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M LINE HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
This quarterly report on Form 10-Q of M Line Holdings, Inc (referred to herein
as "we," or the "Company") for the three month period ended December 31, 2012,
contains forward-looking statements, principally in this Section and n the
section herein entitled "Business." Generally, you can identify these statements
because they use words like "anticipates," "believes," "expects," "future,"
"intends," "plans," and similar terms. These statements reflect only our current
expectations. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which are unforeseen, including, among
others, the risks we face as described in this filing. You should not place
undue reliance on these forward-looking statements which apply only as of the
date of this quarterly report. These forward-looking statements are within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are intended to be
covered by the safe harbors created thereby. To the extent that such statements
are not recitations of historical fact, such statements constitute
forward-looking statements that, by definition, involve risks and uncertainties.
In any forward-looking statement where we express an expectation or belief as to
future results or events, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will be accomplished.
We believe it is important to communicate our expectations to our investors.
There may be events in the future, however, that we are unable to predict
accurately or over which we have no control. The risk factors listed in our
Annual Report on Form 10-K, as well as any cautionary language in our Annual
Report on Form 10-K, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Factors that could cause actual
results or events to differ materially from those anticipated, include, but are
not limited to: our ability to successfully develop new products; the ability to
obtain financing for product development; changes in product strategies; general
economic, financial and business conditions; changes in and compliance with
governmental healthcare and other regulations; changes in tax laws; and the
availability of key management and other personnel.
Overview
Our business consists of two segments, our Machine Sales Group and our Precision
Manufacturing Group.
Our Machine Sales Group is in the business of acquiring and selling computer
numerically controlled ("CNC") machines, and related tools, to manufacturing
customers. We specialize in the purchase, refurbishment and sales of used CNC
machines. We also serve as a manufacturer sales representative firm selling new
CNC machines that we purchase from third party manufacturers into certain
geographic territories.
Our Precision Manufacturing Group is a manufacturer of precision components used
in equipment and machinery in the commercial aviation, medical, defense and
other industries. Sales within this segment are highly concentrated with one
customer, Panasonic Avionics Corporation ("Panasonic"). The loss of all or a
substantial portion of sales to this customer would cause us to lose a
substantial portion of our sales within this segment and on a consolidated
basis, and would have a corresponding negative impact on our operating profit
margin due to the operating leverage this customer provides. This could lead to
sales volumes not being high enough to cover our current cost structure or to
provide adequate operating cash flows. Panasonic has been a customer of ours for
approximately 19 years and we believe our relationship is good.
The Company added and upgraded its manufacturing base from mainly aircraft
interiors to a combination that includes aircraft structures. The Company
incurred considerable startup costs relating to development and staff training,
downtime in manufacturing and other costs, including newer materials, such as
titanium, hard steels, etc. and overhead.
Management entered into agreements with engineering services companies, in
Canada and in India, upgraded the Company's software and purchased new software,
such as Catia. Our commitment to excellence and the new direction to make the
Company an "Aerospace" Company has helped us develop and solidify our business
with United Technologies Aerospace Sytems formerly Rohr, Inc., and its
subsidiary Goodrich Aerostructures. We had, but did overcome the considerable
problems with production, which resulted from a staff knowledge limitation, the
requirement for additional training, engineering staff contracts, and so on.
15
All costs relating to this development have been expensed under Research and
Development costs in our financial statements for the fiscal year ended June 30,
2012.
Trends Affecting Our Business
Although the recent tightening of the capital markets has eased customers'
limited access to capital still hurt our ability to sell used CNC machines.
Historically, as capital markets tighten, companies that purchase large machines
on credit, such as CNC machines, have more difficulty in obtaining credit and,
therefore, are unable to purchase machines that they may be able to purchase in
better financial times. The credit markets have improved slightly but may have
an impact on our customers' ability to purchase machines which could negatively
impact our business.
The primary components sold by our Precision Manufacturing Group during the six
month period ended December 31, 2012 and, 2011, were parts sold to Panasonic, a
leading provider of in-flight entertainment systems for commercial aircraft.
Although the market for in-flight entertainment systems has improved and is
expected to continue to improve over the next two to three years business is
still inconsistent and this may affect our business over the next several
months. In addition, if there is a decrease in work this may have an impact with
the Machine Sales Group, as many of our customers that purchase machines from us
do business with airline manufacturers.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
sales and expenses during the reporting period. Significant estimates made by
management are, among others, realization of inventories, collectability of
accounts receivable, litigation, impairment of goodwill, and long-lived assets
other than goodwill. We regularly evaluate our estimates and assumptions based
upon historical experience and various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. To the extent actual results differ
from these estimates; our future results of operations may be affected.
Inventories
Within our Precision Manufacturing Group, we seek to purchase and maintain raw
materials at sufficient levels to meet lead times based on forecasted demand. We
generally manufacture parts based on purchase orders. Within our Machine Sales
Group, we purchase machines held for resale based on management's judgment of
current market conditions and demand for both new and used machines. If
forecasted demand exceeds actual demand, we may need to provide an allowance for
excess or obsolete quantities on hand. We also review our inventories for
changes indemand patterns and in the market prices of machines held in inventory
and provide reserves as deemed necessary. If actual market conditions are less
favorable than those projected by management, additional inventory reserves for
CNC machines and parts may be required. We state our inventories at the lower of
cost, using the first-in, first-out method on an average costs basis, or market.
Results of Operations for the Three Months Ended December 31, 2012 compared to
the Three Months Ended December 31, 2011.
For the three For the three
month period month period
ended ended
December 31, December 31,
2012 2011 Change
Sales by segment:
Machine Sales $ 1,557,598 $ 1,867,885 (310,287 )
Precision Engineering 883,285 927,706 (44,421 )
2,440,883 2,795,591 (354,708 )
Gross Profit by segment:
Machine Sales 348,335 431,492 (83,157 )
Precision Engineering 239,473 413,916 (174,443 )
587,808 845,408 (257,600 )
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Sales
Sales in the three month period ended December 31, 2012, decreased 13% compared
to the three month period ended December 31, 2011.
The change is attributable to a decrease in sales in both the Machine Sales
group and the Precision Manufacturing Group. Sales decreased by 17% in the
Machine Sales Group and decreased by 5% in the Precision Manufacturing Group.
Our Machine Sales Group primarily sells pre-owned CNC machinery manufactured by
Mori Seiki. The average sale price of the machinery changes based on the
equipment that is available to purchase in the market place and the prevailing
market conditions that affect the price that equipment can be sold for. The
average sale price of the 22 pieces of equipment sold in the three months ended
December 31, 2012 was $65,045 compared to the comparable period in fiscal 2012
of 27 pieces of equipment sold at an average sale price of $68,770. In addition
service work for the three months ended December 31, 2012 was $3,676 compared to
the comparable period in fiscal 2012 of $0.
Market conditions reflect not only the price that equipment can be purchased for
but also the price at which that equipment may be sold. During good economic
times when the business climate is improving, particularly in areas such as
aerospace, the demand for equipment can result in a change in the purchase
price. However the need for that equipment by customers is generally reflected
in the sale price. Therefore as a general rule margins are reasonably consistent
even though average sale prices may change. As a result we do not expect future
results to be materially impacted by these conditions.
The decrease in sales in the Precision Manufacturing Group is the result of a
decrease of $44,421 in sales of precision metal component parts from our major
customer, Panasonic Avionics in the three months ended December 31, 2012, to
$285,077 from $484,488 in fiscal 2012, offset in sales from our new customer
Goodrich Aerostructures and increases from our other customers. Furthermore new
customer sales resulted in an increase of $60,564 during the three months ended
December 31, 2012 as compared to $0 for new customers in the comparable period
in fiscal 2012.
Our Precision Manufacturing Group has approached a new major customer. We have
upgraded our manufacturing operations from primarily interiors work to a
combination of interior and structures and therefore were and are able to quote
for work with major new customers. We have manufactured parts for the aircraft
structure segment and this move helped us obtain new customers and thus
contribute to an increase in sales and profitability of the Precision
Manufacturing Group. The addition of this and other new customers should result
in a positive effect on the future results of the Company.
We anticipate that as a result of an increase in activity in the aerospace
industry, we will continue to grow the revenues of both the Machine Sales Group
and the Precision Manufacturing Group.
17
Gross Margin
Gross profit decreased by 30% in fiscal period ended December 31, 2012 compared
to the comparable period in fiscal 2012. The gross profit for the Machine Sales
Group decreased by 19% due to a decrease in margins as a result of lower prices
received for product sold and higher freight costs. The decrease within the
Precision Manufacturing Group of 42% resulted from lower sales as a result of a
weakness in the scheduling of work in the factory. Management has recognized
this weakness and is taking steps to correct the relevant weakness in the
production area.
Selling, General & Administrative
Selling, general and administrative costs increased by $247,678 to $895,498 for
the fiscal period ended December 31, 2012 compared to $647,820 for the three
months ended December 31, 2011. The change is due primarily to incurring
approximately $118,837 in costs in the current quarter for consulting and
financing fees for investor relations, public relations and loan fees and bad
debt recovery $69,258.
Amortization of Intangible Assets
Amortization expense for intangible assets for the three months ended December
31, 2012 was $0 compared to $13,764 in the comparable period in fiscal 2012.
There was no charge for amortization for the three months ended December 31,
2012 as the intangible asset had been fully amortized.
Interest Expense
Interest expense increased by $46,539 for the three months ended December 31,
2012 compared to the three months ended December 31, 2011. The change is
attributable to a higher usage of our credit line for accounts receivable
finance and interest payable on a new inventory line of credit.
Gain on Debt Settlement
There was no gain or loss for debt settlement during the three month periods
ended December 31, 2012 and 2011.
Interest Income
During the three month period ended December 31, 2012, there was no interest
income as compared to the three month period ended December 31, 2011 in which
there was interest income in the amount of $16,553.
Results of Operations for the Six Months Ended December 31, 2012 compared to the
Six Months Ended December 31, 2011.
For the six For the six
month period month period
ended December ended December
31, 31,
2012 2011 Change
Sales by segment:
Machine Sales $ 2,459,665 $ 2,861,155 (401,490 )
Precision Engineering 1,961,808 2,344,329 (382,521 )
4,421,473 5,205,484 (784,011 )
Gross Profit by segment:
Machine Sales 514,225 513,001 1,224
Precision Engineering 785,502 1,086,755 (301,253 )
1,299,727 1,599,756 (300,029 )
18
Sales
Sales in the six month period ended December 31, 2012 decreased 15% compared to
the Six month period ended December 31, 2011.
The change is attributable to a decrease in sales in the Machine Sales and
Precision Manufacturing Group. Sales decreased by 14% in the Machine Sales Group
and a decrease of 16% in the Precision Manufacturing Group.
Our Machine Sales Group primarily sells pre-owned CNC machinery manufactured by
Mori Seiki. The average sale price of the machinery changes based on the
equipment that is available to purchase in the market place and the prevailing
market conditions that affect the price that equipment can be sold for. The
average sale price of the 38 pieces of equipment sold in the six months ended
December 31, 2012 was $58,728 compared to the comparable period in fiscal 2012
of 41 pieces of equipment sold at an average sale price of $65,778. In addition
service work for the six months ended December 31, 2012 was $14,766 compared to
the comparable period in fiscal 2012 of $149467.
Market conditions reflect not only the price that equipment can be purchased for
but also the price at which that equipment may be sold. During good economic
times when the business climate is improving, particularly in areas such as
aerospace, the demand for equipment can result in a change in the purchase
price. However the need for that equipment by customers is generally reflected
in the sale price. Therefore as a general rule margins are reasonably consistent
even though average sale prices may change. As a result we do not expect future
results to be materially impacted by these conditions.
The decrease in sales in the Precision Manufacturing Group is the result of a
decrease of $707,454 in sales of precision metal component parts from our major
customer, Panasonic Avionics in the six months ended December 31, 2012, to
$736,541 from $1,443,995 in fiscal 2012, offset in sales from our new customer
Goodrich Aerostructures and increases from our other customers. Furthermore new
customer sales resulted in an increase of $141,423 during the six months ended
December 31, 2012 as compared to $0 for new customers in the six month period
ended December 31, 2011.
Our Precision Manufacturing Group approached a new major customer and as result
we have upgraded our manufacturing operations from primarily interiors work to a
combination of interior and structures and therefore were and are able to quote
for work with major new customers. We have manufactured parts for the aircraft
structure segment and this move helped us obtain new customers and thus
contribute to an increase in sales and profitability of the Precision
Manufacturing Group. The addition of this and other new customers should result
in a positive effect on the future results of the Company.
We anticipate that as a result of an increase in activity in the aerospace
industry, we will continue to grow the revenues of both the Machine Sales Group
and the Precision Manufacturing Group.
Gross Margin
Gross profit decreased by 19% in fiscal period ended December 31, 2012 compared
to the comparable period in fiscal 2012. The gross profit for the Machine Sales
Group was almost the same as that in the prior period, Margins were lower during
the current period due to lower prices obtained for machines sold as compared to
that in the prior period and higher freight costs. The decrease within the
Precision Manufacturing Group of 28% resulted from lower sales as a result of a
weakness in the scheduling of work in the factory. Management has recognized
this weakness and is taking steps to correct the relevant weakness in the
production area.
19
Selling, General & Administrative
Selling, general and administrative costs increased by $537,179 to $1,848,265
for the fiscal period ended December 31, 2012 compared to $1,311,086 for the six
months ended December 31, 2011. The change is due primarily to incurring
approximately $115,337 in costs in the current quarter for consulting and
financing fees for investor relations, public relations and loan fees, $103,838
in salaries, and increases in selling, general and administrative costs not
allocated to cost of goods sold in the current six month period.
Amortization of Intangible Assets
Amortization expense for intangible assets for the six months ended December 31,
2012 was $0 compared to $31,952 in the comparable period in fiscal 2012. There
was no charge for amortization for the six months ended December 31, 2012 as the
intangible asset had been fully amortized.
Interest Expense
Interest expense increased by $97,065 for the six months ended December 31, 2012
compared to the six months ended December 31, 2011. The change is attributable
to a higher usage of our credit line for accounts receivable finance and
interest payable on a new inventory line of credit.
Gain on Debt Settlement
During the six month period ended December 31, 2012, the gain on debt
settlements was $0 compared to $85,184 during the six month period ended
December 31, 2011. The Company negotiated various settlements of debts due by
the Company, which resulted in a net gain in the sum of $85,184 for the six
month period ended December 31, 2011.
Interest Income
During the six month period ended December 31, 2012, there was no interest
income as compared to the six month period ended December 31, 2011 in which
there was interest income in the amount of $29,151.
Liquidity and Capital Resources
Our principal sources of liquidity consist of cash and cash equivalents, cash
generated from operations and borrowing from various sources, including Main
Credit, our accounts receivable lender. As of December 31, 2012, our working
capital (current assets less current liabilities) totaled $572,948 compared to
$548,002 as of December 31, 2011, an increase of $24,946
Main Credit provides a $750,000 accounts receivable line of credit with advances
up to 80% of the outstanding receivables of Eran Engineering, Inc. This finance
bears loan interest at the lender's rate at 2% per month with the loan being
paid on a revolving basis when our customers make their payments against their
outstanding receivable balances.
The total of repayments during the three month period ended December 31, 2012
was $1,240,697 and represented payments received from customers of Eran
Engineering, Inc. Borrowings totaled $1,005,364 for this period and represented
cash borrowed from Main Credit on our line of credit with them including
interest costs.
In addition, Main Credit has provided a line of credit in the sum of $250,000
against inventory. This finance bears loan interest at lender's rate at 2%per
month.
Cash Flows
The following table sets forth our cash flows for the six month period ended
December 31, 2012:
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Provided by (used in) 2012 2011 Change
Operating activities 322,984 (96,559 ) (419,543 )
Investing activities (53,651 ) - 53,651
Financing activities (113,940 ) (10,940 ) 102,999
155,393 (107,499 ) (262,893 )
Operating Activities
Operating cash flows during the six month periods ended December 31, 2012 and
2011 respectively reflect our results of operations, offset by net cash provided
by operating assets and liabilities and non-cash items (depreciation,
amortization and stock-based compensation). During the six month period ended
December 31, 2012, non-cash expenses included in our net income and in operating
activities totaled $266,187 compared to $386,898 in the six month period ended
December 31, 2011.
The increase (decrease) in operating assets and liabilities for the six month
periods ended December 31, 2012 and 2011 respectively were $798,894 and
$(755,203), respectively. During the six month period ended December 31, 2012,
the increase was primarily attributable to an increase in accounts receivable,
accounts payable and accrued expenses and in litigation payable.
Investing Activities
We made capital expenditures of $(53,651) and $0 during the six month periods
ended December 31, 2012 and 2011 respectively.
Financing Activities
During the six month periods ended December 31, 2012 and 2011 respectively our
borrowings reduced by (net of repayments) $(113,940) and reduced our borrowings
(net of repayments) by $(10,940), respectively.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
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