfavorable rulings could occur.  If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity
 
ITEM 4 – (REMOVED AND RESERVED).

 
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PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is currently listed on the OTC Bulletin Board under the symbol “MLHC.”  On May 16, 2008, we filed a registration statement on Form 10 to re-register our common stock under Section 12 of the Exchange Act.  As a result, on July 15, 2008, we became subject to the reporting requirements under the Exchange Act.  We began listing on the OTC Bulletin Board on November 23, 2009.

The following table sets forth the high and low bid information for each quarter within the two most recent fiscal years.  The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.

Fiscal Year
Ended
     
Bid Prices
 
June 30,
 
Period
 
High
   
Low
 
                 
2010
 
First Quarter
    N/A       N/A  
   
Second Quarter
  $ 0.25     $ 0.01  
   
Third Quarter
  $ 0.30     $ 0.07  
   
Fourth Quarter
  $ 0.10     $ 0.05  
                     
2011
 
First Quarter
  $ 0.08     $ 0.05  
   
Second Quarter
  $ 0.08     $ 0.01  
   
Third Quarter
  $ 0.10     $ 0.01  
   
Fourth Quarter
  $ 0.20     $ 0.01  
                     
2012
 
First Quarter
  $ 0.20     $ 0.02  

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.  The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet.  Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

Holders

As of June 30, 2011, there were 38,570,845 shares of our common stock outstanding held by 88 holders of record of our common stock and numerous shareholders holding shares in brokerage accounts.  Of these shares, 16,955,124 were held by non-affiliates.  On the cover page of this filing we value these shares at $1,695,512.  These shares were valued at $0.10 per share, which was closing price of our common stock on the OTC Bulletin Board on October 10, 2011.

Dividends

In May 2005, we declared and paid a dividend of $0.005 on our common stock. The dividend was paid to all shareholders except shareholders who are also directors of the Company or members of their immediate family, all of whom waived their right to receive the dividend payment. We have not paid any dividends since May, 2005 nor do we plan to in the foreseeable future.

 
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Securities Authorized for Issuance Under Equity Compensation Plans

There are no outstanding options or warrants to purchase shares of our common stock under any equity compensation plans.

Non-Qualified Stock Option Plan

In November 2006, the Board of Directors approved the creating of a non-qualified stock option plan for key managers, which, among other provisions, would have provided for the granting of options by the board at strike prices at or exceeding market value, and expiration periods of up to ten years.  This plan was never created and no options were ever issued.

 
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As a result, we did not have any options, warrants or rights outstanding as of June 30, 2011.

Plan Category
 
Number of Securities to
be issued upon exercise
of outstanding options,
warrants and rights
   
Weighted-average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders
    - 0 -       - 0 -       - 0 -  
Equity compensation plans not approved by security holders
    - 0 -       - 0 -       - 0 -  
Total
    - 0 -       - 0 -       - 0 -  

Recent Issuance of Unregistered Securities

On October 10, 2011, we issued 40,000 shares to Island Capital Management, LLC, our transfer agent, as part of our agreement with Island.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Island is a sophisticated investor and familiar with our operations.
 
On January 4, 2011, we issued 1,388,889 shares to an unrelated third party pursuant to a conversion request by the lender under one of our promissory notes, which conversion was valued at $55,556.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor is a sophisticated investor and familiar with our operations.

On January 7, 2011, we issued 250,000 shares to Issuer’s Capital Advisors, LLC in exchange for consulting services related to investor relations work and were valued at $5,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Issuer’s Capital Advisors, LLC is a sophisticated investor and familiar with our operations.

On January 5, 2011, we issued 500,000 shares to Anthony Anish, one of our officers and directors, in exchange for compensation equal to $20,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mr. Anish is a sophisticated investor and familiar with our operations.

On January 5, 2011, we issued 500,000 shares to Jitu Banker, one of our officers and directors, in exchange for compensation equal to $20,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mr. Banker  is a sophisticated investor and familiar with our operations.
 
On May 20, 2011, we issued 700,000 shares to Issuer’s Capital Advisors, LLC in exchange for consulting services related to investor relations work and were valued at $21,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Issuer’s Capital Advisors, LLC is a sophisticated investor and familiar with our operations.

 
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On May 20, 2011, we issued 1,200,000 shares in exchange for accrued compensation equal to $36,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors aresophisticated investors and familiar with our operations.
 
On May 27, 2011, we issued a total of 2,000,000 shares to two parties as part of a loan package to the company whereby the investors loaned us a total of $150,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors are sophisticated investors and familiar with our operations.

On May 20, 2011, we issued 380,000 shares in the name of a potential acquisition target company, but have not transferred the shares to the target company until, and unless, we close the acquisition transaction.  The shares are restricted in accordance with Rule 144.  The issuance will be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the target company is a sophisticated investor and familiar with our operations.

On May 20, 2011, we issued 500,000 shares in lieu of expenses.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors are sophisticated investors and familiar with our operations.

On May 20, 2011, we issued 100,000 shares in lieu of accrued compensation equal to $3,000.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors are sophisticated investors and familiar with our operations.
 
On May 20, 2011, we issued 150,000 shares to Mr. Charles W. Kircher, Jr., as part of a settlement agreement, settling outstanding litigation.  The shares were value at $4,500.  The shares were restricted in accordance with Rule 144.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mr. Kircher is a sophisticated investor and familiar with our operations.

If our stock is listed on an exchange we will be subject to the Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

ITEM 6 – SELECTED FINANCIAL DATA

As a smaller reporting company we are not required to provide the information required by this Item.

 
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ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

This annual report on Form 10-K of M Line Holdings, Inc. for the year ended June 30, 2011 contains forward-looking statements, principally in this Section and “Business.” Generally, you can identify these statements because they use words like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described in this filing. You should not place undue reliance on these forward-looking statements which apply only as of the date of this annual 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 this annual report, 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 maintain a credit facility to purchase new and used machines, manufacture new products; the ability to obtain financing for product acquisition; changes in product strategies; general economic, financial and business conditions; changes in and compliance with governmental regulations; changes in various tax laws; and the availability of key management and other personnel.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. We believe that of our significant accounting policies (more fully described in Notes to the Consolidated Financial Statements), the following are particularly important to the portrayal of our results of operations and financial position and may require the application of a higher level of judgment by our management, and as a result are subject to an inherent degree of uncertainty.

Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We review our estimates on an on-going basis, including those related to sales allowances, the allowance for doubtful accounts, inventory reserves, long-lived assets, income taxes and litigation. We base our estimates on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result. We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 
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Revenue Recognition

We recognize revenues when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) our price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We record reserves for estimated sales returns and allowances for both CNC machine sales and manufactured parts in the same period as the related revenues are recognized. We base these estimates on our historical experience for returns or the specific identification of an event necessitating a reserve. Our estimates may change from time to time in the event we ship manufactured parts which in the customers’ opinion, do not conform to the specifications provided. To the extent actual sales returns differ from our estimates, our future results of operations may be affected.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates as we have in the past. Accounts receivable are written off or reserves established when considered to be uncollectible or at risk of being uncollectible. While management believes that adequate allowances have been provided in the Consolidated Financial Statements, it is possible that we could experience unexpected credit losses. Our accounts receivable are concentrated in a relatively few number of customers. One customer, Panasonic Avionics Corporation (“Panasonic”), a leading provider of in-flight entertainment systems for commercial aircraft, accounts for 67% and 50% of our consolidated accounts receivable balance at June 30, 2011 and 2010, respectively.  Therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.

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. 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 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 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.

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

 
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Long-lived Assets

We continually monitor and review long-lived assets, including fixed assets intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of the undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Our estimates of cash flows may differ from actual cash flows due to, among other things increased competition, loss of customers and loss of manufacturer representation contract, all which can cause materially changes our operating performance. If the sums of the undiscounted cash flows are less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset or discounted cash flows.  Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Based on managements review, we determined that there was no impairment provision of long-lived assets for the year ended June 30, 2011. There was an impairment provision of $170,000 for long-lived assets in 2009.

Goodwill and Acquired Intangible Assets

As part of Goodwill impairment testing it requires a two-step approach to test goodwill for impairment for each reporting unit. The first step tests for impairment by applying fair value-based tests to a reporting unit. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities within the reporting unit. Application of the goodwill impairment tests require judgment, including identification of reporting units, assignment of assets and liabilities to each reporting unit, assignment of goodwill to each reporting unit, and determination of the fair value of each reporting unit. The determination of fair value for a reporting unit could be materially affected by changes in these estimates and assumptions.  Based on its review, all remaining goodwill of $198,169 was written off in the financial statements for the year ended June 30, 2010. There was no impairments of goodwill from continuing operations as of June 30, 2011.

Accounting for Income Taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740-10, Income Taxes, (“ASC 740”) which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

The Company accounts for uncertain tax positions in accordance with ASC 740, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest, penalties and disclosures required. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
 
 
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Recent Accounting Pronouncements

In December 2010, the FASB issued ASU 2010-28 updated guidance on when and how to perform certain steps of the periodic goodwill impairment test for public entities that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with early adoption prohibited.  The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
 
In December 2010, the FASB also issued guidance to clarify the reporting of pro forma financial information related to business combinations of public entities and to expand certain supplemental pro forma disclosures. This guidance is effective prospectively for business combinations that occur on or after the beginning of the fiscal year beginning on or after December 15, 2010, with early adoption permitted. It is applicable to the Company’s fiscal year beginning July 1, 2011. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

In May 2011, the FASB issued guidance ASU 2011-04 to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
 
In June 2011, the FASB issued new guidance ASU 2011-05 on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive  statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted.  The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

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.

Results of Operations

Sales Concentration

The sales within our Precision Manufacturing segment are highly concentrated within two customers, Panasonic Avionics and Iris Diagnostics. Sales to these customers accounted for 63% and 85% of consolidated sales for the years ended June 30, 2011 and 2010, respectively. 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.

Gross Profit

Our gross profit represents sales less the cost of sales. Gross margin represents our gross profit divided by sales.

Cost of sales for our Precision Manufacturing segment primarily consists of raw materials, direct labor, depreciation of manufacturing equipment and overhead incurred in the manufacturing of parts for our customers. Our gross margins will increase and decrease depending on the amount of products we manufacture as result of allocating fixed manufacturing costs over a larger or reduced number of parts, which yields lower or higher per unit costs, respectively. As a result, a change in manufacturing volume in a quarter can significantly affect our gross margin in that and future quarters.

 
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Cost of sales for our Machine Sales Segment includes the cost of machines, replacement parts, freight, and refurbishment expenses. Gross margins within the Machine Sales segment can vary based on the price we procure equipment for in the marketplace, sales mix between new and used equipment and the costs to refurbish used machines.
 
Selling, General and Administrative

Our selling, general and administrative expenses consist of personnel costs, including the sales, executive, finance and administration. These costs also include non-manufacturing related depreciation, overhead and professional fees.

Amortization of Intangible Assets

Our amortization expense includes the amortization of identifiable intangible assets, consisting of customer lists, from our acquisition of All American CNC Sales, Inc. in 2004 and our acquisition of CNC Repos, Inc. in fiscal 2008.

Interest Expense

Interest expense primarily consists of the cost of borrowings under our credit agreement with Pacific Western Bank, and Credit and capital lease agreements. See Liquidity and Capital Resources and Notes to Consolidated Financial Statements for further discussion.

Segment Information
         
Year ended June 30,
             
         
2011
   
2010
   
Change ($)
   
Change
(%)
 
Sales by segment:
                             
Machine Sales
          $ 6,179,472     $ 2,843,436     $ 3,336,036       117  
Precision Engineering
            3,721,228       3,370,750       350,478       10  
                                         
Gross profit by segment:
                                       
Machine Sales
            1,122,914       778,444       344,070       44  
Precision Engineering
            1,627,075       586,988       1,040,087       177  
                                         
Gross margin by segment: (%)
                                       
Machine Sales
            18       27                  
Precision Engineering
            44       17                  
                                         

 
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Results of Operations for the Year Ended June 30, 2011 and 2010

Introduction
 
For the twelve months ended June 30, 2011, we generated $9,900,700 in revenues on cost of sales of $7,150,711.  With these revenues and cost of sales for the year ended June 30, 2011, we had a net income of $229,929.  For the year ended June 30, 2010, we had revenues of $6,213,800, on cost of sales of $4,848,755.  With these revenues and costs of sales we had a net loss of $(1,709,086), for year ended June 30, 2010.  An explanation of these numbers and how they relate to our business is contained below.

Revenues, Expenses and Loss from operations:

   
Year ended
   
Year ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
Revenues
  $ 9,900,700     $ 6,213,800  
Cost of Sales
    7,150,711       4,848,755  
Selling, General and  Administrative Expenses
    2,687,213       2,739,523  
Amortization of Intangible Assets
    104,458       41,783  
Operating Income (loss)
    (41,682 )     (1,416,261 )
Interest Expense
    (103,889 )     (187,788 )
Interest Income
    21,756       18,295  
Gain on sale of assets
    -       2,497  
Total Other Income (Expense)
    274,011       (166,366 )
Net Income (Loss)
  $ 232,329     $ (1,582,627 )

Revenues

Our revenues for the year ended June 30, 2011 were $9,900,700 compared to revenues of $6,213,800 for the year ended June 30, 2010.  Our approximately 59% increase in our revenues from the year ended June 30, 2010 to year ended June 30, 2011, was primarily due to increased revenues in our machine sales division.  Our revenues for the year ended June 30, 2011 consisted primarily of sales of CNC machines and machined products.

Cost of Sales

Our cost of sales for the year ended June 30, 2011, were $7,150,711 and consisted primarily of used CNC machines, refurbishment of those machines and raw materials usage, compared to our cost of sales for the year ended June 30, 2010 of $4,848,755.  The increase in our cost of sales was primarily due to the need to purchase more equipment to meet the demands of our customers..

Selling, General and Administrative Expenses

Our selling, general and administrative expenses are those expenses we have related to the actual sales of our products and the costs we incur in transporting those products.  For the year ended June 30, 2011 our selling and distribution expenses were $2,687,213, compared to $2,739,523 for the year ended June 30, 2010.  Our selling, general and administrative expenses for the year ended June 30, 2011, primarily consisted of salaries of $1,593,551, rent of $537,462, legal and professional fees of $185,274 and insurance expenses of $277,373.

 
32

 

Interest Expense

For the year ended June 30, 2011, our interest expense decreased by $83,899 compared to the comparable period in 2010. The change is attributable to lower average debt balances and decreases in the average interest rate paid on our debt and capital lease obligations and is reduced by a derivative benefit of $93,488.

Gain on Sale of Assets

During 2010, we recorded a net gain from the sale of assets within the Machine Sales Group during 2010 of $2,497.  We did not have a gain on sale of assets in 2011.  

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash and cash equivalents, cash generated from operations and borrowing from various sources. At June 30, 2011, our cash and cash equivalents totaled $221,036 and we had negative working capital of $(114,930).

At June 30, 2011, we had $236,400 in debt outstanding under our credit agreement with Pacific Western Bank. The credit agreement provided for borrowings of up to $1,500,000, and included a line of credit, a term loan and a letter of credit. The amount outstanding under the line of credit, term loan and letter of credit are $236,400, $0 and $0, respectively, as of June 30, 2011. We reached a settlement agreement with Pacific Western Bank to extend the repayment of the $236,400 until June 2012.

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

As a result our audited financial statements for the year ended June 30, 2011 contain an explanatory note (Note 19) to the effect that our ability to continue as a going concern is dependent on our ability to retain our current short term financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis in order to attain profitability, as well successfully obtain financing on favorable terms to fund the company’s long term plans.  We can give no assurance that our plans and efforts to achieve the above steps will be successful (see Item 19, Going Concern and Management Plan).
 
 
33

 

Cash Flows

The following table sets forth our cash flows for the years ended June 30:

   
2011
   
2010
 
Provided by (used in):
           
Operating activities
  $ 231,446     $ 400,787  
Investing activities
    (5,928 )     24,000  
Financing activities
    (54,892 )     (812,407 )
    $ 170,626     $ (387,620 )

Cash Flows for the Years Ended June 30, 2011 and 2010

Operating Activities
 
Net cash provided by (used in) operating activities was ($231,445) for the year ended June 30, 2011, compared to $400,787 for the year ended June 30, 2010.  Our cash from operating activities for the year ended June 30, 2011 was primarily ($308,841) in accounts receivables, ($503,102) in inventories, $30,400 in prepaid expenses and other assets, , $953,143 in accounts payable and accrued expenses, $281,875 in depreciation, $104,458 in amortization of intangible assets, and ($39,566)  in deferred rent.
 
Investing Activities

Net cash provided by (used in) investing activities was ($5,928) for the year ended June 30, 2011, compared to $24,000 for the year ended June 30, 2010.  The cash used for investing activities for the year ended June 30, 2011 was for capital expenditures.  For the year ended June 30, 2010, our cash provided by (used in) investing activities consisted of $24,000 in proceeds from sale of assets.  These related to equipment purchases and sales in our precision manufacturing group.

Financing Activities

Net cash provided by (used in) financing activities was ($54,892)for the year ended June 30, 2011, compared to ($812,407) for the year ended June 30, 2010.  The cash provided by (used in) financing activities for the year ended June 30, 2011, consisted of $408,156 in net borrowings on our line of credit, $150,000 in proceeds on note payables, ($16,069) in payments on capital leases ($373,654) due from a related party and ($223,324) payments to notes payable.

 
34

 

 
Contractual Obligations

The following table summarizes our contractual obligations and commercial commitments as of June 30, 2011:

   
2011
   
2012
   
2013
   
2014
   
2015
   
Total
 
                                     
Debt obligations
  $ 800,385     $ 13,428     $ -     $ -     $ -     $ 813,813  
Capital leases
    44,998       29,770       -       -       -       74,768  
Operating leases
    577,213       108,485       111,740       115,092       118,545       1,031,075  
    $ 1,422,596     $ 151,683     $ 111,740     $ 115,092     $ 118,545     $ 1,919,656  

Quantitative and Qualitative Disclosures about Market Risk
 
The only financial instruments we hold are cash and cash equivalents. We also have a fixed interest rate agreement with Pacific Western Bank. In addition we have a fixed interest rate credit facility with Main Credit secured by the receivables and inventory of Eran Engineering.  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 credit and currency rates or changes in economic conditions.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company we are not required to provide the information required by this Item.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Registered Public Accounting Firm
F-1
   
Consolidated Balance Sheets as of June 30, 2011 and 2010
F-2
   
Consolidated Statements of Operations for the years ended June 30, 2011 and 2010
F-3
   
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2011 and 2010
F-4
   
Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010
F-5
   
Notes to Consolidated Financial Statements
F-6

 
35

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
M Line Holdings, Inc.

We have audited the accompanying consolidated balance sheets of M Line Holdings, Inc. (formerly, Gateway International, Inc) (the “Company”)  as of June 30, 2011 and 2010 and the related consolidated statements of operation, stockholders' equity, and cash flow for each of the years in the two-year period ended June 30, 2011.   These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2011 and 2010 and the results of its operations and its cash flow for each of the years in the two-year period ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America.
 
The Company's consolidated financial statements are prepared using the accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred operating losses of $1,582,627 for the year ended June 30, 2010, and has not been profitable through the first three quarters of the fiscal year 2011. The Company has a negative working capital of $114,930 at June 30, 2011. The Company has an accumulated deficit of $9,282,863 as of June 30, 2011.  These factors as discussed in Note 19 to the consolidated financial statements raise doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 19.  The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California
October 12, 2011
 
 
F-1

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 AND JUNE 30, 2010

   
As of June 30
   
As of June 30
 
   
2011
   
2010
 
             
Assets
           
             
Current Assets:
           
Cash and cash equivalents
  $ 221,036     $ 50,410  
Accounts receivable, net
    894,197       613,642  
Inventories, net
    1,199,422       751,300  
Due from related party
    769,499       352,333  
Prepaid and other current assets
    14,148       53,723  
Current Assets - Discontinued Operations
    -       8,113  
Total current assets
    3,098,302       1,829,521  
                 
Property and equipment, net
    537,256       813,203  
Intangible Assets, net
    31,952       136,409  
Deposit on on-going acquisition
    25,650       -  
Deposits and other
    55,003       60,077  
Non Current Assets - Discontinued Operations
    -       23,377  
Total Assets
  $ 3,748,163     $ 2,862,587  
                 
Liabilities and Shareholders' Equity
               
                 
Current Liabilities:
               
Line of Credit
  $ 627,045     $ 218,889  
Accounts Payable
    901,230       720,565  
Accrued Expenses and other
    839,574       557,095  
Derivative liability
    0       98,289  
Notes payable - current
    305,939       272,941  
Convertible notes payable
    -       100,000  
Capital Leases - current
    44,998       46,527  
Litigation payable
    494,446       -  
Current Liabilities - Discontinued Operations
    -       704,061  
Total Current Liabilities
    3,213,232       2,718,367  
                 
Notes Payable - long term
    13,428       19,750  
Capital Leases - long term
    29,770       44,310  
Deferred Income Taxes
    16,710       16,710  
Deferred Rent - long term
    -       39,566  
Total liabilities
    3,273,140       2,838,703  
Committments and Contingencies     -       -  
                 
Shareholders' Equity
               
Common Stock, $0.001: 100,000,000 shares Authorized; 38,570,845 and 30,861,956 shares issued and outstanding at June 30, 2011 and June 30, 2010, respectively
    38,571       30,862  
Additional paid in capital
    9,813,315       9,505,812  
Related party Receivable due to share issued
    (94,000 )     -  
Accumulated deficit
    (9,282,863 )     (9,512,790 )
Total stockholders' equity
    475,022       23,884  
Total Liabilities and Shareholders' Equity
  $ 3,748,163     $ 2,862,587  

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

 
F-2

 

M-LINE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 30, 2011 AND JUNE 30, 2010

   
As of June 30,
 
   
2011
   
2010
 
Net sales
  $ 9,900,700     $ 6,213,800  
Cost of sales
    7,150,711       4,848,755  
Gross Profit
    2,749,989       1,365,045  
                 
Operating expenses:
               
Selling, general and administrative
    2,687,213       2,739,523  
Amortization of intangible assets
    104,458       41,783  
Total operating expense
    2,791,671       2,781,306  
Operating loss
    (41,682 )     (1,416,261 )
                 
Other income (expense):
               
Interest expense
    (103,889 )     (187,788 )
Interest income
    21,756       18,925  
Rental income
    119,700       -  
Change in derivative liability
    93,488       -  
Gain on debt settlement
    142,956       -  
Gain on sale of assets
    -       2,497  
Total other income (expenses)
    274,011       (166,366 )
Income (loss) before income tax
    232,329       (1,582,627 )
                 
Income tax provision
    2,400       126,459  
Net income (loss)
  $ 229,929     $ (1,709,086 )
                 
Net income (loss) per share:
               
Basic and dilutive income (loss) per share:
  $ 0.01     $ (0.06 )
Weighted average number of common shares under in per share calculations (basic and diluted)
    32,603,326       30,861,956  

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

 
F-3

 

M-LINE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
JUNE 30, 2011 AND JUNE 30, 2010

   
Shares
   
Amount
   
Paid-in Amount
   
Related Party
Receivable
   
Deficit
   
Total
 
Balance, July 1, 2009
    30,861,956     $ 30,862     $ 9,505,812     $ -     $ (7,803,704 )   $ 1,732,970  
                                                 
Net loss
    -       -       -       -       (1,709,086 )     (1,709,086 )
                                                 
Balance sheet at June 30, 2010
    30,861,956       30,862       9,505,812       -       (9,512,790 )     23,884  
                                                 
Shares issued for services
    990,000       990       27,010       -       -       28,000  
                                                 
Shares issued  for debt settlement
    3,538,889       3,539       156,517       -       -       160,056  
                                                 
Shares issued for deposit
    380,000       380       11,020       -       -       11,400  
                                                 
Shares issued in lieu of related party expenses
    2,800,000       2,800       91,200       (94,000 )     -       -  
                                                 
Imputed interest on related party notes
    -       -       21,756       -       -       21,756  
                                                 
Net income
    -       -       -               229,929       229,929  
Balance at June 30, 2011
    38,570,845     $ 38,571     $ 9,813,315     $ (94,000 )   $ (9,282,863 )   $ 475,022  

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

 
F-4

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2011 AND JUNE 30, 2010

   
2011
   
2010
 
Cash flows from operating activities:
           
Net income (loss)
  $ 229,929     $ (1,709,086 )
Adjustments to reconcile net income loss to net cash provided by (used in) operating activities:
               
Gain on disposition of assets
    -       (2,497 )
Imputed Interest
    (21,756 )        
Bad Debt expense
    28,285       53,097  
Depreciation
    281,875       417,947  
Amortization of intangible assets
    104,458       41,783  
Issuance of shares for services
    28,000       18,925  
Gain on debt settlement
    (142,956 )        
Deferred tax provision
    -       126,459  
Impairment of intangible assets
    -       170,000  
Reserve for inventories
    54,980       105,084  
Change in derivative liabilities
    (93,844 )     98,289  
Changes in operating assets and liabilities:
               
Account receivable
    (308,841 )     225,978  
Inventory
    (503,102 )     455,037  
Prepaid expenses and other assets
    30,400       26,527  
Account payable and accrued expenses
    953,143       287,964  
Customer Deposit
    -       6,069  
Deferred rent
    (39,566 )     (26,283 )
Cash provided by operating activities
    601,004       295,293  
Cash used in operating activities of discontinued operations
    (369,559 )     105,494  
Net cash provided by operating activities
    231,445       400,787  
                 
Cash flows from investing activities:
               
Capital expenditures
    (5,928 )     -  
Proceeds from sale of assets
    -       24,000  
Net cash provided by (used in) investing activities:
    (5,928 )     24,000  
                 
Cash flows from financing activities:
               
Net borrowings (repayments) on line of credit
    408,156       (221,111 )
Due from related party
    (373,654 )     (381,258 )
Proceeds from notes payable
    150,000       247,834  
Payments to notes payable
    (223,324 )     (288,277 )
Payments on capital leases
    (16,069 )     (169,595 )
Net cash used in financing activities
    (54,892 )     (812,407 )
                 
Net increase (decrease) in cash and cash equivalent
    170,626       (387,620 )
                 
Cash and cash equivalents at beginning of period
    50,410       438,030  
Cash and cash equivalents at end of period
  $ 221,036     $ 50,410  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 129,513     $ 187,788  
Cash paid for income taxes
  $ -     $ -  
                 
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Shares issued for deposit
  $ 11,400     $ -  
Shares issued for related party receivable
  $ 94,000     $ -  
Capital expenditues acquired under capital leases and notes payable
  $ -     $ 92,334  
Shares issued for debt settlement
  $ 160,056     $ -  

The accompanying notes form an integral part of these audited consolidated financial statements
 
 
F-5

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization and Business

Organization and Business

M. Line Holdings, Inc. (formerly, Gateway International Holding, Inc.) (the “Company”) was incorporated in Nevada on September 24, 1997. The Company and its subsidiaries are engaged in the following businesses:

Acquiring, refurbishing and selling pre-owned CNC machine-tool equipment through its Elite subsidiary, the machine sales group.
Manufacturing precision metal component parts in the defense, automotive, aerospace and medical industries through its Eran Engineering, Inc. (“Eran”) subsidiary, the precision manufacturing group.

2.
Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of M Line Holdings, Inc. and its wholly-owned subsidiaries: E.M. Tool Company, Inc. d.b.a. Elite Machine Tool Company, Eran Engineering, Inc and AACNC as discontinued operations. All intercompany accounts and transactions have been eliminated.

Business Segments

FASB ASC Topic 280: Segment Reporting (“ASC 280”) requires the determination of reportable business segments (i.e., the management approach). This approach requires that business segment information used by the chief operating decision maker to assess performance and manage company resources be the source for segment information disclosure. The Company operates in two reportable segments consisting of (1) Machine Sales and (2) Precision Manufacturing.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company invests its cash balances through high-credit quality financial institutions. From time to time, the Company maintains bank account levels in excess of FDIC insurance limits. If the financial institutions in which the Company has its accounts has financial difficulties, the Company’s cash balances could be at risk.

Sales from significant customers representing 10% or more of sales consist of the following customers for the years ended June 30:

   
Year ended June 30,
 
   
2011
   
2010
 
% of sales
    24       47  
# of customers
    1       2  
 
 
F-6

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Accounts receivable from those customers at June 30, 2011 and 2010 were $458,970 and $328,960, respectively.
 
As a result of the Company's concentration of its customer base and industries served, the loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to the above customers or a change in their financial position could materially and adversely affect the Company's consolidated financial position, results of operations and cash flows.

Two customers, included in the Precision Manufacturing segment represents a significant concentration. Sales to these customers as a percentage of sales within the Precision Manufacturing Segment are as follows for the years ended June 30:

   
Year ended June 30,
 
   
2011
   
2010
 
% of segment sales significant customer sales concentration
    62       85  
 
Accounts receivable for significant customers at June 30, 2011 and 2010 were $458,970 and $328,960,respectively.
 
The Company’s Precision Manufacturing segment operates a single manufacturing facility located in Tustin, California. A major interruption in the manufacturing operations at this facility would have a material adverse affect on the consolidated financial position and results of operations of the Company.

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, collectibility of accounts receivable, litigation, impairment of goodwill, and long-lived assets other than goodwill. Actual results could materially differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with insignificant interest rate risk and original maturities of three months or less from the date of purchase to be cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair values. The Company maintains cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies. Management does not believe that as a result of this concentration, it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

Accounts Receivable

The Company performs periodic credit evaluations and continually monitors its collection of amounts due from its customers. The Company adjusts credit limits and payment terms granted to its customers based upon payment history and the customer's current creditworthiness. The Company does not require collateral from its customers to secure amounts due from them. The Company regularly reviews its accounts receivable and collection of these balances subsequent to each of these periods. The Company maintains reserves for potential credit losses, and historically, such losses have been within management expectations. As of June 30, 2011 and 2010, accounts receivable totals were $894,197 and $613,642, net of a provision for bad debt expense of $105,096 and $35,838 respectively.

 
F-7

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories

Inventories are stated at the lower of cost, determined on a first in, first out (“FIFO”)

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Equipment under capital lease obligations is depreciated over the estimated useful life of the asset. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. Repairs and maintenance are expensed as incurred, while improvements are capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation, which any resulting gain or loss included in the consolidated statements of operations.

Long-Lived Assets

The Company reviews its fixed assets and certain identifiable intangibles with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset or discounted cash flows. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Based on management’s review, the Company determined there was an impairment of intangible assets of $0 and $170,000 at June 30, 2011 and 2010, respectively.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740-10, Income Taxes, (“ASC 740”) which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

The Company accounts for uncertain tax positions in accordance with ASC 740, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest, penalties and disclosures required. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
 
 
F-8

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contingencies and Litigation

The Company evaluates contingent liabilities including threatened or pending litigation.”  Management assesses the likelihood of any adverse judgments or outcomes to a potential claim or legal proceeding, as well as potential ranges of probable losses, when the outcomes of the claims or proceedings are probable and reasonably estimable. A determination of the amount of accrued liabilities required, if any, for these contingencies is made after the analysis of each matter. Because of uncertainties related to these matters, management bases its estimates on the information available at the time. As additional information becomes available, management reassess the potential liability related to its pending claims and litigation and may revise our estimates. Any revisions in the estimates of potential liabilities could have a material impact on the results of operations and financial position.

Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition”. Revenue is recognized at the date of shipment to customers when; a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectibility is reasonably assured.
 
Revenues generated from the Precision Manufacturing segment consist of manufactured parts and in some instances, assembly of these items based on detailed engineering specifications received by the Company from the customer. The Company generally begins to manufacture the parts upon the receipt and acceptance of a purchase order which specifies the quantity, price and delivery dates such products are required to be shipped within. Prior to shipment, physical inspection of the parts is performed to ensure specifications meet the engineering requirements. Historically, customer returns have been inconsequential.

Revenues generated from the sales of new and pre-owned CNC machines from the Machine Tools segment are based on the acceptance of a purchase order and the customer’s acknowledgement of the Company’s terms and conditions which specifies the shipping terms, payment terms and the warranty period, if any. In certain instances, the Company may perform installation services including the leveling of the machine, which is inconsequential. Under agreements with certain new equipment manufacturers, a ninety day warranty is provided to customers whereby the manufacturer is responsible for any replacement parts and the Company is responsible for the installation of the parts. In certain instances, the Company provides warranties for used equipment for periods ranging up to thirty days. Historically, warranty costs have been inconsequential. Generally, the Company does not accept returns of equipment.

Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.

Advertising

The Company expenses the cost of advertising when incurred as selling expenses. Advertising expenses were $8,051 and $11,986, for the years ended June 30, 2011 and 2010 respectively.

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing net loss by the Company’s weighted average common shares outstanding during the period. Diluted net income per share reflects the potential dilution to basic earnings per share 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 Company’s weighted average fair value of the common shares during the period. For each period presented, basic and diluted net income (loss) per share amounts are identical as the Company does not have potentially dilutive securities.
 
 
F-9

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

Financial instruments are recorded on the consolidated balance sheets. The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximates the carrying amounts based upon the expected borrowing rate for debt with similar remaining maturities and comparable risk. The fair value of related party notes cannot be readily determined because of the nature of the relationship between the Company and the lenders.

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

In December 2010, the FASB issued updated guidance on when and how to perform certain steps of the periodic goodwill impairment test for public entities that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with early adoption prohibited.  The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
 
In December 2010, the FASB also issued guidance to clarify the reporting of pro forma financial information related to business combinations of public entities and to expand certain supplemental pro forma disclosures. This guidance is effective prospectively for business combinations that occur on or after the beginning of the fiscal year beginning on or after December 15, 2010, with early adoption permitted. It is applicable to the Company’s fiscal year beginning July 1, 2011. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
 
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
 
In June 2011, the FASB issued new guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive  statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted.  The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
 
 
F-10

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

 
F-11

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.
Inventories

Inventories consist of the following at:

   
June 30, 2011
   
June 30, 2010
 
Finished Goods and Components
  $ 740,078     $ 568,695  
CNC Machines held for sale
    -       134,500  
Work in Progress
    505,108       140,773  
Raw Materials and Parts
    9,216       12,416  
      1,254,402       856,384  
Less: Reserve for inventories
    (54,980 )     (105,084 )
Inventories, net.
  $ 1,199,422     $ 751,300  

4.
Related Parties
 
As of June 30, 2011 and 2010, we had an amount due from a related partya shareholder of the Company in the amount of $769, 499 and $352,333 which is expected to be repaid to the company within the next fiscal year. The Company advanced funds and paid various general expenses incurred by the related party during the course of business for the year ended June 30, 2011. These amounts are fully secured by the related party’s assets.  Interest is imputed at 6% per annum. Imputed Interest amounted to $21,756 and $18,925 for the year ended June 30, 2011 and 2010, resspectively
 
5.
Prepaid and Other

Prepaid and other current assets were $14,148 and $53,723 as of June 30, 2011 and 2010.

6.
Property and Equipment

Property and equipment consists of the following at June 30:

   
Estimated
             
   
Useful life
             
   
(in years)
   
2011
   
2010
 
Machinery and Equipment
    7     $ 2,527,488     $ 2,527,488  
Equipment under capital leases
 
4 to 5
      215,021       215,021  
Fixtures, Fittings and office equipment
 
3 to 5
      207,554       207,554  
Vehicles
    5       26,390       26,390  
Leasehold Improvements
    3       119,649       119,649  
              3,096,102       3,096,102  
                         
Less accumulated depreciation
            (2,558,846 )     (2,282,899 )
            $ 537,256     $ 813,203  

Depreciation expense was $281,875 and $ 417,947 for the years ended June 30, 2011 and 2010, respectively.

 
F-12

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.
Intangible Assets

Intangible assets consist of the following at June 30:

   
Weighted
Average
Remaining
   
2011
   
2010
 
   
Life (in
years)
   
Cost
   
Carrying
Amount
   
Cost
   
Carrying
Amount
 
                               
Customer Relationships
    7-6     $ 417,831       31,952     $ 417,831       136,409  

Amortization expense was $104,458 and $41,783 for the years ended June 30, 2011 and 2010, respectively.

Estimated intangible asset amortization expense for the remaining carrying amount   of intangible assets will be $31,952 for the year ending June 30, 2012.
 
The parent company impaired the intangible asset amounting to $170,000 as it did not consider the fair value of the reporting unit adequate to support the carrying amount of the asset in E.M. Tool Company, Inc. dba Elite Machine Tool for the year ended June 30, 2010. There was no impairment for 2011.
 
8.
Accrued Expenses
 
Accrued expenses consist of the following at June 30:
 
   
June 30, 2011
   
June 30, 2010
 
Compensation and related benefits
  $ 738,650     $ 336,595  
Audit Fees
    65,000       70,000  
Other
    35924       150,500  
    $ 839,575     $ 557,095  

9.
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 June 30:
 
 
F-13

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   
June 30, 2011
   
June 30, 2010
 
             
2011
  $ 70,058     $ 48,454  
2012
    11,318       45,693  
2013
    -       13,900  
2014
    -       -  
2015
    -       -  
Total minimum lease payments
    81,376       108,047  
Less amount representing interest
    6,608       17,210  
Present value of future minimum lease payments
    74,768       90,837  
Less current portion of capital lease obligations
    44,998       46,527  
Capital Lease obligations, net of current portion
  $ 29,770     $ 44,310  

10.
Line of Credit and Notes Payable

Pacific Western Bank Credit Agreement  As of June 30, 2011, the Compay owed $218,889 principal plus accrued interest of $17,511 at June 30, 2011.
 
Since the year end on September 1, 2011, the Company settled the dispute with Pacific Western Bank that not only settles all outstanding legal disputes between the parties but agrees monthly payments that will pay off the balance due to Pacific Western Bank.  The first payment of $15,000 was due  on September 30  and has been paid by the Company.  The monthly payments continue as follows:
 
October 30, 2011
  $ 15,000  
         
November 30 through March 31, 2012
  $ 20,000  
         
April 30 through May 31, 2012
  $ 25,000  
         
June, 2012
 
Balance due in full
 

Interest accrues at 6% per annum.  These payments will not only pay off the remainder of the Company’s line of credit balance with Pacific Western Bank but also the balance due from Eran Engineering on the remaining equipment loan with Pacific Western Bank.
 
Under the terms of the agreement the Company can pay off any balance due to Pacific Western Bank at any time without penalty.
 
Main Credit  As of June 30, 2011 the Company owed $390,645 principal.  This line of credit is secured by the receivables and inventory of Eran Engineering.  The original term has expired and the line continues on a month to month basis.  There is no intent by Main Credit to cancel the line and the Company continues to borrow funds as necessary.
 
 
F-14

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Note Payable
       
   
June 30, 2011
   
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% and 9.75% per annum for a period of 50 months.
  $ 44,471     $ 98,046  
An unsecured note payable to a corporation in respect of  accounting software payable in monthly installments of $1,922.82.  This note is now due and the balance is being negotiated with the leasing company.
    46,811       46,811  
An unsecured note payable to a corporation in respect of machines sold to us payable in monthly installments of $5,000.00 per month. .  This agreement will expire in June 2012
    66,070       86,070  
An unsecured note payable to a corporation in settlement of a lawsuit payable in monthly installments of $5,000.00 per month.  This balance is due to be paid in six monthly payments ending December 31, 2011.
    31,764       61,764  
An unsecured note payable to a financial institution due in full on November 30, 2011.  Since the year end the term has been extended to December 15, 2011 with an option to repay over four months next year if necessary.
    150,000          
Convertible note payable to a financial institution secured by common stock of the company and payable in full on demand.
    -       100,000  
TOTAL
    319,367       392,691  
Less: Current Portion
    305,939       372,941  
Long Term Portion
  $ 13,428     $ 19,750  
                 
The amount of future payment of long term debts for the year Ended June 30 is as follows:
               
                 
2011
    305,939       372,941  
2012
    13,428       19,750  
      319,367       392,691  

Interest expense on notes payable and  capital leases for years ended June 30, 2011 and 2010, were $103,889 and  $187,788, respectively.
 
 
F-15

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  Litigation Settlements Payable

The following amounts are based on settlement agreements reached with the parties:
 
An secured note payable to a corporation in settlement of a lawsuit payable in full by December 2011
  $ 377,621       -  
                 
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly payments of $5,000.00 expiring July 25, 2012
    60,000       -  
                 
An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly installments of $1,000.00 expiring Juen 25, 2012
    11,225          
                 
payable lawsuit relating to an ex employee of the Company
               
Due to be paid in 10 monthly payments that commenced in March 2011
    45,600       -  
                 
TOTAL
  $ 494,446          

13.
Derivative Liability

The Company has no provision for derivative liability at June 30, 2011 as the loan was paid in full. However, the company had a provision of $93,488 in 2010 to protect against any losses if the note payable to a financial institution was converted into common stock. This Liability was based on the price of the stock of the Company as of June 30, 2010 based on the terms of the conversion in the agreement..

14.
Commitments and Contingencies

The Company has provided certain of its customers with thirty day product warranties. the warranty expense of  $41,544 and $25,331 for the years ended June 30, 2011 and 2010, respectively were accounted for in the cost of goods sold..

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

Rent expense under operating leases was $537,462 and $547,920 for the years ended June 30, 2011 and 2010, respectively.

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

   
AMOUNT
 
2011
  $ 577,213  
2012
    108,485  
2013
    111,740  
2014
    115,092  
Thereafter
    118,545  
    $ 1,031,075  

 
F-16

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.
Litigation

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

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

The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant.  The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs.  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. 

No provision has been made in the June 30, 2011 financial statements as we feel that the litigation has no merit and the likelihood of any liability is extremely low.

2.
CNC Manufacturing v. All American CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC Repos, Superior Court for the State of California, County of Riverside, Case No. RIC 509650.  

Plaintiff filed this Complaint on October 2, 2008.

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

A provision has been made for $27,500 in the June 30, 2011 financial statements.

3.
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.
  
 
F-17

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 commencing February 15, 2010 with interest at the rate of approximately .44% per annum, the remaining balance being paid in March 2011.
 
A provision has been made in the June 30, 2011 financial statements in the amount of $31,174.

4.
Hwacheon Machinery v. All American CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County, Illinois, Case No. 09L544.  

The Complaint was filed on June 8, 2009. The Complaint alleges causes of action for account stated, and arises from a claim by Hwacheon that All American CNC has not paid it for machines sold to All American CNC.  The Complaint seeks damages of approximately $362,000.  All American filed an answer on or about July 15, 2009.  Default has been entered against All American CNC Sales, Inc.

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

Currently MLH and Hwacheon are negotiating a settlement.  The settlement agreement is expected to be signed shortly. A provision has been made in the June 30, 2011 financial statements. Subsequent to the year end the Company has paid $277,363

5.
Fadal Machining v. All American CNC Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case No. BC415693.  

The Complaint was filed on June 12, 2009.
 
The Complaint alleges causes of action for breach of contract and common counts against All American CNC seeking damages in the amount of at least $163,578.88, and arises from a claim by Fadal that All American failed to pay amounts due.  On June 26, 2009, Fadal amended the Complaint to include M Line Holdings, Inc. as a Defendant.  

A settlement agreement in the amount of $60,000 was signed on May 31, 2011.  This amount is to be paid in 12 monthly installments starting on January 1, 2012.

A provision for $60,000 has been made in the June 30, 2011 financial statements.
 
6.
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.
 
 
F-18

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The case against Elite Machine Tool was settled in 2010 and the settlement amount was paid by the insurance carrier. There are remaining issues of indemnity between the carrier and other parties but Elite is no longer involved in the case.

7.
Fox Hills Machining v. CNC Repos, Orange County Superior Court, Orange County, California, Case No. 30-2009-00121514.  

The Complaint was filed on April 14, 2009.
  
The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos.  The damages sought in the Complaint are estimated to be approximately $30,000.  The Defendants filed an Answer on June 5, 2009.  

Recently the parties agreed to settle but the final numbers have still to be finalized. .   A provision of $10,000 has been made in the June 30, 2011  financial statements.

8.
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.

The Company’s management believes that payment(s), if any, will be the responsibility of the Workers Compensation Board.

9.
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.

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

A provision for $60,000 has been made in the June 30, 2011 financial statements.

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

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

 
F-19

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This case has settled based on payment terms as agreed between the parties.

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

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

This case has settled based on payment terms as agreed between the parties.

A provision has been provided for in the June 30, 2011 financial statements
 
12.
Neal Kohlhaas v. M Line Holdings, INC.  Orange County Superior Court Case No. 30-2011-00442075.

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

No provision has been made in the June 30, 2011 financials as we believe that the case has no merit, and there is little  likelihood of any liability to  the Company.
 
 
F-20

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.  The parties then reached a settlement in the principal sum of $40,000 to be documented in due course.  Meanwhile a default was entered against MLH, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the complaint and has filed a motion for leave to file a cross complaint.

Recently a settlement of $50,000 has been reached in this case, requiring payments commencing on March 11, 2011 for ten months. The first two month’s payment have been made however the Company is currently in default of the terms of this settlement agreement.  Mr. Consalvi has filed his stipulated judgment.

14.
Joe Gledhill v. M Line Holdings, Inc., et. al.-  Los Angeles Superior Court Case No. BC 448012

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

No provision has been made in the June 30, 2011 financials as the company has settled the case with Pacific Western Bank therefore the Company believes that the case has no merit with little likelihood of any liability being incurred by the Company.

15.
M Line Holdings, Inc., v. Timothy Consalvi, et. al.-  Orange County  Superior Court Case No. 30-201100493329

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

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

 
F-21

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.
Income Taxes

The provision (benefit) for income taxes is comprised of the following for the years ended June 30:

   
Year ended
June 30,
   
Year ended
June 30,
 
   
2011
   
2010
 
                 
Current tax expense   $ -     $ -  
Federal     2,400       -  
State                
                 
Current Federal
    -       -  
Current State
    -       (1,600 )
Deferrred Federal
     -        78,373  
Deferred State
    -        49,686  
                 
    $ 2,400     $ 126,459  

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 years ended June 30:

   
Year ended
June 30,
   
Year ended
June 30,
 
   
2011
   
2010
 
Federal Tax at statury rate
    34 %     34 %
Permanent differences:
               
State Income Tax, net of federal benefit
    11 %     7 %
Change in valuation allowance/Other
    -34 %     -32 %
Other
    -3 %     -3 %
      8 %     6 %

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.

 
F-22

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEFERRED TAX ASSETS AND LIABILITIES:
           
   
Year ended
June 30,
   
Year ended
June 30,
 
Deferred tax asset - current  
2011
   
2010
 
Allowances for bad debt
  $ 41,864     $ 33,246  
Reserve for inventories
    21,901       41,859  
Accrued expenses
    13,748       74,606  
Other
    14,311       14,311  
                 
    $ 91,824     $ 164,022  
 
NON-CURRENT;
           
             
Net Operating loss carryforwards
  $ 208,843     $ 350,630  
Depreciation
    25,767       (28,322 )
Amortization of intangibles
    2800       (16,710 )
                 
    $ 237,410     $ 305,598  
                 
TOTAL DEFERRED TAX ASSET
  $ 329,234     $ 469,620  
VALUATION ALLOWANCE
    (329,234 )     (469,620 )
NET DEFERRED TAX ASSET
  $ -     $ -  
                 
Miscellaneous Deferred Tax Liability                
    Non-current   $ 16,710     $ 16,710  
 
The Company’s income tax provision was computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit. As of June 30, 2011 and 2010 the Company had federal and state net operating loss (“NOL”) carry forwards of approximately $550,000 and $376,000, respectively, net of Internal Revenue Code ("IRC") Section 382 limitations. If not used, these carry forwards will begin expiring between 2012 and 2021. These net operating losses are available to offset future regular and alternative minimum taxable income.

The Company has recorded as of June 30, 2011 a valuation allowance of $148,076, as it believes that it is more likely than not that the deferred tax assets will not be realizeable in future years. Management has based its assessment on available historical and projected operating results.
 
 
F-23

 

M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.
Shareholders’ Equity

The Company’s articles of incorporation authorize up to 100,000,000 shares of $0.001 par value preferred stock. Shares of preferred stock may be issued in one or more classes or series at such time as the Board of Directors determine. The Company had no shares of preferred stock issued and outstanding at either June 30, 2011 and 2010.

During the year ended June 30, 2010, the company did not issue any shares of common stock.

During the year ended June 30, 2011. The company issued the following shares of common stock.
 
990,000 shares of common stock to our stock transfer agent and investor relations/financial advisor in payment of services to the company. The company valued the shares at the market price on the issuance date, in the sum of $28,000

3,538,889 shares of common stock to various noteholders in part settlement of the outstanding loans due to them. The company valued the shares at the market price on the issuance date, in the sum of $160,056.  Of the 3,000,000 shares issued to one noteholder, Spagus Capital Partners, 1,000,000 million shares were transferred to Spagus by another noteholder, Asher Enterprises.  The funds required to repay Asher were provided by Spagus.  This transfer of stock to Spagus was a part of that loan transaction.
 
The Company also issued 2,800,000 shares of the company common stock in lieu of salaries and expenses due on  behalf of related parties,. The shares were valued at $94,000 based on the market price, and  the balance was recorded as a contra equity account in the Company’s financial statements as of June 30, 2011. (see Note 4)
 
Non-Qualified Stock Option Plan

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

18.
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 is as follows as of and for the year ended June 30, 2011:
 
   
Machine Sales
   
Precision
Manufacturing
   
Corporate
   
Total
 
Revenue
  $ 6,179,472     $ 3,721,228     $ -     $ 9,900,700  
Interest Income
    -       -       21,756       21,756  
Interest Expense
    2,171       89,917       11,801       103,889  
Depreciation and Amortization
    107,458       255,266       23,610       386,334  
Income (loss) before taxes
    12,165       306,296       (140,712 )     232,329  
Total Assets
    713,773       2,351,738       682,653       3,748,163  
Capital Expenditure
  $ -     $ -     $ -     $ -  
 
 
F-24

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Segment information is as follows as of and for the year ended June 30, 2010:
 
   
Machine Sales
   
Precision
Manufacturing
   
Corporate
   
Total
 
Revenue
  $ 2,843,436     $ 3,370,750     $ (386 )   $ 6,213,800  
Interest Income
    -       -       18,925       18,925  
Interest Expense
    15,036       24,821       147,931       187,788  
Depreciation and Amortization
    5,606       391,383       20,958       417,947  
Income (loss) before taxes
    (438,883 )     (536,788 )     (733,415 )     (1,709,086 )
Total Assets
    141,383       1,889,824       831,380       2,862,587  
Capital Expenditure
  $ -     $ -     $ (92,334 )   $ (92,334 )

Sales are derived principally from customers located within the United States

Long-lived assets consist of property, plant and equipment and intangible assets and are located within the United States.

19.
Going Concern and Management Plans.
 
The Company's consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company has an accumulated deficit of $9,282,863  as of June 30, 2011 .  In addition the Company has a negative working capital for the twelve months ended June 30, 2011 of $114,929.

The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company recognizes that the very weak economy over the past two years and the difficulty in raising new funds has impacted the working capital needs of the Company.  The Company's continuation as a going concern is dependent upon its ability to retain its current short term financing and ultimately to generate sufficient cash flow to meet its obligations on a timely basis in order to attain profitability.

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

The Company has taken significant steps to resolve these issues.  The Company had an extremely positive fourth quarter and expects those results to continue.  Late July, 2011 a new President was appointed to manage Eran Engineering, Inc.  He brings a wealth of experience to this subsidiary and has already taken steps to change the working environment adding new systems and a new management structure.  He has also brought a new Sales Director to the Company who has over twenty five years of experience in airplane interiors.  This is opening many new sales opportunities for the Company.
 
In addition the improved results are making refinancing the business an easier proposition.  New asset based lines of credit are being negotiated and we are hopeful that new lines will be in place before the end of the year.  We are also negotiating new finance lines with various funding sources that will provide capital for growth.
 
 
F-25

 
 
M-LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.
Subsequent Events
 
In September 2011, we signed an extension of the current lease for a additional five year term of approximately 48,600 square feet of office and factory/warehouse space located at 2672 Dow Avenue, Tustin, California.  Under the new terms that commences on October 1, 2011 and continues until June 30, 2017,  the rent for month 1(October 2011) through month 21 is $27,741, month 22 to 33 $28,573, month 34 to 45, $29,430, month 46 to 57, $30,313 and month 58 to 69, $31,223.  This lease expires in July, 2017.  The Precision Machine Group resides at this location.
 
 
F-26

 

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There are no items required to be reported under this Item.

Item 9A 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 June 30, 2011, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 9A(b).

(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 June 30, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on this assessment, Management has identified the following two material weaknesses that have caused management to conclude that, as of June 30, 2011, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

 
36

 

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

2.           We have not documented our internal controls.  We have limited policies and procedures that cover the recording and reporting of financial transactions and accounting provisions.  As a result we were delayed in our ability to calculate certain accounting provisions, such as inventory valuation and deferred taxes.  While we believe these provisions are accounted for correctly in the attached audited financial statements our lack of internal controls led to a delay in the filing of this Annual Report.  We were 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.
 
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.

(c)           Remediation of Material Weaknesses
 
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness.

(d)           Changes in Internal Control over Financial Reporting
 
There are no changes to report during our fiscal quarter ended June 30, 2011.

ITEM 9B – OTHER INFORMATION

There are no events required to be disclosed by the Item.

 
37

 

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person, and the date such person became a director or executive officer. Our executive officers are elected annually by the Board of Directors. The directors serve one year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.

Name
 
Age
 
Position(s)
         
George Colin
 
79
 
Director (3/09), Chief Executive Officer (12/08)
         
Jitu Banker
 
72
 
Chief Financial Officer (3/09) and Director (3/09)
         
Anthony Anish
 
63
 
Secretary (6/11) and Director (6/11)

George Colin has served as one of the Company’s directors since January, 2009.  Since 1994 Mr. Colin has been an independent consultant for numerous businesses regarding general business decisions and investment decisions.  From 1976 to 1994, Mr. Colin was the Chief Executive Officer and majority shareholder of Odyssey Systems.  In this role he managed all aspects of the business, which manufactured and supplied swimming pool equipment.  Mr. Colin also served as a lieutenant in the U.S. Navy.  Mr. Colin received NROTC officer training at Villanova University and obtained a BSCE in 1955.

Jitu Banker has served as one of the Company’s directors since January, 2009.  Mr. Banker is currently the President and Chief Financial Officer of Money Line Capital, Inc., the Company’s largest shareholder.  Since 1990, Mr. Banker has also been the owner of Banker & Co., a company specializing in tax, accounting, Internal Revenue Service audits, and other related services.  From 2004 to 2006, Mr. Banker was one of the Company’s Directors and the Company’s Chief Financial Officer.  Mr. Banker has a Bachelor of Arts in Accounting with Economics and is a member of the Institute of Chartered Accountants in England and Wales, the Institute of Management Accountants in London, England, and the American Institute of Certified Public Accountants.

Anthony Anish is currently the Company Secretary and General Manager of Money Line Capital, Inc., our largest shareholder.  From 2004 until 2006, Mr. Anish was a consultant to our company.  Mr. Anish resigned in 2006, after completing the project requested by the Company, to pursue other activities in the business financing and consulting industry. Mr. Anish has been the General Manager of M Line Holdings, Inc. since March 2009 and has overseen the recovery of the group during the very difficult economic downturn.  Mr. Anish qualified as a member of the Institute of Chartered Accountants in London, England in 1971.

Other Directorships

None of our officers and directors are directors of any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.

 
38

 

Audit Committee

We do not currently have an audit committee.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company.  Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

During the most recent fiscal year, to the Company’s knowledge, the following delinquencies occurred:

       
No. of
 
No. of
   
No. of Late
 
Transactions
 
Failures to
Name
 
Reports
 
Reported Late
 
File
George Colin
 
0
 
0
 
0
Jitu Banker
 
1
 
2
 
0
Robert Sabahat
 
0
 
0
 
0
Anthony Anish   1   0   0
Money Line Capital, Inc.
 
0
 
0
 
0

Board Meetings and Committees

During the fiscal year ended June 30, 2011, the Board of Directors met on a regular basis and took written action on numerous other occasions.  All the members of the Board attended the meetings.  The written actions were by unanimous consent

Code of Ethics

We have not adopted a written code of ethics, primarily because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.

 
39

 

ITEM 11 - EXECUTIVE COMPENSATION

Executive Officers and Directors

The following tables set forth certain information about compensation paid, earned or accrued for services by (i) our Chief Executive Officer and (ii) all other executive officers who earned in excess of $100,000 in the fiscal year ended June 30, 2011, 2010 and 2009 (“Named Executive Officers”):
 
                                
Non-Equity
   
Nonqualified
             
Name and
                 
Stock
   
Option
   
Incentive Plan
   
Deferred
   
All Other
       
Principal
     
Salary
   
Bonus
   
Awards
   
Awards
   
Compensation
   
Compensation
   
Compensation
   
Total
 
Position
 
Year
 
($)
   
($)
   
($) *
   
($) *
   
($)
   
($)
   
($)
   
($)
 
                                                     
George Colin (1)
 
2011
    0       0       0       0       0       0       0       0  
Chief
 
2010
    0       0       0       0       0       0       0       0  
Executive
                                                                   
Officer
 
2009
    0       0       0       0       0       0       0       0  
                                                                     
Jitu Banker (2)
 
2011
    112,000 (2)     0       0       0       0       0       0       112,000 (2)
Chief Financial
 
2010
    180,000       0       0       0       0       0       0       180,000  
Officer
 
2009
    90,000       0       0       0       0       0       0       90,000  
                                                                     
Robert
 
2011
    0       0       0       0       0       0       0       0  
Sabahat (3)
 
2010
    0       0       0       0       0       0       0       0  
Former Secretary
 
2009
    0       0       0       0       0       0       0       0  
                                                                     
Anthony Anish
 
2011
    0       0       0       0       0       0       0       0  
Secretary (11)
                                                                   
                                                                     
Timothy D. Consalvi (4)
 
2010
    20,770       0       0       0       0       0       0       20,770  
Former President and Chief Executive Officer
 
2009
    230,000       0       0       0       0       0       3,157 (8)     233,157  
                                                                     
Joseph Gledhill (5)
 
2010
    -       -       -       -       -       -       -       -  
Former Executive Vice President
 
2009
    248,846       0       0       0       0       0       0 (9)     248,846  
                                                                     
Lawrence A. Consalvi (6)
 
2010
    -       -       -       -       -       -       -       -  
Former Executive Vice President
 
2009
    260,000       0       0       0       0       0       3,157 (10)     263,157  
                                                                     
Stephen M. Kasprisin (7)
 
2010
    -       -       -       -       -       -       -       -  
Former Chief Financial Officer
 
2009
    15,000       0       0       0       0       0       0       15,000  

 
40

 

 
*
Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“FAS”) No. 123R, Share Based Payment.  Our policy and assumptions made in valuation of share based payments are contained in the Notes to our June 30, 2011 financial statements.

 
(1)
George M. Colin was hired as our Chief Executive Officer on December 9, 2008.
 
(2)
Jitu Banker was hired as our Chief Financial Officer on March 31, 2009.  Of the $112,000 of compensation for Mr. Banker in 2011, $98,000 is accrued compensation.
 
(3)
Robert Sabahat was hired our Secretary effective March 31, 2009 and resigned from his position on June 7, 2011.
 
(4)
Timothy D. Consalvi resigned from his position as our Chief Financial Officer on December 9, 2009.
 
(5)
Joseph Gledhill resigned from his position as our Executive Vice President on March 25, 2009, but remains as President of Eran Engineering.
 
(6)
Lawrence Consalvi resigned all positions with us and our subsidiaries, effective September 24, 2008.
 
(7)
Stephen M. Kasprisin was hired on November 13, 2006 as Chief Financial Officer, and resigned on October 17, 2007. In April 2008, Mr. Kasprisin agreed to serve as our interim Chief Financial Officer.  Mr. Kasprisin resigned as our Chief Financial Officer and Secretary on March 31, 2009.
 
(8)
Includes vehicle reimbursements of $0, $13,181, and $8,156 in 2009, 2008 and 2007, respectively, and medical and life insurance payments of $3,157, $8,591, and $2,708, for those same years.
 
(9)
Includes vehicle reimbursements of $0, $15,372 and $13,180, in 2009, 2008 and 2007, respectively, and medical insurance payments of $3,147 in 2007.
 
(10)
Includes vehicle reimbursements of $0, $11,897, and $12,921, in 2009, 2008, and 2007, respectively and medical and life insurance payments of $3,157, $6,760, and $2,708, in 2009, 2008 and 2007, respectively.
 
(11)
Mr. Anish was hired as our Secretary on June 7, 2011.

Employment Contracts

We currently do not have written employment agreements with our executive officers.  We had employment agreements with each of our former principal executives, which provided for participation of the employee in any tax-qualified and nonqualified deferred compensation and retirement plans, group term life insurance plans, short-term and long-term disability plans, employee benefit plans, practices, and programs maintained or to be established by us and made available to similarly situated executives generally.

Agreement with Timothy D. Consalvi. In connection with our acquisition of All American from its sole shareholders in September, 2004, Timothy and Kathy Consalvi, All American entered into an employment agreement with Mr. Consalvi to serve as the President of All American at a compensation rate of $168,000 per annum. The initial term of this employment agreement was for one year commencing on October 1, 2004, and with automatic renewals for successive one year terms unless earlier terminated by either party. On February 1, 2007, we entered into a new employment agreement with Mr. Consalvi to serve as our President and Chief Executive Officer at an annual compensation rate of $260,000. The initial term of this employment agreement was for two years commencing February 1, 2007, with automatic renewals for successive two year terms unless terminated by either party. On December 8, 2008, in conjunction with the sale of a portion of his stock to Money Line Capital, Inc., we entered into a new employment agreement with Mr. Consalvi to serve as the President of All American at a compensation rate of $200,000 per annum.  The employment agreement provided that Mr. Consalvi may be terminated for cause with no further compensation. If Mr. Consalvi was terminated without cause, he was entitled to a lump sum severance payment equal to 75% of his annual salary at the date of termination, and medical benefits for a period of nine months after termination. The agreement also provides that for a period of 12 months following termination of the employment agreement, Mr. Consalvi shall not (i) compete with respect to any services or products of the Company which are either offered or are being developed by the Company, (ii) attempt to influence any employee of ours to leave the employ of the Company or to aid any competitor, customer or supplier to hire any employee of ours, (iii) disclose any information about our affairs including trade secrets, know-how, customer lists, business plans, operational methods, policies, suppliers, customers or other such Company information, nor (iv) use or employ any of our information for his own benefit or in any way adverse to our interests. We terminated this agreement effective June 30, 2010, in conjunction with closing down the operations of All American.  At termination we paid Mr. Consalvi $20,769 in cash constituting his final paycheck, and inventory and equipment totaling approximately $155,000, constituting a severance payment.

 
41

 

Agreement with Joseph T.W. Gledhill. On February 1, 2007, we entered into an employment agreement with Joseph T. W. Gledhill to serve as our Executive Vice President, and President of our wholly-owned subsidiary, Eran Engineering, Inc., at a compensation rate of $260,000 per annum. The initial term of this employment agreement is for two years commencing February 1, 2007, with automatic renewals for successive two year terms unless terminated by either party. The employment agreement provides that Mr. Gledhill may be terminated for cause. If Mr. Gledhill is terminated without cause, he is entitled to a lump sum severance payment equal to twice his annual salary at the date of termination, and medical benefits for a period of 24 months after termination. The agreement also provides that for a period of 12 months following termination of the employment agreement, Mr. Gledhill shall not (i) compete with respect to any services or products of the Company which are either offered or are being developed by the Company, (ii) attempt to influence any employee of ours to leave the employ of the Company or to aid any competitor, customer or supplier to hire any employee of ours, (iii) disclose any information about our affairs including trade secrets, know-how, customer lists, business plans, operational methods, policies, suppliers, customers or other such Company information, nor (iv) use or employ any of our information for his own benefit or in any way adverse to our interests. The agreement provides that the parties will arbitrate any disputes arising under the agreement.

However there is no current employment agreement with Mr. Joseph Gledhill at this time. All prior agreements were terminated effective December 2008.

Agreement with Lawrence A. Consalvi. On February 1, 2007, we entered into an employment agreement with Lawrence A. Consalvi to serve as our Executive Vice President, and President of our wholly-owned subsidiary, E.M. Tool Company, Inc. (doing business as Elite Machine), at a compensation rate of $260,000 per annum. The initial term of this employment agreement is for two years commencing February 1, 2007, with automatic renewals for successive two year terms unless terminated by either party. The employment agreement provides that Mr. Consalvi may be terminated for cause. If Mr. Consalvi is terminated without cause, he is entitled to a lump sum severance payment equal to twice his annual salary at the date of termination, and medical benefits for a period of 24 months after termination. The agreement also provides that for a period of 12 months following termination of the employment agreement, Mr. Consalvi shall not (i) compete with respect to any services or products of the Company which are either offered or are being developed by the Company, (ii) attempt to influence any employee of ours to leave the employ of the Company or to aid any competitor, customer or supplier to hire any employee of ours, (iii) disclose any information about our affairs including trade secrets, know-how, customer lists, business plans, operational methods, policies, suppliers, customers or other such Company information, nor (iv) use or employ any of our information for his own benefit or in any way adverse to our interests. The agreement provides that the parties will arbitrate any disputes arising under the agreement.  Mr. Consalvi resigned, effective September 24, 2008.  We entered into a Separation Agreement with Mr. Consalvi on September 26, 2008.  Under the terms of the agreement, Mr. Consalvi returned 400,000 shares of our common stock to us for cancellation in order to repay certain obligations he owed us.  The shares were cancelled, effective October 6, 2008.  Mr. Consalvi continues to work with us selling CNC machines as President of Elite Machine Tools, Inc.

 
42

 

Director Compensation

The following table sets forth director compensation as of June 30, 2011:

                           
Nonqualified
             
   
Fees Earned
               
Non-Equity
   
Deferred
             
   
or Paid in
               
Incentive Plan
   
Compensation
   
All Other
       
   
Cash
   
Stock Awards
   
Option Awards
   
Compensation
   
Earnings
   
Compensation
   
Total
 
Name
 
($)
   
($) *
   
($) *
   
($)
   
($)
   
($)
   
($)
 
                                           
George Colin (1)
    -0-       -0-       -0-       -0-       -0-       -0-       -0-  
                                                         
Jitu Banker (2)
    -0-       -0-       -0-       -0-       -0-       -0-       -0-  
                                                         
Robert Sabahat (3)
    -0-       -0-       -0-       -0-       -0-       -0-       -0-  
                                                         
Anthony Anish (4)
    -0-       -0-       -0-       -0-       -0-       -0-       -0-  

 
*
Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“FAS”) No. 123R, Share Based Payment. Our policy and assumptions made in valuation of share based payments are contained in the notes to our financial statements. The monies shown in the “option awards” column is the total calculated value for each individual.

 
(1)
George M. Colin was appointed to our Board of Directors on January 28, 2009.
 
(2)
Jitu Banker was appointed to our Board of Directors on January 28, 2009.
 
(3)
Robert Sabahat was appointed to our Board of Directors on March 31, 2009, and resigned on June 7, 2011.
 
(4)
Anthony Anish was appointed to our Board of Directors on June 7, 2011.

We do not provide any compensation to our directors for serving as directors.

 
43

 

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers as of June 30, 2011:

    
Option Awards
   
Stock Awards
 
Name
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
   
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   
Option
Exercise
Price
($)
   
Option
Expiration
Date
   
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
   
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
   
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
 Not Vested
(#)
   
Equity
Incentive
Plan
Awards:
 Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
 Not Vested
($)
 
                                                       
George Colin
    -       -       -       -       -       -       -       -       -  
                                                                         
Jitu Banker
    -       -       -       -       -       -       -       -       -  
                                                                         
Anthony Anish
    -       -       -       -       -       -       -       -       -  
                                                                         
Robert Sabahat
    -       -       -       -       -       -       -       -       -  

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of September 30, 2011, certain information with respect to the Company’s equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 10% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.

Common Stock
 
Title of Class
 
Name and Address
of Beneficial Owner (3)
 
Amount and Nature of
Beneficial Ownership
   
Percent
of Class (1)
 
Common Stock
 
George Colin (2)
    2,277,577       5.5 %
Common Stock
 
Jitu Banker (2)
    2,225,000 (4)     5.4 %
Common Stock
 
Anthony Anish (2)
    2,620,000       6.3 %
Common Stock
 
Money Line Capital, Inc.
17702 Mitchell North, Suite 201
Irvine, CA  92614
    15,818,476 (6)     38.1 %
Common Stock
 
All Directors and Officers
As a Group (3 persons)
    7,122,577 (4)     17.1 %

 
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(1)
Unless otherwise indicated, based on 41,470,845 shares of common stock issued and outstanding.  Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
 
(2)
Indicates one of our officers or directors.
 
(3)
Unless indicated otherwise, the address of the shareholder is M Line Holdings, Inc.
 
(4)
Includes 25,000 shares held by Mr. Banker’s son.
 
(5)
All three of our officers and directors own stock in Money Line Capital, Inc., but none individually or as a group control Money Line’s investment or control decisions, and, therefore, disclaim ownership of Money Line Capital’s stockholdings, including our common stock.
 
(6)
Includes 1,130,000 shares not owned by Money Line Capital, but controlled by irrevocable proxy.

The issuer is not aware of any person who owns of record, or is known to own beneficially, ten percent or more of the outstanding securities of any class of the issuer, other than as set forth above.  There are no classes of stock other than common stock issued or outstanding.

Change of Control Transaction

On June 30, 2010, we entered into a binding letter of intent (“LOI”) with Money Line Capital, Inc. (“MLCI”), our largest shareholder.  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 this transaction.  The parties had agreed to negotiate in good faith to close the transaction on or before January 29, 2010, however due to the downturn in the economy, MLCI’s inability to complete the required audits, and the desire of our Board of Directors to get as favorable a valuation for our common stock as possible, the parties have put the merger transaction on hold indefinitely.  In order for us to finalize the transaction we must be current in our reporting obligations under the Securities and Exchange Act of 1934, as amended, and be publicly-traded at the time of the closing; and MLCI must have its financial statements (and its subsidiaries, as applicable) audited for the period ended June 30, 2011, as well as completing a valuation by a qualified third-party company.  We have re-evaluated the acquisition of MLCI as a whole and  now plan to acquire certain subsidiaries of MLCI one at a time in order to reduce the costs associated with this transaction.

Technically the transaction will not result in a change of control since the shares currently held by Money Line Capital, Inc., the owner of 38% of our common stock, will be retired and become treasury shares, and the new owners of a majority of our common stock will be the shareholders of Money Line Capital at the time of the closing of the transaction.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Letter of Intent with Money Line Capital, Inc.  On June 30, 2010, 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 this transaction.  The parties had agreed to negotiate in good faith to close the transaction on or before January 29, 2010, however due to the downturn in the economy, MLCI’s inability to complete the required audits, and the desire of our Board of Directors to get as favorable a valuation for our common stock as possible, the parties have put the merger transaction on hold indefinitely.  In order for us to finalize the transaction we must be current in our reporting obligations under the Securities and Exchange Act of 1934, as amended, and be publicly-traded at the time of the closing; and MLCI must have its financial statements (and its subsidiaries, as applicable) audited for the period ended June 30, 2011, as well as completing a valuation by a qualified third-party company.
We have re-evaluated the acquisition of MLCI as a whole and now plan to acquire certain subsidiaries of MLCI one at a time in order to reduce the costs associated with this transaction

 
45

 

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.

MLCI Demand Note.  we entered into a Demand Promissory Note dated March 25, 2009 (the “Note”), evidencing the terms under which MLCI will loan us up to $500,000 on an “as needed” basis for working capital purposes.  The Note accrues interest at a of 10% per annum.  Under the terms of the Note, MLCI is not obligated to loan us any money, but the Note sets forth the terms in the event MLCI elects to loan us money for working capital purposes.  Through June 30, 2011, MLCI loaned us $0under this Note.  As of June 30, 2011 we had repaid all loan amounts in full and there was $0 outstanding.

Leavitt Family Trust Note. We currently have an unsecured note payable to a stockholder payable in monthly installments of $4,505 per month, non-interest bearing, including interest imputed at 12% per annum for financial statement purposes, in the aggregate amount of $139,641. As of June 30, 2011, $31,764 remains outstanding.

Joseph Gledhill Note. We had a second unsecured note payable outstanding to Joseph T.W. Gledhill, a former officer and director, and a current stockholder, which was due January, 2009, with interest of 6% per annum, in the aggregate amount of $706,200. This note consolidated earlier promissory notes issued by us in favor of Mr. Gledhill. This loan from Mr. Gledhill was used for working capital requirements. This note was assigned to Money Line Capital, Inc. on March 25, 2009 in exchange for the issuance of 3,250,000 shares of our common stock to Money Line Capital, Inc., which were issued on June 30, 2009.  As a result of the assignment this note is no longer an obligation of the company.

We do not have an audit, compensation, or nominating committee, and none of our Directors are considered independent.

We have not had a promoter during the last five fiscal years.

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit and Restated Fees

During the year ended June 30, 2011, Kabani & Company charged $120,000, in fees for professional services for the audit of our financial statements in our Form 10-K and review of financial statements included in our Form 10-Q’s, as applicable.  During the year ended June 30, 2010, Kabani & Company charged us $107,500 in fees for professional services for the audit and review of our financial statements.

Tax Fees

During the year ended June 30, 2011, Kabani & Company billed us $0 for professional services for tax preparation.   During the year ended June 30, 2010, Kabani & Company billed us $0 for professional services for tax preparation.  

All Other Fees

During the year ended June 30, 2011, Kabani & Company did not bill us any amounts for any other fees.  During the year ended June 30, 2010, Kabani & Company did not bill us any amounts for any other fees.  

 
46

 

Of the fees described above for the year ended June 30, 2011, 100% were approved by the entire Board of Directors.

 
47

 

PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)           Financial Statements

The following financial statements are filed as part of this report:

Report of Registered Public Accounting Firm
F-1
   
Consolidated Balance Sheet as of June 30, 2011 and 2010
F-2
   
Consolidated Statements of Operations for the years ended June 30, 2011 and 2010
F-3
   
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2011 and 2010
F-4
   
Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010
F-5
   
Notes to Consolidated Financial Statements
F-6

(a)(2)      Financial Statement Schedules

We do not have any financial statement schedules required to be supplied under this Item.

(a)(3)      Exhibits

Refer to (b) below.
 
(b)           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
 
 
48

 
 
10.5 (1)
 
Employment Agreement with Joseph T.W. Gledhill dated February 5, 2007
     
10.6 (2)
 
Employment Agreement with Lawrence A. Consalvi dated February 5, 2007
     
10.7 (1)
 
Share Exchange Agreement with Gledhill/Lyons, Inc. dated March 26, 2007
     
10.8 (1)
 
Share Exchange Agreement with Nu-Tech Industrial Sales, Inc. dated March 19, 2007
     
10.9 (1)
 
Fee Agreement with Steve Kasprisin dated April 30, 2008
     
10.10 (3)
 
Separation Agreement by and between Gateway International Holdings, Inc., and Mr. Lawrence A. Consalvi dated September 26, 2008
     
10.11 (4)
 
Sales Agent Agreement by and between Gateway International Holdings, Inc., and Mr. Lawrence A. Consalvi dated September 30, 2008
     
10.12 (4)
 
Loan Agreements with Pacific Western Bank dated September 20, 2008
     
10.13 (5)
 
Assignment of Promissory Note and Consent Thereto by and between M Line Holdings, Inc. and Money Line Capital, Inc. dated March 24, 2009
     
10.14 (5)
 
M Line Holdings, Inc. Demand Note for up to $500,000 dated March 25, 2009
     
10.15 (6)
 
Letter of Intent by and between M Line Holdings, Inc. and Money Line Capital, Inc. dated June 30, 2010
     
10.16 (8)
 
Securities Purchase Agreement and Convertible Promissory Note with Asher Enterprises, Inc. dated April 26, 2010 (filed herewith)
     
10.17 (8)
 
Convertible Promissory Note with Asher Enterprises, Inc. dated May 25, 2010 (filed herewith)
     
10.18 (8)
 
Commercial Real Estate Lease with SG&H Partners, L.P. for Anaheim Property dated August 13, 2010 (filed herewith)
     
10.19 (8)
 
Business Loan Agreement with Pacific Western Bank dated June 7, 2010 (filed herewith)
     
10.20  
Addendum No. 2 dated September 30, 2011 to Commercial Real Estate Lease dated February 15, 2007 for the office space located in Tustin, CA
     
10.21  
Executive Employee Agreement with Barton Webb dated July 25, 2011
     
21 (7)
 
List of Subsidiaries
     
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of George Colin (filed herewith).
     
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Jitu Banker (filed herewith).
     
32.1
 
Section 1350 Certification of George Colin (filed herewith).
     
32.2
 
Section 1350 Certification of Jitu Banker (filed herewith).
 
(1) Incorporated by reference from our Registration Statement on Form 10-12G filed with the Commission on May 16, 2008.

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

 
49

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

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

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

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

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

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

 
50

 

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:  October 12, 2011
         /s/ George Colin
 
By:
George Colin
   
Chief Executive Officer
   
and a Director
     
Dated:  October 12, 2011
          /s/ Jitu Banker
 
By:
Jitu Banker
   
Chief Financial Officer
   
and a Director
     
Dated:  October 12, 2011
          /s/ Anthony Anish
 
By:
Anthony Anish
   
Secretary and a Director

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Dated:  October 12, 2011
          /s/ George Colin
 
By:
George Colin
   
Chief Executive Officer
   
and a Director
     
Dated:  October 12, 2011
          /s/ Jitu Banker
 
By:
Jitu Banker
   
Chief Financial Officer
   
and a Director
     
Dated:  October 12, 2011
          /s/ Anthony Anish
 
By:
Anthony Anish
   
Secretary and a Director

 
51