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 Elite Machine. 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.
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:
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$650,000 in cash and;
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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.
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.
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, we recently 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, 2009. Through our two operating subsidiaries we provide services and products to the machine tool industry, including the sale of new and refurbished CNC machines and the manufacture of precision metal components.
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, 2009, 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, 2010, as well as completing a valuation by a qualified third-party company.
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, 2010, and 2009, the Machine and Tools Group accounted for $2,843,436 (46%) and $4,752,435 (59%) of our total sales, respectively. This segment of our business also accounted for 56% and 25% of our gross profits for the years ended June 30, 2010, and 2009, 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 repairs them prior to being refurbished for resale. Elite Machine’s refurbishments on CNC machines it purchases typically include painting, replacing parts, and servicing the machine.
(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 are currently investigating a strategy to 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.
(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.
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, 2010, we, with our subsidiaries, employ a total of 48 full-time employees, including three executive employees. Of these employees our Machine Sales Group employs two managerial employees, and six employees engaged in the sales and processing of CNC machine sales and the precision manufacturing group employs three managerial employees and 35 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, 2010 and 2009, the Precision Manufacturing Group accounted for $3,370,750 (54%) and $4,898,749 (41%) of our sales, respectively. This segment of our business also accounted for 44% and 35% our gross profits for the years ended June 30, 2010 and 2009, 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;
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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, 2010 and, 2009, 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, customization, the pricing policies of our competitors, customer support, our ability to support industry standards, and industry and general economic trends.
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 it 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 37% and 33% of our total revenue for the years ended June 30, 2010 and 2009, respectively, and Iris Diagnostics, which accounted for 10% and 2.4% of our total revenue for the years ended June 30, 2010 and 2009, 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.
Although there are not many regulations on the manufacturing of precision parts, there are certifications companies can receive in the industry. Eran is ISO 9001-2000 and AS9100 rev. B 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 September 2007 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, 2010, we, with our subsidiaries, employ a total of 48 full-time employees, including three executive employees. For the precision manufacturing group, we employ one managerial employee, one sales manager, and 26 employees engaged in tool manufacturing-related positions and the precision manufacturing group employs three managerial employees and 35 machinists 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.
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 included in the accompanying financial statements as discontinued operations.
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.
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.
ITEM 1A.
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 55% 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 8.5% 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.
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.
We have two customers that account for greater than 47% of our total sales and more than 85% of our precision manufacturing group’s sales for the year ended June 30, 2010.
Panasonic Avionics Corp. and Iris Diagnostics together account for 47% and 36% of our total sales for the years ended June 30, 2010 and 2009, respectively, and more than 85% and 36% of our precision manufacturing group’s sales for the years ended June 30, 2010 and 2009, 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.
We are in default under our agreement with Pacific Western Bank. If Pacific Western Bank files a lawsuit for our default we may be forced to sell assets to pay this obligation, which would have a material, negative impact on our business.
As of September 21, 2009, our credit agreement with Pacific Western Bank terminated. During the quarter ended June 30, 2010 we repaid Pacific Western Bank the sum of $360,000.00 leaving a balance as follows:
We reached an agreement with Pacific Western Bank for an extension until August 31, 2010 to repay this balance, $218,889, at a stated interest rate equal to the lender’s referenced prime rate plus 1.50%. We did not pay the outstanding balance by August 31, 2010, and have not received an additional extension. As a result we are in default under the terms of our line of credit. This line of credit is secured by certain of our assets. If Pacific Western Bank filed a lawsuit as a result of our default we may be required to sell some assets to repay this obligation. Per our agreement to extend time for repayment with Pacific Western Bank, at the time of repayment of the line of credit we also agreed to repay any balance due on the equipment loans to Eran Engineering, Inc. As of June 30, 2010, the balance on these equipment loans totaled $98,045.
As of June 30, 2010, we owed $218,889 under the line of credit with Pacific Western Bank.
As of June 30, 2010, we believe we were in compliance with the covenants under the amended credit agreement. The quarter ended June 30, 2010 was the end of our fiscal year.
New governmental regulation relating to greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.
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.
As we have an accumulated deficit of $9,512,790 as of June 30, 2010 a net loss of $1,709,086 for the year ended June 30, 2010, there is no assurance that we will be able to continue as a going concern.
Our financial statements included with this Annual Report for the years ended June 30, 2010 and 2009, have been prepared assuming that we will continue as a going concern. Our financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern is dependent upon our 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. However, we have an accumulated deficit of $9,512,790 as of June 30, 2010 a net loss of $1,709,086 for the year ended June 30, 2010.
ITEM 1B
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.
ITEM 2
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. The lease contains an option to renew for an additional 60 months with monthly rental of $39,494 for months 61 to 72, $40,679 for months 73 to 84, $41,900 for months 85 to 96, $43,157 for months 97 to 108 and $44,451 for months 109 to 120.
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
ITEM 3 - LEGAL PROCEEDINGS
1. Voicu Belteu v. Mori Seiki Co., Ltd.; Mori Seiki U.S.A., Inc.; All American CNC Sales, Inc. dba Elite Machine Tool Company; Ellison Manufacturing Tech., Superior Court for the State of California, County of Orange, Case No. 30-2008-00103710. Plaintiff filed this action on March 7, 2008.
The Complaint, which has causes of action for strict products liability and negligence, alleges that a CNC machine manufactured by Mori Seiki and sold through our subsidiary, All American CNC Sales, Inc. dba Elite Machine Tool Company, was defective and injured the plaintiff. The Complaint seeks damages in excess of $6,300,000 for medical expenses, future medical expenses, lost wages, future lost wages and general damages. All American CNC Sales filed its Answer and Cross-complaint on July 1, 2008 against several individuals and entities involved in the machine purchase and sales transaction, seeking indemnity and contribution.
Plaintiff and All American CNC Sales have both responded to discovery requests and are engaged in the meet and confer process to resolve outstanding discovery issues. Several depositions have been taken and we anticipate more going forward. Plaintiff and All American have agreed to a settlement in principal providing for a dismissal of the case against All American for a waiver of costs. No provision has been made in our financial statements as we believe that the responsibility for liability, if any, is with the manufacturer.
2. James M. Cassidy v. Gateway International Holdings, Inc., American Arbitration Association, Case No. 73-194-32755-08.
We were served with a Demand for Arbitration and Statement of Claim, which was filed on September 16, 2008.
The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant. The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs. We deny the allegations of the Statement of Claim and will vigorously defend against these allegations. An arbitrator has not yet been selected, and a trial date has not yet been scheduled.
We do not have a provision in our financial statements at June 30, 2010, for this lawsuit. No provision is necessary as we feel that the litigation has no merit.
3. Elite Machine Tool Company v. ARAM Precision Tool and Die, Avi Amichai, Superior Court for the State of California, County of Orange, Case No. 30-2008-00090891.
Elite Machine filed this action on August 8, 2008.
The Complaint alleged breach of contract for the defendants failing to pay Elite Machine for a machine the defendants purchased from Elite Machine, and sought damages totaling $16,238. ARAM Precision Tool and Die filed its Answer and Cross-Complaint on October 1, 2008. The Cross-Complaint alleged that Elite Machine failed to deliver certain parts of the machine per the sales contract and seeks damages totaling $25,000. In late June 2009, the parties settled this matter and the lawsuits were dismissed on August 13, 2009. Under the terms of the settlement, Aram is expected to pay Elite Machine Tool Company $4,000 in full and final settlement. To date this amount has not been received.
4. CNC Manufacturing v. All American CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC Repos, Superior Court for the State of California, County of Riverside, Case No. RIC 509650.
Plaintiff filed this Complaint on October 2, 2008.
The Complaint alleges causes of action for breach of contract and rescission and claims All American breached the agreement with CNC Manufacturing by failing to deliver a machine that conforms to the specifications requested by CNC Manufacturing, and requests damages totaling $138,750. Elite Machine filed an Answer timely, on January 15, 2009. Discovery has commenced in this matter but is not expected to be concluded for several months. The Court has set a Trial Setting Conference for October 13, 2010. Management intends to aggressively defend itself against this claim. No trial date has been set. No provision has been made in the attached financial statements as we believe that the litigation has no merit.
5. Sunbelt Machine Works Corp. v. All American CNC Sales, Inc., United States District Court, Southern District of Texas, Case No. 4:09-cv-108.
Sunbelt filed the Complaint on January 16, 2009.
This case involved a dispute between All American and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by All American to Sunbelt. Sunbelt claimed that it received a machine that does not conform to the specifications it ordered. The amount sought in the Complaint was approximately $139,000. All American filed its Answer on April 13, 2009. Sunbelt filed a Motion for Summary Judgment, which was granted by the Court. As a result a Judgment has been entered against All American and M Line Holdings in the amount of $153,000.
A satisfaction of judgment agreement was entered into by the parties on January 25, 2010. The settlement amount was $152,802.49 to be paid by a Mori Seki MH-50 machine valued at $59,000, with the balance being paid in 13 monthly installments of $5,000.00 commencing February 15, 2010 with interest at the rate of approximately .44% per annum, the remaining balance being paid in March 2011. This amount is being paid according to schedule.
A provision has been made in the attached financial statements in the sum of $61,764 at June 30, 2010.
6. Hwacheon Machinery v. All American CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County, Illinois, Case No. 09L544.
The Complaint was filed on June 8, 2009.
The Complaint alleges causes of action for account stated, and arises from a claim by Hwacheon that All American CNC has not paid it for machines sold to All American CNC. The Complaint seeks damages of approximately $362,000. All American filed an answer on or about July 15, 2009. Default has been entered against All American CNC Sales, Inc.
7. M Line Holdings, Inc. v. Hwacheon Machinery, Orange County Superior Court, Orange County, California, Case No. 30-2010-00369532. The Complaint was filed on May 4, 2010
The Complaint against Hwacheon seeks declaratory relief from the Court relieving M Line Holdings from having to respond to Hwacheon’s harassing, burdensome and voluminous requests for documents relating to Hwacheon’s judgment against All American CNC Sales, Inc. No answer has been filed by Hwacheon and no trial date has been set. Management does not expect a significant financial impact as a result of this lawsuit.
8. Fadal Machining v. All American CNC Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case No. BC415693.
The Complaint was filed on June 12, 2009.
The Complaint alleges causes of action for breach of contract and common counts against All American CNC seeking damages in the amount of at least $163,578.88, and arises from a claim by Fadal that All American failed to pay amounts due. On June 26, 2009, Fadal amended the Complaint to include M Line Holdings, Inc. as a Defendant. On or about August 11, 2009, the Court heard oral argument on Fadal’s Motion for Right to Attach Order and Writ of Attachment. The Court granted this Motion in part, issuing a Right to Attach Order against All American CNC in the amount of approximately $164,000. The Court denied the Motion as to M Line Holdings, Inc. On August 12, 2009, All American CNC filed an Answer to the Complaint, and M Line Holdings, Inc., filed a demurrer to the Complaint. The hearing on M Line Holdings, Inc.’s demurrer is not currently set. Management intends to aggressively defend itself against this claim. No trial date has been set and a provision has been made in the financial statement of All American CNC Sales, Inc. in the sum of $163,578 at June 30, 2010, but not in M Line Holdings, Inc. financial statements where All American CNC Sales, Inc. is recorded as discontinued operations as a result the business shutting down..
9. Do v. E.M. Tool Company, Orange County Superior Court, Orange County, California, Case No. 30-2009-00123879.
The Complaint was filed on June 1, 2009.
The Complaint alleges causes of action for negligence, product liability and breach of warranty, and seeks damages to be determined at time of trial. This lawsuit was tendered by E.M. Tool Company to its insurance company, which is currently providing a defense. We filed an Answer and a Cross-complaint against the manufacturer of the equipment the Mori Seiki Company, Ltd. To the best of our knowledge no trial date has been set and no provision has been made in the financial statement at June 30, 2010 as we believe the litigation has no merit and any liability is that of the manufacturer, not E.M. Tool Company.
10. Fox Hills Machining v. CNC Repos, Orange County Superior Court, Orange County, California, Case No. 30-2009-00121514.
The Complaint was filed on April 14, 2009.
The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos. The damages sought in the Complaint are not less than $30,000. The Defendants filed an Answer on June 5, 2009. Management intends to aggressively defend itself against this claim. No trial date has been set and no provision has been made in the financial statements at June 30, 2010.
11. Laureano v. Eran Engineering, State of California Worker’s Compensation Appeals Board, no case number.
Mr. Laureano has filed a claim with the Worker’s Compensation Appeals Board against Eran Engineering. At this time, Eran Engineering has only been served with a subpoena for business records, requesting Mr. Laureano’s employment file, personnel file, claim file, and payroll documents. Management intends to aggressively defend this claim.
No provision has been made in the financial statements of the company at June 30, 2010. The Company’s management believes that payment(s), if any, will be the responsibility of Workers Compensation Insurance.
12. Timothy D. Consalvi v. M Line Holdings, Inc. et.al., Orange County Superior Court Case No, 00308489.
A former president of All American CNC Sales, Inc. has filed suit against the Company for allegedly failing to pay him his entire severance payment. The Complaint does not specify the damages sought. The parties then reached a settlement in the principal sum of $40,000 to be documented in due course. Meanwhile a default was entered against the Company, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the Complaint and has filed a motion for leave to file a cross complaint.
We are negotiating a settlement in this case at this time. Therefore, no provision has been made in the financial statement for this sum as of June 30, 2010.
13. C. William Kircher Jr. v M Line Holdings, Inc., Orange County Superior Court Case No. 00397576.
A former attorney for M Line Holdings, Inc., has sued us seeking damages for failure to pay legal fees in the amount of $120,166.30. The response is not due yet as of the date of this Annual Report but will be filed in a timely manner.
Management believes that the amount of the charges by Plaintiff is overstated and intends to defend the action for the amount sought by Plaintiff.
Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity.
ITEM 4
ITEM 4 - (REMOVED AND RESERVED).
PART II
ITEM 5
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.
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, 2010, there were 30,861,956 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, 12,470,903 are held by non-affiliates. On the cover page of this filing we value these shares at $810,609. These shares were valued at $0.065 per share, which was closing price of our common stock on the OTC Bulletin Board on October 8, 2010.
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.
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.
As a result, we did not have any options, warrants or rights outstanding as of June 30, 2010.
Recent Issuance of Unregistered Securities
On April 26, 2010, we entered into a Securities Purchase Agreement and Convertible Promissory Note (the “Note”) with Asher Enterprises, Inc. Under the terms of the Note the principal amount is $50,000, the interest rate is 8%, and the repayment in full is due, with interest, on or before the maturity date of January 28, 2011. The principal amount and any unpaid interest is convertible into our common stock at 60% of the closing bid price of our common stock in the three (3) trading days prior to the delivery of a conversion notice by Asher. We issued the Note, restricted in accordance with Rule 144, to Asher on April 26, 2010. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Asher Enterprises, Inc. is a sophisticated investor and familiar with our operations.
On May 25, 2010, we entered into a Convertible Promissory Note (the “Second Note”) with Asher Enterprises, Inc. Under the terms of the Note the principal amount is $50,000, the interest rate is 8%, and the repayment in full is due, with interest, on or before the maturity date of February 28, 2011. The principal amount and any unpaid interest is convertible into our common stock at 60% of the closing bid price of our common stock in the three (3) trading days prior to the delivery of a conversion notice by Asher. We issued the Note, restricted in accordance with Rule 144, to Asher on May 25, 2010. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Asher Enterprises, Inc. 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
ITEM 6 - SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 7
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, 2009 contains forward-looking statements, principally in this Section and “Business.” Generally, you can identify these statements because they use words like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described in this filing. You should not place undue reliance on these forward-looking statements which apply only as of the date of this 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.
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 37% and 31% of our consolidated accounts receivable balance at June 30, 2010 and 2009, 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.
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 an impairment provision of intangible assets of $170,000 for the year ended June 30, 2010. There was no impairment provision for long-lived assets in 2009.
Goodwill
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, 2009. There was no impairments of goodwill from continuing operations as of June 30, 2010.
Accounting for Income Taxes
We account for income taxes under the provisions of ASC 740, “Accounting for Income Taxes”. Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pre-tax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount on the consolidated balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, we must establish a valuation allowance.
In July 2006, the FASB issued ASC 740-10, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 describes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Therefore, FIN 48 was effective for us beginning July 1, 2007. The adoption of FIN 48 on July 1, 2007 did not have a material impact to our consolidated financial statements.
Recent Accounting Pronouncements
In April 2009, the FASB issued ASC 320-10-65, “Recognition and Presentation of Other-Than-Temporary Impairments”. This amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. It is effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In April 2009, the FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. It provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP does not change the definition of fair value under ASC 820. The FSP is effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In May 2009, the FASB issued ASC 855, Subsequent Events. It establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It is effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the Codification). The Codification became the single official source of authoritative, nongovernmental U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In September 2009 the New FASB Accounting Standards Update 2009-08 issued in Earnings Per Share (amendments to Section 260-10-S99). This update includes technical corrections to Topic 260-10-S99 Earnings Per Share, based on EITF Topic D-53, “Computation of Earnings Per Share for a Period that includes redemption or an induced conversion of a portion of a class of preferred stock” and EITF Topic D-42, “The effect of the calculation of Earnings Per Share for the redemption or induced conversion of preferred stock.” The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
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
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 included in the accompanying financial statements as discontinued operations.
All American generated revenues of $0 and $2,964,928 during the years ended June 30, 2010 and 2009, respectively.
During the year ended June 30, 2009, we recognized pre-tax losses from discontinued operations of ($2,264,216). Also during the year ended June 30, 2009, we recorded a loss from discontinued operations, net of income tax benefit of $2,264,216. The losses for All American resulted primarily from - trading losses and the write off of intangible assets.
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 85% and 36% of consolidated sales for the years ended June 30, 2010 and 2009, 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.
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
Results of Operations for the Year Ended June 30, 2010 and 2009
Introduction
For the twelve months ended June 30, 2010, we generated $6,213,800 in revenues on cost of sales of $4,848,755. With these revenues and cost of sales for the year ended June 30, 2010, we had a net loss of ($1,709,086). For the year ended June 30, 2009, we had revenues of $9,651,183, on cost of sales of $6,746,873. With these revenues and costs of sales we had a net loss of $(2,258,883), for year ended June 30, 2009. An explanation of these numbers and how they relate to our business is contained below.
Revenues, Expenses and Loss from operations:
Revenues
Our revenues for the year ended June 30, 2010 were $6,213,800 compared to revenues of $9,651,183 for the year ended June 30, 2009. Our approximately 40% reduction in our revenues from the year ended June 30, 2009 to year ended June 30, 2010, was primarily due to a decline in orders due to a lack of orders from customers. Our revenues for the year ended June 30, 2010 consisted primarily of sales of CNC machines and machined products.
Cost of Sales
Our cost of sales for the year ended June 30, 2010, were $4,848,755 and consisted primarily of used CNC machines and raw materials usage, compared to our cost of sales for the year ended June 30, 2009 of $6,746,873. The reduction in our cost of sales was primarily due to a slowdown in the overall economy and a lack of orders from 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, 2010 our selling and distribution expenses were $2,739,523, compared to $2,771,762 for the year ended June 30, 2009. Our selling, general and administrative expenses for the year ended June 30, 2010, primarily consisted of salaries of $1,656,834, rent of $547,920, legal and professional fees of $96,244, and insurance expenses of $234,658.
Interest Expense
For the year ended June 30, 2010, our interest expense increased by $78,641 compared to the comparable period in 2009. The change is attributable to lower average debt balances and decreases in the average interest rate paid on our debt and capital lease obligations but is increased by a derivative charge of $98,289
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. During the 2009 period, we recorded a net gain of $16,125 from the sale of assets of certain manufacturing equipment within the Precision Manufacturing group.
Loss from Discontinued Operations
The Loss from discontinued operations were $(2,264,216) for the year ended June 30, 2009. As noted above, for the period ended in 2009, this was primarily related to the decision by our management to cease operating All American CNC Sales, Inc. See Notes to Consolidated Financial Statements for further discussion.
Provision for Income Taxes
For the 2010 period, the effective tax rate was 6%.
Liquidity and Capital Resources
Our principal sources of liquidity consist of cash and cash equivalents, cash generated from operations and borrowing from various sources, including Pacific Western Bank. At June 30, 2010, our cash and cash equivalents totaled $50,410 and we had working capital of $(825,846).
At June 30, 2010, we had $218,889 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 $218,889, $0 and $0, respectively, as of June 30, 2010. We reached an agreement with Pacific Western Bank to extend the repayment of the $218,889 until August 31, 2010. We did not repay the amount owed by August 31, 2010 and are currently in default of the terms of credit agreement, as amended and extended. The credit agreement is currently secured by substantially all of our assets and personal guarantees by two of our former executive officers, Joseph Gledhill and Timothy Consalvi, and two of our currentl officers and directors, George Colin and Jitu Banker.
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, 2010 contain an explanatory note (Note 20) 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.
Our financial statements were prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we have an accumulated deficit of $9,512,790 as of June 30, 2010 a net loss of $1,709,086 for the year ended June 30, 2010.
We recognize that the very weak economy over the past two year(s) and the difficulty in raising new funds has impacted our working capital base. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon 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.
To date we have funded our operations from both internally generated cash flow and external sources,. We will pursue additional external capitalization opportunities, as necessary, to fund our long-term goals and objectives We have taken significant steps to resolve these issues. We recently accepted a proposal for an asset based financing line of credit of $1 million from an asset based lender which has not been finalized yet. This proposal includes an equipment loan and a receivable financing line of credit. This proposal is subject to an appraisal of the equipment and an audit of the books and records of Eran Engineering, Inc. The proceeds from this loan would first pay off Pacific Western Bank and our receivable line of credit and would provide working capital for the company. Furthermore, we are negotiating to obtain a $3-5 million convertible debenture financing package that would not only provide additional working capital but would also provide capital for acquisitions within the aerospace industry.
Cash Flows
The following table sets forth our cash flows for the years ended June 30:
Cash Flows for the Years Ended June 30, 2010 and 2009
Operating Activities
Net cash provided by (used in) operating activities was $19,530 for the year ended June 30, 2010, compared to $(221,937) for the year ended June 30, 2009. Our cash from operating activities for the year ended June 30, 2010 was primarily $225,978 in accounts receivables, $445,037 in inventories, $26,527 in prepaid expenses and other assets, $(371,258) in due from related party, $287,964 in accounts payable and accrued expenses, $6,069 in customer deposits, $26,283 in deferred rent, cash provided by operating activities of discontinued operations, and adjustments reconcile to net loss of 19,530.
Investing Activities
Net cash provided by investing activities was $24,000 for the year ended June 30, 2010, compared to $14,277 for the year ended June 30, 2009. 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 used in financing activities was ($431,150) for the year ended June 30, 2010, compared to ($378,953) for the year ended June 30, 2009. The cash provided by (used in) financing activities for the year ended June 30, 2010, consisted of $(221,112) in net borrowings on our line of credit, $247,834 payments from notes payable, $288,277 in payments to notes payable,, and ($169,595) in payments on capital leases.
Contractual Obligations
The following table summarizes our contractual obligations and commercial commitments as of June 30, 2010:
Quantitative and Qualitative Disclosures about Market Risk
The only financial instruments we hold are cash and cash equivalents. We also have a floating interest rate agreement with Pacific Western Bank. Changes in market interest rates will impact our interest costs.
At June 30, 2010, we have a derivative liability with Asher. We have received a notice of demand for payment of this liability and expect to repay the notes in December 2010.
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
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
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
M Line Holdings, Inc.
(formerly, Gateway International, Inc)
We have audited the accompanying consolidated balance sheets of M Line Holdings, Inc. (formerly, Gateway International, Inc) (the “Company”) as of June 30, 2010 and 2009 and the related consolidated statements of operation, stockholders' equity, and cash flow for the years ended June 30, 2010 and 2009. 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 of these consolidated financial statements 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, 2010 and 2009 and the results of its operations and its cash flow for the years ended June 30, 2010 and 2009 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 current liabilities $2,718,367 of that are in excess of current assets of $1,892,521 at June 30, 2010 and has sustained a net loss of $1,709,086 for the year ended June 30, 2010. The Company is not current in respect of its obligations to financial institutions. These factors as discussed in Note 19 to the consolidated financial statements raise substantial 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
November 12, 2010
M LINE HOLDINGS, INC.
(FORMERLY, GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 AND 2009
See Accompanying Notes to Consolidated Financial Statements
M LINE HOLDINGS, INC.
(FORMERLY, GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
See Accompanying Notes to Consolidated Financial Statements
M LINE HOLDINGS, INC.
(FORMERLY, GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED JUNE 30, 2010 AND 2009
See Accompanying Notes to Consolidated Financial Statements
M LINE HOLDINGS, INC.
(FORMERLY, GATEWAY INTERNATIONAL HOLDING, INC)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
See accompanying Notes to Consolidated Financial Statements.
M LINE HOLDINGS, INC.
(FORMERLY, GATEWAY INTERNATIONAL HOLDING, INC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
Organization
M. Line Holdings, Inc. (formerly, Gateway International Holding, Inc.) (the “Company”) was incorporated in Nevada on September 24, 1997, under the name Gourmet Gifts, Inc. (“Gourmet Gifts”). On December 11, 2001, Gourmet Gifts acquired 100% of the issued and outstanding capital stock of Elite Machine Tool Company (“Elite”). Immediately prior to the merger, the Company had 100,000,000 shares of stock authorized, of which 6,768,000 shares were outstanding. Pursuant to the merger, all of the outstanding shares of Elite, aggregating 21,262 shares, were exchanged for shares of common stock of Gourmet Gifts on a 1 to 1,274 basis or into 27,072,000 (net of 600,000 shares subsequently cancelled) shares of common stock leaving a total of 33,240,000 shares of common stock issued and outstanding after the merger. Immediately after the merger, the officers and directors of Gourmet Gifts resigned and the executive officers and directors of Elite the company elected and appointed to such positions, thereby effecting a change of control.
Due to the change in voting control and change in senior management in Gourmet Gift as a result of the merger, the transaction was recorded as a “reverse-merger” whereby Elite was considered to be the acquirer for accounting purposes. At the closing of the reverse merger, Elite became a wholly-owned subsidiary and the Company changed its corporate name to Gateway International Holdings, Inc., effective January 28, 2002. After the merger, through Elite, the Company became engaged in the acquisition, refurbishment, distribution and sales of pre-owned Computer Numerically Controlled (“CNC”) machine tools to manufacturing customers across the United States of America. This was the Company’s sole business until the acquisition of the additional businesses described below.
Business
The Company and its subsidiaries are engaged in the following businesses:
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Acquiring, refurbishing and selling pre-owned CNC machine-tool equipment through its Elite subsidiary, the machine sales group.
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Manufacturing precision metal component parts in the defense, automotive, aerospace and medical industries through its Eran Engineering, Inc. (“Eran”) subsidiary, the precision manufacturing group.
Divestitures of Companies
In April 2005, the Company acquired 100% of the outstanding common stock of Accurate Technologies, Inc. (“Accurate”) for an aggregate purchase price of $8,760,000, payable through the issuance of 12,000,000 shares of the Company’s common stock.
In March 2005, the Company acquired 100% of the outstanding common stock of Nu-Tech Industrial Sales, Inc. (“Nu-Tech”) for an aggregate purchase price of $2,300,000, payable through the issuance of 2,425,000 shares of the Company’s common stock.
In March 2007, the Board of Directors of the Company approved plans to divest Accurate and Nu-Tech, as a part of its strategy to exit non-core businesses. These companies were sold to the existing management of Accurate and Nu-Tech who were also members of the Company’s Board of Directors at the time of the sale, but they did not have controlling voting interests.
The Company incurred aggregate non-cash loss from the sales of these businesses of $2,280,909, net of income tax benefit of $1,212,559, primarily resulting from the change in the fair value of the common stock issued in connection with these acquisitions. These divestitures have been accounted for as discontinued operations in the consolidated statements of operations and cash flows.
The divestiture of Accurate, which was part of the Precision Manufacturing segment, was completed March 23, 2007 for net consideration of 12,000,000 shares of the Company’s common stock tendered with a value of $6,960,000 based upon the trading price of the Company’s stock of $0.585 as quoted on the Pink Sheets OTC Markets Inc. (“Pink Sheets”) on the date of the transaction which management believes is the representative of fair market value. The divestiture transferred substantially all of the assets and liabilities to purchasers of Accurate. The total net assets (total assets less total liabilities) transferred were $8,791,341.
The divestiture of Nu-Tech, which was part of the Precision Manufacturing segment, which closed on March 26, 2007 for net consideration of 2,425,000 shares of the Company’s common stock of $0.58 as quoted on the Pink Sheets with a value of $1,406,500 based upon the trading price of the Company’s stock on the date of the transaction. The divestiture transferred substantially all of the assets and liabilities to purchasers of Nu-Tech. The total net assets transferred were $2,129,959.
Gateway International Holdings, Inc. changed its corporate name to M Line Holdings, Inc. effective March 25, 2009.
2.
Basis of Presentation and Significant Accounting Policies
Discontinued Operations
The Board of Directors of the company decided to discontinue the operations AACNC, a wholly owned subsidiary and a part of the Machine Sales segment, due to continued losses and no prospect of AACNC of getting back to profitability. During the year ended June 30, 2010, the Company incurred losses of $58,800 from the discontinued company, AACNC. During the year ended June 30, 2009, the Company incurred losses of $2,264,216 from discontinued operations of this company, AACNC.
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 institution’s in which the Company has its accounts has financial difficulties, the Company’s cash balances could be at risk.
Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance consists of the following:
Sales from significant customers representing 10% or more of sales consist of the following customers for the years ended June 30:
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:
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.
Inventories
Inventories are stated at the lower of cost, determined on a first in, first out (“FIFO”) basis average cost basis, or market. Market value is based on management’s estimates for future sale of the Company’s products.
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 $170,000 abd $647,302 at June 30, 2010 and 2009, respectively.
Goodwill
As part of testing Goodwill impairment it requires a two-step approach 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, the Company determined that there was a goodwill impairment of $198,169 from continuing operations as of June 30, 2009.
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.
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 ninety days. Historically, warranty costs have been inconsequential. Generally, the Company does not accept returns.
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 $11,986 and $41,172, for the years ended June 30, 2010 and 2009 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.
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 April 2009, the FASB issued ASC 320-10-65, “Recognition and Presentation of Other-Than-Temporary Impairments”. This amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. It is effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In April 2009, the FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. It provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP does not change the definition of fair value under ASC 820. The FSP is effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In May 2009, the FASB issued ASC 855, Subsequent Events. It establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It is effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the Codification). The Codification became the single official source of authoritative, nongovernmental U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
In September 2009 the New FASB Accounting Standards Update 2009-08 issued in Earnings Per Share (amendments to Section 260-10-S99). This update includes technical corrections to Topic 260-10-S99 Earnings Per Share, based on EITF Topic D-53, “Computation of Earnings Per Share for a Period that includes redemption or an induced conversion of a portion of a class of preferred stock” and EITF Topic D-42, “The effect of the calculation of Earnings Per Share for the redemption or induced conversion of preferred stock.” The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
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.
3.
Inventories
Inventories consist of the following at June 30:
4.
Due from Related Parties
In connection with the close of our financial statements for the year ended June 30, 2008, the Company discovered it had paid Lawrence A. Consalvi, a former director for certain expenses submitted for reimbursement. Due to the lack of documentation surrounding the nature of the expense, Mr. Consalvi agreed to reimburse the Company $81,000 or return 400,000 shares of the Company’s common stock. As a result a receivable for $81,000 has been recorded as of June 30, 2008 and received by the company during the year ended June 30, 2009.
We have an amount due from a related party in the sum of $352,333 which is expected to be repaid to the company within the next fiscal year.
5.
Prepaid and Other
On January 10, 2008, the Company entered into a promissory note agreement in the amount of $100,000 with a shareholder of the Company and the brother in-law to Larry Consalvi, the Company’s former Executive Vice President, member of the Company’s board of directors, and the single largest shareholder. The note is due on or before January 10, 2009 and is secured by 357,142 shares of common stock of the Company. The note bears interest at a rate of 9.25% per annum and is payable upon maturity of the note. See Note 14.
The note was repaid during the year ended June 30, 2009.
6.
Property and Equipment
Property and equipment consists of the following at June 30:
Depreciation expense was $417,947 and $ 398,700 for the years ended June 30, 2010 and 2009, respectively.
7.
Intangible Assets
Intangible assets consist of the following at June 30:
Amortization expense was $41,783 and $41,783 for the years ended June 30, 2010 and 2009, respectively.
Estimated intangible asset amortization expense for the remaining carrying amount of intangible assets is as follows for the years ending June 30:
The parent company wrote off the sum of $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. There was no impairment in 2009.
8.
Goodwill
Goodwill, as of June 30, 2010 was $0. Goodwill was written off during the year ended June 30, 2009 as the parent company did not consider the fair value of the reporting unit adequate to support the carrying amount of goodwill in E.M. Tool Co., Inc.
9.
Accrued Expenses
Accrued expenses consist of the following at June 30:
10.
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
11.
Line of Credit and Notes Payable
Pacific Western Bank Credit Agreement
We are in default under our agreement with Pacific Western Bank. If Pacific Western Bank files a lawsuit for our default we may be forced to sell assets to pay this obligation, which would have a material, negative impact on our business.
As of September 21, 2009, our credit agreement with Pacific Western Bank terminated. During the quarter ended June 30, 2010 we repaid Pacific Western Bank the sum of $360,000.00 leaving a balance as follows:
We reached an agreement with Pacific Western Bank for an extension until August 31, 2010 to repay this balance, $218,889, at a stated interest rate equal to the lender’s referenced prime rate plus 1.50%. We did not pay the outstanding balance by August 31, 2010, and have not received an additional extension. As a result we are in default under the terms of our line of credit. This line of credit is secured by certain of our assets. If Pacific Western Bank filed a lawsuit as a result of our default we may be required to sell some assets to repay this obligation. Per our agreement to extend time for repayment with Pacific Western Bank, at the time of repayment of the line of credit we also agreed to repay any balance due on the equipment loans to Eran Engineering, Inc. As of June 30, 2010, the balance on these equipment loans totaled $98,045.
As of June 30, 2010, we owed $218,889 under the line of credit with Pacific Western Bank. At June 30, 2010, the Company was in violation of certain covenants with the bank and the Company has not been able to obtain a waiver from the bank.
Management has signed a letter of intent for a line of credit with Celtic Capital Corporation to repay Pacific Western Bank and provide working capital for the group.
Financial Federal Credit Business Loan Agreement
On August 21, 2006, the Company, entered into a loan agreement with a bank for $1,350,000 in connection with the purchase of real property. On February 23, 2007, the Company sold the real property secured by this loan and the loan was paid in full. The loan, while outstanding, had an interest rate at the lender’s referenced prime rate plus 1.5%, per annum.
Notes payable consist of the following at June 30:
Derivative Liability
The Company has provided a provision of $98,289 to protect against any losses if the note payable to a financial institution is converted into common stock. This Liability is 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, as disclosed.
12.
Notes Payable to Related Parties
All related party notes were repaid or settled in 2009. During 2009, the Company converted $650,000 of these notes and accrued interest with Joe Gledhill in exchange for 3,250,000 shares of common stock. There were no additional costs or charges incurred by the company.
Interest expense on notes payable, capital leases and notes payable-related parties for years ended June 30, 2010 and 2009, was $187,788 and $109,147, respectively.
13.
Commitments and Contingencies
The Company has provided certain of its customers with product warranties of ninety days from the date of sale based on management’s estimate of the probable liability under its product warranties. Warranty expense was $25,331 and $30,049 for the years ended June 30, 2010 and 2009, respectively.
The Company leased its manufacturing and office facilities under non-cancelable operating lease arrangements.
Future minimum lease payments under non-cancelable operating leases are as follows as of June 30:
Rent expense under operating leases was $547,920 and $490,196 for the years ended June 30, 2010 and 2009, respectively.
14.
Litigation
1. Voicu Belteu v. Mori Seiki Co., Ltd.; Mori Seiki U.S.A., Inc.; All American CNC Sales, Inc. dba Elite Machine Tool Company; Ellison Manufacturing Tech., Superior Court for the State of California, County of Orange, Case No. 30-2008-00103710. Plaintiff filed this action on March 7, 2008.
The Complaint, which has causes of action for strict products liability and negligence, alleges that a CNC machine manufactured by Mori Seiki and sold through our subsidiary, All American CNC Sales, Inc. dba Elite Machine Tool Company, was defective and injured the plaintiff. The Complaint seeks damages in excess of $6,300,000 for medical expenses, future medical expenses, lost wages, future lost wages and general damages. All American CNC Sales filed its Answer and Cross-complaint on July 1, 2008 against several individuals and entities involved in the machine purchase and sales transaction, seeking indemnity and contribution.
Plaintiff and All American CNC Sales have both responded to discovery requests and are engaged in the meet and confer process to resolve outstanding discovery issues. Several depositions have been taken and we anticipate more going forward. Plaintiff and All American have agreed to a settlement in principal providing for a dismissal of the case against All American for a waiver of costs. No provision has been made in our financial statements as we believe that the responsibility for liability, if any, is with the manufacturer.
2. James M. Cassidy v. Gateway International Holdings, Inc., American Arbitration Association, Case No. 73-194-32755-08.
We were served with a Demand for Arbitration and Statement of Claim, which was filed on September 16, 2008.
The Statement of Claim alleges that claimant is an attorney who performed services for us pursuant to an agreement dated April 2, 2007 between us and the claimant. The Statement of Claim alleges that we breached the agreement and seeks compensatory damages in the amount of $195,000 plus interest, attorneys’ fees and costs. We deny the allegations of the Statement of Claim and will vigorously defend against these allegations. An arbitrator has not yet been selected, and a trial date has not yet been scheduled.
We do not have a provision in our financial statements at June 30, 2010 for this lawsuit. No provision is necessary as we feel that the litigation has no merit.
3. Elite Machine Tool Company v. ARAM Precision Tool and Die, Avi Amichai, Superior Court for the State of California, County of Orange, Case No. 30-2008-00090891.
Elite Machine filed this action on August 8, 2008.
The Complaint alleged breach of contract for the defendants failing to pay Elite Machine for a machine the defendants purchased from Elite Machine, and sought damages totaling $16,238. ARAM Precision Tool and Die filed its Answer and Cross-Complaint on October 1, 2008. The Cross-Complaint alleged that Elite Machine failed to deliver certain parts of the machine per the sales contract and seeks damages totaling $25,000. In late June 2009, the parties settled this matter and the lawsuits were dismissed on August 13, 2009. Under the terms of the settlement, ARAM is expected to pay Elite Machine Tool Company $4,000 in full and final settlement. To date this amount has not been received.
4. CNC Manufacturing v. All American CNC Sales, Inc., Elite Machine Tool Company/Sales & Services, CNC Repos, Superior Court for the State of California, County of Riverside, Case No. RIC 509650.
Plaintiff filed this Complaint on October 2, 2008.
The Complaint alleges causes of action for breach of contract and rescission and claims All American breached the agreement with CNC Manufacturing by failing to deliver a machine that conforms to the specifications requested by CNC Manufacturing, and requests damages totaling $138,750. Elite Machine filed an Answer timely, on January 15, 2009. Discovery has commenced in this matter but is not expected to be concluded for several months. The Court has set a Trial Setting Conference for October 13, 2010. Management intends to aggressively defend itself against this claim. No trial date has been set. No provision has been made in the attached financial statements as we believe that the litigation has no merit.
5. Sunbelt Machine Works Corp. v. All American CNC Sales, Inc., United States District Court, Southern District of Texas, Case No. 4:09-cv-108.
Sunbelt filed the Complaint on January 16, 2009.
This case involved a dispute between All American and Sunbelt regarding the sale of a Mori Seiki MH-63 machine by All American to Sunbelt. Sunbelt claimed that it received a machine that does not conform to the specifications it ordered. The amount sought in the Complaint was approximately $139,000. All American filed its Answer on April 13, 2009. Sunbelt filed a Motion for Summary Judgment, which was granted by the Court. As a result a Judgment has been entered against All American and M Line Holdings in the amount of $153,000.
A satisfaction of judgment agreement was entered into by the parties on January 25, 2010. The settlement amount was $152,802.49 to be paid by a Mori Seki MH-50 machine valued at $59,000, with the balance being paid in 13 monthly installments of $5,000.00 commencing February 15, 2010 with interest at the rate of approximately .44% per annum, the remaining balance being paid in March 2011. This amount is being paid according to schedule.
A provision has been made in the attached financial statements in the sum of $61,764 at June 30, 2010.
6. Hwacheon Machinery v. All American CNC Sales, Circuit Court of the 19th Judicial Circuit, Lake County, Illinois, Case No. 09L544.
The Complaint was filed on June 8, 2009.
The Complaint alleges causes of action for account stated, and arises from a claim by Hwacheon that All American CNC has not paid it for machines sold to All American CNC. The Complaint seeks damages of approximately $362,000. All American filed an answer on or about July 15, 2009. Default has been entered against All American CNC Sales, Inc.
7. M Line Holdings, Inc. v. Hwacheon Machinery, Orange County Superior Court, Orange County, California, Case No. 30-2010-00369532. The Complaint was filed on May 4, 2010
The Complaint against Hwacheon seeks declatory relief from the Court relieving M Line Holdings from having to respond to Hwacheon’s harassing, burdensome and voluminous requests for documents relating to Hwacheon’s judgment against All American CNC Sales, Inc. No answer has been filed by Hwacheon and no trial date has been set. Management does not expect a significant financial impact as a result of this lawsuit.
8. Fadal Machining v. All American CNC Sales, et al., Los Angeles Superior Court, Los Angeles, California, Case No. BC415693.
The Complaint was filed on June 12, 2009.
The Complaint alleges causes of action for breach of contract and common counts against All American CNC seeking damages in the amount of at least $163,578.88, and arises from a claim by Fadal that All American failed to pay amounts due. On June 26, 2009, Fadal amended the Complaint to include M Line Holdings, Inc. as a Defendant. On or about August 11, 2009, the Court heard oral argument on Fadal’s Motion for Right to Attach Order and Writ of Attachment. The Court granted this Motion in part, issuing a Right to Attach Order against All American CNC in the amount of approximately $164,000. The Court denied the Motion as to M Line Holdings, Inc. On August 12, 2009, All American CNC filed an Answer to the Complaint, and M Line Holdings, Inc., filed a demurrer to the Complaint. The hearing on M Line Holdings, Inc.’s demurrer is not currently set. Management intends to aggressively defend itself against this claim. No trial date has been set and a provision has been made in the financial statement of All American CNC Sales, Inc. in the sum of $163,578 at June 30, 2010, but not in M Line Holdings, Inc. financial statements where All American CNC Sales, Inc. is recorded as discontinued operations as a result the business shutting down..
9. Do v. E.M. Tool Company, Orange County Superior Court, Orange County, California, Case No. 30-2009-00123879.
The Complaint was filed on June 1, 2009.
The Complaint alleges causes of action for negligence, product liability and breach of warranty, and seeks damages to be determined at time of trial. This lawsuit was tendered by E.M. Tool Company to its insurance company, which is currently providing a defense. We filed an Answer and a Cross-complaint against the manufacturer of the equipment the Mori Seiki Company, Ltd. To the best of our knowledge no trial date has been set and no provision has been made in the financial statement at June 30, 2010 as we believe the litigation has no merit and any liability is that of the manufacturer, not E.M. Tool Company.
10. Fox Hills Machining v. CNC Repos, Orange County Superior Court, Orange County, California, Case No. 30-2009-00121514.
The Complaint was filed on April 14, 2009.
The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos. The damages sought in the Complaint are not less than $30,000. The Defendants filed an Answer on June 5, 2009. Management intends to aggressively defend itself against this claim. No trial date has been set and no provision has been made in the financial statements at June 30, 2010.
11. Laureano v. Eran Engineering, State of California Worker’s Compensation Appeals Board, no case number.
Mr. Laureano has filed a claim with the Worker’s Compensation Appeals Board against Eran Engineering. At this time, Eran Engineering has only been served with a subpoena for business records, requesting Mr. Laureano’s employment file, personnel file, claim file, and payroll documents. Management intends to aggressively defend this claim.
No provision has been made in the financial statements of the company at June 30, 2010. The Company’s management believes that payment(s), if any, will be the responsibility of Workers Compensation Insurance.
12. Timothy D. Consalvi v. M Line Holdings, Inc. et.al., Orange County Superior Court Case No, 00308489.
A former president of All American CNC Sales, Inc. has filed suit against the Company for allegedly failing to pay him his entire severance payment. The Complaint does not specify the damages sought. The parties then reached a settlement in the principal sum of $40,000 to be documented in due course. Meanwhile a default was entered against the Company, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the Complaint and has filed a motion for leave to file a cross complaint.
We are negotiating a settlement in this case at this time. Therefore, no provision has been made in the financial statement for this sum as of June 30, 2010.
13. C. William Kircher Jr. v M Line Holdings, Inc., Orange County Superior Court Case No. 00397576.
A former attorney for M Line Holdings, Inc., has sued us seeking damages for failure to pay legal fees in the amount of $120,166.30. The response is not due yet as of the date of this Annual Report but will be filed in a timely manner.
Management believes that the amount of the charges by Plaintiff is overstated and intends to defend the action for the amount sought by Plaintiff.
Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur in any of the above matters, there could be a material adverse effect on our financial condition, results of operations or liquidity.
15.
Income Taxes
The provision (benefit) for income taxes is comprised of the following for the years ended June 30:
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:
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.
Significant components of the Company’s deferred tax assets and liabilities consist of the following at June 30:
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, 2010 the Company had federal and state net operating loss (“NOL”) carry forwards of approximately $889,000 and $830,000, 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, 2010 a valuation allowance of $486,330, as it believes that it is more likely than not that the deferred tax assets will not be realize in future years. Management has based its assessment on available historical and projected operating results.
16.
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.
During the year ended June 30, 2009, the company issued 50,000 shares of common stock to Steve Kasprisin for services rendered to the company. The company also converted the promissory note held by Mr. & Mrs. Gledhill in the sum of $650,000 into 3,250,000 shares of common stock.
During the year ended June 30, 2010, the company did not issue any shares of common stock.
Stock Repurchase Program
On August 31, 2006, the Company announced a stock repurchase program to repurchase up to 2,500,000 shares of common stock. The program authorized the repurchase of shares at certain times and price levels that are satisfactory to the Company. As of June 30, 2007, the Company has repurchased and retired 600,000 shares of common stock at $0.05 per share, or $30,000, in a private negotiated transaction. The program was terminated on July 31, 2007.
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.
17.
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, 2010:
Segment information is as follows as of and for the year ended June 30, 2009:
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.
18.
Discontinued Operations
The following represents the results of discontinued operations for the year ended June 30, 2009:
The following is the the consolidated balance sheet of All American CNC as of the dates of the respective disposition.
The following represents the results of discontinued operations for the year ended June 30, 2008:
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. However, the Company has an accumulated deficit of $9,512,790 as of June 30, 2010 and a net loss of $1,709,086 for the year ended June 30, 2010.
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 consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to retain its current short term financing and ultimately to generate sufficient cash flow to meet its obligations on a timely basis in order to attain profitability.
To date the Company has funded its operations from both internally generated cash flow and external sources. The Company will pursue additional external capitalization opportunities, as necessary, to fund its long-term goals and objectives.
The Company has taken significant steps to resolve these issues. We recently accepted a proposal for an asset based financing line of credit of $1 million from an asset based lender which has not been finalized yet. This proposal includes an equipment loan and a receivable financing line of credit. This proposal is subject to an appraisal of the equipment and an audit of the books and records of Eran Engineering, Inc. The proceeds from this loan would first pay off Pacific Western Bank and our receivable line of credit and would provide working capital for the company. Furthermore the Company is negotiating to obtain a $3-5 million convertible debenture financing package that would not only provide additional working capital but would also provide capital for acquisitions within the aerospace industry.
20.
Subsequent Events
The Company has evaluated events subsequent to June 30, 2010, to assess the need for potential recognition or disclosure in this Report. Such events were evaluated through November 12, 2010, the date these financial statements were issued. Based upon this evaluation, it was determined that there was only one subsequent event that occurred and required recognition in the financial statements and that the following item represents subsequent events that merit disclosure herein:
In September 2010, we signed a new 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 9
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
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, 2010, 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, 2010, 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 of America 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, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management has identified the following two material weaknesses that have caused management to conclude that, as of June 30, 2010, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
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, impairment of intangible assets, derivative liability and deferred income 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 ended 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 consolidated 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 these material weaknesses in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying these material weaknesses.
(d) Changes in Internal Control over Financial Reporting
There are no changes to report during our fiscal quarter and year ended June 30, 2010.
ITEM 9B
ITEM 9B - OTHER INFORMATION
There are no events required to be disclosed by the Item.
PART III
ITEM 10
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
Director (3/09), Chief Executive Officer (12/08)
Jitu Banker
Chief Financial Officer (3/09) and Director (3/09)
Robert Sabahat
Secretary (3/09) and Director (3/09)
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.
Robert Sabahat is an owner and partner of Madison Harbor Law Group, a law firm located in Orange County, California. Mr. Sabahat has held this position since September 1999. In this position Mr. Sabahat has a practice focusing on real estate and commercial litigation involving contract and tort based claims, business transactions, commercial lease agreements, and unfair competition. From June 1995 to September 1999, Mr. Sabahat was Corporate Counsel for Unicorp Paper Industries, Inc., where he was responsible for all legal matters for the multinational manufacturer of commercial printing papers. Mr. Sabahat received his Juris Doctorate with honors from Western State University, College of Law in 1994.
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.
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:
Name
No. of Late
Reports
No. of
Transactions
Reported Late
No. of
Failures to
File
George Colin
Jitu Banker
Robert Sabahat
Money Line Capital, Inc.
Board Meetings and Committees
During the fiscal year ended June 30, 2010, 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.
ITEM 11
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, 2010, 2009 and 2008 (“Named Executive Officers”):
*
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, 2010 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.
(3)
Robert Sabahat was hired our Secretary effective March 31, 2009.
(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)
Includes vehicle reimbursements of $1,500 and $2,400 in 2008 and 2007, respectively, and medical and life insurance payments of $1,628 and $2,474 in 2008 and 2007, respectively.
(12)
Includes vehicle reimbursements of $5,250 in 2007 and medical insurance payments of $3,600 in 2007.
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, 2009, 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.
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..
Director Compensation
The following table sets forth director compensation as of June 30, 2010:
*
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.
We do not provide any compensation to our directors for serving as directors.
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, 2010:
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of October 6, 2010, 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.
(1)
Unless otherwise indicated, based on 30,861,956 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, 2009, 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, 2010, as well as completing a valuation by a qualified third-party company.
Technically the transaction will result in a change of control since the shares currently held by Money Line Capital, Inc., the owner of 54% 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
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Letter of Intent with Money Line Capital, Inc. On June 30, 2009, we entered into a binding Letter of Intent (the “LOI”) with Money Line Capital, Inc., a California corporation (“MLCI”). MLCI is our largest shareholder and specializes in business financing transactions and holds equity in a number of operating subsidiaries in various fields, including financing, aerospace, real estate, media, beverage, and technology. Under the LOI the parties agree to complete a transaction whereby all the MLCI shareholders will exchange their shares of MLCI stock for shares of our stock. No cash will be exchanged in 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, 2010, as well as completing a valuation by a qualified third-party company.
Assignment of Gledhill Note. On March 25, 2009, we entered into an Assignment of Promissory Note and Consent Thereto (the “Assignment”) with MLCI, under which MLCI agreed to assume our repayment obligations to Joseph Gledhill and Joyce Gledhill under that certain $650,000 principal amount Promissory Note dated December 8, 2008 (the “Gateway Note”) in exchange for the issuance of 3,250,000 shares of our common stock (the “Shares”). Mr. Gledhill, one of our former directors, and Joyce Gledhill consented to the Assignment. Pursuant to the Assignment, MLCI and the Gledhill’s entered into a new $650,000 principal amount secured promissory note, a security agreement and a pledge agreement. We issued the 3,250,000 shares of our common stock to MLCI on June 30, 2009.
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 rate 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, 2010, MLCI loaned us $177,400 under this Note. As of June 30, 2010 we had repaid all loan amounts in full and there was $0 outstanding as of June 30, 2010.
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, 2010, $31,526 remains outstanding.
Joseph Gledhill Note. We have 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
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit and Restated Fees
During the year ended June 30, 2010, Kabani & Company charged $107,500, 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, 2009, Kabani & Company and McKennon Wilson & Morgan LLP billed us $25,000 and $109,866 respectively in fees for professional services for the audit and review of our financial statements.
Tax Fees
During the year ended June 30, 2010, Kabani & Company billed us $0 for professional services for tax preparation. During the year ended June 30, 2009, Kabani & Company and McKennon Wilson & Morgan LLP billed us $0 and $5,000 respectively for professional services for tax preparation.
All Other Fees
During the year ended June 30, 2010, Kabani & Company did not bill us any amounts for any other fees. During the year ended June 30, 2009, Kabani & Company and McKennon Wilson & Morgan LLP did not bill us any amounts for any other fees.
Of the fees described above for the year ended June 30, 2010 and 2009, 100% were approved by the entire Board of Directors.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
(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,
10.5 (1)
Employment Agreement with Joseph T.W. Gledhill dated February 5,
10.6 (2)
Employment Agreement with Lawrence A. Consalvi dated February 5,
10.7 (1)
Share Exchange Agreement with Gledhill/Lyons, Inc. dated March 26,
10.8 (1)
Share Exchange Agreement with Nu-Tech Industrial Sales, Inc. dated March 19,
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,
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,
10.15 (6)
Letter of Intent by and between M Line Holdings, Inc. and Money Line Capital, Inc. dated June 30, 2009
10.16
Securities Purchase Agreement and Convertible Promissory Note with Asher Enterprises, Inc. dated April 26, 2010 (filed herewith)
10.17
Convertible Promissory Note with Asher Enterprises, Inc. dated May 25, 2010 (filed herewith)
10.18
Commercial Real Estate Lease with SG&H Partners, L.P. for Anaheim Property dated August 13, 2010 (filed herewith)
10.19
Business Loan Agreement with Pacific Western Bank dated June 7, 2010 (filed herewith)
(7)
List of Subsidiaries
31.1
Rule 13a-14(a)/15d-14(a) Certification of George Colin (filed herewith).
31.2
Rule 13a-14(a)/15d-14(a) Certification of Jitu Banker (filed herewith).
32.1
Section 1350 Certification of George Colin (filed herewith).
32.2
Section 1350 Certification of Jitu Banker (filed herewith).
(1) Incorporated by reference from our Registration Statement on Form 10-12G filed with the Commission on May 16, 2008.
(2) Incorporated by reference from our Registration Statement on First Amended Form 10-12G/A filed with the Commission on July 16, 2008.
(3) Incorporated by reference from our First Amended Current Report on Form 8-K/A filed with the Commission on October 10, 2008.
(4) Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended September 30, 2008, as filed with the Commission on November 13, 2008.
(5) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 24, 2009.
(6) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 6, 2009.
(7) Incorporated by reference from our Annual Report on Form 10-K for the period ended June 30, 2009, as filed with the Commission on October 13, 2009.
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.
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: November 12, 2010
/s/ George Colin
By:
George Colin
Chief Executive Officer
and a Director
Dated: November 12, 2010
/s/ Jitu Banker
By:
Jitu Banker
Chief Financial Officer
and a Director
Dated: November 12, 2010
/s/ Robert Sabahat
By:
Robert Sabahat
Secretary and a Director