American International Industries, Inc.
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, 2010. 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 subsidiary, Northeastern Plastics, Inc. ("NPI"), Delta Seaboard International, Inc. ("Delta"), in which American holds a 46.4% shareholder interest, and Brenham Oil & Gas Corp. (“BOG”), in which American holds a 54.7% interest. All significant intercompany transactions and balances have been eliminated in consolidation.
On June 23, 2010, Joe Hoover, President of Downhole Completion Products, Inc. ("DCP"), purchased 20% of the 1,000 shares of Common Stock of DCP held by American for $20,000 in cash and a $55,000 promissory note. American recorded a $74,814 gain on sale of assets for this transaction. On April 22, 2011, American entered into a stock purchase agreement, whereby Joe Hoover purchased for $5,000 American's 80% ownership of DCP's assets and associated liabilities, which are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheets as of March 31, 2011 and December 31, 2010 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). DCP's net loss of $4,410 for the three months ended March 31, 2011 and net income of $3,302 for the three months ended March 31, 2010 are included in discontinued operations. Additionally, American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the three months ended March 31, 2011.
On November 11, 2010, American sold the assets and associated liabilities of its wholly-owned subsidiary, Shumate Energy Technologies, Inc. ("SET") to Larry C. Shumate, President of SET, for $10,000. SET's net loss of $368,452 for the three months ended March 31, 2010 is included in discontinued operations, net of income taxes in the consolidated statements of operations and in the consolidated statement of cash flows for the three months ended March 31, 2010.
On February 3, 2010, Hammonds Industries Inc. ("Hammonds") and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger"). In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and effected a one-for-ten (1:10) reverse stock split ("Reverse Split") of its common stock. Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock.
American owns 32,859,935 shares of common stock, representing 46.4% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 32,425,832 shares of common stock, representing 45.7% of Delta's total outstanding shares. All other stockholders of Delta own 5,606,483 shares of common stock, representing 7.9% of Delta's total 70,892,250 outstanding shares.
Currently, corporate overhead includes BOG, a division that owns an oil, gas and mineral royalty interest in Washington County, 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. For the year ended December 31, 2010, Brenham issued 13,000,000 shares of common stock for cash consideration of $22,100 and 22,000,000 shares for services valued at $45,466. American maintains control of Brenham through ownership of 54,680,074 shares of Brenham's common stock, representing about 55% of the outstanding shares as of December 31, 2010.
On September 21, 2010, American prepared a registration statement on Form S-1 in order to register the BOG shares being distributed to American’s shareholders. On April 20, 2011, American filed an amended registration statement on Form S-1/A in response to questions received from the SEC. Assuming the effectiveness of the registration statement, these shareholders will have registered free-trading shares. BOG will then be a separate reporting company, and we plan to take action in the future to quote BOG's common stock on the Over-The-Counter Bulletin Board.
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.
Revenue Recognition
Revenue is recognized when the earning process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. Delta receives purchase orders for all of its service work and related pipe sales. All sales are recorded when the work is completed or when the pipe is sold. NPI has purchase orders for all sales, of which many of the items are requested to be container shipped and shipped directly to the end users. All sales are recorded when the inventory items are shipped. Taxes assessed by a governmental authority that are incurred as a result of a revenue transaction are not included in revenues. American has no significant sales returns or allowances.
Net Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of shares outstanding during a period. Diluted net loss per common share is computed by dividing the net loss, adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. No dilutive securities were outstanding at March 31, 2011 and 2010.
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.
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 March 31, 2011, American did not have any significant Level 2 or 3 financial assets or liabilities. The following table provides fair value measurement information for American's trading securities and marketable securities - available for sale:
| | | As of March 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 | | $ | 1,290,817 | | | $ | | | | $ | | | | $ | - | | | $ | - | |
| Marketable Securities - available for sale | | $ | 13,000 | | | $ | 13,000 | | | $ | 13,000 | | | $ | - | | | $ | - | |
Subsequent Events
American has evaluated all transactions from March 31, 2011 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 - 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 March 31, 2011 and 2010, American had unrealized trading losses of $399,638 and $62,081, respectively, related to securities held on those dates. American recorded realized gains of $142,565 and $104,311 for the three months ended March 31, 2011 and 2010, 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. 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 in the consolidated statements of operations. At March 31, 2011, 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 loss for the three months ended March 31, 2011 of $117,000 for the unrealized loss on 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 3 - Inventories
Inventories consisted of the following:
| | | March 31, 2011 | | | | |
| Finished goods | | $ | 6,126,913 | | | $ | 5,482,932 | |
| Less reserve | | | (49,449 | ) | | | (49,439 | ) |
| | | $ | 6,077,464 | | | $ | 5,433,493 | |
Note 4 - Real Estate Transactions
During the fourth quarter of 2009, American foreclosed on real property which was security for a note receivable owed to American, which was in default. At December 31, 2009, American was carrying this property on the balance sheet for $4,611,233, which represented $3,332,543 in principal and accrued interest allocated to the property received at the time of default and the assumption of a $1,278,690 note payable secured by the property by another lien holder. This property consisted of seven tracts, of which several are under contract for sale and the remainder are listed for sale with a broker. The appraised values of these properties exceeded the $4,611,233 owed to American. Values were allocated to the tracts of property based on their recent individual appraised values relative to the total appraised value. During the year ended December 31, 2010, American sold an 8 acre tract recorded at $175,480 for $340,445, which was used to reduce the note payable balance to $938,245. American recognized in the consolidated statements of operations a $164,965 gain on sale of assets for this transaction. On November 22, 2010, a 17 acre tract was transferred to NPI at the allocated cost of $1,155,359. NPI obtained a $1,450,000 long-term loan from the bank using this property as collateral. The proceeds from this loan were used to pay the remaining $938,245 note payable balance and NPI's warehouse property loan balance of $440,381. NPI plans to build a new and larger facility on this site to accommodate business expansion.
During the third quarter of 2009, and in connection with the guarantor’s fee described below, Texas Community Bank made a loan for $3,850,000 to Southwest Gulf Coast Properties, Inc. ("SWGCP") for the purchase the promissory note of Dawn Condominiums L.P. The current balance owed on this loan is $3,600,000. This loan is secured by 17 units of the Dawn Condominiums, located in Galveston, Texas, with an appraised value of over $3,901,500. As additional collateral, American pledged the 287 acres on Dickinson Bayou. American has a note receivable of $601,300 from SWGCP at March 31, 2011, resulting from closing costs, principal and interest paid by American on the loan. This property is listed for sale with a broker. Until the properties are sold, rental income from the condominium units will be used to pay interest on the bank loan and the balance owed to American.
During the fourth quarter of 2008, American received a 1.705 acre tract of land in Galveston County valued at $540,000 as a guarantor's extension fee. This property is listed for sale with a broker.
During 2007, American purchased for investment a 174 acre tract of land in Waller County, Texas for $1,684,066. This property is listed for sale with a real estate broker. American also owns 287 undeveloped acres of waterfront property on Dickinson Bayou and Galveston Bay in Galveston County, Texas. American is carrying this property on the balance sheet at its historical book value of $225,000. American has engaged an independent broker on an exclusive basis to sell the property. These properties are not going to be developed by nor are they being held as inventory by American. These properties are listed for sale with a broker.
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. With the exception of American's 287 acres, 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. The 287 acres is classified as held for sale in long-term assets.
Note 5 - Notes Receivable
Short-term notes receivable consists of the following:
| | | March 31, 2011 | | | | |
| Note secured by a 2nd lien on property, interest at 3% due in semi-annual payments, principal payment due on December 31, 2011 (a) | | $ | 601,300 | | | $ | | |
| Unsecured note receivable, interest at 10% due monthly, principal due on or before December 31, 2011 (b) | | | 120,000 | | | | | |
| | | | 721,300 | | | | 721,300 | |
| Reserve due to uncertainty of collectibility | | | (300,000 | ) | | | (300,000 | ) |
| Short-term notes receivable | | $ | 421,300 | | | $ | | |
(a) Note secured by a 2nd lien on property. This note was issued for $601,300. This note is secured by a 2nd lien on the Dawn Condominiums, located in Galveston, Texas, with an appraised value of over $3,901,500. This note is owed by SWGCP resulting from closing costs, principal and interest paid by American on the SWGCP loan at Texas Community Bank, the 1st lienholder on these condominium units. The current balance owed on the Texas Community Bank loan is $3,600,000. This property is listed for sale with a broker. Until the properties are sold, rental income from the condominium units will be used to pay interest on the bank loan and the balance owed to American.
(b) Unsecured note receivable due December 31, 2011. This note is owed by Lakeland Partners III, L.P., and is personally guaranteed by one of its principals.
Long-term notes receivable consists of the following:
| | | | | | | |
| Unsecured note receivable for sale of former subsidiary, Marald, Inc., principal and interest due monthly through June 5, 2012 | | $ | 49,781 | | | $ | | |
| Note secured by 2nd lien on property of former subsidiary, SET, interest at 4% due monthly beginning July 1, 2011, principal payment due on June 1, 2014 (a) | | | 629,205 | | | | 629,205 | |
| Unsecured note receivable for sale of former subsidiary, Marald, Inc., due in monthly payments of $3,074, including interest at 4%, beginning April 1, 2011 through March 1, 2021 (b) | | | 300,000 | | | | 300,000 | |
| Unsecured note receivable purchased from Texas Community Bank, interest at 8% due monthly, principal due January 2009 (c) | | | 300,000 | | | | 300,000 | |
| Note secured by shares of DCP stock, interest due quarterly at 5%, principal payment due on or before June 23, 2012 (d) | | | - | | | | 55,000 | |
| Notes receivable | | | 1,278,986 | | | | | |
| Reserve due to uncertainty of collectibility | | | (300,000 | ) | | | (300,000 | ) |
| | | | 978,986 | | | | 1,043,456 | |
| Less current portion | | | (39,577 | ) | | | (38,892 | ) |
| Long-term notes receivable | | $ | 939,409 | | | $ | | |
(a) Note secured by 2nd lien on property of former subsidiary, SET. This note originated from advances and fees charged to SET during the year ended December 31, 2010, and is secured by a 2nd lien on the business operations, equipment, inventory, leasehold, trademarks, licenses, permits and / or general intangibles of SET. Stillwater National Bank is the 1st lienholder.
(b) 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. Since payments are currently being made on the other note receivable with Marald in accordance with note terms, no further discounting of the loan was deemed necessary as of March 31, 2011.
(c) Note purchased from Texas Community Bank with a face amount of $300,000. This delinquent note was purchased on September 30, 2009 for $300,000 and new payment terms are being negotiated for this note receivable with the debtors, Las Vegas Premium Gold. This note was purchased as an investment to receive the interest income from the note. Management has assessed this note for impairment and feels that collectability is reasonably possible based on the personal guarantees of the principals. American has hired an attorney in this matter. The attorney has secured a judgment against one of the guarantors and is pursuing collection.
(d) Note secured by shares of DCP stock. On April 22, 2011, American entered into a stock purchase agreement, whereby Joe Hoover purchased for $5,000 American's 80% ownership of DCP's assets and associated liabilities. Additionally, American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the three months ended March 31, 2011.
At December 31, 2010, management reviewed its notes receivable for impairment. Based on this review, American reserved a total of $600,000 due to uncertainty of collectibility.
Interest income on notes receivable is recognized principally by the simple interest method. During the three months ended March 31, 2011 and 2010, American recognized interest income of $1,669 and $9,195, respectively.
Note 6 - Property and Equipment
Major classes of property and equipment together with their estimated useful lives, consisted of the following:
| | Years | | | | | | |
| Land | | | $ | 1,663,020 | | | $ | | |
| Building and improvements | 20 | | | 974,768 | | | | | |
| Machinery and equipment | 7-15 | | | 3,560,223 | | | | | |
| Office equipment and furniture | 7 | | | 279,944 | | | | | |
| Automobiles | 5 | | | 724,013 | | | | | |
| | | | | 7,201,968 | | | | | |
| Less accumulated depreciation | | | | (3,517,929 | ) | | | (3,409,356 | ) |
| Net property and equipment | | | $ | 3,684,039 | | | $ | | |
Depreciation expense for the three months ended March 31, 2011 and 2010 was $109,255 and $121,121, respectively.
Note 7 - Intangible Assets
Intangible assets at March 31, 2011 and December 31, 2010 consisted of goodwill of $674,539 related to the acquisition of NPI.
Note 8 - Short-term Notes Payable
| | | March 31, 2011 | | | | |
| Insurance note payable with interest at 4.99% principal and interest due in monthly payments of $22,796 through May 1, 2011 | | $ | 22,796 | | | $ | 91,183 | |
| 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 | | | 360,000 | | | | - | |
| | | $ | 382,796 | | | $ | | |
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 March 31, 2011 and December 31, 2010, the average annual interest rates of our short-term borrowings were approximately 5.00% and 4.99%, respectively.
Note 9 - Long-term Debt
Long-term debt consisted of the following:
| | | | | | | |
| Revolving line of credit to a bank, which allows Delta to borrow up to $2,000,000, due in monthly payments of interest only, with interest at prime floating rate of 3.25%, with the principal balance due April 30, 2011, secured by assets of Delta. (a) (b) | $ | | 1,683,527 | | | $ | | |
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. (b) | | | 1,436,375 | | | | 1,444,875 | |
| Revolving line of credit to a bank, which allows NPI to borrow up to $3,250,000, interest due monthly at 6.5%, principal balance due December 31, 2010, secured by assets of NPI. | | | - | | | | | |
Revolving line of credit to a bank, which allows NPI to borrow up to $3,000,000, interest due monthly at the greater of prime (3.25%) plus one or 5%, principal balance due in April 2012, secured by assets of NPI. (b) | | | 2,083,963 | | | | - | |
| Note payable to a bank, due in quarterly payments of interest only, with interest at 6%, with a principal balance due in May 2011, secured by real property. | | | 1,566,000 | | | | 1,566,000 | |
| Note payable due in monthly payments of $19,373, including interest at 6%, through March 2013, secured by assets of Delta. | | | 515,884 | | | | | |
| Note payable to a bank, due in monthly payments of $6,120, including interest at 8.25%, through August 9, 2012, secured by assets of Delta. | | | 97,546 | | | | | |
| Other secured notes with various terms | | | 10,864 | | | | | |
| | | | | | | | | |
| Less current portion | | | (3,564,087 | ) | | | (4,794,723 | ) |
| | | $ | 3,830,072 | | | $ | | |
(a) Delta has signed a 30-day extension on this line of credit and is in the process of renewing this note.
(b) 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 March 31, 2011:
| | $ | 3,508,208 | |
| | | 2,385,315 | |
| | | 1,500,636 | |
| Total | | $ | 7,394,159 | |
Note 10 - 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 no 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.
American is authorized to issue up to 50,000,000 shares of Common Stock, $0.001 par value per share, of which 1,036,800 are reserved for issuance pursuant to the exercise of options pursuant to an employment agreement with American's Chairman and CEO. No options are outstanding at March 31, 2011.
During the three months ended March 31, 2011, American purchased 13,300 common shares as treasury stock for $8,629. American issued 500,000 restricted shares of common stock for cash consideration of $300,000 for investment from Dror Charitable Foundation for the Arts and the Dror Family Trust, both of which are related parties to Daniel Dror, CEO. Additionally, American received $245,000 from the Dror Family Trust for a common stock issuance obligation of 500,000 restricted shares, which were issued in April 2011 upon the receipt of the final payment of $5,000. 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.
| | | Three Months Ended March 31, | |
| | | 2011 | | | | |
| Common shares issued for services | | $ | 507,549 | | | $ | 962,770 | |
| Stock options issued for services | | | - | | | | - | |
| Stock-based compensation | | $ | 507,549 | | | $ | 962,770 | |
During the three months ended March 31, 2011, American and its subsidiaries issued the following shares for services:
American issued 576,601 shares of common stock valued at $380,049 to employees, directors and third parties.
Delta issued 2,550,000 shares of its common stock with a value of $127,500 to employees.
During the three months ended March 31, 2010, American and its subsidiaries issued the following shares for services:
American issued 100,000 shares of common stock valued at $115,020 to employees, directors and third parties.
Delta issued 9,607,843 shares of its common stock with a value of $847,750 to employees.
Note 11 - Concentration 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 March 31, 2011, 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 $0.3 million. The terms of these deposits are on demand to minimize risk. American has not incurred losses related to these deposits.
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 three months ended March 31, 2011, NPI had one customer that accounted for 14% of revenues and 14% of trade accounts receivable, and one customer that accounted for 11% of trade accounts receivable on a consolidated basis.
Note 12 - Income Taxes
The components of the income tax provision (benefit) for the three months ended March 31, 2011 and 2010 are as follows:
| | | Three Months ended March 31, | |
| | | 2011 | | 2010 | |
| Current: | | $ | | | $ | | |
| Federal | | | - | | | - | |
| State | | | 8,491 | | | 13,780 | |
| Total current | | | 8,491 | | | 13,780 | |
| | | | | | | | |
| Deferred: | | | | | | | |
| Federal | | | - | | | - | |
| State | | | - | | | - | |
| Total deferred | | | - | | | - | |
| | | | | | | | |
| Total income tax provision | | $ | 8,491 | | $ | 13,780 | |
The following table sets forth a reconciliation of the statutory federal income tax for the three months ended March 31, 2011 and 2010:
| | | Three Months ended March 31, | |
| | | 2011 | | 2010 | |
| Income tax expense computed at statutory rate | | $ | (445,747 | ) | $ | (363,396 | ) |
| Share-based compensation | | | 172,567 | | | 327,342 | |
| Meals and entertainment | | | 6,555 | | | 3,941 | |
| Other | | | - | | | 16 | |
| Change in valuation allowance | | | 266,625 | | | 32,097 | |
| Texas Margin Tax | | | 8,491 | | | | |
| | | $ | 8,491 | | $ | 13,780 | |
The tax effects of the temporary differences between financial statement income and taxable income are recognized as a deferred tax asset and liabilities. Significant components of the deferred tax asset and liability as of March 31, 2011 and December 31, 2010 are set out below:
| | | March 31, 2011 | | December 31, 2010 | |
| Deferred Tax Assets: | | | | | | | |
| Net operating loss carryforward | | $ | 6,242,794 | | $ | 5,935,666 | |
| Loss on discontinued operations | | | 20,199 | | | 119,000 | |
| Unrealized loss on trading securities | | | 135,877 | | | - | |
| Other | | | 6,916 | | | 49,168 | |
| Total deferred tax assets | | | 6,405,786 | | | 6,103,834 | |
| | | | | | | | |
| Deferred Tax Liabilities: | | | | | | | |
| Tax depreciation in excess of books | | | (209,331 | ) | | (837,322 | ) |
| Unrealized gains on trading securities | | | - | | | (562,898 | ) |
| Other | | | - | | | (13,764 | ) |
| Total deferred tax liabilities | | | (209,331 | ) | | (1,413,984 | ) |
| | | | | | | | |
| Valuation allowance | | | (6,196,455 | ) | | (4,689,850 | ) |
| Net deferred tax asset | | $ | - | | $ | - | |
American has loss carry-forwards totaling $18,420,206 available at March 31, 2011 that may be offset against future taxable income. If not used, the carry-forwards will expire as follows:
| Operating Losses |
| Amount | | Expires |
| $ | 1,552,323 | | 2018 |
| | 1,462,959 | | 2019 |
| | 2,086,064 | | 2020 |
| | 860,006 | | 2022 |
| | 566,409 | | 2023 |
| | 1,028,302 | | 2024 |
| | 1,551,019 | | 2025 |
| | 73,187 | | 2026 |
| | 288,855 | | 2027 |
| | 3,626,977 | | 2028 |
| | 3,821,420 | | 2029 |
| | 593,343 | | 2030 |
| | 909,342 | | 2031 |
| $ | 18,420,206 | |
Note 13 - Commitments and Contingencies
On July 23, 2008, Delta Seaboard Well Service, Inc. negotiated a settlement in the Fort Apache Energy, Inc. v. Delta Seaboard Well Service, Inc. lawsuit for $1,450,000. After non-controlling interest, the net impact of this settlement on American's net income is $739,500. Delta recovered $700,000 of this loss through insurance as described below.
Delta Seaboard Well Service, Inc. v. Houstoun, Woodard, Eason, Gentle Tomforde and Anderson, Inc., D/B/A Insurance Alliance and Robert Holman (“Broker Lawsuit”). On February 19, 2010, Delta settled its claims in the Broker Lawsuit and received $700,000, which was included in other income for the three months ended March 31, 2011.
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. In February 2010, the case was mediated and the parties attempted to settle the case. 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 8) with 5% annual interest paid in monthly installments to Botts due by February 1, 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.
Wintech Partners, LLC ("Wintech"), a company owned by the noncontrolling interest owners of Delta, owns 100% of Delta's Houston facilities and is responsible for the associated $1,850,000 note payable. Delta pays a lease to Wintech by paying the interest due on the note payable. Delta has a 5,000 square foot office and warehouse facility in Louisiana which is leased from a third party at an annual rental of $18,000.
Future minimum lease payments are as follows:
| | | Amount | |
| Year December 31, 2011 | | $ | 83,250 | |
| Year December 31, 2012 | | | 55,500 | |
| | | $ | 138,750 | |
Note 14 - Segment Information
We have two 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; |
| | · Delta Seaboard International ("Delta") - a 46.4% owned subsidiary, is an onshore rig-based well-servicing contracting company providing services to the oil and gas industry; |
| | · 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 owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on American's balance sheet at $0. 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 54,680,074 shares of common stock, representing 54.7% 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.
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:
| | | Three months ended March 31, | |
| | | 2011 | | | 2010 | |
| Revenues: | | | | | | | | |
| Northeastern Plastics | | $ | 1,601,859 | | | $ | 1,488,557 | |
| Delta Seaboard | | | 2,622,699 | | | | 2,238,658 | |
| Brenham Oil & Gas | | | 450 | | | | - | |
| Total revenues | | $ | 4,225,008 | | | $ | 3,727,215 | |
| | | | | | | | | |
| Operating income (loss) from continuing operations: | | | | | | | | |
| Northeastern Plastics | | $ | (132,056 | ) | | $ | (80,564 | ) |
| Delta Seaboard | | | 47,739 | | | | (1,294,631 | ) |
| Corporate | | | (871,682 | ) | | | (343,815 | ) |
| Operating loss from continuing operations | | | (955,999 | ) | (1,719,010 | ) |
| Other income (expense) from continuing operations | | | (355,021 | ) | | | 650,197 | |
| Net loss from continuing operations before income tax | | $ | (1,311,020 | ) | | $ | (1,068,813 | ) |
| | | | | | | | | |
| Depreciation and amortization: | | | | | | | | |
| Northeastern Plastics | | $ | 14,501 | | | $ | 14,845 | |
| Delta Seaboard | | | 93,149 | | | | 103,302 | |
| Corporate | | | 1,605 | | | | 2,974 | |
| Total depreciation and amortization | | $ | 109,255 | | | $ | 121,121 | |
| | | | | | | | | |
| Interest expense: | | | | | | | | |
| Northeastern Plastics | | $ | 51,722 | | | $ | 25,189 | |
| Delta Seaboard | | | 39,835 | | | | 40,366 | |
| Corporate | | | 27,797 | | | | 61,270 | |
| Total interest expense | | $ | 119,354 | | | $ | 126,825 | |
| | | | | | | | | |
| | | Three months ended March 31, | |
| | | 2011 | | | 2010 | |
| Capital expenditures: | | | | | | | | |
| Northeastern Plastics | | $ | 1,756 | | | $ | - | |
| Delta Seaboard | | | 118,249 | | | | 58,584 | |
| Corporate | | | - | | | | - | |
| Total capital expenditures | | $ | 120,005 | | | $ | 58,584 | |
| | | | | | | | | |
| Non-cash transactions: | | | | | | | | |
| Delta | | | | | | | | |
| Accounts payable and dividends payable assumed in Delta reverse merger transaction | | $ | - | | | $ | 597,131 | |
| Delta dividends declared and unpaid | | $ | 60,000 | | | $ | 60,000 | |
| Corporate | | | | | | | | |
| Unrealized loss on available for sale securities | | $ | 117,000 | | | $ | - | |
| Receipt of common stock to convert promissory note due from Delta | | $ | - | | | $ | 872,352 | |
| Adjustment to noncontrolling interest in Delta and BOG | | $ | 33,262 | | | $ | 310,906 | |
| Stock issued to related party for receivable | | $ | - | | | $ | 262,600 | |
| Note payable issued for lawsuit settlement | | $ | 400,000 | | | $ | - | |
| | | March 31, 2011 | | | | |
| Identifiable assets: | | | | | | |
| Northeastern Plastics | | $ | 8,587,013 | | | $ | | |
| Delta | | | 5,911,859 | | | | | |
| Corporate | | | 9,203,000 | | | | | |
| Assets held for sale | | | 163,817 | | | | 239,380 | |
| Total identifiable assets | | $ | 23,865,689 | | | $ | | |
Note 15 - Related Party Transactions
American issued 500,000 restricted shares of common stock for cash consideration of $300,000 for investment from Dror Charitable Foundation for the Arts and the Dror Family Trust, both of which are related parties to Daniel Dror, CEO. Additionally, American received $245,000 from the Dror Family Trust for a common stock issuance obligation of 500,000 restricted shares, which were issued in April 2011 upon the receipt of the final payment of $5,000. 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.
Note 16 - Assets held for sale
On June 23, 2010, Joe Hoover, President of DCP, purchased 20% of the 1,000 shares of Common Stock of DCP held by American for $20,000 in cash and a $55,000 promissory note. American recorded a $74,814 gain on sale of assets for this transaction. On April 22, 2011, American entered into a stock purchase agreement, whereby Joe Hoover purchased for $5,000 American's 80% ownership of DCP's assets and associated liabilities, which are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheets as of March 31, 2011 and December 31, 2010 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). DCP's net loss for the three months ended March 31, 2011 and net income for the three months ended March 31, 2010 are included in discontinued operations. Additionally, American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the three months ended March 31, 2011.
The carrying amounts of the major classes of assets and liabilities for DCP at March 31, 2011 and December 31, 2010 are summarized below:
| | |
| | | March 31, 2011 | | | December 31, 2010 | |
| Assets held for sale | | | | | | |
| Current assets held for sale: | | | | | | |
| Cash and cash equivalents | | $ | 22,240 | | | $ | 44,542 | |
| Accounts receivable | | | 22,135 | | | | 8,250 | |
| Accounts receivable from related parties | | | | | | | | |
| Inventories | | | 104,106 | | | | 166,659 | |
| Prepaid expenses and other current assets | | | 15,336 | | | | 18,546 | |
| Total current assets held for sale | | | 163,817 | | | | 237,997 | |
| | | | | | | | | |
| Other assets | | | - | | | | 1,383 | |
| Total assets held for sale | | $ | 163,817 | | | $ | 239,380 | |
| | | | | | | | | |
| Liabilities associated with assets held for sale | | | | | | | | |
| Current liabilities associated with assets held for sale: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 157,401 | | | $ | 228,554 | |
| Total current liabilities associated with assets held for sale | | | 157,401 | | | | 228,554 | |
| Long-term capital lease obligations, less current installments | | | | | | | | |
| Total liabilities associated with assets held for sale | | $ | 157,401 | | | $ | 228,554 | |
DCP's revenues and net loss before income tax are summarized below:
| | | Three Months Ended | |
| | | March 31, 2011 | | | March 31, 2010 | |
| Revenues | | | | | | | | |
| DCP | | $ | 246,131 | | | $ | 62,942 | |
| SET | | | - | | | | 1,206,356 | |
| Total revenues from discontinued operations | | $ | 246,131 | | | $ | 1,269,298 | |
| Net loss before income tax | | | | | | | | |
| DCP | | | (4,410 | ) | | | 3,302 | |
| SET | | | - | | | | (368,452 | ) |
| Net loss before income tax | | $ | (4,410 | ) | | $ | (365,150 | ) |
| Loss on disposal of discontinued operations | | $ | (55,000 | ) | | $ | - | |
Note 17 - Subsequent Events
From April 1, 2011 through May 13, 2011, American paid $3,040 to repurchase 4,700 shares of its common stock for treasury and issued 228,000 for services valued at $144,440. During the three months ended March 31, 2011, American received $245,000 from the Dror Family Trust for a common stock issuance obligation of 500,000 restricted shares, which were issued in April 2011 upon the receipt of the final payment of $5,000. Mr. Dror is not a trustee of the Dror Family Trust and he disclaims any beneficial interest in the trust.
On May 1, 2011, Delta executed a new insurance note payable for $264,590, with interest at 4.79%. Principal and interest are due in monthly payments of $22,270 through May 1, 2012.
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 two 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; |
| | · Delta Seaboard International (Delta) - a 46.4% owned subsidiary, is an onshore rig-based well-servicing contracting company providing services to the oil and gas industry; |
| | · 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, a division that owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on American's balance sheet at $0. 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 54,680,074 shares of common stock, representing 54.7% of BOG’s total outstanding shares. |
On June 23, 2010, Joe Hoover, President of DCP, purchased 20% of the 1,000 shares of Common Stock of DCP held by American for $20,000 in cash and a $55,000 promissory note. American recorded a $74,814 gain on sale of assets for this transaction. On April 22, 2011, American entered into a stock purchase agreement, whereby Joe Hoover purchased for $5,000 American's 80% ownership of DCP's assets and associated liabilities, which are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheets as of March 31, 2011 and December 31, 2010 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). DCP's net loss for the three months ended March 31, 2011 and net income for the three months ended March 31, 2010 are included in discontinued operations. Additionally, American forgave the $55,000 promissory note owed by Joe Hoover and this is included as a loss in discontinued operations for the three months ended March 31, 2011.
On February 3, 2010, Hammonds Industries Inc. ("Hammonds") and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger"). In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and effected a one-for-ten (1:10) reverse stock split ("Reverse Split") of its common stock. Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock.
American owns 32,859,935 shares of common stock, representing 46.4% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 32,425,832 shares of common stock, representing 45.7% of Delta's total outstanding shares. All other stockholders of Delta own 5,606,483 shares of common stock, representing 7.9% of Delta's total 70,892,250 outstanding shares.
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 complimentary businesses and by expanding the operations of our existing businesses, especially in the energy sector. We will evaluate whether additional and complimentary 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 Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010.
The following is derived from, and should be read in conjunction with, our unaudited consolidated financial statements, and related notes for the three months ended March 31, 2011 and 2010.
Net revenues. Revenues from continuing operations were $4,225,008 for the three months ended March 31, 2011, compared to $3,727,215 for the three months ended March 31, 2010, representing an increase of $497,793, or 13.4%. Delta's revenues increased by $384,041, or 17.2%. Pipe sales increased by $215,604 for the three months ended March 31, 2011, compared to the same period in the prior year. The cost of steel products decreased, allowing Delta to be more competitive in the pipe market. More pipe was sold to end-users, affording Delta larger pipe orders with higher margins. Rig service revenues increased by $168,437 for the three months ended March 31, 2011, compared to the same period in the prior year. Rig service revenues have increased due to major maintenance on two rigs during 2010. Drilling activities have significantly increased during the three months ended March 31, 2011, compared to the same period in the prior year. NPI's revenues increased by $113,302, or 7.6%, for the three months ended March 31, 2011, compared to the same period in the prior year. NPI's revenues increased due to the addition of several new accounts and increased orders for existing accounts. Brenham's revenues for the three months ended March 31, 2011 were $450.
Cost of sales and margins. Cost of sales for the three months ended March 31, 2011 was $2,228,563, compared to $2,333,423 for the three months ended March 31, 2010. Our gross margins in 2011 were 47.3%, compared to gross margins of 37.4% in 2010. The increase in margins was primarily due to higher margins on pipe sales for Delta. Margins on pipe sales were 34% for the three months ended March 31, 2011, compared to 2% for the three months ended March 31, 2010. The increase in margins was due to the sale of high-priced pipe from inventory during the three months ended March 31, 2010.
Selling, general and administrative. Consolidated selling, general and administrative expenses for the three months ended March 31, 2011 were $2,952,444, compared to $3,112,802 in the prior year, representing a decrease of $160,358, or 5.2%, primarily due to a decrease in stock-based compensation. General and administrative expenses for the three months ended March 31, 2011 included non-cash stock-based compensation of $507,549, compared to $962,770 during the three months ended March 31, 2010, of which $847,750 was for the executive officers of Delta Seaboard in consideration for extending their employment agreements (as described in Note 1 to the consolidated financial statements). This decrease in stock-based compensation was offset by increases in selling, general and administrative expenses incurred in support of higher revenues for NPI and Delta. Selling, general and administrative expenses for the three months ended March 31, 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.
Loss from operations. We had an operating loss of $955,999 for the three months ended March 31, 2011, compared to an operating loss of $1,719,010 for the three months ended March 31, 2010.
Total other income/expenses. Other expenses were $355,021 for the three months ended March 31, 2011, compared to other income of $650,197 for the three months ended March 31, 2010. Other expenses for the three months ended March 31, 2011 included non-cash unrealized losses on trading securities of $399,638. Interest expense was $119,354 during the three-month period ended March 31, 2011, compared to $126,825 during the same period in the prior year. Other income for the three months ended March 31, 2010 included the receipt of a $700,000 cash settlement for its claims in an insurance lawsuit.
Net loss. We had a net loss from continuing operations of $1,319,511, or $0.11 per share, for the three months ended March 31, 2011, compared to a net loss of $1,082,593, or $0.08 per share, for the same period in 2010. We had a net loss from discontinued operations of $59,410, or $0.01 per share, for the three months ended March 31, 2011, compared to a net loss of $365,150, or $0.04 per share, for the three months ended March 31, 2010. Net loss from discontinued operations for the three months ended March 31, 2011 includes DCP's net loss of $4,410 for the three months ended March 31, 2011 and $55,000 for the promissory note owed by Joe Hoover which was forgiven as part of the sale of DCP. Net loss from discontinued operations for the three months ended March 31, 2010 includes SET's net loss of $368,452 and DCP's net income of $3,302.
Our net loss was $1,378,950, or $0.12 per share, for the three months ended March 31, 2011, compared to net a net loss of $1,104,409, or $0.12 per share, for the three months ended March 31, 2010.
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 issuance of common stock of $300,000, proceeds from a common stock issuance obligation of $245,000, and net borrowings under lines of credit agreements of $869,963.
Capital expenditures for the three months ended March 31, 2011 were $120,005 compared to $58,584 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 $2,117,236 for the three months ended March 31, 2011, compared to net cash provided of $179,845 for the three months ended March 31, 2010. Net cash used in operating activities for the three months ended March 31, 2011 includes a one-time lump sum payment of $1,250,000 for a lawsuit settlement. Additionally, accounts payable decreased significantly due to payments made in the three months ended March 31, 2011 for expenses incurred during the three 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 to 24 months from the date of this report. The appraised values of the Company's portfolio of real estate is significantly higher than the value recorded on the books.
For the three months ended March 31, 2011, our investing activities provided cash of $119,651, compared to $245,939 during the three months ended March 31, 2010. Our financing activities provided cash of $1,219,488 during the three months ended March 31, 2011, compared to $390,282 during the three months ended March 31, 2010.
In January 2011, NPI obtained a line of credit from Trustmark Bank in the amount of $3,000,000, which has a maturity date in April 2012. Our subsidiary, Delta has a line of credit for $2,000,000 with Trustmark Bank, which has a maturity date in May 2011. Delta's line of credit with its bank has historically been renewed prior to the due date for a period of 18 to 24 months. Management plans to renew this line of credit upon expiration. Delta has an excellent relationship with its bank and believes that they will be able to renegotiate their lines of credit at terms and conditions satisfactory to the Company.
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.
Total assets at March 31, 2011 were $23,865,689, compared to $25,890,861 at December 31, 2010, representing a decrease of $2,025,172. At March 31, 2011, consolidated working capital was $11,432,728, compared to working capital of $9,728,802 at December 31, 2010, representing an increase of $1,703,926. Total assets as of March 31, 2011, included real estate held for sale of $5,825,321 (see note 4), inventories of $6,077,464, accounts receivable of $2,954,163, cash and cash equivalents of $693,265, certificates of deposit of $779,397, $1,290,817 of trading securities, $1,400,286 in notes receivable, and $3,684,039 of property and equipment.
We had total liabilities of $10,651,042 as of March 31, 2011, which included $6,820,970 of current liabilities, mainly consisting of $2,695,730 of accounts payable and accrued expenses, $3,564,087 of current installments of long-term debt, and long-term liabilities of $3,830,072, consisting of long-term debt (less current installments).
Cash flow from operations. Net cash used in operating activities from continuing operations was $2,117,236 for the three months ended March 31, 2011, compared to net cash provided of $179,845 for the three months ended March 31, 2010. Net cash used in operating activities for the three months ended March 31, 2011 includes a one-time lump sum payment of $1,250,000 for a lawsuit settlement. Our net loss from continuing operations of $1,319,511 for the three months ended March 31, 2011 included non-cash expenses of $616,804, including depreciation and amortization of $109,255 and share-based compensation of $507,549. Our net loss from continuing operations of $1,082,593 for the three months ended March 31, 2010 included non-cash expenses of $1,083,891, including depreciation and amortization of $121,121 and share-based compensation of $962,770. Accounts receivable decreased by $1,106,458 during the three months ended March 31, 2011, compared to an increase of $219,113 during the same period in 2010. NPI collected accounts receivable during the three months ended March 31, 2011, which resulted from significantly higher revenues during the three months ended December 31, 2010. Our inventories increased by $643,971 for the three months ended March 31, 2011, compared to a decrease of $780,020 during the three months ended March 31, 2010. Accounts payable decreased by $2,185,539 during the three months ended March 31, 2011, compared to a decrease of $335,768 during the same period in 2010. The decrease in accounts payable during the three months ended March 31, 2011 included the a one-time lump sum payment of $1,250,000 for a lawsuit settlement. The remainder of the decrease in accounts payable was primarily due to payments made in the three months ended March 31, 2011 for expenses incurred during the three months ended December 31, 2010 in support of higher revenues at NPI.
Cash flow from investing activities. For the three months ended March 31, 2011, our investing activities provided cash of $119,651 primarily as a result of proceeds from the sale of trading securities of $242,554, offset by the purchase of property and equipment of $120,005 and loans to related parties of $10,090. Our investing activities provided cash of $245,939 during the three months ended March 31, 2010, primarily as a result of proceeds from the sale of trading securities of $617,220, offset by loans to related parties of $241,079, the purchase of trading securities of $74,208, and the purchase of property and equipment of $58,584.
Cash flow from financing activities. Our financing activities provided cash of $1,219,488 during the three months ended March 31, 2011, primarily as a result of proceeds from the issuance of common stock of $300,000, proceeds from a common stock issuance obligation of $245,000, and net borrowings under lines of credit agreements of $869,963, offset by payments on debt of $186,846. During the three months ended March 31, 2010, our financing activities provided cash of $390,282, primarily as a result of proceeds from the issuance of common stock of $746,810, offset by payments on debt and net repayments under lines of credit agreements of $353,254.
Not applicable.
Evaluation of disclosure controls and procedures. As of March 31, 2011, 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.
PART II - OTHER INFORMATION
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. In February 2010, the case was mediated and the parties attempted to settle the case. 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 8) with 5% annual interest paid in monthly installments to Botts due by February 1, 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.
There are no other updates to any legal proceedings previously disclosed.
There have been no material changes from Risk Factors as previously disclosed in the Registrant’s annual report for the year ended December 31, 2010.
During the three months ended March 31, 2011, American purchased 13,300 common shares as treasury stock for $8,629. American issued 500,000 restricted shares of common stock for cash consideration of $300,000 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.
None.
None.
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 Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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, PRESIDENT AND CHAIRMAN
Dated: May 13, 2011
/s/ SHERRY L. MCKINZEY
CHIEF FINANCIAL OFFICER
Dated: May 13, 2011
