10-Q 1 amin032012_10q.htm AMIN 10-Q 09-30-2012 UNITED STATES

[amin032012_10q002.gif] UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________ 

Commission File No.: 1-33640 

AMERICAN INTERNATIONAL INDUSTRIES, INC. 

(Exact Name Of Registrant As Specified In Its Charter) 

Nevada

88-0326480

(State of Incorporation)

(I.R.S. Employer Identification No.)

601 Cien Street, Suite 235, Kemah, TX

77565-3077

(Address of Principal Executive Offices)

(ZIP Code)

Registrant's Telephone Number, Including Area Code: (281) 334-9479 

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

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

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

The number of shares outstanding of each of the issuers classes of equity as of November 14, 2012 is 1,411,315 shares of common stock and 1,000 shares of preferred stock.




1




TABLE OF CONTENTS

Item

 

Description

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

3

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

24

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

29

ITEM 4T.

 

CONTROLS AND PROCEDURES

 

29

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

30

ITEM 1A.

 

RISK FACTORS

 

31

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

31

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

31

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

31

ITEM 5.

 

OTHER INFORMATION

 

31

ITEM 6.

 

EXHIBITS

 

31




2




PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

Financial Statements


Financial Statements

 

Unaudited Consolidated Balance Sheets – September 30, 2012 and December 31, 2011

4

Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2012 and 2011

6

Unaudited Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011

7

Notes to Unaudited Consolidated Financial Statements

9




3



AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


 

September 30, 2012

December 31, 2011

Assets

 

 

Current assets:

 

 

   Cash and cash equivalents

$

1,273,848

$

869,246

   Trading securities

-

155,600

   Accounts receivable from related parties

3,191

-

   Accounts receivable, less allowance for doubtful accounts

 

 

     of $33,671 and $24,290, respectively

2,561,249

1,211,000

   Notes receivable – related party

181,000

-

   Short-term notes receivable

-

62,500

   Current portion of notes receivable

525,604

320,359

   Inventories, net

2,116,030

1,905,015

   Real estate held for sale

7,131,909

7,915,512

   Prepaid expenses and other current assets

77,331

77,782

   Assets held for sale

-

3,577,340

     Total current assets

13,870,162

16,094,354

 

 

 

Long-term notes receivable, less current portion

1,464,453

296,300

Oil & gas properties – unproved

8,400

8,400

Property and equipment, net of accumulated depreciation and amortization

1,986,656

2,028,532

Goodwill

674,539

674,539

Patents & trademarks, net of accumulated amortization

140,764

44,910

Marketable securities - available for sale

13,000

7,800

Other assets

4,005

4,005

Assets held for sale

-

1,707,686

       Total assets

$

18,161,979

$

20,866,526

Liabilities and Equity

 

 

Current liabilities:

 

 

   Accounts payable and accrued expenses

$

2,002,988

$

1,933,212

   Bank overdrafts

21,987

26,596

   Short-term notes payable

-

145,719

   Accounts and notes payable to related parties

3,456

6,497

   Current installments of long-term debt

1,533,387

2,045,359

   Liabilities associated with assets held for sale

-

2,763,857

     Total current liabilities

3,561,818

6,921,240

 

 

 

Accrued pension expense

48,708

56,277

Long-term debt, less current installments

2,651,872

1,374,955

Long-term liabilities associated with assets held for sale

-

49,843

     Total liabilities

6,262,398

8,402,315

 

 

 

Commitments and contingencies

-

-




4




 

September 30, 2012

December 31, 2011

Equity:

 

 

   Preferred stock, $0.001 par value, 1,000,000 authorized, 1,000 shares

 

 

       issued and outstanding

   Common stock, $0.001 par value, 50,000,000 authorized;

 

 

       1,619,714 and 1,601,714 shares issued, respectively and

 

 

       1,417,915 and 1,536,471 shares outstanding, respectively

1,620 

1,602 

   Additional paid-in capital

38,032,787 

36,952,561 

   Stock subscription receivable

(72,000)

(72,000)

   Accumulated deficit

(24,114,170)

(23,066,214)

   Accumulated other comprehensive loss

(1,392,000)

(1,397,200)

   Less treasury stock, at cost; 201,799 and 65,243 shares, respectively

(833,409)

(628,694)

   Total American International Industries, Inc. equity

11,622,829 

11,790,056 

       Non-controlling interest

276,752 

674,155 

   Total equity

11,899,581 

12,464,211 

   Total liabilities and equity

$

18,161,979 

$

20,866,526 


See accompanying notes to the unaudited consolidated financial statements.



5



AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)


 

For the Three Months Ended

September 30,

For the Nine Months Ended

September 30,

 

2012

2011

2012

2011

Revenues

$

3,121,692 

$

4,405,063 

$

5,254,133 

$

8,426,403 

Costs and expenses:

 

 

 

 

   Cost of sales

2,382,994 

3,255,454 

3,883,293 

6,180,467 

   Selling, general and administrative

824,304 

1,696,917 

2,887,019 

4,316,459 

     Total operating expenses

3,207,298 

4,952,371 

6,770,312 

10,496,926 

 

 

 

 

 

   Gain (loss) on sale of assets

(203,992)

3,476,824 

(272,002)

3,476,824 

 

 

 

 

 

Operating income (loss)

(289,598)

2,929,516 

(1,788,181)

1,406,301 

 

 

 

 

 

Other income (expenses):

 

 

 

 

   Interest and dividend income

21,068 

1,553 

40,502 

15,250 

   Botts lawsuit settlement

(49,281)

   NPI lawsuit settlement

(34,400)

(54,500)

   Shumate lawsuit settlement

(40,000)

(40,000)

   Realized gains (losses) on the sale of trading securities, net

30,233 

(534,320)

42,997 

(791,163)

   Unrealized gains (losses) on trading securities, net

4,384 

290,192 

(4,074)

206,759 

   Interest expense

(56,808)

(66,965)

(174,320)

(235,784)

   Other income (expense), net

(49,282)

(69,692)

(10,633)

(76,094)

     Total other expenses

(124,805)

(379,232)

(249,309)

(881,032)

 

 

 

 

 

     Income (loss) before income tax

(414,403)

2,550,284 

(2,037,490)

525,269 

     Income tax expense (benefit)

3,340 

123,325 

(23,218)

128,335 

     Income (loss) from continuing operations, net of income taxes

(417,743)

2,426,959 

(2,014,272)

396,934 

     Gain (loss) on disposal of discontinued operations

1,498,327 

(50,000)

     Income (loss) from discontinued operations, net of income taxes

54,408 

(922,517)

187,031 

     Net income (loss)

(417,743)

2,481,367 

(1,438,462)

533,965 

     Net loss attributable to the non-controlling interest

27,143 

4,861 

390,506 

27,362 

     Net income (loss) attributable to American International Industries, Inc.

$

(390,600)

$

2,486,228 

$

(1,047,956)

$

561,327 

Net income (loss) per common share - basic and diluted:

 

 

 

 

     Continuing operations

$

(0.26)

$

1.64 

$

(1.07)

$

0.33 

     Discontinued operations

0.00 

0.04 

0.38 

0.10 

     Total

$

(0.26)

$

1.68 

$

(0.69)

$

0.43 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

1,483,851 

1,483,245 

1,516,649 

1,307,234 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

     Net income (loss)

$

(417,743)

$

2,481,367 

$

(1,438,462)

$

533,965 

     Unrealized gain (loss) on marketable securities

(11,050)

5,200 

(121,550)

Total comprehensive income (loss)

(417,743)

2,470,317 

(1,433,262)

412,415 

     Comprehensive  loss attributable to the non-controlling interests

27,143 

4,861 

390,506 

27,362 

Comprehensive income (loss) attributable to American International Industries, Inc.

$

(390,600)

$

2,475,178 

$

(1,042,756)

$

439,777 

See accompanying notes to the unaudited consolidated financial statements.



6



AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


 

For the Nine Months Ended September 30,

 

2012

2011

Cash flows from operating activities:

 

 

   Net income (loss)

$

(1,438,462)

$

533,965 

   Income from discontinued operations, net of income taxes

575,810 

137,031 

   Net income (loss) from continuing operations

(2,014,272)

396,934 

   Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations:

 

 

       Depreciation and amortization

61,806 

48,334 

       Share-based compensation

42,600 

1,284,627 

       Amortization of guarantor fee

18,505 

12,032 

       Other income from forgiveness of debt

(15,000)

       (Gain) loss on sale of assets

272,002 

(3,476,824)

       Realized (gains) losses on the sale of trading securities, net

(42,997)

791,163 

       Unrealized (gains) losses on trading securities, net

4,074 

(206,759)

       Change in operating assets and liabilities:

 

 

          Accounts receivable

(1,350,249)

(1,030,974)

          Inventories

(211,015)

746,249 

          Prepaid expenses and other current assets

(18,054)

(30,130)

          Other assets

5,552 

          Accounts payable and accrued expenses

1,123,637 

(1,425,272)

             Net cash used in operating activities from continuing operations

(2,128,963)

(2,885,068)

  

 

 

Cash flows from investing activities from continuing operations:

 

 

   Investment in certificate of deposit

(50,000)

(5,381)

   Redemption of certificate of deposit

50,000 

   Purchase of trading securities

(211,552)

(1,596,475)

   Sale of trading securities

426,783 

2,572,421 

   Proceeds from sale of subsidiary

1,600,000 

   Proceeds from sale of real estate

511,601 

   Purchase of property and equipment

(3,510)

(3,133)

   Costs of securing patents and trademarks

(112,274)

   Proceeds from notes receivable

89,102 

109,980 

            Net cash provided by investing activities from continuing operations

2,300,150 

1,077,412 

  

 

 

Cash flows from financing activities from continuing operations:

 

 

   Proceeds from issuance of common stock

977,001 

   Net borrowings under line of credit agreements

884,000 

580,963 

   Bank overdrafts

(4,609)

12,488 

   Proceeds from the issuance of debt

20,000 

   Principal payments on debt

(269,774)

(515,123)

   Loans to related parties

(187,232)

(12,795)

   Payments for acquisition of treasury stock of subsidiary

(4,255)

(95)

   Payments for acquisition of treasury stock

(204,715)

(22,783)

            Net cash provided by financing activities from continuing operations

233,415 

1,019,656 

 

 

 

Net increase (decrease) in cash and cash equivalents from continuing operations

404,602 

(788,000)

Cash and cash equivalents at beginning of period

869,246 

1,446,690 

Cash and cash equivalents at end of period

$

1,273,848 

$

658,690 




7




 

For the Nine Months Ended September 30,

 

2012

2011

Discontinued operations:

 

 

   Net cash provided by operating activities

$

300,902 

$

482,094 

   Net cash used in investing activities

(125,399)

(12,218)

   Net cash used in financing activities

(186,158)

(441,262)

Net increase (decrease) in cash and cash equivalents from discontinued operations

(10,655)

28,614 

Cash and cash equivalents at beginning of period from discontinued operations

10,655 

24,672 

Cash and cash equivalents at end of period from discontinued operations

$

$

53,286 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

   Interest paid 

$

174,152 

$

348,741 

   Income taxes paid

$

$

73,751 

 

 

 

Non-cash investing and financing transactions:

 

 

   Unrealized gain (loss) on marketable securities

$

5,200 

$

(121,550)

   Note payable issued for lawsuit settlement

$

$

400,000 

   Adjustment to non-controlling interest in AMIH and BOG

$

563,319 

$

29,935 

   AMIH preferred dividends declared and unpaid

$

20,000 

$

180,000 

   Reversal of preferred dividends of AMIH

$

1,055,000 

$

   Stock issued to related party for receivable

$

$

74,000 

   Stock issued to related party for real estate

$

$

520,382 

   VOMF settlement recorded as deemed dividend for AMIH

$

$

250,000 

   SET receivable from foreclosure of certificate of deposit

$

$

532,500 

   Issuance of BOG stock for oil & gas properties

$

$

8,400 

   Preferred stock issued to officer as guarantor fee

$

$

49,463 

   Note receivable received from sale of AMIH’s assets

$

1,400,000 

$


See accompanying notes to the unaudited consolidated financial statements.



8



AMERICAN INTERNATIONAL INDUSTRIES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Note 1 - Summary of Significant Accounting Policies


The accompanying unaudited interim consolidated financial statements of American International Industries, Inc. (“American”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in American's latest Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.


Organization, Ownership and Business


American, a Nevada corporation, operates as a diversified holding company with a number of wholly-owned subsidiaries and some partially owned subsidiaries. American is a diversified corporation with interests in industrial/commercial companies and an oil and gas service business. American's business strategy is to acquire controlling equity interests in businesses that it considers undervalued. American's management takes an active role in providing its subsidiaries with access to capital, leveraging synergies and providing management expertise in order to improve its subsidiaries' growth.


Principles of Consolidation


The consolidated financial statements include the accounts of American International Industries, Inc. ("American") and its wholly-owned subsidiaries Northeastern Plastics, Inc. ("NPI") and American International Texas Properties, Inc. ("AITP"), American International Holdings Corp. (“AMIH”), formerly Delta Seaboard International, Inc. ("Delta"), in which American holds a 86.8% shareholder interest, and Brenham Oil & Gas Corp. (“BOG”), in which American holds a 53.2% interest.  All significant intercompany transactions and balances have been eliminated in consolidation.


On October 17, 2012, American effected a reverse stock split whereby all outstanding shares of its common stock were subject to a reverse split on a one for ten (1:10) basis. All share and per share amounts for American contained in this Form 10Q have been retroactively adjusted to reflect the reverse stock split.


On August 13, 2012, AMIH effected a reverse stock split whereby all outstanding shares of its common stock were subject to a reverse split on a one for one hundred (1:100) basis. All share and per share amounts for AMIH contained in this Form 10Q have been retroactively adjusted to reflect the reverse stock split.


On April 3, 2012, AMIH entered into an Asset Purchase Agreement with Delta Seaboard, LLC (the "Purchaser"), a Texas limited liability company that is owned and controlled by Robert W. Derrick, Jr. and Ronald D. Burleigh, Delta's president and director and vice-president and director, respectively, Delta Seaboard Well Service, Inc. ("DSWSI"), a Texas corporation and a wholly-owned subsidiary of AMIH, and American.

 

The agreement provided, among other things, that: (i) AMIH sell, transfer and assign the assets and liabilities of DSWSI to the Purchaser; (ii) Messrs. Derrick and Burleigh resign as executive officers and as members of AMIH’s board of directors; and (iii) Messrs. Derrick and Burleigh transfer and assign all of their 319,258 AMIH shares valued at $624,704 to American. In consideration for the sale, transfer and assignment of the DSWSI net assets to Purchaser, Purchaser paid $1,600,000 in cash at the closing and executed a 5 year note bearing interest at 5% per annum in the face amount of $1,400,000.  Total consideration for the sale was $3,000,000.  The note is personally guaranteed by Messrs. Derrick and Burleigh and is secured by the 3.2 acre parcel on which the business of DSWSI is located (the "DSWSI Property"). Notwithstanding its 5 year term, the Note expressly provides that the principal and interest shall be prepaid in full upon the sale of the DSWSI Property. AMIH will receive additional consideration equal to the amount that Delta LLC receives from the planned sale of the 3.2 acre property in excess of $3 million.

 



9



The assets of DSWSI are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheet as of December 31, 2011 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20).  Discontinued operations for the nine months ended September 30, 2012 include a gain on disposal of DSWSI of $1,498,327 for total consideration of $3,000,000 less DSWSI's assets and associated liabilities of $1,501,673 (Note 7).  DSWSI's net loss of $922,517 for the nine months ended September 30, 2012, and net income of $54,408 and $191,441 for the three and nine months ended September 30, 2011, respectively, are included in discontinued operations.


Currently, corporate overhead includes BOG, a division that owns an oil, gas and mineral royalty interest in Washington County, Texas and an oil field in Abilene, Texas.  Through BOG, the Company is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves.  The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. In April 2010, American entered into a Separation and Distribution Agreement to spin off Brenham Oil & Gas, Inc., which was 100% owned by American. In conjunction with this transaction, American formed Brenham Oil & Gas, Corp. with authorized common stock of 200,000,000 shares and authorized preferred stock of 10,000,000 shares. BOG issued 64,977,093 shares of common stock to American for all shares of Brenham Oil & Gas, Inc., of which American issued as a dividend 10,297,019 shares to the existing stockholders of American. American maintains control of Brenham through ownership of 58,680,074 shares of Brenham's common stock, representing about 53.2% of the outstanding shares as of September 30, 2012.The resale registration statement of Brenham was declared effective by the SEC on May 16, 2011. This registration statement registered 10,279,019 shares of Brenham common stock issued to American shareholders as a dividend on July 21, 2010. BOG is a separate reporting company, and BOG's common stock is quoted on the Over-The-Counter Bulletin Board beginning in August 2011.

 

Reclassifications

 

Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation.  All reclassifications have been applied consistently to the periods presented.


Net Income (Loss) Per Share


The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during a period. Diluted net income (loss) per common share is computed by dividing the net income (loss), adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities.  For the three and nine months ended September 30, 2012 and 2011, potential dilutive securities that had an anti-dilutive effect were not included in the calculation of diluted net income (loss) per common share. These securities include 10,000 options to purchase shares of common stock that were not "in the money".

 

Management's Estimates and Assumptions


The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.

 

Fair Value of Financial Instruments


Effective January 1, 2008, American adopted the framework for measuring fair value that establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Basis of Fair Value Measurement

 

Level 1    Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2    Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 



10



Level 3   Unobservable inputs reflecting American's own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

American believes that the fair value of its financial instruments comprising cash, accounts receivable, notes receivable, accounts payable, and notes payable approximate their carrying amounts.  The interest rates payable by American on its notes payable approximate market rates.  The fair values of American's Level 1 financial assets, trading securities and marketable securities - available for sale that primarily include shares of common stock in various companies, are based on quoted market prices of the identical underlying security. As of September 30, 2012 and December 31, 2011, American did not have any significant Level 2 or 3 financial assets or liabilities.


The following tables provide fair value measurement information for American's trading securities and marketable securities - available for sale:  


 

As of September 30, 2012

 

 

 Fair Value Measurements Using: 

 

Carrying

Amount

Total

Fair Value

Quoted Prices

in Active Markets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

Financial Assets:

 

 

 

 

 

  Trading Securities

$

-

$

-

$

-

$

-

$

-

  Marketable Securities - available for sale

$

13,000

$

13,000

$

13,000

$

-

$

-

 

 

As of December 31, 2011

 

 

 Fair Value Measurements Using: 

 

Carrying

Amount

Total

Fair Value

Quoted Prices

in Active Markets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

Financial Assets:

 

 

 

 

 

  Trading Securities

$

155,600

$

155,600

$

155,600

$

-

$

-

  Marketable Securities - available for sale

$

7,800

$

7,800

$

7,800

$

-

$

-

 

Subsequent Events

 

American has evaluated all transactions from September 30, 2012 through the financial statement issuance date for subsequent event disclosure consideration.

 

New Accounting Pronouncements

 

There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our consolidated financial position, operations or cash flows.

 

Note 2 - Concentrations of Credit Risk

 

American maintains its cash and certificates of deposit in commercial accounts at major financial institutions. The FDIC no longer has limits on non-interest bearing accounts. Although the financial institutions are considered creditworthy, at September 30, 2012, American's cash and certificates of deposit balances held in banks in interest bearing accounts exceeded the limit covered by the Federal Deposit Insurance Corporation by approximately $7,200. The terms of these deposits are on demand to minimize risk. American has not incurred losses related to these deposits.

 



11



Trade accounts receivable subject American to the potential for credit risk with customers in the retail and distribution sectors. To reduce credit risk, American performs ongoing evaluations of its customer’s financial condition but generally does not require collateral. As of and during the nine months ended September 30, 2012, NPI had one customer that accounted for 23% of revenues and 30% of trade accounts receivable, one customer that accounted for 12% of revenues, and one customer that accounted for 13% of accounts receivable on a consolidated basis.


Note 3 - Trading Securities and Marketable Securities - Available for Sale


Investments in equity securities primarily include shares of common stock in various companies that are bought and held principally for the purpose of selling them in the near term with the objective of generating profits on short-term differences in price. These investments are classified as trading securities and, accordingly, any unrealized changes in market values are recognized in the consolidated statements of operations.  For the three months ended September 30, 2012 and 2011, American had net unrealized trading gains of $4,384 and $290,192, respectively, related to securities held on those dates.  American recorded net realized gains of $30,233 and losses of $534,320 for the three months ended September 30, 2012 and 2011, respectively.  For the nine months ended September 30, 2012 and 2011, American had net unrealized trading losses of $4,074 and gains of $206,759, respectively, related to securities held on those dates.  American recorded net realized gains of $42,997 and losses of $791,163 for the nine months ended September 30, 2012 and 2011, respectively.


On June 21, 2010, American received as compensation for consulting services 1,000,000 restricted shares of ADB International Group, Inc. ("ADBI") common stock valued at $1,370,000, based on the closing market price of $1.37 per share on that date.  On December 8, 2010, American purchased an additional 300,000 shares for $35,000. This investment is classified as marketable securities - available for sale and, accordingly, any unrealized changes in market values are recognized as other comprehensive loss.  At September 30, 2012, this investment was valued at $13,000, based on the closing market price of $0.01 per share on that date.  American recognized other comprehensive gains of $5,200 for the nine months ended September 30, 2012 and losses of $11,050 and $121,550 for the three and nine months ended September 30, 2011, respectively, for the unrealized changes in market values for this investment.


Equity markets can experience significant volatility and therefore are subject to changes in value. Based upon the current volatile nature of the U.S. securities markets and the decline in the U.S. economy, we believe that it is possible, that the market values of our equity securities could decline in the near term. We have a policy in place to review our equity holdings on a regular basis. Our policy includes, but is not limited to, reviewing each company’s cash position, earnings/revenue outlook, stock price performance, liquidity and management/ownership. American seeks to manage exposure to adverse equity returns in the future by potentially increasing the diversity of our securities portfolios.

 

Note 4 - Notes receivable

 

Short-term notes receivable consists of the following:


 

September 30, 2012

December 31, 2011

Unsecured note receivable, interest at 3%, principal and interest due on March 30, 2012 (a)

$

-

$

62,500


(a) Unsecured note receivable due March 30, 2012.  This note replaced the $120,000 note previously owed by Lakeland Partners III, L.P.  In September 2011, American and Kentner Shell entered into an agreement whereby the $120,000 note was paid in full for consideration of $62,500 in cash and a new note agreement for $62,500, due in full with interest on March 30, 2012.  On June 15, 2012, Shell paid the balance due on this note.

 

Short-term related party notes receivable:


On July 13, 2012, AITP entered into an agreement with Daniel Dror II to purchase a 48-acre tract, or 50% undivided interest in a 96-acre tract, of property located in Galveston County.  Daniel Dror II signed a promissory note in the amount of $181,000 for an earnest money contract associated with this agreement, bearing interest at 5% per year, with the principal amount due on or before July 13, 2013, in the event that the purchase of the property is not finalized.  In the event of a final sale, the $181,000 will be considered as cash consideration for the purchase.  Daniel Dror II is the adult son of Daniel Dror, CEO.



12



Long-term receivables consist of the following:


 

September 30, 2012

December 31, 2011

Unsecured note receivable for sale of former subsidiary, Marald, Inc., principal and interest due monthly through September 5, 2012

$

$

20,359 

Unsecured note receivable for sale of former subsidiary, Marald, Inc., due in monthly payments of $3,074, including interest at 4%, beginning July 1, 2012 through June 1, 2022 (a)

293,757 

300,000 

Note receivable for the sale of DSWSI, interest due monthly at 5%, principal due on or before April 3, 2017, or upon sale of the 3.2 acre property securing the note (Note 1)

1,400,000 

Unsecured note receivable purchased from Texas Community Bank, interest at 8% due monthly, principal due January 2009 (b)

300,000 

Unsecured note receivable, interest at 3% due in semi-annual payments, principal due on or before October 1, 2014 (c)

596,300 

596,300 

Total notes receivable

2,290,057 

1,216,659 

Reserve due to uncertainty of collectability

(300,000)

(600,000)

 

1,990,057 

616,659 

Less current portion

(525,604)

(320,359)

Long-term notes receivable

$

1,464,453 

$

296,300 


(a) Sale of former subsidiary, Marald, Inc., principal and interest due monthly through July 2012.  The original note was for $300,000 and was discounted to $200,000 for the receipt of full payment on or before October 25, 2007.  On May 4, 2010, a new promissory note was executed in the amount of $300,000 for the note balance plus accrued interest, with the payment terms indicated above.  As of September 30, 2012, the other note receivable with Marald has been paid in full and payments began on this note under a new extension and renewal agreement in July 2012.


(b) Note purchased from Texas Community Bank with a face amount of $300,000.  This delinquent note owed by Las Vegas Premium Gold was purchased on September 30, 2009 for $300,000.  This note was purchased as an investment to receive the interest income from the note.  During the nine months ended September 30, 2012, American wrote this note off against the notes receivable reserve.

 

(c) Unsecured note receivable due October 1, 2014. This note was issued for $601,300. This note was previously owed by Southwest Gulf Coast Properties, Inc. ("SWGCP") resulting from closing costs, principal and interest paid by American on the SWGCP loan at TXCB. In February, SWGCP obtained a judgment against Kentner Shell ("Shell"), who personally guaranteed the note, for $4,193,566 for matters related to these condominiums.  On September 30, 2011, SWGCP assigned all of its interests in this judgment to American in exchange for this note and $10.  In September 2011, American and Shell entered into an agreement whereby Shell will make quarterly payments in the amount of $100,000, beginning April 1, 2012.  Further, in the event that Shell pays $400,000 on or before October 1, 2012, the debt will be considered paid in full.  In the event that Shell pays $500,000 on or before October 1, 2013, the debt will be considered paid in full. Shell previously owed a short-term note of $62,500 that was due in full with interest on March 30, 2012. On June 15, 2012, Shell paid the balance due on this note. Management believes that because Shell has paid the short-term note and has sufficient assets to pay the balance of this note that this note is fully collectible. American has not specifically discounted this note due to the $300,000 reserve for the uncertainty of collectability which has been recorded for notes receivable.

 

American has reserved a total of $300,000 on all notes in the aggregate due to uncertainty of collectability. American believes this reserve remains appropriate at September 30, 2012.

 

Interest income on notes receivable is recognized principally by the simple interest method.  During the three and nine months ended September 30, 2012 and 2011, American recognized interest income of $20,479, $39,666, $646, and $7,307, respectively.

 

Note 5 - Inventories

 

Inventories consisted of the following:


 

September 30, 2012

December 31, 2011

Finished goods

2,136,075 

1,906,947 

Less reserve

(20,045)

(1,932)

 

$

2,116,030 

$

1,905,015 

 



13



Note 6 - Real Estate Held for Sale

 

Real estate held for sale consisted of the following:


 

September 30, 2012

December 31, 2011

65 acres in Galveston County, Texas

$

520,382

$

520,382

1.705 acres in Galveston County, Texas

460,000

460,000

Two residential lots in Galveston County, Texas

95,861

95,861

Dawn Condominium units on the waterfront in Galveston, Texas; 10 units and 15 units as of September 30, 2012 and December 31, 2011, respectively (a)

1,252,131

1,874,809

14 acres - vacant commercial use land in Houston, Texas (b)

-

160,925

5 acres - vacant commercial use land in Houston, Texas

1,303,905

1,303,905

19 acres - vacant mixed use land in Houston, Texas

1,072,833

1,072,833

12 acres - vacant mixed use land in Houston, Texas

742,731

742,731

174 acres in Waller County, Texas

1,684,066

1,684,066

 

$

7,131,909

$

7,915,512

  

(a)

Dawn Condominium units on the waterfront in Galveston, Texas - During the three months ended September 30, 2012, one Dawn Condominium unit was sold for $49,130, resulting in a loss on sale of assets of $43,067. During the nine months ended September 30, 2012, five Dawn Condominium units were sold for $511,601, resulting in a loss on sale of assets of $111,077.

(b)

14 acres – vacant commercial use land in Houston, Texas – During the three months ended September 30, 2012, this property was granted to a third party to save on property taxes associated with holding this property, resulting in a loss of $160,925.


American reviewed the accounting standards Real Estate - General (ASC 970-10) and Property, Plant, and Equipment (ASC 360-10) to determine the appropriate classification for these properties.  According to ASC 970-10, real estate that is held for sale in the ordinary course of business is classified as inventory, which is a current asset.  ASC 360-10 provides the following criteria for property to be classified as held for sale:


·

Management with the appropriate authority commits to a plan to sell the asset;

·

The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

·

An active program to locate a buyer and other actions required to complete the plan of sale have been initiated;

·

The sale of the property or asset within one year is probable and will qualify for accounting purposes as a sale;

·

The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

·

Actions required to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.


Management consulted with the real estate brokers for these properties and reviewed the recent interest for each property.  Based on our consultations and review, we believe that the sale of these properties within one year is probable.  We concluded that all of these criteria have been met for these properties and that they are appropriately classified as held for sale in current assets.

 

Note 7 - Assets held for sale

 

On April 3, 2012, AMIH sold the assets and liabilities of DSWSI as discussed in Note 1. 

 

The assets and liabilities of DSWSI are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheet as of December 31, 2011 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20).  Discontinued operations for the nine months ended September 30, 2012 include a gain on disposal of DSWSI of $1,498,327 for total consideration of $3,000,000 less DSWSI's assets and associated liabilities of $1,501,673.  DSWSI's net loss of $922,517 for the nine months ended September 30, 2012, and net income of $54,408 and $191,441 for the three and nine months ended September 30, 2011, respectively, are included in discontinued operations.

 



14



On April 22, 2011, American entered into a stock purchase agreement, whereby Joe Hoover, President of Downhole Completion Products, Inc. ("DCP), purchased for $5,000 American's 80% ownership of DCP's assets and associated liabilities. DCP's net loss of $4,410 for the nine months ended September 30, 2011 is included in discontinued operations. During the nine months ended September 30, 2011, American received the $5,000 for the purchase. This is included as income from discontinued operations for the nine months ended September 30, 2011. American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the nine months ended September 30, 2011.


The carrying amounts of the major classes of assets and liabilities for DSWSI at December 31, 2011 are summarized below:


 

December 31, 2011

Assets held for sale

 

Current assets:

 

Cash and cash equivalents

$

10,655

Trading securities

105

Accounts receivable, less allowance for doubtful accounts of $55,087

1,469,406

Inventories

1,862,098

Prepaid expenses and other current assets

235,076

Total current assets held for sale

3,577,340

 

 

Property and equipment, net of accumulated depreciation

1,701,186

Other assets

6,500

Total assets held for sale

$

5,285,026


Liabilities associated with assets held for sale

 

Current liabilities:

 

Accounts payable and accrued expenses

$

486,684

Bank overdrafts

81,392

Short-term notes payable

89,080

Current installments of long-term debt

2,106,701

Total current liabilities associated with assets held for sale

2,763,857

 

 

Long-term debt, less current installments

49,843

Total liabilities associated with assets held for sale

$

2,813,700


The gain on disposal of DSWSI is summarized below:


 

April 3, 2012

Cash

$

1,600,000

Note receivable

1,400,000

  Total consideration

3,000,000

DSWSI's assets less associated liabilities

1,501,673

  Gain on disposal of DSWSI

$

1,498,327




15



DSWSI's and DCP's revenues and net income (loss) before income tax are summarized below:


 

For the Three Months Ended September 30,

 

For the Nine Months Ended

September 30,

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 DSWSI

$

-

 

$

2,941,919

 

$

3,598,374 

 

$

8,151,616 

 DCP

-

 

-

 

 

246,131 

  Total revenues from discontinued operations

$

-

 

$

2,941,919

 

$

3,598,374 

 

$

8,397,747 

Net income (loss) before income tax

 

 

 

 

 

 

 

 DSWSI

$

-

 

$

64,431

 

$

(883,373)

 

$

212,701 

 DCP

-

 

-

 

 

(4,410)

  Net loss before income tax

$

-

 

$

64,431

 

$

(883,373)

 

$

208,291 

Gain on disposal of discontinued operations

 

 

 

 

 

 

 

 DSWSI

$

-

 

$

-

 

$

1,498,327 

 

$

 DCP

-

 

-

 

 

(50,000)

  Gain (loss) on disposal of discontinued operations

$

-

 

$

-

 

$

1,498,327 

 

$

(50,000)

 

Note 8 - Property and Equipment

 

Major classes of property and equipment together with their estimated useful lives, consisted of the following:


 

Years

September 30, 2012

December 31, 2011

Land

-

$

1,663,020 

$

1,663,020 

Building and improvements

20

922,945 

922,945 

Machinery and equipment

7-15

112,991 

112,991 

Office equipment and furniture

7

150,900 

147,390 

 

 

2,849,856 

2,846,346 

Less accumulated depreciation

 

(863,200)

(817,814)

Net property and equipment

 

$

1,986,656 

$

2,028,532 


Depreciation expense for the three and nine months ended September 30, 2012 and 2011 was $15,168, $45,386, $16,810, and $48,334, respectively.


Note 9 - Intangible Assets

 

Intangible assets at September 30, 2012 consisted of the following:


 

Gross Carrying Amount

Accumulated Amortization

Intangibles, net

Average Weighted Lives

Goodwill related to the acquisition of NPI

 

 

$

674,539

N/A

 

 

 

 

 

Patents for new NPI products

$

160,301

$

19,537

$

140,764

3-10 years

 



16



Intangible assets at December 31, 2011 consisted of the following:

 

 

Gross Carrying Amount

Accumulated Amortization

Intangibles, net

Average Weighted Lives

Goodwill related to the acquisition of NPI

 

 

$

674,539

N/A

 

 

 

 

 

Patents for new NPI products

$

48,027

$

3,117

$

44,910

3-10 years

 

Amortization expense for the three and nine months ended September 30, 2012 and 2011 was $8,730, $16,420, $0, and $0, respectively.


Note 10 - Short-term Notes Payable


 

September 30, 2012

December 31, 2011

Note payable with interest at 0.00%, principal due in monthly payments of $20,000 through April 20, 2012 (a)

$

-

$

80,000

Note payable with interest at 5% due monthly, principal due in monthly payments of $20,000, with a final principal balance due on February 1, 2012, secured by trading securities (b)

-

65,719

 

$

-

$

145,719


(a) On June 29, 2011, AMIH entered into an agreement, with an effective date of July 1, 2011, with Vision Opportunity Master Fund, Ltd. (“VOMF”), pursuant to which VOMF agreed to convert 3,769,626 shares of the Company’s preferred stock, constituting all of AMIH’s outstanding preferred stock, into 37,696 shares (3,769,626 shares pre-split) of common stock and also agreed to waive all accrued dividends payable on the preferred stock. In consideration for the conversion, AMIH agreed to pay VOMF total consideration of $250,000, $50,000 of which was paid on July 1, 2011, and the $200,000 remainder is due and payable at the rate of $20,000 per month. On February 23, 2012, AMIH completed the agreement with VOMF. VOMF accepted a payment of $65,000 in full satisfaction of this note, and the difference of $15,000 was recognized as other income from forgiveness of debt. On February 29, 2012, 3,769,626 shares of AMIH's preferred stock were converted into 37,696 shares (3,769,626 shares pre-split) of AMIH's common stock.

 

(b) On July 31, 2012, a settlement was reached in the Botts lawsuit and the balance of this note was paid in full.

 

Each of American's subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s inventory, accounts receivable, property and equipment and guarantees from American.  At September 30, 2012 and December 31, 2011, the average annual interest rates of our short-term borrowings were approximately 0.00% and 2.25%, respectively.



17



Note 11 - Long-term Debt

 

Long-term debt consisted of the following:


 

September 30, 2012

December 31, 2011

Note payable to a bank, due in monthly installments of $11,549, including interest at 7.25% with a principal balance due in November 2013, secured by real property. (a)

$

1,384,296 

$

1,411,351 

Revolving line of credit to a bank, which allows NPI to borrow up to $2,250,000, interest due monthly at the greater of prime (3.25%) plus one or 5%, principal balance due in April 2013, secured by assets of NPI. (a)

1,482,963 

598,963 

Note payable to a bank, due in quarterly payments of interest only, with interest at 5%, with a principal balance due in May 2014, secured by real property.

1,300,000 

1,410,000 

Note payable, due in monthly payments of $1,000, with interest at 4%, due March 2014 (a)

18,000 

 

4,185,259 

3,420,314 

Less current portion

(1,533,387)

(2,045,359)

 

$

2,651,872 

$

1,374,955 


(a) Daniel Dror, Chairman and CEO of American, is a personal guarantor of these notes payable.

 

Each of American's subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s inventory, accounts receivable, property and equipment and guarantees from American.

 

Principal repayment provisions of long-term debt are as follows at September 30, 2012:

 

2012

$

12,347

2013

2,869,912

2014

1,303,000

Total

$

4,185,259


Note 12 - Commitments and Contingencies

 

American International Industries, Inc. v. William W. Botts. American filed this lawsuit against William W. Botts (“Botts”) seeking damages as a result of a Stock Purchase Agreement and Consulting Agreement that American entered into with Botts on September 12, 2007. Under the Stock Purchase Agreement, American gave Botts $1,000,000 in cash and 28,800 shares of restricted AMIN stock (24,000 original shares plus a 20% stock dividend) for 170,345 shares of OI Corporation. As part of the original agreement, Botts had the right to sell the 28,800 shares back to American for $41.70 per share. Under the Consulting Agreement, American agreed to pay Botts $14,000 per month, plus expenses for performing consulting services. On or about November 5, 2008, American paid Botts $100,000 to terminate the Consulting Agreement to stop the accrual of monthly consulting payments to Botts. Effective February 25, 2011, the parties settled the proceedings against each other, pursuant to which American paid Botts $1,250,000 and executed a $400,000 one year promissory note (note 10) with 5% annual interest paid in monthly installments to Botts due by February 1, 2012. The 28,800 restricted American shares in Botts name were transferred to the Dror Family Trust in consideration for the cash payment to American of approximately $1,400,000 and the issuance to certain Dror related entities and an entity controlled by Mr. Dror's brother, of 110,000 restricted American shares. The cash proceeds from the restricted share sale were used to fund the settlements to Botts.

 

On July 1, 2012, the parties reached another settlement, pursuant to which American paid Botts $115,000, of which $65,719 was for payment of the balance of the note.  The remaining $49,281 was recorded as Botts lawsuit settlement expense during the nine months ended September 30, 2012.

 

American International Industries, Inc. v. Rubicon Financial Incorporated.  On March 5, 2010, American filed suit against Rubicon Financial Corporation (OTCBB: RBCF.OB), a Nevada corporation with offices in Irvine, CA ("Rubicon"), and Rubicon's control person, chief executive officer and primary financial officer, Joe Mangiapane, Jr., in the District Court, 281st Judicial District, Harris County, TX, for breach of contract, rescission, fraudulent inducement, common law fraud and fraud in the sale of securities. The action related to the acquisition by American on November 27, 2007, of 1,000,000 restricted shares of Rubicon's common stock for a $1,000,000 cash payment and the issuance of 20,000 restricted shares of American's common stock, valued at $49.00 per common share based upon the closing market price on the date of acquisition.



18



On August 19, 2011, American was granted a default judgment for fraud and breach of contract against Rubicon in the amount of $2,000,000 plus attorney's fees and accrued interest at 5% per annum by the 281st District Court, following which American, through California counsel, commenced a separate proceeding seeking to enforce the judgment against Rubicon in a court of competent jurisdiction in Orange County, CA.

 

Rubicon has filed a separate action with the same District Court in Harris County, TX, seeking to have the judgment vacated and seeking sanctions against American. On May 1, 2012, the default judgment was vacated by the District Court but Rubicon's demand for sanctions was denied. The District Court determined that American would not suffer injury.


On May 24, 2012, American filed a motion seeking an order in effect rescinding its May 1, 2012 order that had vacated the default judgment against Rubicon. On July 12, 2012, the Court granted American's motion and ordered a new trial on the issue of whether Rubicon was negligent in failing to appear before the Court in the proceeding that resulted in the grant of the $2 million default judgment on August 19, 2011.


As a result of the July 12, 2012 order, American has been informed by its Texas counsel that the default judgment against Rubicon remains in full force and effect. American has also been informed by its California counsel that it plans to file a motion seeking a stay in the California proceeding pending the final determination of the District Court in Harris County, TX.  American believes that it will prevail on the merits in this proceeding against Rubicon in the District Court, Harris County, and that it will be able to successfully enforce a final judgment of approximately $2 million plus interest in California.


Consumer Advocacy Group, Inc. v. Northeastern Plastics, Inc. and American International Industries, Inc. In October 2012, NPI and American entered into a settlement agreement with Consumer Advocacy Group, Inc., whereby NPI agreed to cease distribution and/or sales of the Bitty Booster Cable 10 Gauge 10 ft. product in California and to pay $54,000 in attorney’s fees and $500 in lieu of a civil penalty.  The amounts of $34,400 and $54,500 were accrued and recorded as the NPI settlement as of and during the three and nine months ended September 30, 2012, respectively.


Shumate Machine Works, Inc. v. American International Industries, Inc. In September 2012, American entered into a settlement agreement with Shumate Machine Works, Inc. relating to a tax liability issue associated with American’s purchase of Shumate Machine Works, Inc. in 2008, whereby American agreed to pay $40,000 to HII Technologies, Inc. Under the agreement, American paid $20,000 in cash and entered into a promissory note agreement for the remaining $20,000, with interest of 4% per year, payable in installments of $1,000 monthly through March 2014.  Additionally, American transferred its 296,000 shares of HII Technologies, Inc. common stock for attorney’s fees, which were recorded at $0 on American’s balance sheet.  Previously, American had fully recognized trading losses associated with these shares.  The $40,000 settlement amount was accrued and recorded as the Shumate settlement as of and during the three and nine months ended September 30, 2012.

 

Note 13 - Capital Stock and Stock Options

 

American is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.001 par value per share, of which 1,000 shares are presently outstanding. The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion, redemption rights and sinking fund provisions.

 

On June 9, 2011, the Board of Directors of American approved the issuance to Daniel Dror, CEO, of 1,000 shares of the Company’s Series A Preferred Stock. Mr. Dror has personally guaranteed the following loans of American, and without such guarantees, American would not have been able to receive such funding: (1) a $1,450,000 loan to Northeastern Plastics (“NPI”) at Icon Bank; (2) a $3,000,000 loan to Delta Seaboard at Trustmark National Bank; (3) a $1,850,000 loan to the Company, Rob Derrick and Ron Burleigh at Texas Community Bank (which has since been repaid); and (4) a $3,250,000 loan to NPI at Trustmark National Bank (collectively the “loans”); which the Company has received and continues to receive significant value.  Based on 1% of the outstanding balances of these loans at June 9, 2011, American valued these preferred shares and recorded a guarantor fee of $49,463 to prepaid expenses.  This amount is being amortized to expense over the remaining terms of these loans.  During the three and nine months ended September 30, 2012, American recorded amortization of $1,478 and $18,505, respectively.

 



19



The Series A Preferred Stock, as amended, has the right to vote in aggregate, on all shareholder matters votes equal to 30% of the total shareholder vote on any and all shareholder matters. The Series A Preferred Stock will be entitled to this 30% voting right no matter how many shares of common stock or other voting stock of American are issued or outstanding in the future. For example, if there are 10,000 shares of American’s common stock issued and outstanding at the time of a shareholder vote, the holder of the Series A Preferred Stock (Mr. Dror), voting separately as a class, will have the right to vote an aggregate of 4,286 shares, out of a total number of 14,286 shares voting.  Additionally, American shall not adopt any amendments to American’s Bylaws, Articles of Incorporation, as amended, make any changes to the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock.


American is authorized to issue up to 50,000,000 shares of Common Stock, $0.001 par value per share, of which 103,680 are reserved for issuance pursuant to the exercise of options pursuant to an employment agreement with American's Chairman and CEO.


During the year ended December 31, 2011, American issued 154,522 restricted shares of common stock for cash consideration of $795,000 and a receivable of $24,000 for investment from Dror Charitable Foundation for the Arts and the Dror Family Trust, both of which are related parties to Daniel Dror, CEO.  Mr. Dror is not a trustee of the Dror Charitable Foundation for the Arts nor of the Dror Family Trust and he disclaims any beneficial interest in these trusts. Additionally, American issued 40,000 restricted shares of common stock for cash consideration of $184,000 and a receivable of $48,000 to International Diversified Corporation, Ltd., a corporation owned by Elkana Faiwuszewicz, Daniel Dror's brother. Mr. Dror is not an officer, director or shareholder of International Diversified Corporation, Ltd., and he disclaims any beneficial interest in the shares owned by Mr. Faiwuszewicz or his corporation.  As of September 30, 2012, both subscription receivables totaling $72,000 were still outstanding.


On January 13, 2011, American entered into a letter of intent with Kemah Development Texas L.P. (“KDT”) which is owned by an entity which is controlled by the brother of Daniel Dror (Daniel Dror disclaims any ownership in or control over KDT), pursuant to which KDT agreed to sell 65 acres of land located in Galveston County, Texas to American in consideration for restricted shares of common stock. Subsequently, the agreement was amended to provide for the purchase price to be paid by the issuance of 146,000 restricted shares of common stock with a fair market value of $919,800. These shares were issued on June 10, 2011. American has received an appraisal of the property from an independent third-party appraiser which concluded that the property had an estimated fair market value of approximately $1,900,000. The purchase of the property closed on July 9, 2011, and American recorded the land at $520,382, the original cost to KDT of this property, and recorded share-based compensation of $399,418 in July 2011. American's present intention is that the property will be held for sale by its wholly-owned real estate subsidiary, American International Texas Properties, Inc.


On June 24, 2011, American issued 10,000 stock options to American's President, Mr. S. Scott Gaille, with an exercise price of $6.00 per share, expiring in 2 years, valued at $46,559 and recorded as share-based compensation.  American estimated the fair value of each stock option at the grant date as $4.70 by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2011 as follows:


 

June 24, 2011

Dividend yield

0.0%

Expected volatility

104.50%

Risk free interest

0.75%

Expected lives

2 years

 

A summary of the status of American's stock options to employees for the nine months ended September 30, 2012 is presented below:


 

Shares

Weighted Average Exercise Price

Intrinsic Value

Outstanding and exercisable as of December 31, 2011

10,000

$

6.00

 

Granted

-

N/A

 

Exercised

-

N/A

 

Canceled / Expired

-

N/A

 

Outstanding and exercisable as of September 30, 2012

10,000

$

6.00

$

-




20



Stock-based compensation consisted of the following:


 

For the Three Months Ended September 30,

 

For the Nine Months Ended

September 30,

 

2012

 

2011

 

2012

 

2011

Common shares issued for services

$

20,000

 

$

513,319

 

$

42,600

 

$

1,238,068

Stock options issued for services

-

 

-

 

-

 

46,559

   Stock-based compensation

$

20,000

 

$

513,319

 

$

42,600

 

$

1,284,627


During the three and nine months ended September 30, 2012, American and its subsidiaries issued the following shares for services:


·

American issued 10,000 and 18,000 shares of common stock valued at $20,000 and $37,600, respectively, to third parties for services.

·

Brenham issued 0 and 100,000 shares of its common stock with a value of $0 and $5,000, respectively, to a third party.


During the three and nine months ended September 30, 2011, American and its subsidiaries issued the following shares for services:


·

American issued 19,600 and 112,260 shares of common stock valued at $78,200 and $675,449, respectively, to employees, directors and third parties.

·

American issued 146,000 restricted shares of common stock with a fair market value of $919,800 for property with an original cost of $520,382 to a related party, and recorded the difference as share-based compensation of $399,418.

·

AMIH issued 0 and 25,500 shares of its common stock with a value of $0 and $127,500, respectively, to employees.

·

BOG issued 4,500,000 shares of its common stock with a value of $18,900 to employees, directors and third parties.


On July 22, 2011, Brenham Oil & Gas Corp., entered into an Asset Purchase and Sale Agreement with Doug Pedrie, Davis Pedrie Associates, LLC and Energex Oil, Inc. (“Sellers”), pursuant to which Brenham acquired 700 acres of unproved property located in the Permian Basin near Abilene, Texas. The agreement provides for the Sellers to complete all oil lease assignments by August 15, 2011. The purchase consideration for the acquisition is the issuance to Sellers of 2,000,000 restricted shares of Brenham common stock valued at $8,400, with an additional 2,000,000 restricted shares to be issued contingent upon realization of certain production targets in 2012. On March 8, 2012, this agreement was rescinded and replaced with an agreement that in consideration for the Brenham share issuance, Brenham has a 2.5% overriding royalty interest in all of the leases associated with this property and any properties acquired or renewed in the future within a ten-mile radius. In addition, the contingency to issue additional shares was removed. This property is on the balance sheet as "Oil & gas properties - unproved" for $8,400.


During the nine months ended September 30, 2012 and 2011, AMIH declared preferred dividends of $20,000 and $180,000, respectively, which were accrued and unpaid.  On June 29, 2011, AMIH entered into an agreement, with an effective date of July 1, 2011, with Vision Opportunity Master Fund, Ltd. (“VOMF”), pursuant to which VOMF agreed to convert 3,769,626 shares of the Company’s preferred stock, constituting all of AMIH’s outstanding preferred stock, into 37,696 shares (3,769,626 shares pre-split) of common stock and also agreed to waive all accrued dividends payable on the preferred stock. In consideration for the conversion, AMIH agreed to pay VOMF total consideration of $250,000, $50,000 of which was paid on July 1, 2011, and the $200,000 remainder is due and payable at the rate of $20,000 per month. On February 23, 2012, AMIH completed the agreement with VOMF. VOMF accepted a payment of $65,000 in full satisfaction of this note, and the difference of $15,000 was recognized as other income from forgiveness of debt. On February 29, 2012, 3,769,626 shares of AMIH's preferred stock were converted into 37,696 shares (3,769,626 shares pre-split) of AMIH's common stock and accrued dividends of $1,055,000 were forgiven.



21



Note 14 – Income (Loss) Per Share


The numerator for net income (loss) per common share is determined as follows:


 

For the Three Months Ended September 30,

 

For the Nine Months Ended

September 30,

 

2012

 

2011

 

2012

 

2011

Income (loss) from continuing operations, net of income taxes

$

(417,743)

 

$

2,426,959

 

$

(2,014,272)

 

$

396,934 

Net loss attributable to the non-controlling interest

27,143 

 

4,861

 

390,506 

 

27,362 

  Net income (loss) from continuing operations

$

(390,600)

 

$

2,431,820

 

$

(1,623,766)

 

$

424,296 

 

 

 

 

 

 

 

 

Gain (loss) on disposal of discontinued operations

$

 

$

-

 

$

1,498,327 

 

$

(50,000)

Income (loss) from discontinued operations, net of income taxes

 

54,408

 

(922,517)

 

187,031 

  Net income from discontinued operations

$

 

$

54,408

 

$

575,810 

 

$

137,031 


Note 15 - Segment Information

 

We have three reporting segments and corporate overhead:


·

Northeastern Plastics ("NPI") - a wholly-owned subsidiary, is a supplier of automotive after-market products and consumer durable goods products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets;

·

American International Holdings Corp. (“AMIH”), formerly Delta Seaboard International ("Delta") - a 86.8% owned subsidiary, was an onshore rig-based well-servicing contracting company providing services to the oil and gas industry; As of September 30, 2012, Delta Seaboard Well Service, Inc. ("DSWSI"), a Texas corporation was a wholly-owned subsidiary of Delta. On April 3, 2012, AMIH entered into an Asset Purchase Agreement to sell the assets and liabilities of DSWSI (notes 1 and 7). The assets and liabilities of DSWSI are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheet as of December 31, 2011 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20).  Discontinued operations for the nine months ended September 30, 2012 includes a gain on disposal of DSWSI of $1,498,327 for the total consideration of $3,000,000 less DSWSI's assets and associated liabilities of $1,501,673 (Note 7).  DSWSI's net loss of $922,517 for the nine months ended September 30, 2012, and net income of $54,408 and $191,441 for the three and nine months ended September 30, 2011, respectively, are included in discontinued operations.

·

American International Texas Properties, Inc. ("AITP") - a wholly-owned real estate subsidiary, with real estate holdings in Harris, Galveston, and Waller Counties in Texas.

·

Corporate overhead - American's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses.  Corporate overhead also includes Brenham Oil & Gas ("BOG"), a division that currently owns minimal oil, gas and mineral royalty interests. Through Brenham Oil & Gas, American is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. American owns 58,680,074 shares of common stock, representing 53.2% of BOG’s total outstanding shares.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. American evaluates performances based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.  American's reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were acquired as subsidiaries and the management at the time of the acquisition was retained.  American's areas of operations are principally in the United States. No single foreign country or geographic area is significant to the consolidated financial statements.




22



Consolidated revenues from external customers, operating income (loss), depreciation and amortization expense, interest expense, capital expenditures, non-cash transactions, and identifiable assets were as follows:


 

For the Three Months Ended September 30,

For the Nine Months Ended

September 30,

 

2012

2011

2012

2011

Revenues:

 

 

 

 

Northeastern Plastics

$

3,104,838 

$

4,404,716 

$

5,215,398 

$

8,425,385 

Brenham Oil & Gas

127 

347 

538 

1,018 

AITP

16,727 

38,197 

   Total revenues

$

3,121,692 

$

4,405,063 

$

5,254,133 

$

8,426,403 

  

 

 

 

 

Operating income (loss) from continuing operations:

 

 

 

 

Northeastern Plastics

$

189,907 

$

421,686 

$

(241,634)

$

393,032 

AMIH

(50,848)

(127,725)

(127,505)

AITP

(214,816)

3,476,824 

(502,763)

3,476,127 

Corporate

(213,841)

(968,994)

(916,059)

(2,335,353)

Operating income (loss) from continuing operations

(289,598)

2,929,516 

(1,788,181)

1,406,301 

Other expenses from continuing operations

(124,805)

(379,232)

(249,309)

(881,032)

Net income (loss) from continuing operations before income tax

$

(414,403)

$

2,550,284 

$

(2,037,490)

$

525,269 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

Northeastern Plastics

$

22,621 

$

14,859 

$

57,901 

$

43,665 

Corporate

1,277 

1,951 

3,905 

4,669 

Total depreciation and amortization

$

23,898 

$

16,810 

$

61,806 

$

48,334 

 

 

 

 

 

Interest expense:

 

 

 

 

Northeastern Plastics

$

45,555 

$

50,383 

$

122,587 

$

153,176 

Corporate

11,253 

16,582 

51,733 

82,608 

Total interest expense

$

56,808 

$

66,965 

$

174,320 

$

235,784 

 

 

 

 

 

Capital expenditures:

 

 

 

 

Northeastern Plastics

$

$

836 

$

3,510 

$

3,133 

Total capital expenditures

$

$

836 

$

3,510 

$

3,133 

 

 

 

 

 




23




 

For the Three Months Ended September 30,

For the Nine Months Ended

September 30,

 

2012

2011

2012

2011

Non-cash investing and financing transactions:

 

 

 

 

AMIH

 

 

 

 

   AMIH dividends declared and unpaid

 

 

$

20,000

$

180,000 

   VOMF settlement recorded as deemed dividend for AMIH

 

 

$

-

$

250,000 

   Reversal of preferred dividends of AMIH

 

 

$

1,055,000

$

   Note receivable received from sale of AMIH’s assets

 

 

$

1,400,000

$

BOG

 

 

 

 

   Issuance of BOG stock for oil & gas properties

 

 

$

-

$

8,400 

Corporate

 

 

 

 

   Unrealized gain (loss) on marketable securities

 

 

$

5,200

$

(121,550)

   Note payable issued for lawsuit settlement

 

 

$

-

$

400,000 

   Adjustment to non-controlling interest in AMIH and BOG

 

 

$

563,319

$

29,935 

   Stock issued to related party for receivable

 

 

$

-

$

74,000 

   Stock issued to related party for real estate

 

 

$

-

$

520,382 

   SET receivable from foreclosure of certificate of deposit

 

 

$

-

$

532,500 

   Preferred stock issued to officer as guarantor fee

 

 

$

-

$

49,463 


 

September 30, 2012

December 31, 2011

Identifiable assets:

 

 

Northeastern Plastics

$

8,264,993

$

6,725,241

AITP

6,991,635

8,042,142

AMIH

2,905,351

-

Corporate

-

814,117

Assets held for sale

-

5,285,026

   Total identifiable assets

$

18,161,979

$

20,866,526



Note 16 - Subsequent Events

 

From October 1, 2012 through November 14, 2012, American paid $12,070 to repurchase 6,600 shares of its common stock. 



24



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Forward-Looking Statements; Market Data

 

As used in this Quarterly Report, the terms "we", "us", "our". "American" and the "Company" means American International Industries, Inc., a Nevada corporation, and its subsidiaries. To the extent that we make any forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report, we emphasize that forward-looking statements involve risks and uncertainties and our actual results may differ materially from those expressed or implied by our forward-looking statements. Our forward-looking statements in this Quarterly Report reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties. Generally, forward-looking statements include phrases with words such as "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions to identify forward-looking statements.

 

Overview

 

American International Industries, Inc., organized under the laws of the State of Nevada in September 1994, is a diversified corporation with interests in industrial companies, oil and gas interests, oilfield supply and service companies, and interests in undeveloped real estate in the Galveston Bay, Texas area. The Company’s business strategy is to acquire controlling equity interests in undervalued companies and take an active role in its new subsidiaries to improve their growth, by providing its subsidiaries with access to capital, leveraging synergies and providing its subsidiaries with the Company's management expertise.

 

American International Industries, Inc. is a holding company and has three reporting segments and corporate overhead:


·

Northeastern Plastics ("NPI") - a wholly-owned subsidiary, is a supplier of automotive after-market products and consumer durable goods products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets;

·

American International Holdings Corp. (“AMIH”), formerly Delta Seaboard International ("Delta") - a 86.8% owned subsidiary, was an onshore rig-based well-servicing contracting company providing services to the oil and gas industry; As of September 30, 2012, Delta Seaboard Well Service, Inc. ("DSWSI"), a Texas corporation was a wholly-owned subsidiary of Delta. On April 3, 2012, AMIH entered into an Asset Purchase Agreement to sell the assets and liabilities of DSWSI (notes 1 and 7). The assets and liabilities of DSWSI are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheet as of December 31, 2011 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20).  Discontinued operations for the nine months ended September 30, 2012 includes a gain on disposal of DSWSI of $1,498,327 for the total consideration of $3,000,000 less DSWSI's assets and associated liabilities of $1,501,673 (Note 7).  DSWSI's net loss of $922,517 for the nine months ended September 30, 2012, and a net income of $54,408 and $191,441 for the three and nine months ended September 30, 2011, respectively, are included in discontinued operations.

·

American International Texas Properties, Inc. ("AITP") - a wholly-owned real estate subsidiary, with real estate holdings in Harris, Galveston, and Waller Counties in Texas.

·

Corporate overhead - American's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses.  Corporate overhead also includes Brenham Oil & Gas ("BOG"), a division that currently owns minimal oil, gas and mineral royalty interests. Through Brenham Oil & Gas, American is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. American owns 58,680,074 shares of common stock, representing 53.2% of BOG’s total outstanding shares.


 On April 3, 2012, AMIH entered into an Asset Purchase Agreement to sell the assets and liabilities of DSWSI (Notes 1 and 7). The assets and liabilities of DSWSI are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheet as of December 31, 2011 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). DSWSI's net loss of $922,517 for the nine months ended September 30, 2012, and a net income of $54,408 and $191,441 for the three and nine months ended September 30, 2011, respectively, are included in discontinued operations.

 



25



On April 22, 2011, American entered into a stock purchase agreement, whereby Joe Hoover, President of Downhole Completion Products, Inc. ("DCP), purchased for $5,000 American's 80% ownership of DCP's assets and associated liabilities. DCP's net loss of $4,410 for the nine months ended September 30, 2011 is included in discontinued operations. During the nine months ended September 30, 2011, American received the $5,000 for the purchase. This is included as income from discontinued operations for the three and nine months ended September 30, 2011. American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the nine months ended September 30, 2011.


The historical financial statements of the Company include the acquisitions of acquired companies as of the effective dates of the purchases, and the results of those companies subsequent to closing, as these transactions were accounted for under the purchase method of accounting.

 

We intend to continue our efforts to grow through the acquisition of additional and complementary businesses and by expanding the operations of our existing businesses, especially in the energy sector. We will evaluate whether additional and complementary businesses can be acquired at reasonable terms and conditions, at attractive earnings multiples and which present opportunity for growth and profitability. These efforts will include the application of improved access to financing and management expertise afforded by synergistic relationships between the Company and its subsidiaries. Potential acquisitions are evaluated to determine that they would be accretive to earnings and equity, that the projected growth in earnings and cash flows are attainable and consistent with our expectations to yield desired returns to investors, and that management is capable of guiding the growth of operations, working in concert with others in the group to maximize opportunity. Periodically as opportunities present themselves, we may sell or merge the subsidiaries in order to bring value to the holding company and our shareholders and to enable the Company to acquire larger companies.

 

The Company’s real estate investment policy historically has been to acquire real estate for resale based upon our view of market conditions. Such properties are listed on the balance sheet as real estate acquired for resale.  Real estate is not a segment of the Company's business.

 

We expect to face competition for acquisition candidates, which may limit the number of acquisition opportunities and may lead to higher acquisition prices. There can be no assurance that we will be able to identify, acquire or manage profitably of additional businesses or to integrate any acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Further, acquisitions involve a number of risks, including possible adverse effects on our operating results, diversion of management's attention, failure to retain key personnel of the acquired business and risks associated with unanticipated events or liabilities. Some or all of which could have a material adverse effect on our business, financial condition and results of operations. The timing, size and success of our acquisition efforts and the associated capital commitments cannot be readily predicted. It is our current intention to finance future acquisitions by using shares of our common stock and other forms of financing as the consideration to be paid. In the event that the common stock does not have and maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept common stock as part of the consideration for the sale of their businesses, we may be required to seek other forms of financing in order to proceed with our acquisition program. If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional equity or debt financing at terms acceptable to the Company.

 

Corporate overhead includes our investment activities for financing current operations and expansion of our current holdings, as well as evaluating the feasibility of acquiring additional businesses.

 

Results of Operations

 

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine months Ended September 30, 2011.

 

The following is derived from, and should be read in conjunction with, our unaudited consolidated financial statements, and related notes for the three and nine months ended September 30, 2012 and 2011.

 



26



Net revenues.  Revenues from continuing operations were $3,121,692 for the three months ended September 30, 2012, compared to $4,405,063 for the three months ended September 30, 2011, representing a decrease of $1,283,371, or 29.1%.  Revenues from continuing operations were $5,254,133 for the nine months ended September 30, 2012, compared to $8,426,403 for the nine months ended September 30, 2011, representing a decrease of $3,172,270, or 37.6%. NPI's revenues decreased by $1,299,878, or 29.5%, to $3,104,838 for the three months ended September 30, 2012, compared to $4,404,716 for the same period in the prior year.  NPI's revenues decreased by $3,209,987, or 38.1%, to $5,215,398 for the nine months ended September 30, 2012, compared to $8,425,385 for the same period in the prior year.  NPI's revenues decreased primarily because of lower revenues with one of its principal customers.  NPI has added several new customers to replace this business and expects to add additional medium to large customers in the year 2012.  For the three and nine months ended September 30, 2012 and September 30, 2011, Brenham's revenues were $127, $538, $347, and $1,018, respectively.  For the three and nine months ended September 30, 2012, AITP's revenues were $16,727 and $38,197, respectively.

 

Cost of sales and margins.  Cost of sales for the three months ended September 30, 2012 was $2,382,994, compared to $3,255,454 for the three months ended September 30, 2011. Cost of sales for the nine months ended September 30, 2012 was $3,883,293, compared to $6,180,467 for the nine months ended September 30, 2011. Our gross margins for the three and nine months ended September 30, 2012 were 23.7% and 26.1%, respectively, compared to gross margins for the three and nine months ended September 30, 2011 of 26.1% and 26.7%. The decrease in margins was primarily due to the product mix at NPI.


Selling, general and administrative.  Consolidated selling, general and administrative expenses for the three months ended September 30, 2012 were $824,304, compared to $1,696,917 in the prior year, representing a decrease of $872,613, or 51.4%.  Consolidated selling, general and administrative expenses for the nine months ended September 30, 2012 were $2,887,019, compared to $4,316,459 in the prior year, representing a decrease of $1,429,440, or 33.1%.  General and administrative expenses for the three and nine months ended September 30, 2012 decreased from the same periods in the prior year primarily due to a decrease in stock-based compensation.  General and administrative expenses for the three and nine months ended September 30, 2012 and September 30, 2011 included non-cash stock-based compensation of $20,000, $42,600, $513,319, and $1,284,627, respectively.  Additionally, selling, general and administrative expenses for the three and nine months ended September 30, 2011 included higher than normal legal costs related to the Botts lawsuit settlement and one-time costs incurred for Brenham to become a public company.

 

Gain (loss) on sale of assets. Loss on sale of assets for the three and nine months ended September 30, 2012 was $203,992 and $272,002, respectively, compared to gains on the sale of assets of $3,476,824 and $3,476,824, respectively, for the three and nine months ended September 30, 2011.  During the three months ended September 30, 2012, one Dawn Condominium unit was sold for $49,130, resulting in a loss on sale of assets of $43,067. During the nine months ended September 30, 2012, five Dawn Condominium units were sold for $511,601, resulting in a loss on sale of assets of $111,077.  During the three months ended September 30, 2012, 14 acres of vacant commercial use land in Houston, Texas was granted to a third party to save on property taxes associated with holding this property, resulting in a loss of $160,925.  (see Note 6 to the consolidated financial statements).  On September 30, 2011, AITP sold 287 acres of vacant property located in Dickinson, Texas, to Texas Community Bank, N.A. ("TXCB") as part of a settlement of lawsuit claims that American had against TXCB, resulting in a gain on sale of assets of $3,476,824.

 

Income (loss) from operations. We had an operating loss of $289,598 and $1,788,181, respectively, for the three and nine months ended September 30, 2012, compared to operating income of $2,929,516 and $1,406,301, respectively, for the three and nine months ended September 30, 2011.

 

Total other income/expenses. Other expenses were $124,805 for the three months ended September 30, 2012, compared to $379,232 for the three months ended September 30, 2011.  Other expenses were $249,309 for the nine months ended September 30, 2012, compared to other expenses of $881,032 for the nine months ended September 30, 2011.  Other expenses for the nine months ended September 30, 2012 included an expense of $49,281 for the Botts lawsuit settlement (see Note 12).  Other expenses for the three and nine months ended September 30, 2012 included expenses of $34,400 and $54,500, respectively, for NPI’s lawsuit settlement (see Note 12).  Other expenses for the three and nine months ended September 30, 2012 included expenses of $40,000 and $40,000, respectively, for the Shumate lawsuit settlement (see Note 12).  Other expenses for the three months ended September 30, 2012 included non-cash unrealized gains on trading securities of $4,384, compared to $290,192 for the three months ended September 30, 2011.  Realized gains on trading securities for the three months ended September 30, 2012 were $30,233 compared to losses of $534,320 for the three months ended September 30, 2011.  Other expenses for the nine months ended September 30, 2012 included non-cash unrealized losses on trading securities of $4,074, compared to gains of $206,759 for the nine months ended September 30, 2011.  Realized gains on trading securities for the nine months ended September 30, 2012 were $42,997 compared to losses of $791,163 for the nine months ended September 30, 2011.  Interest expense was $56,808 during the three-month period ended September 30, 2012, compared to $66,965 during the same period in the prior year.  Interest expense was $174,320 during the nine-month period ended September 30, 2012, compared to $235,784 during the same period in the prior year. 

 



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Net loss.  We had a net loss from continuing operations of $417,743, or $0.26 per share, for the three months ended September 30, 2012, compared to net income of $2,426,959, or $1.64 per share, for the three months ended September 30, 2011.  We had a net loss from continuing operations of $2,014,272, or $1.07 per share, for the nine months ended September 30, 2012, compared to net income of $396,934, or $0.33 per share, for the nine months ended September 30, 2011.  We had net income from discontinued operations of $0, or $0.00 per share, for the three months ended September 30, 2012, compared to $54,408, or $0.04 per share, for the same period in the prior year.  We had net income from discontinued operations of $575,810, or $0.38 per share, for the nine months ended September 30, 2012, compared to net income of $137,031, or $0.10 per share, for the nine months ended September 30, 2011.  Discontinued operations for the nine months ended September 30, 2012 includes a gain on disposal of DSWSI of $1,498,327 for the total consideration of $3,000,000 less DSWSI's assets and associated liabilities of $1,501,673 (see Note 7).  Net income from discontinued operations for the nine months ended September 30, 2012 and 2011 includes DSWSI's net loss of $922,517 and net income of $191,441, respectively.  Net income from discontinued operations for the three months ended September 30, 2011 includes DSWSI's net income of $54,408.  DCP's net loss of $4,410 for the nine months ended September 30, 2011 is included in discontinued operations. During the nine months ended September 30, 2011, American received the $5,000 for the purchase of DCP. This is included as income from discontinued operations for the nine months ended September 30, 2011. American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the nine months ended September 30, 2011.

 

Our net loss was $390,600, or $0.26 per share, for the three months ended September 30, 2012, compared to net income of $2,486,228, or $1.68 per share, for the three months ended September 30, 2011.  Our net loss was $1,047,956, or $0.69 per share, for the nine months ended September 30, 2012, compared to net income of $561,327, or $0.43 per share, for the nine months ended September 30, 2011.


Liquidity and Capital Resources

 

Liquidity is our ability to generate sufficient cash flows to meet the Company’s obligations and commitments, or obtain appropriate financing. Currently, our liquidity needs arise primarily from working capital requirements, debt service on indebtedness, and capital expenditures. We have funded these liquidity requirements from proceeds from the sale of Delta of $1,600,000, proceeds from net borrowings under lines of credit agreements of $884,000, and proceeds from the sale of real estate held for sale of $511,601.

 

Capital expenditures for the nine months ended September 30, 2012 were $3,510 compared to $3,133 for the same period in the prior year. The Company has no major capital expenditure commitments for the next 12 months.

 

Net cash used in operating activities from continuing operations was $2,128,963 for the nine months ended September 30, 2012, compared to $2,885,068 for the nine months ended September 30, 2011.  Net cash used in operating activities for the nine months ended September 30, 2012 was derived primarily from our net loss from continuing operations of $2,014,272 and an increase in accounts receivable of $1,350,249, offset by an increase in accounts payable of $1,123,637.  The increases in accounts receivable and accounts payable are due to higher revenues at NPI during the three months ended September 30, 2012 as a result of the seasonality of NPI’s revenues.  Net cash used in operating activities for the nine months ended September 30, 2011 includes a one-time lump sum payment of $1,250,000 for a lawsuit settlement that was accrued as of December 31, 2010. Additionally, accounts payable decreased significantly due to payments made in the nine months ended September 30, 2011 for expenses incurred during the nine months ended December 31, 2010 in support of higher revenues at NPI.

 

The Company's prospects for selling real estate from its portfolio have improved significantly due to infrastructure developments in close proximity to these properties. Management believes that demand and prices for real estate will increase during the next 12 months from the date of this report. The appraised values of the Company's portfolio of real estate are significantly higher than the value recorded on the books.

 

For the nine months ended September 30, 2012, our investing activities provided cash of $2,300,150, compared to $1,077,412 during the nine months ended September 30, 2011. Our financing activities provided cash of $233,415 during the nine months ended September 30, 2012, compared to $1,019,656 during the nine months ended September 30, 2011.

 

NPI has a line of credit from Trustmark Bank in the amount of $2,250,000, which had a maturity date in April 2013.

 

We believe that our cash on hand, operating cashflows, and credit facilities will be sufficient to fund our operations, service our debt, and fund planned capital expenditures for at least 12 months from the date of this report.

 



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Total assets at September 30, 2012 were $18,161,979, compared to $20,866,526 at December 31, 2011, representing a decrease of $2,704,547.  At September 30, 2012, consolidated working capital was $10,308,344, compared to working capital of $9,173,114 at December 31, 2011, representing an increase of $1,135,230.  Total assets as of September 30, 2012, included real estate held for sale of $7,131,909 (see Note 6), inventories of $2,116,030, accounts receivable of $2,561,249, cash and cash equivalents of $1,273,848, $1,990,057 in notes receivable, and $1,986,656 of property and equipment.


We had total liabilities of $6,262,398 as of September 30, 2012, which included $3,561,818 of current liabilities, mainly consisting of $2,002,988 of accounts payable and accrued expenses, $1,533,387 of current installments of long-term debt, and long-term liabilities of $2,700,580, consisting of long-term debt (less current installments) of $2,651,872 and accrued pension expense of $48,708.


Cash flow from operations.  Net cash used in operating activities from continuing operations was $2,128,963 for the nine months ended September 30, 2012, compared to $2,885,068 for the nine months ended September 30, 2011.  Net cash used in operating activities for the nine months ended September 30, 2012 was derived from our net loss from continuing operations of $2,014,272, which included non-cash expenses of $122,911, including depreciation and amortization of $61,806, share-based compensation of $42,600, and amortization of guarantor fee of $18,505.  Our net income from continuing operations of $396,934 for the nine months ended September 30, 2011 included non-cash expenses of $1,344,993, including depreciation and amortization of $48,334, share-based compensation of $1,284,627, and amortization of guarantor fee of $12,032.  Our net loss from continuing operations for the nine months ended September 30, 2012 included a loss on the sale of assets of $272,002, compared to a gain of $3,476,824 for the nine months ended September 30, 2011.  Accounts receivable increased by $1,350,249 during the nine months ended September 30, 2012, compared to $1,030,974 during the same period in 2011.  Accounts payable increased by $1,123,637 during the nine months ended September 30, 2012, compared to a decrease of $1,425,272 during the same period in 2011.  The increases in accounts receivable and accounts payable for the nine months ended September 30, 2012 are due to higher revenues at NPI during the three months ended September 30, 2012 as a result of the seasonality of NPI’s revenues.  The decrease in accounts payable during the nine months ended September 30, 2011 included a one-time lump sum payment of $1,250,000 for a lawsuit settlement.  Our inventories increased by $211,015 for the nine months ended September 30, 2012, compared to a decrease of $746,249 during the nine months ended September 30, 2011. 

 

Cash flow from investing activities. For the nine months ended September 30, 2012, our investing activities provided cash of $2,300,150 primarily as a result of proceeds from the sale of the assets of DSWSI of $1,600,000, proceeds from the sale of real estate held for sale of $511,601 and proceeds from notes receivable of $89,102, offset by the costs of securing patents and trademarks of $112,274. Our investing activities provided cash of $1,077,412 during the nine months ended September 30, 2011, primarily as a result of proceeds from the sale of trading securities of $2,572,421 and proceeds from notes receivable of $109,980, offset by the purchase of trading securities of $1,596,475.

 

Cash flow from financing activities. Our financing activities provided cash of $233,415 during the nine months ended September 30, 2012, primarily as a result of net borrowings under lines of credit agreements of $884,000, offset by payments on debt of $269,774, payments for the acquisition of treasury stock of $204,715, and loans to related parties of $187,232.  During the nine months ended September 30, 2011, our financing activities provided cash of $1,019,656, primarily as a result of proceeds from the issuance of common stock of $977,001, net borrowings under lines of credit agreements of $580,963, offset by payments on debt of $515,123.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not applicable.

 

ITEM 4T. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures. As of September 30, 2012, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in internal controls. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 



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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

American International Industries, Inc. v. William W. Botts. American filed this lawsuit against William W. Botts (“Botts”) seeking damages as a result of a Stock Purchase Agreement and Consulting Agreement that American entered into with Botts on September 12, 2007. Under the Stock Purchase Agreement, American gave Botts $1,000,000 in cash and 288,000 shares of restricted AMIN stock (240,000 original shares plus a 20% stock dividend) for 170,345 shares of OI Corporation. As part of the original agreement, Botts had the right to sell the 288,000 shares back to American for $4.17 per share. Under the Consulting Agreement, American agreed to pay Botts $14,000 per month, plus expenses for performing consulting services. On or about November 5, 2008, American paid Botts $100,000 to terminate the Consulting Agreement to stop the accrual of monthly consulting payments to Botts. Effective February 25, 2011, the parties settled the proceedings against each other, pursuant to which American paid Botts $1,250,000 and executed a $400,000 one year promissory note (note 10) with 5% annual interest paid in monthly installments to Botts due by February 1, 2012. On July 1, 2012, the parties reached another settlement, pursuant to which American paid Botts $115,000, of which $65,719 was for payment of the balance of the note.  The remaining $49,281 was accrued and recorded as Botts lawsuit settlement expense as of and during the nine months ended September 30, 2012. The 288,000 restricted American shares in Botts name were transferred to the Dror Family Trust in consideration for the cash payment to American of approximately $1,400,000 and the issuance to certain Dror related entities and an entity controlled by Mr. Dror's brother, of 1,100,000 restricted American shares. The cash proceeds from the restricted share sale were used to fund the settlements to Botts.

 

American International Industries, Inc. v. Rubicon Financial Incorporated.  On March 5, 2010, American filed suit against Rubicon Financial Corporation (OTCBB: RBCF.OB), a Nevada corporation with offices in Irvine, CA ("Rubicon"), and Rubicon's control person, chief executive officer and primary financial officer, Joe Mangiapane, Jr., in the District Court, 281st Judicial District, Harris County, TX, for breach of contract, rescission, fraudulent inducement, common law fraud and fraud in the sale of securities. The action related to the acquisition by American on November 27, 2007, of 1,000,000 restricted shares of Rubicon's common stock for a $1,000,000 cash payment and the issuance of 200,000 restricted shares of American's common stock, valued at $4.90 per common share based upon the closing market price on the date of acquisition.


On August 19, 2011, American was granted a default judgment for fraud and breach of contract against Rubicon in the amount of $2,000,000 plus attorney's fees and accrued interest at 5% per annum by the 281st District Court, following which American, through California counsel, commenced a separate proceeding seeking to enforce the judgment against Rubicon in a court of competent jurisdiction in Orange County, CA.

  

Rubicon has filed a separate action with the same District Court in Harris County, TX, seeking to have the judgment vacated and seeking sanctions against American. On May 1, 2012, the default judgment was vacated by the District Court but Rubicon's demand for sanctions was denied. The District Court determined that American would not suffer injury.


On May 24, 2012, American filed a motion seeking an order in effect rescinding its May 1, 2012 order that had vacated the default judgment against Rubicon. On July 12, 2012, the Court granted American's motion and ordered a new trial on the issue of whether Rubicon was negligent in failing to appear before the Court in the proceeding that resulted in the grant of the $2 million default judgment on August 19, 2011.


As a result of the July 12, 2012 order, American has been informed by its Texas counsel that the default judgment against Rubicon remains in full force and effect. American has also been informed by its California counsel that it plans to file a motion seeking a stay in the California proceeding pending the final determination of the District Court in Harris County, TX.  American believes that it will prevail on the merits in this proceeding against Rubicon in the District Court, Harris County, and that it will be able to successfully enforce a final judgment of approximately $2 million plus interest in California.


Consumer Advocacy Group, Inc. v. Northeastern Plastics, Inc. and American International Industries, Inc. In October 2012, NPI and American entered into a settlement agreement with Consumer Advocacy Group, Inc., whereby NPI agreed to cease distribution and/or sales of the Bitty Booster Cable 10 Gauge 10 ft. product in California and to pay $54,000 in attorney’s fees and $500 in lieu of a civil penalty.  The amounts of $34,400 and $54,500 were accrued and recorded as the NPI settlement as of and during the three and nine months ended September 30, 2012, respectively.




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Shumate Machine Works, Inc. v. American International Industries, Inc. In September 2012, American entered into a settlement agreement with Shumate Machine Works, Inc. relating to a tax liability issue associated with American’s purchase of Shumate Machine Works, Inc. in 2008, whereby American agreed to pay $40,000 to HII Technologies, Inc. Under the agreement, American paid $20,000 in cash and entered into a promissory note agreement for the remaining $20,000, with interest of 4% per year, payable in installments of $1,000 monthly through March 2014.  Additionally, American transferred its 296,000 shares of HII Technologies, Inc. common stock for attorney’s fees, which were recorded at $0 on American’s balance sheet.  Previously, American had fully recognized trading losses associated with these shares.  The $40,000 settlement amount was accrued and recorded as the Shumate settlement as of and during the three and nine months ended September 30, 2012.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from Risk Factors as previously disclosed in the Registrant’s annual report for the year ended December 31, 2011.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document.

 

Exhibit No.

Description

31.1

Certification of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002

31.2

Certification of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002

32.1

Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2

Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 



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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

 

/s/ DANIEL DROR

   CEO AND CHAIRMAN

  Dated: November 14, 2012

 

/s/ SHERRY L. MCKINZEY

  CHIEF FINANCIAL OFFICER

  Dated: November 14, 2012



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