10-Q 1 v335141_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2012

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

For the transition period from _______________ to _______________.

Commission File Number 0-32341

M LINE HOLDINGS, INC.

(Exact Name of Company as Specified in its Charter)

Nevada

(State or other jurisdiction of

incorporation or organization)

88-0375818

(I.R.S. Employer

Identification No.)

2672 Dow Avenue

Tustin, CA

(Address of principal executive offices)

92780

(Zip Code)

(714) 630-6253

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company x
(Do not check if a smaller reporting company)

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

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨.

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of February 18, 2013, there were 60,196,145 shares of common stock, par value $0.001, issued and outstanding.

M LINE HOLDINGS, INC.

TABLE OF CONTENTS

PART I		Page

Item 1.	Unaudited Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	21

item 4.	Controls and Procedures.	22

PART II

Item 1.	Legal Proceedings.	22

Item 1A.	Risk Factors.	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25

Item 3.	Defaults Upon Senior Securities.	26

Item 4.	Mine Safety Disclosures.	26

Item 5.	Other Information.	26

Item 6.	Exhibits.	26

	Signatures	28

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

PART 1-FINANCIAL INFORMATION

Reference in this document to “us”,”we” or the “Company” refer to M LINE HOLDINGS, INC. and our subsidiaries E.M. Tool Company, Inc. and Eran Engineering, Inc.

Item 1. Financial Statements

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	As of December 31,			As of June 30,
	2012			2012
Assets
Current assets:
Cash and cash equivalents	$	160,605		$	5,212
Accounts receivable, net		436,692			794,317
Inventory, net		1,710,308			1,609,411
Due from related party		1,279,239			1,262,615
Prepaid expenses and other current assets		942			-
Total current assets		3,587,786			3,671,555

Property and equipment, net		502,513			543,050
Deposits and other		109,621			82,806
Total assets	$	4,199,920		$	4,297,411

Liabilities and shareholders' equity
Current liabilities:
Line of credit	$	749,144			1,083,879
Accounts payable		1,261,995			996,861
Accrued expenses and other		1,435,395			1,314,065
Notes payable - current		494,919			597,261
Capital Leases - current		33,648			71,559
Litigation payable		185,634			116,541
Total Current Liabilities		4,160,734			4,180,166

Notes payable - long term		380,797			19,749
Deferred income taxes		16,711			16,710
Total liabilities		4,558,242			4,216,625

Commitments and contingencies		-			-

Shareholders' equity
Common stock: $0.001 par, 100,000,000 shares authorized, 60,196,145 and 46,871,145 shares issued and outstanding at December 31, 2012 and June 30, 2012, respectively		60,199			46,871
Additional paid in capital		10,467,696			10,179,021
Related party receivable on issuance of shares		(94,000	)		(94,000	)
Accumulated deficit		(10,792,217	)		(10,051,106	)
Total shareholders' equity/(deficit)		(358,322	)		80,786
Total liabilities and shareholders' equity	$	4,199,920		$	4,297,411

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

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three months ended December 31,						Six months ended December 31,
	2012			2011			2012			2011

Net sales	$	2,440,883		$	2,795,591		$	4,421,473		$	5,205,484
Cost of sales		1,853,075			1,950,183			3,121,746			3,605,728
Gross profit		587,808			845,408			1,299,727			1,599,756
		0			0
Operating expenses:
Selling, general and administrative		895,497			647,820			1,848,264			1,311,086
Amortization of intangible assets		-			13,764			-			31,952
Total operating expense		895,497			661,584			1,848,264			1,343,038

Operating profit (loss)		(307,689	)		183,824			(548,537	)		256,718

Other income (expense):
Interest expense		(92,375	)		(45,836	)		(191,465	)		(94,400	)
Interest income		-			16,553			-			29,151
Gain (loss) on debt settlement		-			-			-			85,184
Loss on sale of assets		-			(2,507	)		-			(2,507	)
Total other income (expense)		(92,375	)		(31,790	)		(191,465	)		17,428
Income (loss) before income tax		(400,064	)		152,034			(740,002	)		274,146

Income tax		(61	)		-			(2,087	)		(2,400	)
Net income (loss)	$	(400,125	)	$	152,034		$	(742,089	)	$	271,746

Net income (loss) per share:
Basic and dilutive income (loss) per share:	$	(0.01	)	$	0.00		$	(0.01	)	$	0.01
Weighted average number of common shares (basic and diluted) *		57,731,879			46,608,345			56,325,357			48,934,432

* Weighted average number of shares used to compute basic and diluted loss per share is the same as the effect of potential dilutive securities is anti-dilutive.

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

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Six months ended December 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(742,089	)	$	271,746
Reconciliation of net loss to net cash provided by operations:
Imputed interest		-			(29,151	)
Bad debt expense		-			(65,947	)
Depreciation		94,187			116,379
Amortization of intangible assets		-			31,952
Issuance of shares for services		172,000			368,750
Gain on debt settlement		-			(85,184	)
Reserve for inventories		-			50,099
Change in derivative liabilities		-			-
Changes in operating assets and liabilities:
Accounts receivable		357,625			355,439
Inventory		(100,897	)		(781,991	)
Prepaid expenses and other assets		(27,757	)		11,994
Due from related party		(16,624	)		(371,887	)
Accounts payable, accrued expenses and other		517,446			314,963
Litigation payable		69,093			(283,721	)
Deferred rent		-			-
Cash provided by operating activities		322,984			(96,559	)
Cash used in operating activities of discontinued operations		-			-
Net cash provided by/(used in) operating activities		322,984			(96,559	)

Cash flows from investing activities:
Acquisition of property and equipment		(53,651	)		-

Cash flows from financing activities:
Net borrowings (repayments) on line of credit		(334,735	)		(6,663	)
Proceeds from notes payable		519,835			75,000
Payments to notes payable		(261,129	)		-
Payments on capital leases		(37,911	)		(79,277	)
Net cash used in financing activities		(113,940	)		(10,940	)

Net increase (decrease) in cash and cash equivalent		155,393			(107,499	)

Cash and cash equivalents at beginning of period		5,212			221,036
Cash and cash equivalents at end of period	$	160,605		$	113,537

Supplemental disclosure of cash flow information:
Cash paid for interest	$	191,465		$	94,400
Cash paid for income taxes	$	-		$	-

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

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Business

M. Line Holdings, Inc. (the “Company”) was incorporated in Nevada on September 24, 1997, under the name Gourmet Gifts, Inc. (“Gourmet Gifts”). On January 28, 2002, the Company’s name was changed to Gateway International Holdings, Inc. and on February 19, 2009, the Company changed its name to its current name.

The Company and its subsidiaries currently are engaged in the following businesses, which also, represent its business segments:

Acquiring, refurbishing and selling new and used CNC machine-tool equipment (Machine Sales Group).

Manufacturing precision metal component parts for the defense, automotive, aerospace and medical industries through its Eran Engineering, Inc. (“Eran”) subsidiary (Precision Manufacturing Group).

Accounting Policies

Accounting Principles

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, 2012 filed with the U.S. Securities and Exchange Commission (the “Commission”) on October 15, 2012.

Principles of Consolidation

The financial statements include the accounts of M Line Holdings, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include collectability of accounts receivable, sales returns, and recoverability of long-term assets.

Recent Accounting Pronouncements

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portions of this guidance.

In September 2011 the FASB issued guidance on intangibles, goodwill and others and the testing of goodwill for impairment. Effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

In September 2011 the FASB issued guidance on compensation, retirement benefits on a multiemployer plan. This guidance relates to disclosures about an employer’s participation in a multi-employee plan. For public entities, effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented.

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In December 2011 the FASB issued guidance on Property, Plant, and Equipment and the De-recognition of in Substance Real Estate—a Scope Clarification. The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities.

In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013.

Inventories

Inventories consisted of the following:

	December 31, 2012		June 30, 2012
Finished Goods and Components	$	1,003,162	$	1,157,918
CNC Machines held for sale		115,000		116,000
Work in Progress		509,738		387,969
Raw Materials and Parts		82,408		5,632
		1,710,308		1,667,519
Less: Reserve for inventories		-		(58,108	)
Inventories, net.	$	1,710,308	$	1,609,411

Accrued Expenses

	December 31, 2012		June 30, 2012
Compensation and related benefits	$	1,044,658	$	993,077
Audit Fees		20,000		77,500
Other		370,737		243,488
	$	1,435,395	$	1,314,065

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 December 31, 2012 and June 30, 2012.

	December 31, 2012		June 30, 2012
2012	$33,648		$71,558
2013	-		-
2014	-		-
2015	-		-
2016	-		-
Total minimum lease payments		33,648		71,558
Less amount representing interest		-		-
Present value of future minimum lease payments		33,648		71,558
Less current portion of capital lease obligations		33,648		71,558
Capital Lease obligations, net of current portion	$	-	$	-

Line of Credit

As of December 31, 2012, the Company owed Pacific Western Bank $0. On October 18, 2012 The Company paid off the amount due to Pacific Western Bank in full, and as a result all outstanding legal disputes between the parties were settled.

Notes Payable

Notes payable consisted of the following at December 31, 2012 and June 30, 2012:


	December 31, 2012		June 30, 2012
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.	$	484,834	$	253,129

An unsecured note payable to a corporation in respect of accounting software payable in monthly installments of $ 1,922.82. This note is now due and payable and is being negotiated with the Company.		46,812		46,811

An unsecured note payable to a corporation in respect of machines sold to us payable in monthly installments of $5,000.00 per month. . This agreement will expire in June 2012		9,070		17,070


Two unsecured notes payable in the sum of $150,000.00, 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 commencing February 2013.		300,000		300,000

A note payable to an individual for the sale of a machine in monthly installments of $5,000 each.		35,000		-

TOTAL		875,716		617,010
Less Current Portion		494,919		597,261
Long Term Portion	$	380,797	$	19,749

2013		494,919		597,261
2014		143,538		19,749
2015		123,788		-
2016		113,471		-
Thereafter		-		-
		875,716		617,010

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Interest expense on notes payable and capital leases for the six months ended December 31, 2012 and December 31, 2011 were $191,465 and $94,400 respectively.

Commitments

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

2012	$	438,217
2013		451,361
2014		464,900
2015		478,848
Thereafter		493,221
	$	2,326,547

Contingencies & Litigation Payable

An unsecured note payable to a corporation in settlement of a lawsuit payable in full by December 31, 2012			48,316

An unsecured note payable to a corporation in settlement of a lawsuit payable in 12 monthly payments of $5,000.			60,000

The settlement of a lawsuit by a former officer and director of the company, payable in monthly payments of $5,000, which is unpaid at December 31, 2012.			40,000

An unsecured note payable to a corporation in settlement of a lawsuit which is unpaid at December 31, 2012			37,318

TOTAL			185,634

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10.

Litigation:

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

Our client was 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. 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 December 31, 2012 financial statements as the Company assessed the litigation has no merit and the likelihood of any liability is extremely low.

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.

Abstract of Judgment and Writ were issued August 17, 2012.

No provision has been made in the December 31, 2012 as the Company does not believe the liability is specific to the current subsidiaries of the Company.

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

The Complaint was filed on June 8, 2009.

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

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

MLH has entered into a revised settlement agreement in the total amount of $105,000 with $70,000 being paid out of proceeds of an anticipated new loan and the balance being paid at the rate of $5,000 per month commencing December 15, 2012 reducing by $10,000 if paid in full by December 15, 2012.

Payments due under this settlement agreement have not been made as stipulated and management plans to renegotiate a final pay-off in March.

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 executed on May 31, 2011.

To date, MLH has not made payments that are due under the settlement agreement. Judgment was entered on June 16, 2011 and a Writ was issued on February 24, 2012.

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

The Complaint was filed on April 14, 2009.

The Complaint alleges causes of action for Declaratory Relief, Breach of Contract, Fraud, Common Counts, and Negligent Misrepresentation, claiming the Defendant failed to pay Fox Hills Machining for the sale of two machines from Fox Hills to CNC Repos. The damages sought in the Complaint are estimated to be approximately $30,000. The Court records show the case was dismissed on July 31, 2012. Further, the records show that a stipulated judgment was entered August 27, 2012; Writ was issued on September 9, 2012.

A provision of $10,000 has been made in the June 30, 2012 financial statements.

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 $120,166.30.

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.

MLH is currently in default of its payment obligations under the settlement. Plaintiff is currently seeking to obtain a judgment as a result of the breach of the settlement agreement.

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

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

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On July 12, 2012 a Writ was issued and on September 24, 2012 an Abstract of Judgment was issued. Subsequently, MLH has paid the bank and the case has been concluded.

Neal Kohlhaas v. M Line Holdings, INC. Orange County Superior Court Case No. 30-2011-00442075.

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

This case has been settled and the court docket shows that this case was dismissed in October of 2012.

Timothy D. Consalvi v. M Line Holdings, Inc. et.al., Orange County Superior Court Case No, 00308489.

A former president of All American CNC Sales, Inc. has filed suit against the Company seeking payment on an alleged severance obligation by the Company. The Complaint does not specify the damages sought. The parties then reached a settlement in the principal sum of $40,000 to be documented in due course. Meanwhile a default was entered against MLH, which management believes was in error because a settlement was already reached by the principal parties involved. The default has since been vacated and Company has answered the complaint and has filed a motion for leave to file a cross complaint.

Recently a settlement of $50,000 has been reached in this case, requiring payments commencing on March 11, 2011 for ten months. The first two month’s payment have been made however the Company is currently in default of the terms of this settlement agreement. Mr. Consalvi has filed his stipulated judgment on March 5, 2012. Abstract of judgment and Writ were issued on March 13, 2012..

To date there has been no further action on this case and the Company plans to resolve this matter as soon as possible.

10.

Joe Gledhill v. M Line Holdings, Inc., et. al.- Orange County Superior Court Case No. 30-2011-00506723

Joseph Gledhill, a former officer and director of the company and its subsidiary Eran Engineering has filed suit within the Pacific Western case seeking indemnity of the Pacific Western claim and various other causes of action. Management has decided to vigorously defend these claims and believes Mr. Gledhill’s suit has no merit. Trial has been set for April 8, 2013.

This case has now been dismissed.

11.

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

M Line has recently filed suit against two of its former directors alleging that they breached their fiduciary duty to the company by mismanaging the corporate affairs of the company and its subsidiaries resulting in damages to the company and its subsidiaries. Defendants have not yet been served or have not answered the complaint at this time.

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

This case Has been dismissed with prejudice.

122.

All Direct Travel Services, Inc. Vs Jitu Banker, M Line holdings, Inc., Airworks International, Inc., case number 30-2011-00472824-CL-CO-CJC

It has been settled as to Jitu and M Line for $2,000 payable on 25 February. We do not yet have sufficient information to render an opinion on potential outcome of this matter or the financial impact on the company.

Default Judgment entered on January 6, 2012.

11.

Income Taxes

Our effective tax rates were approximately 1% for the three months ended December 31, 2012 and 2011, respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to differences between financial and income tax basis amounts and the fact that we currently record a valuation allowance against our deferred tax assets.

12.

Common Stock

Common Stock

The Company’s articles of incorporation authorize 100,000,000 shares of common stock $0.001 par value per share. The Company’s articles of incorporation also authorize 10,000,000 shares of preferred stock $0.001 per share. Shares of preferred may be issued in one or more series and designations as may be authorized by the Board of Directors from time to time. The Company had no shares of preferred stock issued and outstanding as of December 31, 2012.

During the six months ended December 31, 2012, the Company issued the following shares of common stock:

The Company issued 7,825,000 shares of the Company's common stock to our investor relations and other consultants in payment of services to the Company. The Company valued the shares at the market price on the issuance date in the sum of $172,000.

The Company issued 5,500,000 shares of the Company's common stock in lieu of salaries due on behalf of related parties. These shares were valued at $130,000 being the market price on the issuance date.

13.

Related Party Transactions

As of December 31, 2012 and 2011 we had an amount due from a related party, a shareholder of the Company, in the amount of $1,279,239 and $1,262,615 respectively which is expected to be repaid to the Company within the next fiscal year. The Company advanced funds and paid various general expenses incurred by the related party during the course of business. These amounts are fully secured by the related party's assets. Interest was imputed at 6% per annum.

	December 31, 2012		June 30, 2012

Due from related party	$	1,279,239	$	1,262,615

14.

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 for the three month period ended December 31, 2012	Machine Sales		Precision Manufacturing			Corporate			Total

Revenue	$	1,557,598	$	883,285		$	-		$	2,440,883
Interest Income		-		-			-			0
Interest Expense		-		60,789			31,586			92,375
Depreciation and Amortization		750		42,172			545			43,467
Income (loss) before taxes		51,706		(387,777	)		(63,994	)		(400,064	)
Total Assets		409,214		2,543,267			1,247,439			4,199,920
Capital Expenditure	$	-	$	-		$	-		$	-

Segment Information for the three month period ended December 31, 2011	Machine Sales		Precision Manufacturing			Corporate		Total

Revenue	$	1,867,885	$	927,706		$	-	$	2,795,591
Interest Income		-		-			16,553		16,553
Interest Expense		4,482		37,488			3,866		45,836
Depreciation and Amortization		14,514		51,084			6,355		71,953
Income (loss) before taxes		118,410		(102,463	)		136,087		152,034
Total Assets		262,854		2,954,163			1,207,095		4,424,112
Capital Expenditure	$	-	$	-		$	-	$	-

M LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Segment Information for the six month period ended December 31, 2012	Machine Sales			Precision Manufacturing			Corporate			Total

Revenue	$	2,459,665		$	1,961,808		$	-		$	4,421,473
Interest Income		-			-			-			0
Interest Expense		17,151			132,603			41,711			191,465
Depreciation and Amortization		1,500			91,699			988			94,187
Income (loss) before taxes		(62,128	)		(388,288	)		(289,585	)		(740,002	)
Total Assets		409,214			2,543,267			1,247,439			4,199,920
Capital Expenditure	$	-		$	-		$	-		$	-


Segment Information for the six month period ended December 31, 2011		Machine Sales			Precision Manufacturing			Corporate			Total
Revenue	$	2,861,155		$	2,344,329		$	-		$	5,205,484
Interest Income		-			-			29,151			29,151
Interest Expense		4,482			74,676			15,242			94,400
Depreciation and Amortization		33,452			102,168			12,711			148,331
Income (loss) before taxes		(87,922	)		191,298			168,370			271,146
Total Assets		262,854			2,954,163			1,207,095			4,424,112
Capital Expenditure	$	-		$	-		$	-		$	-

15.

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 $10,792,217 as of December 31, 2012 and a net loss of $742,089 for the six month period ended December 31, 2012.

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.

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. The Company has pursued various sources of asset based lending in order to relieve its cash flow deficiencies.

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 “we,” or the “Company”) for the three month period ended December 31, 2012, contains forward-looking statements, principally in this Section and n the section herein entitled “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

Our business consists of two segments, our Machine Sales Group and our Precision Manufacturing Group.

Our Machine Sales Group is in the business of acquiring and selling computer numerically controlled (“CNC”) machines, and related tools, to manufacturing customers. We specialize in the purchase, refurbishment and sales of used CNC machines. We also serve as a manufacturer sales representative firm selling new CNC machines that we purchase from third party manufacturers into certain geographic territories.

Our Precision Manufacturing Group is a manufacturer of precision components used in equipment and machinery in the commercial aviation, medical, defense and other industries. Sales within this segment are highly concentrated with one customer, Panasonic Avionics Corporation (“Panasonic”). The loss of all or a substantial portion of sales to this customer would cause us to lose a substantial portion of our sales within this segment and on a consolidated basis, and would have a corresponding negative impact on our operating profit margin due to the operating leverage this customer provides. This could lead to sales volumes not being high enough to cover our current cost structure or to provide adequate operating cash flows. Panasonic has been a customer of ours for approximately 19 years and we believe our relationship is good.

The Company added and upgraded its manufacturing base from mainly aircraft interiors to a combination that includes aircraft structures. The Company incurred considerable startup costs relating to development and staff training, downtime in manufacturing and other costs, including newer materials, such as titanium, hard steels, etc. and overhead.

Management entered into agreements with engineering services companies, in Canada and in India, upgraded the Company’s software and purchased new software, such as Catia. Our commitment to excellence and the new direction to make the Company an “Aerospace” Company has helped us develop and solidify our business with United Technologies Aerospace Sytems formerly Rohr, Inc., and its subsidiary Goodrich Aerostructures. We had, but did overcome the considerable problems with production, which resulted from a staff knowledge limitation, the requirement for additional training, engineering staff contracts, and so on.

All costs relating to this development have been expensed under Research and Development costs in our financial statements for the fiscal year ended June 30, 2012.

Trends Affecting Our Business

Although the recent tightening of the capital markets has eased customers’ limited access to capital still hurt our ability to sell used CNC machines. Historically, as capital markets tighten, companies that purchase large machines on credit, such as CNC machines, have more difficulty in obtaining credit and, therefore, are unable to purchase machines that they may be able to purchase in better financial times. 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 six month period ended December 31, 2012 and, 2011, 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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of sales and expenses during the reporting period. Significant estimates made by management are, among others, realization of inventories, collectability of accounts receivable, litigation, impairment of goodwill, and long-lived assets other than goodwill. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from these estimates; our future results of operations may be affected.

Inventories

Within our Precision Manufacturing 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 indemand 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.

Results of Operations for the Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011.

	For the three month period ended December 31,		For the three month period ended December 31,
	2012		2011		Change

Sales by segment:
Machine Sales	$	1,557,598	$	1,867,885		(310,287	)
Precision Engineering		883,285		927,706		(44,421	)
		2,440,883		2,795,591		(354,708	)

Gross Profit by segment:
Machine Sales		348,335		431,492		(83,157	)
Precision Engineering		239,473		413,916		(174,443	)
		587,808		845,408		(257,600	)

Sales

Sales in the three month period ended December 31, 2012, decreased 13% compared to the three month period ended December 31, 2011.

The change is attributable to a decrease in sales in both the Machine Sales group and the Precision Manufacturing Group. Sales decreased by 17% in the Machine Sales Group and decreased by 5% 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 22 pieces of equipment sold in the three months ended December 31, 2012 was $65,045 compared to the comparable period in fiscal 2012 of 27 pieces of equipment sold at an average sale price of $68,770. In addition service work for the three months ended December 31, 2012 was $3,676 compared to the comparable period in fiscal 2012 of $0.

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 decrease of $44,421 in sales of precision metal component parts from our major customer, Panasonic Avionics in the three months ended December 31, 2012, to $285,077 from $484,488 in fiscal 2012, offset in sales from our new customer Goodrich Aerostructures and increases from our other customers. Furthermore new customer sales resulted in an increase of $60,564 during the three months ended December 31, 2012 as compared to $0 for new customers in the comparable period in fiscal 2012.

Our Precision Manufacturing Group has approached a new major customer. We have upgraded our manufacturing operations from primarily interiors work to a combination of interior and structures and therefore were and are able to quote for work with major new customers. We have manufactured parts for the aircraft structure segment and this move helped us obtain new customers and thus contribute to an increase in sales and profitability of the Precision Manufacturing Group. The addition of this and other new customers should result in a positive effect on the future results of the Company.

We anticipate that as a result of an increase in activity in the aerospace industry, we will continue to grow the revenues of both the Machine Sales Group and the Precision Manufacturing Group.

Gross Margin

Gross profit decreased by 30% in fiscal period ended December 31, 2012 compared to the comparable period in fiscal 2012. The gross profit for the Machine Sales Group decreased by 19% due to a decrease in margins as a result of lower prices received for product sold and higher freight costs. The decrease within the Precision Manufacturing Group of 42% resulted from lower sales as a result of a weakness in the scheduling of work in the factory. Management has recognized this weakness and is taking steps to correct the relevant weakness in the production area.

Selling, General & Administrative

Selling, general and administrative costs increased by $247,678 to $895,498 for the fiscal period ended December 31, 2012 compared to $647,820 for the three months ended December 31, 2011. The change is due primarily to incurring approximately $118,837 in costs in the current quarter for consulting and financing fees for investor relations, public relations and loan fees and bad debt recovery $69,258.

Amortization of Intangible Assets

Amortization expense for intangible assets for the three months ended December 31, 2012 was $0 compared to $13,764 in the comparable period in fiscal 2012. There was no charge for amortization for the three months ended December 31, 2012 as the intangible asset had been fully amortized.

Interest Expense

Interest expense increased by $46,539 for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The change is attributable to a higher usage of our credit line for accounts receivable finance and interest payable on a new inventory line of credit.

Gain on Debt Settlement

There was no gain or loss for debt settlement during the three month periods ended December 31, 2012 and 2011.

Interest Income

During the three month period ended December 31, 2012, there was no interest income as compared to the three month period ended December 31, 2011 in which there was interest income in the amount of $16,553.

Results of Operations for the Six Months Ended December 31, 2012 compared to the Six Months Ended December 31, 2011.

	For the six month period ended December 31,		For the six month period ended December 31,
	2012		2011		Change

Sales by segment:
Machine Sales	$	2,459,665	$	2,861,155		(401,490	)
Precision Engineering		1,961,808		2,344,329		(382,521	)
		4,421,473		5,205,484		(784,011	)

Gross Profit by segment:
Machine Sales		514,225		513,001		1,224
Precision Engineering		785,502		1,086,755		(301,253	)
		1,299,727		1,599,756		(300,029	)

Sales

Sales in the six month period ended December 31, 2012 decreased 15% compared to the Six month period ended December 31, 2011.

The change is attributable to a decrease in sales in the Machine Sales and Precision Manufacturing Group. Sales decreased by 14% in the Machine Sales Group and a decrease of 16% 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 38 pieces of equipment sold in the six months ended December 31, 2012 was $58,728 compared to the comparable period in fiscal 2012 of 41 pieces of equipment sold at an average sale price of $65,778. In addition service work for the six months ended December 31, 2012 was $14,766 compared to the comparable period in fiscal 2012 of $149467.

The decrease in sales in the Precision Manufacturing Group is the result of a decrease of $707,454 in sales of precision metal component parts from our major customer, Panasonic Avionics in the six months ended December 31, 2012, to $736,541 from $1,443,995 in fiscal 2012, offset in sales from our new customer Goodrich Aerostructures and increases from our other customers. Furthermore new customer sales resulted in an increase of $141,423 during the six months ended December 31, 2012 as compared to $0 for new customers in the six month period ended December 31, 2011.

Our Precision Manufacturing Group approached a new major customer and as result we have upgraded our manufacturing operations from primarily interiors work to a combination of interior and structures and therefore were and are able to quote for work with major new customers. We have manufactured parts for the aircraft structure segment and this move helped us obtain new customers and thus contribute to an increase in sales and profitability of the Precision Manufacturing Group. The addition of this and other new customers should result in a positive effect on the future results of the Company.

We anticipate that as a result of an increase in activity in the aerospace industry, we will continue to grow the revenues of both the Machine Sales Group and the Precision Manufacturing Group.

Gross Margin

Gross profit decreased by 19% in fiscal period ended December 31, 2012 compared to the comparable period in fiscal 2012. The gross profit for the Machine Sales Group was almost the same as that in the prior period, Margins were lower during the current period due to lower prices obtained for machines sold as compared to that in the prior period and higher freight costs. The decrease within the Precision Manufacturing Group of 28% resulted from lower sales as a result of a weakness in the scheduling of work in the factory. Management has recognized this weakness and is taking steps to correct the relevant weakness in the production area.

Selling, General & Administrative

Selling, general and administrative costs increased by $537,179 to $1,848,265 for the fiscal period ended December 31, 2012 compared to $1,311,086 for the six months ended December 31, 2011. The change is due primarily to incurring approximately $115,337 in costs in the current quarter for consulting and financing fees for investor relations, public relations and loan fees, $103,838 in salaries, and increases in selling, general and administrative costs not allocated to cost of goods sold in the current six month period.

Amortization of Intangible Assets

Amortization expense for intangible assets for the six months ended December 31, 2012 was $0 compared to $31,952 in the comparable period in fiscal 2012. There was no charge for amortization for the six months ended December 31, 2012 as the intangible asset had been fully amortized.

Interest Expense

Interest expense increased by $97,065 for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. The change is attributable to a higher usage of our credit line for accounts receivable finance and interest payable on a new inventory line of credit.

Gain on Debt Settlement

During the six month period ended December 31, 2012, the gain on debt settlements was $0 compared to $85,184 during the six month period ended December 31, 2011. The Company negotiated various settlements of debts due by the Company, which resulted in a net gain in the sum of $85,184 for the six month period ended December 31, 2011.

Interest Income

During the six month period ended December 31, 2012, there was no interest income as compared to the six month period ended December 31, 2011 in which there was interest income in the amount of $29,151.

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 Main Credit, our accounts receivable lender. As of December 31, 2012, our working capital (current assets less current liabilities) totaled $572,948 compared to $548,002 as of December 31, 2011, an increase of $24,946

Main Credit provides a $750,000 accounts receivable line of credit with advances up to 80% of the outstanding receivables of Eran Engineering, Inc. This finance bears loan interest at the lender's rate at 2% per month with the loan being paid on a revolving basis when our customers make their payments against their outstanding receivable balances.

The total of repayments during the three month period ended December 31, 2012 was $1,240,697 and represented payments received from customers of Eran Engineering, Inc. Borrowings totaled $1,005,364 for this period and represented cash borrowed from Main Credit on our line of credit with them including interest costs.

In addition, Main Credit has provided a line of credit in the sum of $250,000 against inventory. This finance bears loan interest at lender’s rate at 2% per month.

Cash Flows

The following table sets forth our cash flows for the six month period ended December 31, 2012:

Provided by (used in)	2012		2011		Change

Operating activities	322,984		(96,559	)	(419,543	)
Investing activities	(53,651	)	-		53,651
Financing activities	(113,940	)	(10,940	)	102,999
	155,393		(107,499	)	(262,893	)

Operating Activities

Operating cash flows during the six month periods ended December 31, 2012 and 2011 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 six month period ended December 31, 2012, non-cash expenses included in our net income and in operating activities totaled $266,187 compared to $386,898 in the six month period ended December 31, 2011.

The increase (decrease) in operating assets and liabilities for the six month periods ended December 31, 2012 and 2011 respectively were $798,894 and $(755,203), respectively. During the six month period ended December 31, 2012, the increase was primarily attributable to an increase in accounts receivable, accounts payable and accrued expenses and in litigation payable.

Investing Activities

We made capital expenditures of $(53,651) and $0 during the six month periods ended December 31, 2012 and 2011 respectively.

Financing Activities

During the six month periods ended December 31, 2012 and 2011 respectively our borrowings reduced by (net of repayments) $(113,940) and reduced our borrowings (net of repayments) by $(10,940), respectively.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company we are not required to provide the information required by this Item. However, we opted to include the following information.

The only financial instruments we hold are cash and cash equivalents. Changes in market interest rates will impact our interest costs.

We currently are billed by the majority of our vendors in U.S. dollars and we currently bill the majority of our customers in U.S. dollars. However, our financial results could be affected by factors such as changes in foreign currency rates or changes in economic conditions.

Item 4. Controls and Procedures.

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 December 31, 2012, 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 officerand 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 December 31, 2012, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in this Item.

Changes in Internal Control over Financial Reporting

There have been no changes to our internal control over financial reporting during our most recently completed during our quarterly period ended December 31, 2012.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.