References in this document to “us,” “we” or the “Company”
refer to M LINE HOLDINGS, INC. and our subsidiaries, E.M. Tool Company, Inc. and
Precision Aerospace & Technologies, Inc., formerly Eran Engineering, Inc.
Item 1. Financial Statements.
M LINE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
Assets
|
|
|
|
|
As of March 31
|
|
|
As of June 30
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
187,148
|
|
$
|
182,305
|
|
|
Accounts receivable, net
|
|
2,044,498
|
|
|
990,010
|
|
|
Inventory, net
|
|
1,654,593
|
|
|
1,555,910
|
|
|
Due from related party
|
|
179,769
|
|
|
99,348
|
|
|
Deferred financing costs
|
|
-
|
|
|
199,516
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
4,066,008
|
|
|
3,027,089
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
439,308
|
|
|
556,555
|
|
|
|
|
|
|
|
|
|
|
Deposits and other
|
|
115,922
|
|
|
113,445
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
4,621,238
|
|
$
|
3,697,089
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Bank overdraft
|
$
|
80,366
|
|
$
|
85,542
|
|
|
Accounts payable
|
|
1,404,470
|
|
|
1,421,626
|
|
|
Accounts payable - related party
|
|
43,454
|
|
|
43,454
|
|
|
Accrued expenses and other
|
|
2,753,988
|
|
|
2,788,697
|
|
|
Litigation payable
|
|
137,500
|
|
|
137,500
|
|
|
Derivative liability
|
|
605,987
|
|
|
-
|
|
|
Line of credit
|
|
1,641,215
|
|
|
1,702,726
|
|
|
Notes payable - current, net of debt
discount of $292,142 and $69,996 respectively.
|
|
701,403
|
|
|
675,961
|
|
|
Current portion of capital lease obligations
|
|
53,901
|
|
|
54,501
|
|
|
Deferred income
|
|
-
|
|
|
10,000
|
|
|
Total Current Liabilities
|
|
7,422,284
|
|
|
6,920,007
|
|
|
|
|
|
|
|
|
|
|
Notes payable - net of current portion
|
|
274,194
|
|
|
318,903
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
50,917
|
|
|
90,742
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
7,747,395
|
|
|
7,329,652
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferential stock: $0.001 par value, 10,000,000 shares
authorized, 200,000 shares issued and outstanding at March 31, 2014 and
June 30, 2013 respectively
|
|
200
|
|
|
200
|
|
|
Common stock: $0.001 par, 500,000,000
shares authorized, 145,951,247 and 70,211,145 shares issued and
outstanding at March 31, 2014 and June 30, 2013, respectively
|
|
145,951
|
|
|
70,211
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
11,798,044
|
|
|
10,741,397
|
|
|
|
|
|
|
|
|
|
|
Subscription receivable
|
|
(27,200
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
(15,043,152
|
)
|
|
(14,444,371
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
(3,126,157
|
)
|
|
(3,632,563
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
4,621,238
|
|
$
|
3,697,089
|
|
The accompanying notes form an integral part of these
unaudited consolidated financial statements
-4-
M LINE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS
ENDED MARCH 31, 2014 AND 2013
(UNAUDITED)
|
|
|
Three months ended March 31,
|
|
|
Nine months ended March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,419,511
|
|
$
|
2,319,819
|
|
$
|
8,453,085
|
|
$
|
6,741,292
|
|
|
Cost of sales
|
|
1,459,876
|
|
|
1,960,709
|
|
|
5,572,301
|
|
|
5,082,455
|
|
|
Gross profit
|
|
959,635
|
|
|
359,110
|
|
|
2,880,784
|
|
|
1,658,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
724,055
|
|
|
863,060
|
|
|
1,875,106
|
|
|
2,711,324
|
|
|
Amortization of intangible assets
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total operating expense
|
|
724,055
|
|
|
863,060
|
|
|
1,875,106
|
|
|
2,711,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
235,580
|
|
|
(503,950
|
)
|
|
1,005,678
|
|
|
(1,052,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(557,325
|
)
|
|
(111,463
|
)
|
|
(902,667
|
)
|
|
(302,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative loss
|
|
(651,968
|
)
|
|
-
|
|
|
(700,098
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
(1,209,293
|
)
|
|
(111,463
|
)
|
|
(1,602,765
|
)
|
|
(302,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
(973,713
|
)
|
|
(615,413
|
)
|
|
(597,087
|
)
|
|
(1,355,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
-
|
|
|
-
|
|
|
(1,694
|
)
|
|
(2,086
|
)
|
|
Net loss
|
$
|
(973,713
|
)
|
$
|
(615,413
|
)
|
$
|
(598,781
|
)
|
$
|
(1,357,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and dilutive loss per share:
|
$
|
(0.01
|
)
|
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares under in per share calculations (basic and diluted)
|
|
104,796,533
|
|
|
62,234,201
|
|
|
87,226,691
|
|
|
58,266,218
|
|
The accompanying notes form an integral part of these
unaudited consolidated financial statements
-5-
M LINE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Nine months ended March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(598,781
|
)
|
$
|
(1,357,501
|
)
|
|
Reconciliation of net loss to net
cash provided by operations:
|
|
|
|
|
|
|
|
Depreciation
|
|
125,247
|
|
|
134,828
|
|
|
Amortization of deferred financing
costs
|
|
199,516
|
|
|
-
|
|
|
Amortization of debt discount
|
|
393,293
|
|
|
-
|
|
|
Issuance of shares for services
|
|
217,916
|
|
|
380,750
|
|
|
Change in derivative liabilities
|
|
700,098
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,054,488
|
)
|
|
(111,780
|
)
|
|
Inventory
|
|
(98,683
|
)
|
|
(13,415
|
)
|
|
Prepaid expenses and other assets
|
|
(2,477
|
)
|
|
(26,816
|
)
|
|
Due from related party
|
|
(80,421
|
)
|
|
(54,974
|
)
|
|
Accounts payable, accrued expenses and other
|
|
(85,566
|
)
|
|
1,016,646
|
|
|
Litigation payable
|
|
-
|
|
|
105,959
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
(284,346
|
)
|
|
73,697
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
(8,000
|
)
|
|
(53,650
|
)
|
|
Net cash used in investing activities
|
|
(8,000
|
)
|
|
(53,650
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Net borrowings (repayments) on line of credit
|
|
(61,511
|
)
|
|
(223,501
|
)
|
|
Net proceeds from notes payable
|
|
643,695
|
|
|
619,835
|
|
|
Bank overdraft
|
|
(5,176
|
)
|
|
-
|
|
|
Payments to notes payable
|
|
(239,394
|
)
|
|
(220,384
|
)
|
|
Payments on capital leases
|
|
(40,425
|
)
|
|
(60,738
|
)
|
|
Net cash provided by financing
activities
|
|
297,189
|
|
|
115,212
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
4,843
|
|
|
135,259
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of period
|
|
182,305
|
|
|
5,212
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
$
|
187,148
|
|
$
|
140,471
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
211,560
|
|
$
|
302,928
|
|
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
$
|
|
|
$
|
|
|
|
Debt discount from derivative liability
|
|
544,400
|
|
|
-
|
|
|
Common stock issued for debt conversions
|
|
248,761
|
|
|
-
|
|
|
Derivative resolution due to conversions
|
|
638,511
|
|
|
-
|
|
|
Subscription receivable
|
|
27,200
|
|
|
-
|
|
The accompanying notes form an integral part of these
unaudited consolidated financial statements
-6-
M LINE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Business
M. Line Holdings, Inc. (the “Company”) and its subsidiaries
currently are engaged in the following businesses, which also represent its
business segments:
-
E.M. Tool Company, Inc. dba Elite Machine Tool Company (“Elite”), its
wholly owned subsidiary, acquires, refurbishes and sells pre-owned CNC machine
tool equipment. This is the machine sales group.
-
Precision Aerospace & Technologies, Inc., formerly Eran Engineering,
Inc. (“Precision”), its wholly owned subsidiary, manufactures precision metal
component parts and assemblies for the aerospace, medical and defense
industries. This is the precision manufacturing group.
2. Significant Accounting Policies
Basis of presentation
In the opinion of management, the accompanying balance sheets
and related interim statements of operations and cash flows include all
adjustments, consisting only of normal recurring items, necessary for their fair
presentation in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). Interim results are not necessarily
indicative of results for a full year. The information included in this Form
10-Q should be read in conjunction with information included in the Company’s
annual report on Form 10-K for the fiscal year ended June 30, 2013 filed with
the U.S. Securities and Exchange Commission (the “Commission”) on January 2,
2014.
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of M Line Holdings, Inc. and its wholly owned subsidiaries Elite and
Precision. All Intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates made by management are among others, realization of
inventories, collectability of accounts receivable, litigation, impairment of
goodwill and long-lived assets other than goodwill. Actual results could
materially differ from those estimates.
Recent accounting pronouncements
The Company has implemented all new accounting pronouncements
that are in effect and that may impact its financial statements and does not
believe that there are any other new pronouncements that have been issued that
might have a material impact on its financial position or results of operations.
3. Going Concern and Management Plans
The Company's consolidated financial statements are prepared
using generally accepted accounting principles in the United States of America
applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company has an
accumulated deficit of $15,043,152 as of March 31, 2014 and negative working
capital.
The Company recognizes that the very weak economy over the past
few years and the difficulty in raising new funds has impacted the working
capital needs of the Company.
-7-
The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of liabilities
that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent upon
its ability to retain its current short term financing and ultimately to
generate sufficient cash flow to meet its obligations on a timely basis in order
to attain profitability.
To date the Company has funded its operations from both
internally generated cash flow and external sources. The Company will pursue
additional external capitalization opportunities, as necessary, to fund its
long-term goals and objectives.
4. Inventories
Inventories are stated at the lower of cost or market, cost
being determined using the first in first out (“FIFO”) method. The Company
provides inventory reserves for obsolescence and other matters based on
management’s review of current inventory levels. The Company includes inventory
costs, labor and overhead costs directly associated with manufacturing its
product.
Inventories consisted of the following:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Finished Goods and Components
|
$
|
1,194,034
|
|
$
|
971,099
|
|
|
CNC Machines held for sale
|
|
265,500
|
|
|
364,583
|
|
|
Work in Progress
|
|
378,419
|
|
|
415,108
|
|
|
Raw Materials and Parts
|
|
16,640
|
|
|
5,120
|
|
|
|
|
1,854,593
|
|
|
1,755,910
|
|
|
Less: Reserve for inventories
|
|
(200,000
|
)
|
|
(200,000
|
)
|
|
Inventories, net.
|
$
|
1,654,593
|
|
$
|
1,555,910
|
|
5. Accrued Expenses
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Compensation and related
benefits
|
$
|
1,939,270
|
|
$
|
1,934,314
|
|
|
Audit Fees
|
|
46,000
|
|
|
72,500
|
|
|
Other
|
|
768,718
|
|
|
781,883
|
|
|
|
$
|
2,753,988
|
|
$
|
2,788,697
|
|
6. Capital Leases
The Company leases certain equipment under capital leases with
terms ranging from four to five years. Future annual minimum lease payments are
as follows as of March 31, 2014 and June 30, 2013.
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
$
|
53,901
|
|
$
|
54,501
|
|
|
2015
|
|
50,917
|
|
|
54,501
|
|
|
2016
|
|
-
|
|
|
36,241
|
|
|
2017
|
|
-
|
|
|
-
|
|
|
Total minimum lease payments
|
|
104,818
|
|
|
145,243
|
|
|
Less amount representing interest
|
|
-
|
|
|
-
|
|
|
Present value of future
minimum lease payments
|
|
104,818
|
|
|
145,243
|
|
|
Less current portion of capital lease
obligations
|
|
(53,901
|
)
|
|
(54,501
|
)
|
|
Capital Lease obligations,
net of current portion
|
$
|
50,917
|
|
$
|
90,742
|
|
-8-
7. Line of Credit
Main Credit:
As of March 31, 2014, the Company owed $0 principal as all
outstanding sums were paid in July 2013.
TCA Global Master Credit Fund LP (“TCA”):
The line of credit with Main Credit was replaced on April 30,
2013, with a line of credit from TCA up to the amount of $10 million. As of
March 31, 2014, the Company has drawn $1,836,470 from the line of which
$1,641,215 is outstanding as of March 31, 2014. Amounts drawn from the line of
credit are subject to interest at 18% per annum. The loan matured on October 31,
2013, but was extended for a further period of six months through April 30,
2014.
The line of credit with TCA Global Credit Master Fund, LP is
secured by the receivables and inventory of Precision Aerospace and
Technologies, Inc., E. M. Tool Co. Inc., and a blanket lien over all of the
group’s assets.
8. Notes Payable
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Notes payable to a financial institution,
secured by the underlying equipment in aggregate monthly installments of
varying amounts, on a reducing balance method, with the balance due in
October 2016.
|
$
|
335,525
|
|
$
|
422,940
|
|
|
|
|
|
|
|
|
|
|
An unsecured note payable to a corporation in respect
of accounting software payable in monthly installments of $ 1,923. This
note is now due and payable and is being negotiated with the company.
|
|
46,811
|
|
|
46,811
|
|
|
|
|
|
|
|
|
|
|
Two unsecured convertible notes payable to a financial institution, net of debt discount of 186,676
|
|
16,970
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
An unsecured convertible note payable to a
financial institution, net of discount of $25,208
|
|
2,292
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
An unsecured convertible note payable to a
financial institution, net of discount of $17,917
|
|
3,583
|
|
|
-
|
|
-9-
|
Two unsecured convertible notes payable in
the sum of $110,751, $55,463 of which have been converted to common stock,
net of discount of $4,407.
|
|
50,881
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Two unsecured notes payable in the sum of
$150,000, each, to a financial institution in full in November 2011 and
March 31, 2012. The company is currently in default and has negotiated to
pay the notes in monthly installments of $20,000 commencing November 2012.
|
|
137,810
|
|
|
354,459
|
|
|
|
|
|
|
|
|
|
|
Two unsecured convertible notes payable in
the sum of $110,751, $18,500 of which have been converted to common stock,
net of discount of $35,209
|
|
57,042
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Two unsecured convertible notes payable in
the sum of $110,751, $48,750 of which have been converted to common stock,
net of discount of $10,001
|
|
52,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
An unsecured note payable to a corporation
in weekday amounts of $700, increasing to $1,650, in September 2013
through December 2013. This note is currently past due.
|
|
40,300
|
|
|
86,624
|
|
|
|
|
|
|
|
|
|
|
An unsecured note payable to a corporation
in weekday amounts of $691 each, ending in December 2013. This note is
currently past due.
|
|
57,121
|
|
|
84,030
|
|
|
|
|
|
|
|
|
|
|
An unsecured note payable to a corporation
in weekday amounts of $890 each, ending in October 2014, net of a discount
of $12,724.
|
|
69,911
|
|
|
-
|
|
-10-
|
An unsecured note payable to a corporation
in weekday amounts of $841 each, ending in February 2014. This note is
currently past due.
|
|
105,351
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
975,597
|
|
|
994,864
|
|
|
Less Current Portion
|
|
701,403
|
|
|
675,961
|
|
|
Long Term Portion
|
$
|
274,194
|
|
$
|
318,903
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
701,403
|
|
|
675,961
|
|
|
2015
|
|
143,537
|
|
|
123,780
|
|
|
2016
|
|
130,657
|
|
|
123,780
|
|
|
2017
|
|
-
|
|
|
71,343
|
|
|
Thereafter
|
|
-
|
|
|
-
|
|
|
|
|
975,597
|
|
|
994,864
|
|
9. Commitments and Contingencies
Leases
The Company leased its manufacturing and office facilities
under non-cancellable operating lease arrangements.
Rent expense under operating leases was $404,462 and $375,887
for the nine months ended March 31, 2014 and 2013.
Litigations
Litigation payable consisted of the following at March 31, 2014
and June 30, 2013:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An unsecured note payable to a corporation
in settlement of a lawsuit payable in 12 monthly payments of $5,000.
|
$
|
60,000
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable to various parties
in settlement of lawsuits payable in full.
|
|
77,500
|
|
|
77,500
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
$
|
137,500
|
|
|
137,500
|
|
The Company’s existing litigations are set forth below:
|
|
1.
|
James M. Cassidy v. Gateway International Holdings,
Inc.
, American Arbitration Association, Case No. 73-194-32755-
08
.
|
|
|
|
|
|
|
|
The Company was served with a Demand for Arbitration and
Statement of Claim, which was filed on September 16,
2008.
|
-11-
|
|
|
The Statement of Claim alleges that claimant is an
attorney who performed services for the Company pursuant to an agreement
dated April 2, 2007 between the Company and the claimant. The Statement of
Claim alleges that the Company breached the agreement and seeks
compensatory damages in the amount of $195,000 plus interest, attorneys’
fees and costs. Management denies the allegations of the Statement of
Claim and will vigorously defend against these allegations. An arbitrator
has not yet been selected, and a trial date has not yet been
scheduled.
|
|
|
|
|
|
|
|
No provision has been made in the March 31, 2014
financial statements with respect to this matter, because the Company has
assessed the litigation as having no merit and the likelihood of any
liability pursuant to this litigation to be remote.
|
|
|
|
|
|
|
2.
|
CNC Manufacturing v. All American CNC Sales, Inc.,
Elite Machine Tool Company/Sales & Services, CNC Repos,
Superior Court for the State of California, County of
Riverside, Case No. RIC 509650.
|
|
|
|
|
|
|
|
Plaintiff filed this Complaint on October 2,
2008.
|
|
|
|
|
|
|
|
The Complaint alleges causes of action for breach of
contract and rescission and claims that All American breached the
agreement with CNC Manufacturing by failing to deliver a machine that
conforms to the specifications requested by CNC Manufacturing, and
requests damages totaling $138,750. Elite Machine filed an answer timely,
on January 15, 2009.
|
|
|
|
|
|
|
|
Abstract of Judgment and Writ were issued August 17,
2012.
|
|
|
|
|
|
|
|
A provision has been made in the March 31, 2014 financial
statements in litigation payable with respect to this matter in the sum of $37,500.
|
|
|
|
|
|
|
3.
|
Fadal Machining v. All American CNC Sales, et
al.
, Los Angeles Superior Court, Los Angeles, California, Case
No. BC415693.
|
|
|
|
|
|
|
|
The Complaint was filed on June 12, 2009.
|
|
|
|
|
|
|
|
The Complaint alleges causes of action for breach of
contract and common counts against All American CNC seeking damages in the
amount of at least $163,578.88, and arises from a claim by Fadal that All
American failed to pay amounts due. On June 26, 2009, Fadal amended the
Complaint to include M Line Holdings, Inc. as a Defendant.
|
|
|
|
|
|
|
|
A settlement agreement in the amount of $60,000 was
signed on May 31, 2011.
|
|
|
|
|
|
|
|
The Company has made a provision in the sum of $60,000 in the financial statements in accounts payable as of June 30, 2013 but no payments that are due under the settlement agreement have been made. Judgment was entered on June 16, 2011, and a Writ for collection was issued on February 24, 2012.
|
|
|
|
|
|
|
4.
|
Fox Hills Machining v. CNC Repos
, Orange
County Superior Court, Orange County, California, Case No. 30-2009-
00121514.
|
|
|
|
|
|
|
|
The Complaint was filed on April 14, 2009.
|
|
|
|
|
|
|
|
The Complaint alleges causes of action for Declaratory
Relief, Breach of Contract, Fraud, Common Counts, and Negligent
Misrepresentation, claiming the Defendant failed to pay Fox Hills
Machining for the sale of two machines from Fox Hills to CNC Repos. The
damages sought in the Complaint are estimated to be approximately $40,000.
Court records show that a stipulated judgment was entered on August 27,
2012; a writ was issued on September 9, 2012.
|
|
|
|
|
|
|
|
However, an agreement has been entered into with Fox
Hills Machinery to pay off the judgment in the sum of $48,673. A sum of
$40,000 has been paid in installments of $10,000 each effective November
8, 2013 and the final payment was made on December 9, 2013.
|
|
|
|
|
|
|
5.
|
C. William Kircher Jr. v. M Line Holdings, Inc.
Orange County Superior Court Case No. 00397576
|
|
|
|
|
|
|
|
A former attorney for M Line Holdings, Inc. has sued seeking damages for failure to pay legal fees in the amount of $120,166.
|
-12-
|
|
|
The parties reached a settlement. The terms of the
settlement call for 12 payments of $5,000 per month commencing August 25,
2011 and the issuance of 150,000 shares of common stock. The company has
issued the 150,000 shares of common stock and made two payments to date.
The Company has a provision in the sum of $50,000 in the financial
statements in accounts payable as of March 31, 2014.
|
|
|
|
|
|
|
|
The Company currently is in default of its payment
obligations under the settlement. Plaintiff currently is seeking to obtain
a judgment as a result of the breach of the settlement
agreement.
|
|
|
|
|
|
|
6.
|
Timothy D. Consalvi v. M Line Holdings, Inc.
et.al
., Orange County Superior Court Case No,
00308489.
|
|
|
|
|
|
|
|
A former president of All American CNC Sales, Inc. has
filed suit against the Company seeking payment on an alleged severance
obligation by the Company. The Complaint does not specify the damages
sought. The parties then reached a settlement in the principal sum of
$40,000 to be documented in due course. Meanwhile a default was entered
against the Company, which management believes was in error because a
settlement was already reached by the principal parties involved. The
default has since been vacated, and the Company has answered the complaint
and has filed a motion for leave to file a cross complaint.
|
|
|
|
|
|
|
|
A settlement of $50,000 was reached in this case,
requiring payments commencing on March 11, 2011 for 10 months.
|
|
|
|
|
|
|
|
The first two month’s payments were made; however, the
Company currently is in default of the terms of this settlement agreement.
Mr. Consalvi filed his stipulated judgment on March 5, 2012. Abstract of
judgment and Writ were issued on March 13, 2012.
|
|
|
|
|
|
|
|
A provision in the sum of $40,000 has been made in the
financial statements in litigation payable as of March 31, 2014.
|
|
|
|
|
|
|
|
To date, there has been no further action on this case.
|
|
|
|
|
|
|
7.
|
All Direct Travel Services, Inc. v. Jitu Banker, M
Line holdings, Inc., Airworks International, Inc., case number 30-2011-
00472824-CL-CO-CJC
|
|
|
|
|
|
|
|
This case was settled as to Jitu Banker and the Company
for $2,000 payable on February 25, 2013. We do not yet have sufficient
information to determine what the potential outcome of this may be or
whether or to what extent it would or could have a financial impact on the
Company. A default judgment was entered on January 6, 2012.
|
|
|
|
|
|
|
8.
|
Douglas Technologies Group, Inc. v Elite Machine
Tool Company and Lawrence Consalvi, et al., case number 30-
2013-00657906-CU-FR-CJC
.
|
|
|
|
|
|
|
|
This suit was filed on June 20, 2013 in respect of an
alleged deficiency in the machine supplied to Douglas Technologies. The
Company decided to settle the lawsuit and thereby entered into a
settlement agreement with the customer.
|
This case was settled on November 5,
2013 for $50,000 requiring a commencing payment of $10,000 on November 15, 2013
with the balance being paid in 8 monthly installments of $5,000 each. Payments amounting to of $30,000 were
made during the period ended March 31, 2014.
The balance of the provision in
accounts payable is $20,000 at March 31, 2014.
|
|
9.
|
Donald Yu. v M Line Holdings, Inc., Anthony L Anish
and Jitu Banker, et al., case number 30-2012-005-740-19-CU-
BC-CJC
.
|
|
|
|
|
|
|
|
This suit was filed in respect of consulting services
rendered to the Company. The Company decided to settle the lawsuit and
thereby entered into a settlement agreement with Donald Yu.
|
|
|
|
|
|
|
|
The case was settled on September 25, 2013 for $24,000
requiring two payments of $12,000 each, payable on September 30, 2013 and
October 30, 2013.
|
The Company made the first payment of
$12,000 on September 30, 2013 but has not made the second payment due on October
30, 2013.
A provision in the sum of $12,000 has
been made in the financial statements in accrued expenses as of March 31, 2014.
-13-
|
|
10.
|
Alu Forge, Inc., dba
American Handforge
. v Jitu Banker, Precision Aerospace & Technologies, Inc., and M
Line
Holdings, Inc., et al., case number
30-2013-00670772-CL-BC-CJC
.
|
|
|
|
|
|
|
|
This suit was filed in respect of materials supplied to
the Company. The Company decided to settle the lawsuit and thereby entered
into a settlement agreement with the plaintiff.
|
|
|
|
|
|
|
|
The case was settled on October 31, 2013 for $19,500 with
payments of $5,250 on October 31, 2013, $5,250 on November 30, 2013 and
the balance of $9,000 on December 31, 2013.
|
|
|
|
|
|
|
|
The Company made the first and second payments of $5,250
on October 31, 2013 and December 24, 2013, and the final payment of $9,000
was made on December 31, 2013.
|
|
|
|
|
|
|
|
No provision is necessary as the liability has been
settled in full.
|
|
|
11.
|
Yates, Fontenot, Smith & Brum, LLC v. M
Line Holdings, Inc. (formerly Gateway International Holdings, Inc.), et
al.;
Case No.
30-2013-0063058
6
|
The above-referenced matter is an
unlawful detainer action concerning certain real property located at 2672 Dow
Avenue, Tustin, California. The unlawful detainer action was filed against the
Company by its landlord Yates, Fontenot, et al. on February 15, 2013. The action
is pending in Orange County Superior Court.
On or about September 2013, the
parties settled the action for an agreed upon sum payable in installments
through January 5, 2014. Assuming all payment obligations are made, plaintiff
shall file a request for dismissal with prejudice of the entire action by or
before March 14, 2014.
A provision in the amount of $35,000
has been made in the financial statements, in accounts payable, as of March 31,
2014.
Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. If an unfavorable ruling were to occur in any
of the above matters, there could be a material adverse effect on the Company’s
financial condition, results of operations or liquidity.
The related provisions for these litigations are reported under
litigation payable, accounts payable and accrued expenses and other in the
consolidated balance sheets.
10. Shareholders’ Equity
During the nine months ended March 31, 2014, the Company issued
the following shares of common stock:
-
5,805,130 common shares were issued to financial advisors, consultants and
other parties in payment of fees and services to the Company. The Company
determined the fair value of these shares to be $57,916.
-
16,000,000 common shares were issued to officers in lieu of salaries. The
Company determined the fair value of these shares to be $160,000.
-
45,934,972 common shares were issued in connection with the conversion of
debt and accrued interest of $248,761 to equity
-
8,000,000 common shares issued for subscriptions amounting to $27,200
The authorized common stock of the Company was increased to 500,000,000 shares effective October 15, 2013.
11. Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation
techniques used to measure fair value maximize the use of observable inputs and
minimize the use of unobservable inputs. The Company utilizes a fair value
hierarchy based on three levels of inputs, of which the first two are
considered observable and the last unobservable.
-14-
|
•
|
Level 1 -
|
Quoted prices in active markets for identical assets or
liabilities. These are typically obtained from real-time quotes for
transactions in active exchange markets involving identical assets.
|
|
•
|
Level 2 -
|
Quoted prices for similar assets and liabilities in
active markets; quoted prices included for identical or similar assets and
liabilities that are not active; and model-derived valuations in which all
significant inputs and significant value drivers are observable in active
markets. These are typically obtained from readily-available pricing
sources for comparable instruments.
|
|
•
|
Level 3 -
|
Unobservable inputs, where there is little or no market
activity for the asset or liability. These inputs reflect the reporting
entity’s own beliefs about the assumptions that market participants would
use in pricing the asset or liability, based on the best information
available in the circumstances.
|
The following table presents the derivative financial
instrument, the Company’s only financial liability measured and recorded at fair
value on the Company’s consolidated balance sheets on a recurring basis and
their level of hierarchy as of March 31, 2014:
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Embedded conversion derivative liability
|
$
|
605,987
|
|
$
|
-
|
|
$
|
-
|
|
$
|
605,987
|
|
|
Total
|
$
|
605,987
|
|
$
|
-
|
|
$
|
-
|
|
$
|
605,987
|
|
The following table provides a summary of the changes in fair
value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant
unobservable inputs:
|
Balance at June 30, 2013
|
$
|
-
|
|
|
Fair value of warrant derivative liabilities at issuance,
recorded as debt discount
|
|
544,400
|
|
|
Settlement of derivative liabilities to
additional paid in capital
|
|
(638,511
|
)
|
|
Unrealized derivative loss included in other expense
|
|
700,098
|
|
|
Balance at March 31, 2014
|
$
|
605,987
|
|
The fair value of the derivative liability is calculated at the
time of issuance and the Company records a derivative liability for the
calculated value. Changes in the fair value of the derivative liability are
recorded in other income (expense) in the consolidated statements of operations.
The following are the assumptions used for derivative
instrument valued using the Black Scholes option pricing model:
|
|
|
At Issuance
|
|
|
March 31, 2014
|
|
|
Market value of stock on measurement date
|
$
|
0.01 - 0.03
|
|
$
|
0.01
|
|
|
Risk-free interest rate
|
|
0.07 - 0.35%
|
|
|
0.13 – 0.44%
|
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
|
Volatility factor
|
|
256 - 343%
|
|
|
321 -334%
|
|
|
Term
|
|
0.26 - 2 years
|
|
|
0.84 – 1.9 years
|
|
12. Related Party Transactions
As of March 31, 2014, due from related party of $179,769
represents an amount due from an officer of Elite for funds advanced by the
Company.
-15-
13. Segments and Geographic Information
The Company’s segments consist of individual companies managed
separately with each manager reporting to the Board. “Other” represents
corporate functions. Sales, and operating or segment profit, are reflected net
of inter-segment sales and profits. Segment profit is comprised of net sales
less operating expenses and interest. Income taxes are not allocated and
reported by segment since they are excluded from the measure of segment
performance reviewed by management.
Segment information is as follows for the three and nine months
ended March 31, 2014 and 2013:
|
Segment Information for the three
|
|
Machine
|
|
|
Precision
|
|
|
|
|
|
|
|
|
months ended March 31, 2014
|
|
Sales
|
|
|
Manufacturing
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,580,726
|
|
$
|
838,785
|
|
$
|
-
|
|
$
|
2,419,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
36,342
|
|
|
79,153
|
|
|
441,830
|
|
|
557,325
|
|
|
Depreciation and Amortization
|
|
750
|
|
|
39,244
|
|
|
-
|
|
|
39,994
|
|
|
Income (loss) before taxes
|
|
291,422
|
|
|
(46,896
|
)
|
|
(1,218,239
|
)
|
|
(973,713
|
)
|
|
Total Assets
|
|
1,613,644
|
|
|
2,976,949
|
|
|
30,645
|
|
|
4,621,238
|
|
|
Capital Expenditure
|
$
|
-
|
|
$
|
8,000
|
|
$
|
-
|
|
$
|
8,000
|
|
|
Segment Information for the three
|
|
Machine
|
|
|
Precision
|
|
|
|
|
|
|
|
|
months ended March 31, 2013
|
|
Sales
|
|
|
Manufacturing
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenue
|
$
|
1,431,482
|
|
$
|
888,337
|
|
$
|
-
|
|
$
|
2,319,819
|
|
|
Interest Expense
|
|
-
|
|
|
66,878
|
|
|
44,585
|
|
|
111,463
|
|
|
Depreciation and Amortization
|
|
750
|
|
|
37,091
|
|
|
2,799
|
|
|
40,640
|
|
|
Income (loss) before taxes
|
|
(18,914
|
)
|
|
(418,053
|
)
|
|
(178,466
|
)
|
|
(615,433
|
)
|
|
Total Assets
|
|
780,201
|
|
|
2,675,766
|
|
|
1,270,213
|
|
|
4,726,180
|
|
|
Capital Expenditure
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Segment Information for the nine
|
|
Machine
|
|
|
Precision
|
|
|
|
|
|
|
|
|
months ended March 31, 2014
|
|
Sales
|
|
|
Manufacturing
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
5,787,485
|
|
$
|
2,665,600
|
|
$
|
-
|
|
$
|
8,453,085
|
|
|
Interest Income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Interest Expense
|
|
134,853
|
|
|
193,968
|
|
|
573,846
|
|
|
902,667
|
|
|
Depreciation and Amortization
|
|
1,500
|
|
|
123,747
|
|
|
-
|
|
|
125,247
|
|
|
Income (loss) before taxes
|
|
500,068
|
|
|
511,001
|
|
|
(1,608,156
|
)
|
|
(597,087
|
)
|
|
Total Assets
|
|
1,613,644
|
|
|
2,976,949
|
|
|
30,645
|
|
|
4,621,238
|
|
|
Capital Expenditure
|
$
|
-
|
|
$
|
8,000
|
|
$
|
-
|
|
$
|
8,000
|
|
-16-
|
Segment Information for the nine
|
|
Machine
|
|
|
Precision
|
|
|
|
|
|
|
|
|
months ended March 31, 2013
|
|
Sales
|
|
|
Manufacturing
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
3,891,147
|
|
$
|
2,850,145
|
|
$
|
-
|
|
$
|
6,741,292
|
|
|
Interest Income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Interest Expense
|
|
17,151
|
|
|
199,481
|
|
|
86,296
|
|
|
302,928
|
|
|
Depreciation and Amortization
|
|
2,250
|
|
|
128,790
|
|
|
3,787
|
|
|
134,827
|
|
|
Income (loss) before taxes
|
|
(81,042
|
)
|
|
(806,340
|
)
|
|
(468,033
|
)
|
|
(1,355,415
|
)
|
|
Total Assets
|
|
780,201
|
|
|
2,675,766
|
|
|
1,270,213
|
|
|
4,726,180
|
|
|
Capital Expenditure
|
$
|
-
|
|
$
|
(53,651
|
)
|
$
|
-
|
|
$
|
(53,651
|
)
|
Sales are derived principally from customers located within the
United States.
14. Subsequent Events
In April and part of May 2014, the company issued 70,462,554 shares of common stock to the note holders, disclosed in note 8, in settlement of the debt due to these companies.
Mr. Percy Cerff was appointed to the Board of Directors on April 21, 2014.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
This quarterly report on Form 10-Q of M Line Holdings, Inc.
(referred to herein as “us, “we” or the “Company”) for the nine month period
ended March 31, 2014 contains forward-looking statements, principally in this
section and in the section herein titled “Business.” Generally, you can identify
these statements because they use words like “anticipates,” “believes,”
“expects,” “future,” “intends,” “plans” and similar terms. These statements
reflect only our current expectations. Although we do not make forward-looking
statements unless we believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy, and actual results may differ materially from those we
anticipated due to a number of uncertainties, many of which are unforeseen,
including, among others, the risks we face as described in this filing. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this quarterly report. These forward-looking statements
are within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and are
intended to be covered by the safe harbors created thereby. To the extent that
such statements are not recitations of historical fact, such statements
constitute forward-looking statements that, by definition, involve risks and
uncertainties. In any forward-looking statement where we express an expectation
or belief as to future results or events, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will be
accomplished.
We believe it is important to communicate our expectations to
our investors. There may be events in the future, however, that we are unable to
predict accurately or over which we have no control. The risk factors listed in
our Annual Report on Form 10-K, as well as any cautionary language in our Annual
Report on Form 10-K, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Factors that could cause actual
results or events to differ materially from those anticipated, include but are
not limited to: our ability to successfully develop new products; the ability to
obtain financing for product development; changes in product strategies; general
economic, financial and business conditions; changes in and compliance with
governmental healthcare and other regulations; changes in tax laws; and the
availability of key management and other personnel.
Overview
We currently conduct all of our operations through two of our
two wholly-owned subsidiaries: E..M. Tool Company, Inc. dba Elite Machine Tool
Company (“Elite”) and Precision Aerospace & Technologies, Inc.
(“Precision”), (formerly Eran Engineering, Inc.). Through Elite we refurbish and
sell pre-owned CNC (computer numerically controlled) machine tool equipment and
service and rebuild CNC equipment for customers and Precision is a customer
focused, industry leading aircraft and medical precision metal component
manufacturer offering low cost build-to-print and assembly services for
production and spare parts, with design, development and sustaining engineering
support services for its customers.
-17-
Our services and products are primarily marketed and sold to
the commercial aviation, defense, medical, and energy industries. Currently we
manage the operations of these subsidiaries. In the future we hope to expand our
business, both through the growing of our existing businesses and their client
bases, as well as through acquisitions of companies that complement the products
and services we currently offer.
Machine Sales Group
The Machine Sales Group is currently composed of one
subsidiary, Elite, which is in the business of acquiring refurbishing and
selling computer numerically controlled (“CNC”) machine tools, and providing
service and machine rebuilds, to manufacturing customers.
CNC machines use commands from an onboard computer to control
the movement of cutting tools and the rotation speeds in order to cut precision
metal parts. The computer controls enable the operator to program specific
operations, such as part rotation and tooling selection and movement for a
particular part and then store that program in memory for future use. Because
CNC machines can manufacture parts unattended and operate at speeds faster than
similar manually-operated machines, they can generate higher profits with less
rework and scrap. Elite Machine specializes in selling refurbished Mori Seiki
and other high end Japanese manufactured machine Tools.
Precision Manufacturing Group
The Precision Manufacturing Group is composed of Precision
(formerly Eran Engineering), a wholly-owned subsidiary. Precision is a customer
focused, industry leading aircraft and medical component manufacturer offering
low cost build-to-print and assembly services for production and spare parts,
with design, development and sustaining engineering support services for its
customers. Precision, with an installed base of over forty CNC machines,
manufactures parts and assemblies primarily for the aerospace and medical
industries. Aerospace Customers include Panasonic Avionics Corporation
(“Panasonic”), Rockwell Collins, UTC Aerospace, (formerly Goodrich
Aerostructures), a division of the United Technologies Group and our largest
medical customer, Beckman Coulter (part of the Danaher group).
Trends Affecting Our Business
Although the recent tightening of the capital markets has
eased, customers’ limited access to capital still limits our ability to sell
used CNC machines. Historically, as capital markets tighten, companies that
purchase large machines on credit, such as CNC machines, have more difficulty in
obtaining credit and, therefore, are unable to purchase machines that they may
be able to purchase in better financial times. The credit markets have improved
slightly but may have an impact on our customers’ ability to purchase machines,
which could negatively impact our business.
The primary components sold by our Precision Manufacturing
Group during the nine month period ended March 31, 2014 and 2013 were parts sold
to Panasonic, a leading provider of in-flight entertainment systems for
commercial aircraft. Although the market for in-flight entertainment systems has
improved and is expected to continue to improve over the next two to three
years, business is still inconsistent, and this may affect our business over the
next several months. In addition, if there is a decrease in work, this may have
an impact with the Machine Sales Group, as many of our customers that purchase
machines from us do business with airline manufacturers.
Critical Accounting Policies
Use of Estimates
Our preparation, discussion and analysis of our financial
condition and results of operations are based on our consolidated financial
statements, which are in conformity with and have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting principles
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of sales and expenses during the
reporting period. By their nature, these estimates made by management are, among
others, realization of inventories, collectability of accounts receivable,
litigation, impairment of goodwill and long-lived assets other than goodwill. We
regularly evaluate our estimates and assumptions based on historical experience
and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. To the extent actual results differ from these estimates, our
future results of operations may be affected.
-18-
Inventories
Within our Precision Manufacturing Group, we seek to purchase
and maintain raw materials at sufficient levels to meet lead times based on
forecasted demand. We generally manufacture parts based on purchase orders.
Within our Machine Sales Group, we purchase machines held for resale based on
management’s judgment of current market conditions and demand for both new and
used machines. If forecasted demand exceeds actual demand, we may need to
provide an allowance for excess or obsolete quantities on hand. We also review
our inventories for changes in demand patterns and in the market prices of
machines held in inventory and provide reserves as deemed necessary. If actual
market conditions are less favorable than those projected by management,
additional inventory reserves for CNC machines and parts may be required. We
state our inventories at the lower of cost, using the first-in, first-out method
on an average costs basis, or market.
Abnormal amounts of idle facility expense, freight, handling
costs and wasted materials (spoilage) are recognized as current-period charges.
Fixed production overhead is allocated to the costs of conversion into
inventories based on normal capacity of the production facilities. We utilize an
expected normal level of production within the Precision manufacturing segment,
based on our plant capacity. To the extent we do not achieve normal expected
productions levels, we charge such under-absorption of fixed overhead to
operations.
Results of Operations for the Three Months Ended March 31, 2014
compared to the Three Months Ended March 31, 2013.
|
|
|
For the three
|
|
|
For the three
|
|
|
|
|
|
|
|
months
|
|
|
months
|
|
|
|
|
|
|
|
ended March
|
|
|
ended March
|
|
|
|
|
|
|
|
31,
|
|
|
31,
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by segment:
|
|
|
|
|
|
|
|
|
|
|
Machine Sales
|
$
|
1,580,726
|
|
$
|
1,431,482
|
|
|
149,244
|
|
|
Precision Engineering
|
|
838,785
|
|
|
888,337
|
|
|
(49,552
|
)
|
|
|
|
2,419,511
|
|
|
2,319,819
|
|
|
99,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit by segment:
|
|
|
|
|
|
|
|
|
|
|
Machine Sales
|
|
637,451
|
|
|
239,390
|
|
|
398,061
|
|
|
Precision Engineering
|
|
322,184
|
|
|
119,720
|
|
|
202,464
|
|
|
|
|
959,635
|
|
|
359,110
|
|
|
600,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit by segment: %
|
|
|
|
|
|
|
|
|
|
|
Machine Sales
|
|
66.43
|
|
|
66.66
|
|
|
|
|
|
Precision Engineering
|
|
33.57
|
|
|
33.34
|
|
|
|
|
Sales
Sales in the three month period ended March 31, 2014 increased
4.30% compared to the three month period ended March 31, 2013.
The change is attributable to an increase in sales in the
Machine Sales Group. Sales increased by 10.43% in the Machine Sales Group and
decreased by 5.58% in the Precision Manufacturing Group.
Our Machine Sales Group primarily sells pre-owned CNC machinery
manufactured by Mori Seiki. The average sale price of the machinery changes
based on the equipment that is available to purchase in the market place and the
prevailing market conditions that affect the price that equipment can be sold
for. The average sale price of the 29 pieces of equipment sold in the three
months ended March 31, 2014 was $54,442 compared to the comparable period in
fiscal 2013 of 20 pieces of equipment sold at an average sale price of $69,225.
In addition, service work for the three months ended March 31, 2014 was $8,635
compared to the comparable period in fiscal 2013 of $33,365.
Market conditions reflect not only the price that equipment can
be purchased for but also the price at which that equipment may be sold. During
good economic times when the business climate is improving, particularly in
areas such as aerospace, the demand for
-19-
equipment can result in a change in the purchase price.
However, the need for that equipment by customers is generally reflected in the
sale price. Therefore, as a general rule margins are reasonably consistent even
though average sale prices may change. As a result, we do not expect future
results to be materially impacted by these conditions.
The decrease in sales in the Precision Manufacturing Group is
the result of a net decrease of $49,552 in sales of precision metal component
parts from Goodrich Aerostructures in the three months ended March 31, 2014.
Gross Margin
Gross profit increased by 167.23% in fiscal period ended March
31, 2014 compared to the comparable period in fiscal 2013. The gross profit for
the Machine Sales Group increased by 166.28% due to an increase in the volume of
machines sold during this three month period. The increase within the Precision
Manufacturing Group of 169.11% resulted from lower costs of goods sold as a
result of an improvement in work flow and the scheduling of work in the factory.
Management had recognized this weakness previously and has corrected it, thereby
achieving greater productivity in the production area.
Selling, General & Administrative
Selling, general and administrative costs decreased by $139,005 to $724,055 for the three month period ended March 31, 2014 compared to $863,060 for the three months ended March 31, 2013. The change is due primarily to improved manufacturing efficiencies in the Precision engineering division.
Interest Expense
Interest expense increased by $445,862 for the three months
ended March 31, 2014 compared to the three months ended March 31, 2013. The
change is attributable to the amortization of the debt discount related to new
notes in 2014.
Derivative Gain (Loss)
The derivative loss for the three month period ended March 31,
2014 was $651,968 compared to that of the comparable period in 2013 amounting to
$0. The loss was the result of the new notes in 2014 that qualified as
derivatives.
Results of Operations for the Nine Months Ended March 31, 2014
compared to the Nine Months Ended March 31, 2013.
|
|
|
For the nine
|
|
|
For the nine
|
|
|
|
|
|
|
|
months
|
|
|
months
|
|
|
|
|
|
|
|
ended March
|
|
|
ended March
|
|
|
|
|
|
|
|
31,
|
|
|
31,
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by segment:
|
|
|
|
|
|
|
|
|
|
|
Machine Sales
|
$
|
5,787,485
|
|
$
|
3,891,147
|
|
|
1,896,338
|
|
|
Precision Engineering
|
|
2,665,600
|
|
|
2,850,145
|
|
|
(184,545
|
)
|
|
|
|
8,453,085
|
|
|
6,741,292
|
|
|
1,711,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit by segment:
|
|
|
|
|
|
|
|
|
|
|
Machine Sales
|
|
1,564,034
|
|
|
753,614
|
|
|
810,420
|
|
|
Precision Engineering
|
|
1,316,750
|
|
|
905,223
|
|
|
411,527
|
|
|
|
|
2,880,784
|
|
|
1,658,837
|
|
|
1,221,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit by segment: %
|
|
|
|
|
|
|
|
|
|
|
Machine Sales
|
|
54.29
|
|
|
45.43
|
|
|
|
|
|
Precision Engineering
|
|
45.71
|
|
|
54.57
|
|
|
|
|
-20-
Sales
Sales in the nine month period ended March 31, 2014 increased
25.39% compared to the nine month period ended March 31, 2013.
The change is attributable to an increase in sales in the
Machine Sales Group. Sales increased by 48.73% in the Machine Sales Group and
decreased by 6.47% in the Precision Manufacturing Group.
Our Machine Sales Group primarily sells pre-owned CNC machinery
manufactured by Mori Seiki. The average sale price of the machinery changes
based on the equipment that is available to purchase in the market place and the
prevailing market conditions that affect the price that equipment can be sold
for. The average sale price of the 105 pieces of equipment sold in the nine
months ended March 31, 2014 was $51,373 compared to the comparable period in
fiscal 2013 of 58 pieces of equipment sold at an average sale price of $62,347.
In addition, service work for the nine months ended March 31, 2014 was $232,709
compared to the comparable period in fiscal 2013 of $48,131.
Market conditions reflect not only the price that equipment can
be purchased for but also the price at which that equipment may be sold. During
good economic times when the business climate is improving, particularly in
areas such as aerospace, the demand for equipment can result in a change in the
purchase price. However, the need for that equipment by customers is generally
reflected in the sale price. Therefore, as a general rule margins are reasonably
consistent even though average sale prices may change. As a result, we do not
expect future results to be materially impacted by these conditions.
The decrease in sales in the Precision Manufacturing Group is
the result of a net decrease of $184,545 in sales of precision metal component
parts from Goodrich Aerostructures in the nine months ended March 31, 2014.
Gross Margin
Gross profit increased by 73.66% in fiscal period ended March
31, 2014 compared to the comparable period in fiscal 2013. The gross profit for
the Machine Sales Group increased by 107.54% due to an increase in the volume of
machines sold during this nine month period. The increase within the Precision
Manufacturing Group of 45.46% resulted from lower costs of goods sold as a
result of an improvement in work flow in the scheduling of work in the factory.
Management had recognized this weakness previously and has corrected it, thereby
achieving greater productivity in the production area.
Selling, General & Administrative
Selling, general and administrative costs decreased by $836,218 to $1,875,106 for the nine month period ended March 31, 2014 compared to $2,711,324 for the nine months ended March 31, 2013. The change is primarily due to the write back of the overprovision for rent expense and a reduction of legal and professional expenses due to lower costs for investor relations and financing costs.
Interest Expense
Interest expense increased by $599,739 for the nine months
ended March 31, 2014 compared to the nine months ended March 31, 2013. The
change is attributable to amortization of debt discount related to new notes in
2014 as well as the recognition of amortization of deferred financing fees.
Derivative Gain (Loss)
There was a derivative (loss) of $700,098 for the nine month period ended March 31, 2014 and $0 in the comparable period in 2013. The change is due to the additional notes that qualified as derivatives in 2014.
Liquidity and Capital Resources
Our principal sources of liquidity consist of cash and cash
equivalents, cash generated from operations and borrowing from various sources,
including repayment of debt by the issue of common stock. As of March 31, 2014,
our working capital (current assets less current liabilities) totaled
($3,356,276) compared to $(3,983,660) as of June 30, 2013, a decrease of
$627,384.
As of March 31, 2014 we had $1,641,215 in debt outstanding
under our Accounts Receivable and Inventory line of Credit with TCA Global
Credit Master Fund, LP.
-21-
Our existing sources of liquidity, along with cash expected to
be generated from sales, may not be sufficient to fund our operations,
anticipated capital expenditures, working capital and other financing
requirements for the foreseeable future. If that is the case we may need to seek
to obtain additional debt or equity financing, especially if we experience
downturns or cyclical fluctuations in our business that are more severe or
longer than anticipated, or if we fail to achieve anticipated revenue targets,
or if we experience significant increases in the cost of raw material and
equipment for resale, or lose a significant customer, or experience increases in
our expense levels resulting from being a publicly traded company. If we attempt
to obtain additional debt or equity financing, we cannot assure you that such
financing will be available to us on favorable terms, or at all.
Cash Flows
The following table sets forth our cash flows for the nine
month periods ended March 31, 2014 and 2013.
|
Provided by (used in)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
(284,346
|
)
|
|
73,697
|
|
|
(358,043
|
)
|
|
Investing activities
|
|
(8,000
|
)
|
|
(53,650
|
)
|
|
45,650
|
|
|
Financing activities
|
|
297,189
|
|
|
115,212
|
|
|
181,977
|
|
|
|
|
4,843
|
|
|
135,259
|
|
|
130,416
|
|
Operating Activities
Operating cash flows during the nine month periods ended March
31, 2014 and 2013, respectively, reflect our results of operations, offset by
net cash provided by operating assets and liabilities and non-cash items
(depreciation, amortization and stock-based compensation). During the nine month
period ended March 31, 2014, non-cash expenses included in our net income and in
operating activities totaled $1,636,070 compared to $515,578 in the nine month
period ended March 31, 2013.
The increase (decrease) in operating assets and liabilities for
the nine month period ended March 31, 2014 and 2013 were $(1,321,635) and
$915,610, respectively. During the nine month period ended March31, 2014, the
decrease was primarily attributable to an increase in accounts receivable, and
inventory.
Investing Activities
We made capital expenditures of $8,000 and $(53,650) during the
nine month period of the fiscal 2014 and 2013 period, respectively.
Financing Activities
Net cash provided by financing activities was $297,189 for the
nine months ended March 31, 2014, compared to $115,212 for the nine months ended
March 31, 2013.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
