UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-K

For the fiscal year ended June 30, 2013

OR

For the transition period from_____________ to _____________.

Commission file number 000-53265

M LINE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Common Stock, par value $0.001

(Title of class)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

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

Aggregate market value of the voting stock held by non-affiliates: $595,594 as based on last reported sales price of such stock.  The voting stock held by non-affiliates on that date consisted of 29,779,701 shares of common stock.

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of December 18, 2013, there were 75,306,275 of common stock, par value $0.001, issued and outstanding.

Documents Incorporated by Reference

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

M Line Holdings, Inc.

TABLE OF CONTENTS

PART I

Explanatory Note

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

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

ITEM 1 – BUSINESS

Corporate History

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

Acquisition of Elite Machine and Reverse Acquisition Accounting

On December 11, 2001, we finalized an agreement to acquire 100% of the issued and outstanding capital stock of E.M. Tool Co., Inc. dba Elite Machine Tool (“Elite Machine”) . Immediately prior to the merger, we had 100,000,000 shares authorized, of which 6,768,000 shares were outstanding. Pursuant to the merger, all of the outstanding shares of Elite Machine, aggregating 21,262 shares, were exchanged for shares of our common stock on a 1 to 1,274 basis or into 27,072,000 (net of 600,000 shares subsequently cancelled) shares of our common stock leaving a total of 33,240,000 shares of common stock issued and outstanding after the merger. Immediately after the merger, our previous officers and directors resigned and the executive officers and directors of Elite Machine were elected and appointed to such positions, thereby effecting a change of control.

Due to the change in voting control and change in senior management in Gateway as a result of the merger, the transaction was recorded as a “reverse-merger” whereby Elite Machine was considered to be the acquirer for accounting purposes. At the closing of the reverse merger, Elite Machine became our wholly-owned subsidiary and we changed our corporate name to Gateway International Holdings, Inc., effective January 28, 2002.

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

After the merger, through Elite Machine, we were a company engaged in the acquisition, refurbishment, distribution and sales of pre-owned computer numerically controlled (“CNC”) machine tools to manufacturing customers across the United States of America. This was our sole business from this point until we acquired the additional businesses listed herein.

Acquisition of Precision Aerospace and Technologies, Inc. (formerly Eran Engineering, Inc.)

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

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

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

As discussed below, Precision manufactures and assembles specialized, precision components used primarily in the commercial aviation, medical, and defense industries. In 2007 Precision moved its manufacturing plant to Tustin and the building purchased in the acquisition was sold. Barton Webb was appointed in July 2011 to serve as the President of Precision.

Precision Aerospace and Technologies, Inc. a Nevada Corporation (“Precision”) was formed in April 2013 and Eran Engineering, Inc. was merged into Precision.

Re-Registration of our Common Stock

On May 16, 2008, we filed a registration statement on Form 10 to re-register our common stock, that had been delisted in May 2006, under Section 12 of the Exchange Act.  As a result, on July 15, 2008, we became subject to the reporting requirements under the Exchange Act.  Effective November 23, 2009, our common stock was re-listed on the OTC Bulletin Board under the symbol “MLHC.”

Business Overview

We currently conduct all of our operations through two of our two wholly-owned subsidiaries: E. M. Tool Company, Inc. dba Elite Machine Tool Company and Precision Aerospace & Technologies, Inc. (formerly Eran Engineering). Through Elite Machine 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 it’s customers.

Our services and products are primarily marketed and sold to the commercial aviation and defence, 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 Machine, 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 Japannes manufactured machine Tools.

For the years ended June 30, 2013, and 2012, the Machine and Tools Group accounted for $5,810,909 (62.32%) and $5,929,967 (58.26%) of our total sales, respectively. This segment of our business also accounted for 66.6% and 31% of our gross profits for the years ended June 30, 2013, and 2012, respectively.

(a)          Company Overview

Elite Machine is a California corporation and was founded in 1990 by our former Director and Executive Vice President, Lawrence A. Consalvi. Mr. Consalvi was previously the President of Elite Machine. Through the reverse merger transaction described above, Elite Machine became our wholly-owned subsidiary. Elite Machine specializes in the sale of preowned CNC machine tools including Mori Seiki, and other high end Japoanes manufactured machine tools. Elite Machine is a leading dealer of pre-owned CNC machines in the Western United States. Elite Machine purchases pre-owned CNC machinery from Japan, Europe, and the United States, and inspects and where necessary repairs and refurbishes the machine tools prior to resale. the refurbishing completed on CNC machines it purchases typically includes painting, replacing parts, and servicing the machine.

(b)          Principal Products and Services.

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

Elite Machine purchases all the pre-owned machines it sells, bears the risk of reselling the machines, and is responsible for all costs incurred in order to resell the machines. Normally the machines sold by Elite Machine are sold “as is.” However, Elite Machine does offer a limited warranty to the purchasers of the used CNC machines it sells, but the company is planning on moving away from this practice. Currently, approximately 40% of Elite Machine’s customers purchase with some type of warranty with most on a 30-day warranty.

(c)           Product Manufacturing.

Elite Machine does not manufacture any of its own products.

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

(d)           Sales, Marketing and Distribution.

The Elite Machine product line consists primarily of pre-owned CNC machines. These machines are predominately marketed through our in-house sales staff. Sales personnel are assigned regions and sell the machines in their territory.  Used machines are sold on a warranty basis, typically with a 30-day expiration, and generally include installation of the machine at the customer’s location. We also sell machine tools through alternative channels such as the internet and auctions.

On September 24, 2008, Lawrence A. Consalvi resigned from his position as President of Elite Machine.  Currently Mr. Consalvi manages Elite Machine.

(e)           New Product Development.

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

(f)           Competition.

Our competitors in the machine tool industry consist of a large fragmented group of companies, including certain business units or affiliates of our customers. Our management believes that competition within the industry will not increase significantly as the barrier to entry carries a very high cost however industry consolidations and trends toward favoring greater outsourcing of components and a reduction in the number of preferred suppliers will increase. Certain of our competitors may have substantially greater financial, production and other resources and may have (i) the ability to adapt more quickly to changes in customer requirements and industry conditions or trends, (ii) stronger relationships with customers and suppliers, and (iii) greater name recognition.

(g)          Sources and Availability of Raw Materials.

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

(h)          Dependence on Major Customers.

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

(i)           Patents, Trademarks and Licenses.

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

(j)           Need for Government Approval.

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

(k)          Effect of Government Regulation on Business.

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

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

(l)           Research and Development.

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

(m)         Effects of Compliance with Environmental Laws.

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

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

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

(n)           Employees.

As of June 30, 2013, we, with our subsidiaries, employ a total of 57 full-time employees, including 2 executive employees. Of these employees our Machine Sales Group employs 2 managerial employees, and 10 employees engaged in the sales and processing of CNC machine sales and the precision manufacturing group employs 7 managerial employees and 35 machinists and support personnel.

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

Precision Manufacturing Group

The Precision Manufacturing Group is composed of 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 it’s 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 (formerly Iris Diagnostics) a division of the Danaher Group.

For the years ended June 30, 2013 and 2012, the Precision Manufacturing Group accounted for $3,513,776 (37.68%) and $4,247,482 (42%) of our sales, respectively.  This segment of our business also accounted for 33% and 50% of our gross profits for the years ended June 30, 2013 and 2012, respectively.

(a)           Company Overview.

(1)            Precision Aerospace & Technologies, Inc., (formerlyEran Engineering, Inc).

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

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

(b)           Product Manufacturing.

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 it’s 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).

The primary components sold by Precision during the years ended June 30, 2013 and 2012, were parts sold to Panasonic Avionics Corporation, a leading provider of in-flight entertainment systems for commercial aircraft. The other components were parts manufactured for, and sold to, medical companies and general commercial aircraft companies. Precision (formerly Eran Engineering) maintains approximately 40 CNC machines for use in its specialized manufacturing processes. Barton Webb, serves as the President of Precision.

(c)           Sales, Marketing and Distribution.

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

(d)           New Product Development.

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

(e)           Competition.

The market for precision part manufacturing is extremely competitive. There are no substantial barriers to entry, and we continue to face competition from domestic and international manufacturers. We believe that our ability to compete successfully depends upon a number of factors, including market presence, connections in the industry, reliability, low error rate, technical expertise and functionality, performance and quality of our parts, on time deliveries, customization, the pricing policies of our competitors, customer support, our ability to support industry standards, and industry and general economic trends.

Many of our competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to us. As a result, they may be able to develop and expand more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing of their services than we can.

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

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

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

(f)           Sources and Availability of Raw Materials.

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

(g)           Dependence on Major Customers.

Precision has two major customers:  Panasonic Avionics Corp., which accounted for 45.22% and 53.77% of Precision’s total revenue for the years ended June 30, 2013 and 2012, respectively, and Beckman Coulter, which accounted for 14.73% and 8.14% of Precision’s total revenue for the years ended June 30, 2013 and 2012 respectively.

(h)           Patents, Trademarks and Licenses.

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

(i)           Need for Government Approval.

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

(j)           Effect of Government Regulation on Business.

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

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

(k)           Research and Development.

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

(l)           Effects of Compliance with Environmental Laws.

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

The precision manufacturing division utilizes various coolants and lubricants that could be considered hazardous waste. Care is taken to prevent accidental discharge and all coolants and lubricants removed from machines are contained and disposed of by an outside waste disposal company. In addition, our Tustin facility is subject to certain local waste water regulations and is required annually to have its waste water and backflow prevention equipment tested by an outside testing agency. The last test was performed in November 2013.

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

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

(m)           Employees.

As of June 30, 2013, we, with our subsidiaries, employ a total of 57 full-time employees, including 2 executive employees. For the precision manufacturing group, we employ 4 managerial employees, 1 sales manager, and 35 employees engaged in precision metal parts manufacturing related positions  and the machinery sales group employs 2 managerial employees and 10 sales and support personnel.

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

Industry Overview

CNC Machines

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

Precision Tools

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

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

ITEM 1A. – RISK FACTORS.

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

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

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

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

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

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

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

Our share ownership is concentrated.

Money Line Capital, Inc., our largest shareholder, controls approximately 21.6% of our outstanding common stock.  Our officers and directors, as a group, own a majority of Money Line Capital, Inc.’s common stock and own an additional 30.8% of our common stock as a group.  As a result, these stockholders can exert significant influence over all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation or sale of all or substantially all of assets, as well as any charter amendment and other matters requiring stockholder approval. In addition, these stockholders may dictate the day to day management of the business. This concentration of ownership may delay or prevent a change in control and may have a negative impact on the market price of our common stock by discouraging third party investors. In addition, the interests of these stockholders may not always coincide with the interests of our other stockholders.

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

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

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

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

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

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

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

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

We have two customers that account for greater than 59% of our total sales for the year ended June 30, 2013.

Panasonic Avionics Corp. account for 45.22% and 53.77% and Iris Diagnostics 14.73% and 8.14% of our total sales for the years ended June 30, 2013 and 2012, respectively.  We do not have a long term, exclusive agreement with these customers. If either of these customers reduced or stopped ordering precision parts from Eran it would have a material adverse impact on our consolidated sales, results of operations and cash flows.

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

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

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

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

As of June 30, 2013 the Company owed Pacific Western Bank $0 and $253,128 at June 30, 2012.

We have paid in full all of our obligations due to Pacific Western Bank, and as a result this settles all outstanding legal disputes between the parties.

As of June 30, 2013, the Company owed Main Credit $20,753 and $1,083,879 at June 30. 2012.

We have refinanced the line of credit with Main Credit and have therefore repaid the sum of $1,063,126 during the fiscal year nded June 30, 2013. The balance due to Main Credit, $20,753 at June 30, 2013 was paid in full in July 2013. We have therefore repaid in full all our obligations to Main Credit in the subsequent fiscal period.

As of June 30, 2013, the Company owed TCA Global Credit Master Fund, LP $1,681,973 and $0 at June 30. 2012.

The company’s Line of Credit with TCA Global Credit Master Fund, LP became due on October 31, 2013 and was renewed for a further six months. Management is currently in the process of refinancing its line of credit with TCA Global Credit Master Fund, LP and is currently in negotiation with other lenders.

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

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

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

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

ITEM 1B – UNRESOLVED STAFF COMMENTS

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

ITEM 2 – PROPERTIES

In July, 2007, we entered into a 5-year triple net lease for approximately 48,600 square feet of manufacturing and office space in a free-standing industrial building at 2672 Dow Avenue, Tustin, California 92780 for a average monthly rental of $28,390 for the first 12 months, $35,090 for the second 12 months, $36,143 for the third 12 months, $37,227 for the fourth 12 months and $38,334 for the final 12 months. We finalized an amendment to the lease agreement on September 30, 2011 that extends the lease under new terms that commenced on July 1, 2012 and continues until June 30, 2017.  The rent for month 1(July 2012) through month 12 is $27,741, month 13 to 24 $28,573, month 25 to 36, $29,430, month 37 to 48, $30,313 and month 49 to 60, $31,223

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

ITEM 3 - LEGAL PROCEEDINGS

The Company 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 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 June 30, 2013 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 extremely low.

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 June 30, 2013 financial statements with respect to this matter in the sum of $37,500.

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. (currently known as Precision Aerospace and Technologies, Inc.), E.M. Tool Company, Inc. and M Line Holdings, Inc. The judge granted the summary judgment against all three defendants in the amount of $403,860.91, including interest through February 8, 2011. Post judgment proceedings have been initiated by Hwacheon. The Company and Eran Engineering, Inc. (currently known as Precision Aerospace and Technologies, Inc.) filed an appeal, which later was dismissed pursuant to settlement.

The Company entered into a revised settlement agreement for a settlement in the total amount of $85,000, as of March 31, 2013, which was subsequently paid in full on April 30, 2013.

A satisfaction of judgment has been filed in this matter.

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 $60,000.00 in the financial statements 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 was issued on February 24, 2012.

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 $48,673.20. A sum of $40,000.00 has been paid in installments of $10,000.00 each effective November 8, 2013 and the final payment was made on December 9, 2013.

A provision of $48,673 was made for this matter in the June 30, 2013 financial statements which was fully paid in December 2013.

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. 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 as of June 30, 2013.

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.

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 as of June 30, 2013.

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

Joseph Gledhill, a former officer and director of the Company and its subsidiary, Eran Engineering, Inc. (currently known as Precision Aerospace and Technologies, Inc.), 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 was set for April 8, 2013. This case has been dismissed.

The Company filed suit against two of its former directors alleging that they breached their fiduciary duties to the Company by mismanaging the corporate affairs of the Company and its subsidiaries, resulting in damages to the Company and its subsidiaries. The defendants were never served, and the defendants never answered the complaint. This case has been dismissed with prejudice.

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.

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 15, 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.

A provision in the amount of $50,000 has been made in the financial statements as of June 30, 2013

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 $12,000on September 30, 2013 but has not made the second payment due on October 30, 2013.

A provision in the amount of $24,000 has been made in the financial statements as of June 30, 2013.

.

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.

A provision in the sum of $19,500 has been made in the financial statements of the Company at June 30, 2013.

The case was settled on October 31, 2013 for $19,500 with payments of $5,250 due on October 31, 2013, $5,250 on November 30, 2013 both oif whiuch have been paid and the balance of $9,000 is due on December 31, 2013.

The Company made the first two payments of $5,250 with the final payment due on December 31, 2013.

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 $255,374 has been made in the financial statements as of June 30, 2013

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.

ITEM 4 – (REMOVED AND RESERVED).

PART II

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

Market Information

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

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

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

Holders

As of June 30, 2013, there were 70,211,145 shares of our common stock outstanding held by134 holders of record of our common stock and numerous shareholders holding shares in brokerage accounts.  Of these shares, 31,819,701were held by non-affiliates.  On the cover page of this filing we value these shares at $0.024.  These shares were valued at $0.024 per share, which was closing price of our common stock on the OTC Bulletin Board on December 21, 2013.

Dividends

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

Securities Authorized for Issuance Under Equity Compensation Plans

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

Non-Qualified Stock Option Plan

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

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

Recent Issuance of Unregistered Securities

During the year ended June 30, 2013, the company issued the following shares of common stock.

14,840,000 shares were issued to financial advisors and other parties in payment of services to the Company. The Company valued the shares at the market price on the issuance dates in the sum of $267,942.

The Company also issued 8,500,000 shares of the Company common stock in lieu of salaries and expenses due on behalf of related parties. The shares were valued at $168,700 based on the market price of the shares at the grant date

During the year ended June 30, 2013, the Company issued 200,000 Series A Preferred shares to a lender in connection with our line of credit.

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

ITEM 6 – SELECTED FINANCIAL DATA

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

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

Forward-Looking Statements

This annual report on Form 10-K of M Line Holdings, Inc. for the year ended June 30, 2013 contains forward-looking statements, principally in this Section and “Business.” Generally, you can identify these statements because they use words like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described in this filing. You should not place undue reliance on these forward-looking statements which apply only as of the date of this annual report. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbors created thereby. To the extent that such statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation of belief will be accomplished.

We believe it is important to communicate our expectations to our investors. There may be events in the future; however, that we are unable to predict accurately or over which we have no control. The risk factors listed in this filing, as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results or events to differ materially from those anticipated, include, but are not limited to: our ability to successfully maintain a credit facility to purchase new and used machines, manufacture new products; the ability to obtain financing for product acquisition; changes in product strategies; general economic, financial and business conditions; changes in and compliance with governmental regulations; changes in various tax laws; and the availability of key management and other personnel.

Critical Accounting Policies

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

Estimates

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

Revenue Recognition

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

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates as we have in the past. Accounts receivable are written off or reserves established when considered to be uncollectible or at risk of being uncollectible. While management believes that adequate allowances have been provided in the Consolidated Financial Statements, it is possible that we could experience unexpected credit losses. Our accounts receivable are concentrated in a relatively few number of customers. One customer, Panasonic Avionics Corporation (“Panasonic”), a leading provider of in-flight entertainment systems for commercial aircraft, accounts for 23.38% and 44.64% of our consolidated accounts receivable balance at June 30, 2013 and 2012, respectively.  Therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.

Inventories

Within our Precision Manufacturing segment, we seek to purchase and maintain raw materials at sufficient levels to meet lead times based on forecasted demand. Within our Machine Tools segment, we purchase machines held for resale based upon management’s judgment of current market conditions and demand for both new and used machines. If forecasted demand exceeds actual demand, we may need to provide an allowance for excess or obsolete quantities on hand. We also review our inventories for changes in the market prices of machines held in inventory and provide reserves as deemed necessary. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. We state our inventories at the lower of cost, using the first-in, first-out method on an average costs basis, or market.

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

Long-lived Assets

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

cash flows are less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset or discounted cash flows.  Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Based on management’s review, we determined that there was no impairment provision of long-lived assets for the year ended June 30, 2013.

Accounting for Income Taxes

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

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

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.

Results of Operations

Sales Concentration

The sales within our Precision Manufacturing segment are highly concentrated within two customers, Panasonic Avionics and Beckman Coulter. Sales to these customers accounted for 23% and 26% of consolidated sales for the years ended June 30, 2013 and 2012, respectively. The loss of all or a substantial portion of sales to this customer would cause us to lose a substantial portion of our sales within this segment and on a consolidated basis, and have a corresponding negative impact on our operating profit margin due to operation leverage this customer provides. This could lead to sales volumes not being high enough to cover our current cost structure or provide adequate operating cash flows. Panasonic has been a customer of ours for approximately 15 years and we believe our relationship is good.

Gross Profit

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

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

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

Selling, General and Administrative

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

Interest Expense

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

Segment Information

Results of Operations for the Year Ended June 30, 2013 and 2012

Introduction

For the twelve months ended June 30, 2013, we generated $9,324,685 in revenues on cost of sales of $7,561,454.  With these revenues and cost of sales for the year ended June 30, 2013, we had a net loss of $4,393,268, after taxes.  For the year ended June 30, 2012, we had revenues of $10,177,449, on cost of sales of $7,330,725.  With these revenues and costs of sales we had a net loss of $768,242, after taxes, for year ended June 30, 2012.  An explanation of these numbers and how they relate to our business is contained below.

Revenues

Sales in the fiscal 2013 period decreased 8.38% compared to the comparable period in fiscal 2013.

The change is attributable primarily to a decrease in sales in the Precision Manufacturing Group.  Sales decreased by (2.01) % in the Machine Sales Group and by (17.27) % in the Precision Manufacturing Group.  

The 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 86 pieces of equipment sold in the year ended June 30, 2013 was $61,224 compared to the comparable period in fiscal 2012 of 84 pieces of equipment sold at an average sale price of $67,239. In addition repair work for the year ended June 30, 2012 was $146,712 compared to the comparable period in fiscal 2012 of $156,098.

Market conditions reflect not only the price that equipment can be purchased for but also the price 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 buying 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 $756,817 in sales of precision metal component parts from a customer of ours, Panasonic Avionics, in the fiscal year ended June 30, 2013, compared to the fiscal year ended June 30, 2012 compared to $46,078 from fiscal year 2011 to 2012. Furthermore new customer sales to Goodrich Aerostructures resulted in an increase of $84,950 during the year ended June 30, 2013 as compared to $256,878 for new customers in the comparable period in fiscal 2012.

Our precision manufacturing group has recently received orders from Panasonic Avionics, and we expect to increase our sales to much higher levels fiscal 2014 to those achieved in fiscal 2013. We have contacted new customers and expect to receive orders shortly. We anticipate increasing our sales to old and 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 Tool Group and the Precision Manufacturing Group.

Gross Margin

Gross profit decreased by 38.06% compared to the comparable period in fiscal 2012. The gross profit for the Machine Sales Group increased by 6.2% due to an increase in margins as a result of lower prices and associated costs paid for product. The decrease within the Precision Manufacturing Group of 66.2% resulted from lower margins as a result of the decrease in sales in this group.

Cost of Sales

Our cost of sales for the year ended June 30, 2013, was $7,561,454 and consisted primarily of used CNC machines, refurbishment of those machines and raw materials usage, compared to our cost of sales for the year ended June 30, 2012 of $7,330,725.  The increase in our cost of sales was primarily due to the increase in the purchase of raw materials and outside processing costs to meet the sales of our precision manufacturing group.

Write off of Related Party receivable

The related party receivable of $1,446,067 for the fiscal year 2013 was written off in full .

Selling, General and Administrative Expenses

Our selling, general and administrative expenses are those expenses we have related to the actual sales of our products and the costs we incur in transporting those products.  For the year ended June 30, 2013 our selling general and administrative expenses were $4,226,647, compared to $2,661,184 for the year ended June 30, 2012.  Our selling, general and administrative expenses for the year ended June 30, 2013, primarily consisted of salaries of $2,051,973, rent of $460,565, legal and professional fees of $506,853, insurance expenses of $166,275, and legal settlements of $352,447.

Interest Expense

For the year ended June 30, 2013, our interest expense increased by $289,220 compared to the comparable period in 2012. The change is attributable to higher average debt balances and increases in the average interest rate paid on our debt and capital lease obligations.

Research and Development

We did not incur research and development expenditures during the fiscal 2013 period.

However, we did incur research and development expenditure during the third quarter of fiscal 2012, which represented the development costs incurred for aircraft structures. The Company upgraded its manufacturing base from purely aircraft interiors to a combination which includes aircraft structures. and therefore incurred considerable startup costs relating to these developments.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash and cash equivalents, cash generated from operations and borrowing from various sources. At June 30, 2013, our cash and cash equivalents totaled $182,305.

At June 30, 2013, we had $0 in debt outstanding under our credit agreement with Pacific Western Bank as all outstanding debt with the bank had been paid off in full. The credit agreement provided for borrowings of up to $1,500,000, and included a line of credit, a term loan and a letter of credit. The amount outstanding under the line of credit, term loan and letter of credit are all $0, as of June 30, 2013.

As of June 30, 2013, we had $20,753 in debt outstanding under our Accounts Receivable and Inventory line of credit with Main Credit. We have subsequent to year end, paid off the sum of $20,753 in full and final settlement of all of our outstanding debt to Main Credit.

As of June 30, 2013, we had $1,681,973 in debt outstanding under our Accounts Receivable and Inventory Line of Credit with TCA Global Credit Master Fund, LP.

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

Cash Flows

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

Cash Flows for the Years Ended June 30, 2013 and 2012

Operating Activities

Net cash used in operating activities was $(539,087) for the year ended June 30, 2013, compared to $(266,425) for the year ended June 30, 2012.  Our cash used in operating activities for the year ended June 30, 2013 was primarily due to net losses of $(4,393,268) offset by non-cash expenses related to inventory reserves, depreciation, amortization, share based compensation and write off of related party receivables totaling to $2,440,793, $(195,693) in accounts receivables, $(146,499) in inventories, $(30,639) in prepaid expenses and other assets and $1,626,806 in accounts payable and accrued expenses.

Investing Activities

Net cash used in investing activities was ($19,335) for the year ended June 30, 2013, compared to $(59,907) for the year ended June 30, 2012.  The cash used for investing activities for the year ended June 30, 2013 was for capital expenditures.  

Financing Activities

Net cash provided by financing activities was $735,515 for the year ended June 30, 2013, compared to $110,508 for the year ended June 30, 2012.  The cash provided by financing activities for the year ended June 30, 2013, consisted of $348,847 in net borrowings on our line of credit, $596,051 in proceeds on note payables, and $222,125 in payments on note payables and capital leases.

Contractual Obligations

The following table summarizes our contractual obligations and commercial commitments as of June 30, 2013:

Quantitative and Qualitative Disclosures about Market Risk

The only financial instruments we hold are cash and cash equivalents. We also have a fixed interest rate agreement with TCA Global Credit Master Fund, LP secured by receivables and inventory of Precision Aerospace and Technologies, Inc., and E M Tool Co., Inc. In addition we have a fixed interest rate credit facility with Main Credit secured by the receivables and inventory of Eran Engineering.  The Main Credit facility was paid off in full in the subsequent fiscal period. Changes in market interest rates will impact our interest costs.

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

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

M Line Holdings, Inc.

Tustin, CA

We have audited the accompanying consolidated balance sheet of M Line Holdings, Inc. and subsidiaries (collectively, the “Company”) as of June 30, 2013 and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of M Line Holdings, Inc. and subsidiaries as of June 30, 2013, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations. These raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ MaloneBailey, LLP

www.malone-bailey.com

Houston, Texas

December 30, 2013

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

M Line Holdings, Inc.

We have audited the accompanying consolidated balance sheet of M Line Holdings, Inc. (the “Company”) as of June 30, 2012 and the related consolidated statements of operation, stockholders' equity, and cash flow for the year then. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2012 and the results of its operations and its cash flow for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The Company's consolidated financial statements are prepared using the accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. 

The Company's consolidated financial statements are prepared using the accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred operating losses of $768,242 for the year ended June 30, 2012. The Company had an excess of current liabilities above current assets of a negative working capital of $508,610 at June 30, 2012. The Company has an accumulated deficit of $10,051,106 as of June 30, 2012.  These factors as discussed in Note 3 to the consolidated financial statements raise doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 19.  The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Kabani & Company, Inc.

CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California

October 15, 2012

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 AND JUNE 30, 2012

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

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2013 AND JUNE 30, 2012

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

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

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2013 AND JUNE 30, 2012

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

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Organization and Business

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

Acquiring, refurbishing and selling pre-owned CNC machine-tool equipment through Elite Machine Tool Company (“Elite”), its wholly owned subsidiary, the machine sales group.

Precision Aerospace & Technologies, Inc., (formerly Eran Engineering, Inc.) (“Precision”), its wholly owned subsidiary, manufactures precision metal component parts for the aerospace, medical and defense industries. This is the precision manufacturing group.

Basis of Presentation

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

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.

Business Segments

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

Concentrations of Credit Risks

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

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

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a result of the Company's concentration of its customer base and industries served, the loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to the above customers or a change in their financial position could materially and adversely affect the Company's consolidated financial position, results of operations and cash flows.

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

Accounts receivable from this customer at June 30, 2013 and 2012 were $254,757 and $354,589 respectively.

The Company’s Precision Manufacturing segment operates a single manufacturing facility located in Tustin, California. A major interruption in the manufacturing operations at this facility would have a material adverse effect on the consolidated financial position and results of operations of the Company.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of sales and expenses during the reporting period. Significant estimates made by management are, among others, realization of inventories, collectability of accounts receivable, litigation, impairment of goodwill, and long-lived assets other than goodwill. Actual results could materially differ from those estimates.

Cash and Cash Equivalents

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

Accounts Receivable

The Company performs periodic credit evaluations and continually monitors its collection of amounts due from its customers. The Company adjusts credit limits and payment terms granted to its customers based upon payment history and the customer's current creditworthiness. The Company does not require collateral from its customers to secure amounts due from them. The Company regularly reviews its accounts receivable and collection of these balances subsequent to each of these periods. The Company maintains reserves for potential credit losses, and historically, such losses have been within management expectations. As of June 30, 2013 and 2012, accounts receivable totals were $990,010 and $794,317, net of an allowance for bad debt expense of $29,566 and $47,193 respectively.

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 labor and overhead costs directly associated with manufacturing its products in inventory costs.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred financing fees

The Company incurs costs in connection with its line of credit which may consist of legal, finders and due diligence fees. Such costs are deferred and amortized to interest expense over the term of the line of credit. As of June 30, 2013, the Company incurred deferred financing costs of $299,274 of which $99,758 has been amortized to interest expense for the year ended June 30, 2013.

Property and Equipment

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

Long-Lived Assets

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

Based on management’s review, the Company determined that there was no impairment to its long-lived assets for the years ended June 30, 2013 and 2012.

Income Taxes

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

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

Contingencies and Litigation

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

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition”. Revenue is recognized at the date of shipment to customers when; a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist, and collectability is reasonably assured.

Revenues generated from the Precision Manufacturing segment consist of manufactured parts and in some instances, assembly of these items based on detailed engineering specifications received by the Company from the customer. The Company generally begins to manufacture the parts upon the receipt and acceptance of a purchase order which specifies the quantity, price and delivery dates such products are required to be shipped within. Prior to shipment, physical inspection of the parts is performed to ensure specifications meet the engineering requirements. Historically, customer returns have been inconsequential.

Revenues generated from the sales of new and pre-owned Computer Numerically Controlled machines from the Machine Tools segment are based on the acceptance of a purchase order and the customer’s acknowledgement of the Company’s terms and conditions which specifies the shipping terms, payment terms and the warranty period, if any. In certain instances, the Company may perform installation services including the leveling of the machine, which is inconsequential. Under agreements with certain new equipment manufacturers, a ninety day warranty is provided to customers whereby the manufacturer is responsible for any replacement parts and the Company is responsible for the installation of the parts. In certain instances, the Company provides warranties for used equipment for periods ranging up to thirty days. Historically, warranty costs have been inconsequential. Generally, the Company does not accept returns of equipment. Warranty expense, included in cost of sales, for the years ended June 30, 2013 and 2012 amounted to $68,364 and $35,047, respectively.

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

Advertising

The Company expenses the cost of advertising when incurred as selling expenses. Advertising expenses were $17,901 and $7,685, for the years ended June 30, 2013 and 2012, respectively.

Stock-Based Compensation

The Company accounts for share-based awards issued to employees in accordance with FASB ASC 718. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period or vesting period. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value.

Net Income (Loss) per Share

Basic net loss per share is calculated by dividing net loss by the Company’s weighted average common shares outstanding during the period. Diluted net income per share reflects the potential dilution to basic earnings per share that could occur upon conversion or exercise of securities, options or other such items to common shares using the treasury stock method, based upon the Company’s weighted average fair value of the common shares during the period. For each period presented, basic and diluted net loss per share amounts are identical as the Company does not have potentially dilutive securities. The weighted average number of shares used to compute basis and dilute loss per share is the same as the effect of potential dilutive securities is anti-dilutive.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, line of credit and notes payable approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair value of long-term notes approximates the carrying amounts based upon the expected borrowing rate for debt with similar remaining maturities and comparable risk.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reclassification

Certain reclassification has been made to the previous year’s financial statements to conform to current year presentation with no effect on previously reported net loss.

Recent Accounting Pronouncements

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.

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 $14,444,371 as of June 30, 2013, negative working capital and negative cash flows from operations for the year ended June 30, 2013.

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.

Inventories consist of the following at June 30:

As of June 30, 2013, due from related parties of $99,348 includes an amount due from an officer of Elite amounting to $83,348 which is expected to be repaid to the Company within the next fiscal year. The Company advanced funds and paid various general expenses incurred by the related party during the course of business for the years ended June 30, 2013 and 2012.

As of June 30, 2012, the amount due from related parties includes amounts advanced to an entity that is majority-owned by certain officers of the Company amounting to 1,176,229 in connection with its planned acquisitions of the entity’s subsidiaries. The acquisitions did not push through and the Company has written off the outstanding balance as of June 30, 2013 amounting to $1,446,067.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2013, the Company owes $43,454 to one of its officers for expenses paid on behalf of the Company.

Property and equipment consists of the following at June 30:

Depreciation expense was $173,532 and $192,755 for the years ended June 30, 2013 and 2012, respectively.

Accrued expenses and other consist of the following at June 30:

The Company leases certain equipment under capital leases with terms ranging from four to five years. Future annual minimum lease payments are as follows as of June 30:

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pacific Western Bank:

The Company owed $0 and $253,128 plus accrued interest as of June 30, 2013 and 2012 respectively.

Main Credit:  

As of June 30, 2013 the Company owed $20,753 principal, which sum was paid in full 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 June 30, 2013, the Company has drawn $1,700,000 from the line of which $1,681,973 is outstanding as of June 30, 2013. Amounts drawn from the line of credit are subject to interest of 18% per annum and the loan matured on October 31, 2013 but was extended for a further six months.

The line of credit with TCA Global Credit Master Fund, LP is secured by the receivables and inventory of Precision Aerospace and Technologies, Inc.. and E. M. Tool Co. Inc. and a blanket lien over all of the group’s assets.

Notes payable as of June 30 consist of:

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases

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

Rent expense under operating leases was $460,565 and $383,932 for the years ended June 30, 2013 and 2012, respectively.

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

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company 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 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 June 30, 2013 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.

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 June 30, 2013 financial statements with respect to this matter in the sum of $37,500.

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. (currently known as Precision Aerospace and Technologies, Inc.), E.M. Tool Company, Inc. and M Line Holdings, Inc. The judge granted the summary judgment against all three defendants in the amount of $403,861, including interest through February 8, 2011. Post judgment proceedings have been initiated by Hwacheon. The Company and Eran Engineering, Inc. (currently known as Precision Aerospace and Technologies, Inc.) filed an appeal, which later was dismissed pursuant to settlement.

The Company entered into a revised settlement agreement for a settlement in the total amount of $85,000, as of March 31, 2013, which was subsequently paid in full on April 30, 2013.

A satisfaction of judgment has been filed in this matter.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 was issued on February 24, 2012.

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 with the final payment to be made on December 9, 2013. A provision of $48,673 was made for this matter in the June 30, 2013 financial statements, which was fully paid in December 2013.

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. 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 as of June 30, 2013.

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.

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.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 as of June 30, 2013.

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

Joseph Gledhill, a former officer and director of the Company and its subsidiary, Eran Engineering, Inc. (currently known as Precision Aerospace and Technologies, Inc.), 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. This case has been dismissed.

The Company filed suit against two of its former directors alleging that they breached their fiduciary duties to the Company by mismanaging the corporate affairs of the Company and its subsidiaries, resulting in damages to the Company and its subsidiaries. The defendants were never served, and the defendants never answered the complaint. This case has been dismissed with prejudice.

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.

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.

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 $24,000 has been made in the financial statements as of June 30, 2013.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

A provision in the sum of $19,500 has been made in the financial statements of the Company at June 30, 2013.

The case was settled on October 31, 2013 for $19,500 with payments of $5,250 due on October 31, 2013, and $5,250 due on November 30, 2013 both of which have been paid with the balance of $9,000 due on December 31, 2013.

14. Yates, Fontenot, Smith and Brum, LLC v M Line Holdings, Inc. (formerly Gateway International holdings, Inc.) et al; Case No. 30-2013-00630586

The above referenced matter is an unlawful detainer action comcerning the 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 the plaintiff shall file a request for dismissal with prejudice of the entire action by March 14, 2014.

A provision in the amount of $255,374 has been made in the financial statements as of June 30, 2013.

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 and accrued expenses and other in the consolidated balance sheet.

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

The benefit for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The differences between the federal statutory tax rate of 34% and the effective tax rates are primarily due to state income tax provisions, net operating loss (“NOL”) carry forwards, deferred tax valuation allowance and permanent differences as follows for the years ended June 30:

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The Company’s income tax provision was computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit. As of June 30, 2013 and 2012 the Company had federal and state net operating loss (“NOL”) carry forwards of approximately $3.7 million and $550,000, respectively, net of Internal Revenue Code ("IRC") Section 382 limitations. If not used, these carry forwards will begin expiring between 2012 and 2021. These net operating losses are available to offset future regular and alternative minimum taxable income.

The Company has recorded as of June 30, 2013 a valuation allowance of $1,591,975, as it believes that it is more likely than not that the deferred tax assets will not be realizable in future years. Management has based its assessment on available historical and projected operating results.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s articles of incorporation authorize up to 100,000,000 shares of $0.001 par value common stock. Shares of common or preferential stock may be issued in one or more classes or series at such time as the Board of Directors determine.

The Company’s articles of incorporation authorize up to 10,000,000 shares of $0.001 par value preferred stock.

The Company designated 200,000 shares as Series A Preferred shares. The Series A preferred shares are not entitled to dividends but are convertible to common shares.

During the year ended June 30, 2012, the Company issued the following shares of common stock:

During the year ended June 30, 2013, the company issued the following shares of common stock:

During the year ended June 30, 2013, the Company issued 200,000 Series A Preferred shares to a lender in connection with the line of credit. These shares were valued using the common share’s stock price at the date of grant using the “as if” converted method. The fair value of the shares amounting to $149,274 was recognized as deferred financing costs and amortized over the term of the line of credit.

Non-Qualified Stock Option Plan

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

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.

M-LINE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment information is as follows as of and for the years ended June 30, 2013 and 2012:

Segment information for the year ended June 30, 2012:

Sales are derived principally from customers located within the United States

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

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

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

Item 9A Controls and Procedures

(a)            Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2013, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2013, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 9A(b).

(b)           Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on this assessment, Management has identified the following two material weaknesses that have caused management to conclude that, as of June 30, 2013, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

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

2.           We have not documented our internal controls and have adequate internal controls over our financial reporting process. We have limited policies and procedures that cover the recording and reporting of financial transactions and accounting provisions.  As a result we were delayed in our ability to calculate certain accounting provisions, such as inventory valuation and deferred taxes.  While we believe these provisions are accounted for correctly in the attached audited financial statements our lack of internal controls led to a delay in the filing of this Annual Report.  We were required to provide written documentation of key internal controls over financial reporting beginning with our fiscal year ended June 30, 2009.  Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.  Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

(c)           Remediation of Material Weaknesses

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

(d)           Changes in Internal Control over Financial Reporting

There are no changes to report during our fiscal quarter ended June 30, 2013.

ITEM 9B – OTHER INFORMATION

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

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

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

George Colin is the Chairman of the Board.   Since 1994 Mr. Colin has been an independent consultant for numerous corporations regarding general business and investment decisions.  From 1976 to 1994, Mr. Colin was the Chief Executive Officer and majority shareholder of Odyssey Systems.  In this role he managed all aspects of the business.  Mr. Colin also served as a lieutenant in the U.S. Navy.  Mr. Colin received NROTC officer training at Villanova University and obtained a BSCE in 1955.

Anthony Anish became a Director in early 2011 and is currently the COO and Company Secretary. Mr. Anish has extensive business and financing experience having been involved in many growth businesses both in the USA but also in England. Mr. Anish has been managing M Line Holdings, Inc. since March 2009 and has overseen the recovery of the group during the very difficult economic downturn. Mr. Anish qualified as a member of the Institute of Chartered Accountants in London, England in 1971.

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

Other Directorships

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

Audit Committee

We do not currently have an audit committee.

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

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

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

Board Meetings and Committees

During the fiscal year ended June 30, 2013, the Board of Directors met on a regular basis and took written action on numerous other occasions.  All the members of the Board attended the meetings.  The written actions were by unanimous consent

Code of Ethics

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

ITEM 11 - EXECUTIVE COMPENSATION

Executive Officers and Directors. The following tables set forth certain information about compensation paid, earned or accrued for services by (i) our Chief Executive Officer and (ii) all other executive officers who earned in excess of $100,000 in the fiscal year ended June 30, 2013, 2012 and 2011 (“Named Executive Officers”):