**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 June 30, 2014

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  ̈Nox

The number of shares outstanding of each of the issuer’s classes of equity as of August 19, 2014 is 2,410,948 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

 

19

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

23

ITEM 4T.

 

CONTROLS AND PROCEDURES

 

23

 

 

 

 

 

 

 

**PART II – OTHER INFORMATION**

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

23

ITEM 1A.

 

RISK FACTORS

 

23

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

23

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

23

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

23

ITEM 5.

 

OTHER INFORMATION

 

23

ITEM 6.

 

EXHIBITS

 

23

 

2

**PART I - FINANCIAL INFORMATION**

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

**Financial Statements**

 

 

 

 

Financial Statements

 

Unaudited Consolidated Balance Sheets – June 30, 2014 and December 31, 2013

4

Unaudited Consolidated Statements of Operations and Comprehensive Loss – Three and Six Months Ended June 30, 2014 and 2013

5

Unaudited Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 and 2013

6

Notes to Unaudited Consolidated Financial Statements

7

 

3

**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**(Unaudited)**

 

 

 

 

 

 

 

**June 30, 2014**

** **

**December 31, 2013**

Assets

 

 

 

 

Current assets:

 

 

 

 

   Cash and cash equivalents

$

865,705

$

                         715,572

   Accounts receivable from related parties

 

1,244

 

                                498

   Accounts receivable, net of allowance for doubtful accounts

 

1,009,343

 

                      1,365,460

   Short-term note receivable

 

12,000

 

                           32,000

   Current portion of long-term notes receivable

 

60,000

 

                           42,821

   Inventories, net of reserve for obsolescence

 

1,836,902

 

                      1,495,030

   Real estate held for sale

 

8,991,170

 

                      8,421,465

   Prepaid expenses and other current assets

 

75,760

 

                           32,527

     Total current assets

 

12,852,124

 

                    12,105,373

 

 

 

 

Long-term notes receivable, less current portion

 

779,576

 

                         814,397

Oil and gas properties, costs subject to amortization

 

90,280

 

                         91,573

Oil and gas properties, costs not subject to amortization

341,900

91,900

Property and equipment, net of accumulated depreciation

 

39,885

 

                         771,728

Goodwill

 

674,539

 

                         674,539

Patents, trademarks and tooling, net of accumulated amortization

 

153,882

 

                         160,883

Marketable securities – available for sale

 

35,300

 

                             8,000

Other assets

 

4,005

 

                             4,005

       Total assets

$

14,971,491

 $

                    14,722,398

 

 

 

 

Liabilities and Equity

 

 

 

Current liabilities:

 

 

 

   Accounts payable and accrued expenses

$

1,425,756

 $

                      1,245,792

   Accounts payable to related parties

 

131,100

 

                         133,312

   Short-term notes payable

 

200,000

 

                         200,000

   Current portion of long-term debt

 

2,975,324

 

                      3,497,808

   Current portion of long-term debt to related parties

15,000

-

     Total current liabilities

 

4,747,180

 

                      5,076,912

 

 

 

 

Accrued pension expense

 

31,113

 

                           36,349

Deferred income

 

478,142

 

                                     -

Asset retirement obligations

 

7,030

 

                             6,702

Long-term debt, less current portion

 

611,483

 

                         314,469

Long-term debt to related parties, less current portion

 

285,000

 

-

     Total liabilities

 

6,159,948

  

                      5,434,432

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Equity:

 

 

 

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

 

 

 

    issued and outstanding

 

                                       1

 

                                    1

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

 

 

 

 

    2,415,986 and 2,138,986 shares issued, respectively and

 

 

 

 

    2,410,948 and 2,133,948 shares outstanding, respectively

 

2,416

 

                             2,139

   Less: treasury stock, at cost; 264,353 and 259,393 shares, respectively

(1,223,655)

 

                     (1,210,917)

   Additional paid-in capital

 

39,142,168

 

                    38,777,125

   Accumulated deficit

 

(27,782,920)

 

                   (26,981,161)

   Accumulated other comprehensive loss

 

(1,369,700)

 

                     (1,397,000)

   Total equity attributable to American International Industries, Inc.

 

8,768,310

 

                      9,190,187

       Non-controlling interest

 

43,233

 

                           97,779

   Total equity

 

8,811,543

 

                      9,287,966

   Total liabilities and equity

$

14,971,491

 $

                    14,722,398

See accompanying notes to the unaudited consolidated financial statements.

4

 

 

 

 

**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**

**Consolidated Statements of Operations and Comprehensive Loss**

**(Unaudited)**

 

 

 

 

 

 

**For the Three Months**

**For the Six Months**

 

 

 

**Ended June 30,**

**Ended June 30,**

 

 

 

**2014**

**2013**

**2014**

 

**2013**

 

 

 

 

 

 

 

 

 

Revenues

$

1,631,836

$

1,017,146

$

2,833,400

$

2,534,749

 

 

 

 

 

 

Costs and expenses:

 

 

 

   Cost of revenues

 

1,198,152

 

776,742

2,120,357

1,894,741

 

 

   Selling, general and administrative

 

884,748

 

845,820

1,790,363

2,106,849

 

 

     Total costs and expenses

 

2,082,900

 

1,622,562

3,910,720

4,001,590

 

 

 

 

 

 

Loss on sale of assets

 

(21,079) 

(38,546)

(21,079)

(38,546)

 

 

 

 

Operating loss

(472,143)

 

(643,962)

(1,098,399)

(1,505,387)

 

 

 

 

 

 

Other income (expenses):

 

 

 

   Interest and dividend income

 

3,110

30,248

7,817

50,774

 

 

  Rubicon lawsuit settlement

-

 

7,500

-

7,500

 

 

   Realized gains on the sale of trading securities, net

 

36,863

 

23,953

49,418

132,627

 

 

   Unrealized gains (losses) on trading securities, net

 

21,334

 

(28,533)

(52,848)

(88,323)

 

 

   Interest expense

 

(58,677)

 

(59,538)

(115,294)

(123,799)

 

 

   Other income

 

351,130

-

344,155

-

 

 

     Total other income (expense)

 

353,760

 

(26,370)

233,248

(21,221)

 

 

 

 

 

 

     Loss before income tax

 

(118,383)

 

(670,332)

(865,151)

(1,526,608)

 

 

     Income tax expense (benefit)

 

4,409

4,113

(8,846)

6,120

 

 

     Net loss

 

(122,792)

 

(674,445)

(856,305)

(1,532,728)

 

 

     Net loss attributable to the non-controlling interest

 

29,351

 

28,246

54,546

242,325

 

 

     Net loss attributable to American International Industries, Inc.

$

(93,441)

$

(646,199)

$

(801,759)

$

(1,290,403)

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

$ 

(0.04)

 $

(0.34)

$ 

(0.36)

$ 

(0.71)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

2,193,916

 

1,914,257

 

2,220,592

 

1,813,745

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

     Net loss

$

(122,792)

$

(674,445)

$

(856,305)

$

(1,532,728)

 

 

     Unrealized loss on marketable securities

 

27,300

 

26,000

 

27,300

 

(26,000)

 

 

Total comprehensive loss

 

(95,492)

 

(648,445)

 

(829,005)

 

(1,558,728)

 

 

     Comprehensive loss attributable to the non-controlling interests

 

29,351

 

28,246

 

54,546

 

242,325

 

 

Comprehensive loss attributable to American International Industries, Inc. shareholders

$

(66,141)

$

(620,199)

$

(774,459)

$

(1,316,403)

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 

**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 

 

 

 

 

 

 

**For the Six Months**

 

 

**Ended June 30,**

 

 

**2014**

 

**2013**

Cash flows from operating activities:

 

 

 

 

   Net loss

$

(856,305)

$

(1,532,728)

   Adjustments to reconcile net loss to net cash used in operating activities:

 

       Depreciation and amortization

 

25,802

44,248

       Stock-based compensation

 

215,320

342,880

       Amortization of guarantor fee

 

-

2,955

       Loss on sale of assets

21,079

38,546

       Realized gains on the sale of trading securities, net

 

(49,418)

(132,627)

       Unrealized losses on trading securities, net

 

52,848

88,323

       Change in operating assets and liabilities:

 

          Accounts receivable

 

356,117

1,040,929

          Accounts receivable – related parties

 

(746)

-

          Inventories

 

(341,872)

(170,672)

          Prepaid expenses and other current assets

 

(43,233)

(56,302)

          Accounts payable – related parties

 

(2,212)

131,100

          Accounts payable and accrued expenses

 

156,832

(445,086)

             Net cash used in operating activities

(465,788)

(648,434)

  

 

Cash flows from investing activities:

 

   Purchase of trading securities

 

(3,197,644)

(213,808)

   Purchase of oil and gas properties

 

(20,000)

(87,500)

   Purchase of VOMF interest in AMIH

 

-

(12,000)

   Sale of trading securities

 

3,014,695

184,355

   Proceeds from sale of assets

1,262,317

53,651

   Purchase of property and equipment

 

(5,596)

-

   Costs of securing patents, trademarks and tooling

 

(18,285)

(20,939)

   Purchase of land

(220,000)

(23,700)

   Proceeds from notes receivable

 

37,642

816,745

            Net cash provided by investing activities

853,129

696,804

  

 

Cash flows from financing activities:

 

   Proceeds from sale of common stock of subsidiary

-

100,000

   Net borrowings under line of credit agreements

 

526,907

67,594

   Bank overdrafts

 

-

(80,598)

   Proceeds from stock subscription receivable

 

-

55,500

   Proceeds from the issuance of debt

 

335,604

-

   Principal payments on debt

 

(1,086,981)

(173,017)

   Loans to related parties

 

-

(10,026)

   Payments for acquisition of treasury stock

 

(12,738)

(15,470)

            Net cash used in financing activities

(237,208)

(56,017)

 

 

Net increase (decrease) in cash and cash equivalents

 

150,133

(7,647)

Cash and cash equivalents at beginning of period

 

715,572

1,016,454

Cash and cash equivalents at end of period

$

865,705

$

1,008,807

Supplemental cash flow information:

 

 

   Interest paid 

 $

-

 $

128,477

   Income taxes paid

 $

-

 $

3,149

 

 

 

Non-cash investing and financing transactions:

 

 

   Unrealized loss on marketable securities

 $

27,300

 $

26,000

   Adjustment to non-controlling interest in AMIH and BOG

 $

-

 $

172,151

   Stock and note issued to related party for acquisition of real estate

 $

450,000

 $

360,000

   Conversion of related party note receivable for real estate

 $

-

 $

181,000

   Conversion of BOG payable owed to AMIN to equity

 $

-

 $

125,181

   Unpaid portion of Inez oil and gas property acquisition

 $

230,000

 $

-

   Capitalized asset retirement costs

 $

-

 $

1,868

   Receipt of AMIH common shares for stock subscription receivable

$

-

$

16,500

 

See accompanying notes to the unaudited consolidated financial statements.

6

 

 

**AMERICAN INTERNATIONAL INDUSTRIES, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

**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, 2013. 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 International Industries, Inc. ("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 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 93.2% shareholder interest, and Brenham Oil & Gas Corp. (“BOG”), in which American holds a 51.0% interest. All significant intercompany transactions and balances have been eliminated in consolidation.

 

**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.

 

**Cash and Cash Equivalents**

** **

American considers cash and equivalents to include cash on hand and certificates of deposits with banks with an original maturity of three months or less, that American intends to convert.

** **

**Accounts Receivable**

** **

Accounts receivable consist primarily of trade receivables, net of a valuation allowance for doubtful accounts.

** **

**Allowance for Doubtful Accounts**

** **

American extends credit to customers and other parties in the normal course of business. American regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, American makes judgments regarding its customers' ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. When American determines that a customer may not be able to make required payments, American increases the allowance through a charge to income in the period in which that determination is made.

** **

**Notes Receivable**

 

Notes receivable are carried at the expected net realizable value. Impairment of notes receivable is based on management's continued assessment of the collectability of debtors.

** **

7

**Inventories**

** **

Inventories are valued at the lower-of-cost or market on a first-in, first-out basis, and includes the cost of the inventories and freight. American assesses the realizability of its inventories based upon specific usage and future utility. A charge to income is taken when factors that would result in a need for a reduction in the valuation, such as excess or obsolete inventory, are noted.

**Investment Securities**

 

American accounts for its investments in accordance with ASC 320-10, "Investments in Debt and Equity Securities." Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Debt securities for which American does not have the intent or ability to hold to maturity and equity securities not classified as trading securities are classified as available-for-sale. The cost of investments sold is determined on the specific identification or the first-in, first-out method. Trading securities are reported at fair value with unrealized gains and losses recognized in earnings, and available-for-sale securities are also reported at fair value but unrealized gains and losses are included in stockholders' equity. Management determines fair value of its investments based on quoted market prices at each balance sheet date.

 

**Oil and Gas Properties, Full Cost Method**

 

BOG uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.

 

Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities, are capitalized as oil and gas property costs. Properties not subject to amortization consist of exploration and development costs that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. BOG assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future development of individually significant properties and the ability of BOG to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

 

Under this method, sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the consolidated statements of operations.

 

**Ceiling Test**

 

In applying the full cost method, BOG performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the “estimated present value” of its proved reserves, discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. During the six months ended June 30, 2014, no impairment of oil and gas properties was recorded.

 

**Property, Plant, Equipment, Depreciation, Amortization and Long-Lived Assets**

 

Long-lived assets include:

 

Property, Plant and Equipment – Assets acquired in the normal course of business are recorded at original cost and may be adjusted for any additional significant improvements after purchase. We depreciate the cost evenly over the assets’ estimated useful lives. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, with any resultant gain or loss being recognized as a component of other income or expense. 

 

Identifiable intangible assets – These assets are recorded at acquisition cost. Intangible assets with finite lives are amortized evenly over their estimated useful lives.

 

At least annually, we review all long-lived assets for impairment. When necessary, we record changes for impairments of long-lived assets for the amount by which the present value of future cash flows, or some other fair value measure, is less than the carrying value of these assets.

 

8

**Revenue Recognition** 

 

Revenue is recognized when the earnings 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.

 

**Income Taxes**

 

American is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.

 

American has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740-10 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of June 30, 2014, American had not recorded any tax benefits from uncertain tax positions.

** **

**Net Loss Per Common 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.  During the three and six months ended June 30, 2014 and 2013, potential dilutive securities that had an anti-dilutive effect were not included in the calculation of diluted net loss per common share.

 

**Advertising Costs**

 

The cost of advertising is expensed as incurred. 

**Stock-Based Compensation**

 

American sometimes grants shares of stock for goods and services and in conjunction with certain agreements. These grants are accounted for based on the grant date fair values.

 

**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, marketable securities - available for sale, are based on quoted market prices of the identical underlying security. As of June 30, 2014 and December 31, 2013, 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 marketable securities - available for sale: 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**As of June 30, 2014**

 

 

** 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:**

 

 

 

 

 

 

 

  Marketable Securities - available for sale

$             35,300

$               35,300

$                         -

$                        -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**As of December 31, 2013**

 

 

**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:**

 

 

 

 

 

 

  Marketable Securities - available for sale

$                       8,000

$             8,000

$               8,000

$                         -

$                         -

 

** **

**Subsequent Events**

** **

American has evaluated all transactions from June 30, 2014 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. 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 six months ended June 30, 2014, the Company had one customer that accounted for 17.26% of revenues, one customer that accounted for 14.03% of revenues and 14.09% of accounts receivable, and one customer that accounted for 8.16% of revenues.

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

 

*Trading securities* - represents 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. Any unrealized changes in market values are recognized in the consolidated statements of operations. 

During the three months ended June 30, 2014 and 2013, American had net unrealized trading gains of $21,334 and net unrealized trading losses of $28,533, respectively, related to securities held on those dates.  American recorded net realized gains of $36,863 and net realized gains of $23,953 during the three months ended June 30, 2014 and 2013, respectively.

During the six months ended June 30, 2014 and 2013, American had net unrealized trading losses of $52,848 and net unrealized trading losses of $88,323, respectively, related to securities held on those dates.  American recorded net realized gains of $49,418 and net realized gains of $132,627 during the six months ended June 30, 2014 and 2013, respectively.

*Marketable securities* - available for sale - any unrealized changes in market values are recognized as other comprehensive loss. At June 30, 2014, this investment was valued at $35,300, based on the closing market price of $0.027. American recognized other comprehensive gains of $27,300 and losses of $26,000 during the six months ended June 30, 2014 and 2013, respectively, for the unrealized changes in market values for this investment.

10

 

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:

 

 

 

 

 

 

 

**June 30, 2014**

**December 31, 2013**

Unsecured note receivable, interest at 5%, principal due on July 10, 2014

$                         12,000

$                         32,000

** **

 

Long-term note receivables consist of the following:

 

 

 

 

 

 

 

**June 30, 2014**

**December 31, 2013**

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

$                          281,073 

$                      281,073 

Unsecured note receivable due in monthly payments of $5,000, including interest at 3%, principal due on or before April 1, 2018 (b)

578,026 

595,668

Total notes receivable

859,099 

876,741 

Reserve due to uncertainty of collectability

(19,523)

(19,523)

Subtotal 

839,576 

857,218 

Less: current portion

(60,000)

(42,821)

Long-term notes receivable

$                          799,576

$                        814,397

 

(a)*Sale of Marald, Inc., principal and interest due monthly through June 1, 2022*. 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. In July 2012, payments began under a new extension and renewal agreement for the note balance plus accrued interest, with the payment terms indicated above. Since April 2013, no payments have been received on this note. American has filed a lawsuit for the total amount owed plus interest and attorney’s fees. The Company believes this receivable is fully collectible, but has classified the receivable as long-term at June 30, 2014 and December 31, 2013.

 

(b) *Unsecured note receivable due April 1, 2018*. 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. On April 1, 2013, American and Shell executed a $620,000 note agreement whereby Shell will make monthly payments in the amount of $5,000, beginning May 1, 2013, with a balloon payment for the remaining amount owed due on or before April 1, 2018. 

 

At June 30, 2014 and December 31, 2013, American had reserved a total of $19,523 on all notes receivable in the aggregate due to uncertainty of collectability. American believes this reserve remains appropriate at June 30, 2014 and December 31, 2013.

 

Interest income on notes receivable is recognized principally by the simple interest method. During the three and six months ended June 30, 2014 and 2013, American recognized interest income of $3,110, $7,817, $ 30,248 and $50,774, respectively, on the notes receivable.

11

**Note 5 - Inventories**

 

Inventories consisted of the following:

 

 

 

 

 

 

 

**June 30, 2014**

**December 31, 2013**

Finished goods

$                                     1,898,902 

$                             1,573,867

Less: reserve for obsolescence

(62,000)

(78,837)

Inventories, net

      $                                       1,836,902

               $                              1,495,030

**Note 6 - Real Estate Held for Sale**

 

Real estate held for sale consisted of the following: 

 

 

 

 

 

 

 

**June 30, 2014**

**December 31, 2013**

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; 6 and 7 units as of June 30, 2014 and December 31, 2013, respectively (a)

             788,033

         888,328

96 acres - vacant commercial use land in Galveston County, Texas (b)

1,211,000

           541,000

5 acres - vacant commercial use land in Houston, Texas

          1,303,905

         1,303,905

31 acres - vacant mixed use land in Houston, Texas

          1,772,564

         1,772,564

17 acres - vacant mixed use land in Houston, Texas

               1,155,359

         1,155,359

174 acres in Waller County, Texas

          1,684,066

         1,684,066

 

 

 

 

$                                 8,991,170

$                          8,421,465

  

(a)

*Dawn Condominium units on the waterfront in Galveston, Texas*- During the six months ended June 30, 2013, one Dawn Condominium units was sold for a total of $79,216, resulting in a total loss on sale of assets of $21,079.

(b)

*96 acres – vacant commercial use land in Galveston County, Texas* - On June 2, 2014 the Company and Daniel Dror II entered into an agreement whereby the Company agreed to purchase the remaining 50% interest in 96 acres in Galveston, Texas for $220,000 in cash, a $300,000 five year promissory note, and 120,000 shares of common stock valued at $150,000.

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:

 

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

2)        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;

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

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

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

6)        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.

In January 2014, AITP entered into an earnest money contract to sell its 31 acre property located in Houston, Texas. The contract expired and the property continues to be offered for sale.

In March 2014, AITP entered into an earnest money contract for $3,350,000 for its 174 acres in Waller County, Texas, which closed on July 25, 2014.

12

**Note 7 - Leases**

On March 6, 2014, the Company’s wholly owned subsidiary, Northeastern Plastics, Inc. sold its office warehouse property, a 32,000 sq. ft. office warehouse facility on I-59 in Houston, Texas, to a third party. The property was sold for $1,325,000 in cash. The Company paid selling expenses of $108,314, and received cash proceeds of $1,183,101. The basis in the property and equipment sold was $727,320 on the date of the sale.  Because the Company immediately leased back the warehouse from the seller upon closing, the transaction was accounted for as a sales leaseback transaction, pursuant to guidance in ASC 840,*Leases*. The Company recorded deferred income of $489,366 initially which will be amortized to rent expense over the life of the lease. As of June 30, 2014, the Company recognized $11,224 of the deferred income as gain on sales of assets. The lease term is 10 years and annual base rent is $121,500, then increases by 2% each year over the 10 year life of the lease. Daniel Dror, Chairman and CEO of American, is a personal guarantor of the lease. 

**Note 8 - Oil and Gas Properties**

 

Brenham uses the full cost method of accounting for oil and gas producing activities.  Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs are capitalized.  Properties not subject to amortization consist of exploration and development costs that are evaluated on a property-by-property basis.  Amortization of these unproved property costs begins when the properties become proved, or their values become impaired and the corresponding costs are added to the capitalized costs subject to amortization.  During the three and six months ended June 30, 2014, depletion of oil and gas properties of $472 and $1,293, respectively, was recorded.  During the three and six months ended June 30, 2013, depletion of oil and gas properties of $141 and $167, respectively, was recorded.  Costs of oil and gas properties are amortized using the units of production method.  Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool, and generally, no gain or loss is recognized.

In applying the full cost method, Brenham performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties.  If capitalized costs exceed this limit, the excess is charged as an impairment expense.  During the six months ended June 30, 2014 and 2013, no impairment of oil and gas properties was recorded.

Below are the components of the oil and gas properties balance:

 

 

 

 

 

 

 

 

 

 

 

 

**June 30, 2014**

 

**December 31, 2013**

Royalty interest in 24 acres in Washington County, Texas (a)

$

 

- 

 

$

 

-

Royalty interest in 700 acres in the Permian Basin (b)

 

8,400 

 

8,400

10% working interest in the Pierce Junction Field (c)

 

87,500

 

87,500

Lease of 394 acres in the Gillock Field (d)

 

83,500 

 

83,500

Lease of 332 acres in Inez Prospect (e)

250,000

-

Capitalized asset retirement costs

 

6,055

 

6,055

  Total oil and gas properties

 

435,455

 

185,455

     Accumulated depletion

 

(3,275)

 

(1,982)

  Net capitalized costs

$

432,180

$

183,473

a)      *Royalty interest in 24 acres in Washington County, Texas*- The Company has an oil and gas mineral royalty interest, covering a twenty-four acre tract of land located in Washington County, Texas, which is carried on the balance sheet at $0.  The royalty interest is currently leased by Anadarko Petroleum Corporation for a term continuing until the covered minerals are no longer produced in paying quantities from the leased premises.  Royalties on the minerals produced are currently incidental and paid to the Company as follows: (i) for oil and other liquid hydrocarbons, and (ii) for gas (including casing-head gas); the royalty is one-sixth of the net proceeds realized by Anadarko Petroleum Corporation on the sale thereof, less a proportionate part of ad valorem taxes and production, severance, or other excise taxes.  In addition, the Company is entitled to shut-in royalties of $1 per acre of land for every ninety-day period within which one or more of the wells in leased premises, or lands pooled therewith, are capable of producing paying quantities, but such wells are either shut-in or production is not being sold.

b)      *Royalty interest in 700 acres in the Permian Basin*- On July 22, 2011, the Company entered into an Asset Purchase and Sale Agreement with Doug Pedrie, Davis Pedrie Associates, LLC and Energex Oil, Inc. (“Sellers”), pursuant to which the Company acquired 700 acres of unproved property located in the Permian Basin near Abilene, Texas.  The agreement provided 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.

13

c)*       10% working interest in the Pierce Junction Field*- On March 12, 2013, Brenham entered into an agreement with an effective date of January 1, 2013, to purchase a 10% working interest in the Pierce Junction Field for $50,000 cash and a $70,000 non-interest bearing note payable due on August 31, 2013.  On May 30, 2013, the holder of this note payable accepted $37,500 as full payment and Brenham recorded $32,500 as a reduction in the value of the oil and gas property due to the decrease in the consideration given to acquire it.

d)      *Lease of 394 acres in the Gillock Field*- Brenham leased 394 acres in Galveston County for the acquisition of 100% working interest in the Gillock Field from Kemah Development Texas, L.P. (“KDT”) and Daniel Dror II Trust of 2012 for $300 per acre, or $131,100 (recorded as accounts payable – related parties in the consolidated balance sheet as of June 30, 2014 and December 31, 2013) and 200,000 shares of American restricted common stock.  Brenham issued 3,326,316 shares of Brenham restricted common stock to American as payment in full for the 200,000 shares issued by American on Brenham’s behalf.  In 2002, KDT paid $1,175,000 for the original 437 acres and the mineral rights to 394 acres.  However, KDT assigned no value to the mineral rights.  Due to the related parties having no basis in the mineral rights, Brenham expensed the costs associated with the transaction, which totaled $447,100 and consisted of i) $316,000 of stock-based compensation calculated at the grant date fair value of the 3,326,316 shares of Brenham common stock issued to American (which equaled the grant date fair value of the common stock American issued to KDT and the Daniel Dror II Trust) and ii) the $131,100 related party payable.

e)*       Lease of 332 acres in the Inez Prospect-*On January 8, 2014, the Company entered into a letter of intent with a third party to acquire a 332-acre oil and gas lease, the “Inez Prospect,” located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith.  On April 10, 2014, the Company and the third party entered into a prospect and lease acquisition agreement.  Pursuant to the agreement, the Company has agreed to acquire 100% of the working interest for a total purchase price of $250,000, consisting of a $20,000 deposit, which was paid during the six months ended June 30, 2014, and a payment of the remaining $230,000 prior to the beginning of any exploration which is recorded in accounts payable and accrued expenses at June 30, 2014.

**Note 9 - Property and Equipment**

 

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

 

 

 

 

 

 

 

 

 

**Years**

**June 30, 2014**

**December 31, 2013**

Land

-

$                                         - 

 

$                            507,661 

Building and improvements

20

63,502 

922,945 

Machinery and equipment

7-15

112,991 

112,991 

Office equipment and furniture

7

132,700 

151,982 

 Total

 

309,193 

1,695,579 

Less accumulated depreciation

 

(269,308)

(923,851)

Net property and equipment

 

 

$                              39,885 

 

$                            771,728 

 

On March 6, 2014, the Company’s wholly owned subsidiary, Northeastern Plastics, Inc. sold its office warehouse property, a 32,000 sq. ft. office warehouse facility on I-59 in Houston, Texas. The property was sold for $1,325,000 in cash, and Northeastern reduced its long-term debt with a $1,000,000 payment of principal, and entered into a modification and extension agreement whereby the maturity date was extended from February 22, 2014 to February 22, 2019. The note, as amended, bears interest at 7.25% and payment of $3,941 are owed monthly for 59 months beginning March 22, 2014, and a balloon payment owed for the remainder of the note payable and interest (approximately $196,000) due February 22, 2019.

Depreciation expense during the three and six months ended June 30, 2014 and 2013 was $2,248, $10,119, $11,406 and $22,812, respectively.

 

14

**Note 10 - Intangible Assets**

 

Intangible assets at June 30, 2014 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 and tooling

$         254,660

$              100,778

$                    153,882

3-10 years

 

Intangible assets at December 31, 2013 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 and tooling

$          234,506

$               73,623

$                     160,883

3-10 years

Amortization expense for the three months and six months ended June 30, 2014 and 2013 was $12,837, $25,286, $10,804 and $21,269 respectively.

 

**Note 11 - Debt**

** **

Debt consisted of the following:

 

 

 

 

 

 

 

 

**June 30, 2014**

**December 31, 2013**

Note payable to a bank, due in monthly installments, including interest at 7.25% with a principal balance due on February 22, 2019, secured by real property. (a) (b)

$                            327,580 

$                           1,341,243

Revolving line of credit to a bank, which allows NPI to borrow up to $2,500,000 through May 2016, secured by assets of NPI, including, but not limited to, accounts receivable, inventory, and equipment. (d)

1,844,941 

- 

Revolving line of credit to a bank, which allows NPI to borrow up to $2,000,000, interest due monthly at the greater of prime (3.25%) plus one or 5%, principal balance due April 30, 2014, secured by assets of NPI. (a) (d)

-

1,318,034 

Note payable to a bank, due in quarterly payments of interest only, with interest at 5%, with a principal balance due May 31, 2014, secured by the Company’s real property.

1,150,000 

1,150,000 

 

 

Note payable, due in monthly payments of $1,000, with interest at 4%.  This note is paid in full.

- 

3,000 

Note payable to a bank, due in monthly installments, with interest at 12.5%, with a principal balance due in February 2017, secured by the Company’s real property. (a) (c)

228,682

-

Note payable, non-interest bearing, which was issued in exchange for shares to be purchased by the Company, secured by 63,540 shares of the Company not delivered as of June 30, 2014, principal balance due on September 30, 2014  

200,000

200,000

Note payable to a bank, due in monthly installments, with interest at 12.5%, with a principal balance due in June 30, 2017, secured by the Company’s real property. (a) (c)

35,604

-

 

 

 

15

Subtotal 

3,786,807 

4,012,277 

Less current portion

(3,175,324)

(3,697,808)

Total

$                               611,483 

$                           314,469 

 

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

 

(b)On February 22, 2014, the Company entered into a modification and extension agreement with the bank.  In connection with this agreement, the Company paid down $1,000,000 of the note payable owed to the bank. In addition, the term of the note payable was extended from February 22, 2014 to February 22, 2019. The note as amended bears interest at 7.25% and payments of $3,941 are owed monthly for 59 months beginning March 22, 2014, and a balloon payment owed for the remainder of the note payable and interest (approximately $196,000) due February 22, 2019.  

(c) On February 24, 2014, the Company entered into a promissory note agreement. The note bears interest at 12.5% and payments of $3,444 are owed monthly for 35 months, beginning in March 2014, and a payment for the remainder of the note payable is due during the 36 th month.

(d) On May 21, 2014, the Company entered into a new revolving line of credit agreement, which allows NPI to borrow up to $2,500,000. The previous line of credit balance owed was concurrently paid off.

Interest expense for the three and six months ended June 30, 2014 and 2013 was $58,677, 115,294, 59,538, and 123,799, respectively.

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 is guaranteed by American.

 

**Note 12 - 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.

 

During 2011, the Company issued to Daniel Dror, CEO, of 1,000 shares of the Company’s Series A Preferred Stock in exchange for his personal guarantee on certain loans of American.

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.

 

On October 1, 2013, American entered into a stock purchase agreement with Scott Wolinsky, a former director of American, whereby American purchased Mr. Wolinsky’s 89,540 shares of American’s common stock for cash of $130,000 and a non-interest bearing note payable of $200,000, due on September 30, 2014. A related treasury stock obligation in the amount of $200,000 was recorded. In the event that American is unwilling or not able to make the $200,000 payment when the note becomes due, at American’s option, it may instruct Wolinsky to sell the shares in the open market and apply the proceeds from such sales to any balance owed. In the event that Wolinsky sells the shares for more than $200,000, Wolinsky shall return any portion of the unsold shares back to American and any proceeds over $200,000. As of June 30, 2014, 26,000 shares have been returned to the Company.

During the six months ended June 30, 2014, American and its subsidiaries issued the following shares as stock-based compensation:

American issued 10,000 shares of common stock valued at $17,900 to its CEO as a bonus.

American issued 10,000 shares of common stock valued at $17,900 for consulting services.

American issued 10,000 shares of common stock valued at $17,900 for director fees.

American issued 18,000 shares of common stock valued at $25,920 for legal fees.

16

American issued 9,000 shares of common stock valued at $11,700 to employees for bonuses.

American issued 100,000 shares of common stock valued $124,000 to its CEO for being the personal guarantor on Company loans.

American issued 120,000 shares of common stock valued at $150,000 to a related party for acquisition of real estate.

**Note 13 - Related Parties**

 

Real estate – related party

On June 2, 2014, the Company and Daniel Dror II entered into an agreement whereby the Company agreed to purchase the remaining 50% interest in 96 acres in Galveston, Texas for $220,000 in cash, a $300,000 five-year promissory note, and 120,000 shares of common stock valued at $150,000. The Company appraised the property at $1,220,000, which included a stock valuation of $700,000, but the Company valued the property at lower of cost or market of the related party of $670,000 or the cost basis of $720,385. Daniel Dror II is the son of Daniel Dror, American’s Chairman, Chief Executive Officer, and President. This property is recorded on the balance sheet as “Real estate held for sale” for $1,211,000 as of June 30, 2014. Related party real estate transactions are recorded at lower of cost or market and the original cost of the contributors.

Accounts payable to related parties

On February 28, 2013, Brenham leased 394 acres in Galveston County for the acquisition of mineral rights for the Gillock Field from KDT and Daniel Dror II Trust of 2012 for $300 per acre, or $131,100 and 200,000 shares of American restricted common stock. Brenham issued 3,326,316 shares of Brenham restricted common stock to American as payment in full for the 200,000 shares issued by American on Brenham’s behalf. The $131,100 is payable to KDT on or before December 30, 2014.

 

In addition, as of June 30, 2014 and December 31, 2013, the Company owed other amounts to related parties of $0 and $2,212, respectively.

**Note 14 - Segment Information**

 

American International Industries, Inc. is a holding company and has the following reporting segments:

 

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 93.2% owned subsidiary, was an onshore rig-based well-servicing contracting company providing services to the oil and gas industry. As of June 30, 2014, Delta Seaboard Well Service, Inc. ("DSWSI"), a Texas corporation and formerly a subsidiary of Delta, was a wholly-owned subsidiary of AMIH. On April 3, 2012, AMIH entered into an Asset Purchase Agreement to sell the operating assets and liabilities of DSWSI.

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

 

Brenham Oil & Gas ("BOG") - a 51.0% owned subsidiary that currently owns oil and gas properties. 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.

 

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. 

 

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 currently significant to the consolidated financial statements.

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

 

 

 

 

 

For the Three Months Ended June 30,

**For the Six Months Ended June 30,**

 

**2014**

**2013**

**2014**

**2013**

Revenues:

Northeastern Plastics

1,626,193

1,006,463

2,817,336

2,508,081

Brenham Oil & Gas

5,643

8,079

16,064

16,722

AITP

-

2,604

-

9,946

Total revenues

1,631,836

1,017,146

2,833,400

2,534,749

Operating income (loss) from continuing operations:

Northeastern Plastics

(26,427)

(290,471)

(279,301)

(358,939)

 

AMIH

(34,253)

(36,166)

(59,643)

(74,644)

 

AITP

(70,392)

(68,681)

(123,847)

(73,562)

 

Brenham Oil & Gas

(55,466)

(57,733)

(103,632)

(538,579)

 

Corporate

(285,605)

(190,911)

(531,976)

(459,663)

 

Operating loss from continuing operations

(472,143)

(643,962)

(1,098,399)

(1,505,387)

 

Other income (expense) from continuing operations

353,760

(26,370)

233,248

(21,221)

 

Net loss from continuing operations

(118,383)

(670,332)

(865,151)

(1,526,608)

 

Depreciation, depletion and amortization:

Northeastern Plastics

3,418

21,766

23,294

43,194

Brenham Oil & Gas

638

141

1,621

167

Corporate

444

444

887

887

Total depreciation, depletion and amortization

4,500

22,351

25,802

44,248

 

 

 

17

 

**For the Three Months Ended June 30,**

**For the Six Months Ended June 30,**

**2014**

**2013**

**2014**

**2013**

Interest Expense:

Northeastern Plastics

32,883

43,678

71,346

91,263

AITP

10,625

-

13,750

-

Corporate

15,169

15,860

30,198

32,536

Total interest expense

58,677

59,538

115,294

123,799

Capital Expenditures:

Northeastern Plastics

14,485

-

23,881

-

AITP

220,000

-

220,000

Brenham Oil & Gas

20,000

37,500

20,000

87,500

Total capital expenditures

254,485

37,500

263,881

87,500

**June 30, 2014**

**December 31, 2013**

Identifiable Assets:

Northeastern Plastics

5,112,439

5,639,717

AITP

7,939,329

7,309,106

AMIH

-

-

Brenham Oil & Gas

438,565

193,432

Corporate

1,531,543

1,580,143

Total identifiable assets

15,021,876

14,722,398

**Note 15 - Subsequent Events**

In March 2014, AITP entered into an earnest money contract for $3,350,000 for its 174 acres in Waller County, Texas, which closed on July, 25, 2014.  The carried value was less than the closing price.  In connection with the close, the Company entered into a promissory note receivable with the purchaser of the aforementioned property for $2,000,000.  The purchaser will make monthly installment payments of $8,333 to the Company, which includes annual interest of 5%.  The final monthly installment payment is due on July 25, 2016.  On August 25, 2016, all remaining principal and accrued interest is due to the Company.

18

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 93.2% owned subsidiary, was an onshore rig-based well-servicing contracting company providing services to the oil and gas industry. Delta Seaboard Well Service, Inc. ("DSWSI"), a Texas corporation was a wholly-owned subsidiary of AMIH. On April 3, 2012, AMIH sold the operating assets and liabilities of DSWSI.

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

Brenham Oil & Gas ("BOG") – a 51.0% owned subsidiary that currently owns oil and gas properties.  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.

**Our Properties**

Brenham holds oil and gas leases interests in Texas.

Victoria County, Texas

On January 16, 2014, Brenham acquired a 332 acre oil and gas lease, the "Inez Field Prospect," located in Victoria County, Texas. Further, Brenham acquired #1 Roberts Unit well-bore, as well as all the equipment down-hole and surface equipment associated therewith. Brenham acquired 100% of the working interest and a net revenue interest of 74%. In January 1990, Ken Petroleum Corporation drilled and completed the #1 Roberts Unit in the Inez (8,600') Field in Victoria County, Texas. The well was initially completed in the Yegua "B" between 8498-8510' and flowed 2,668 MCFGPD on an 8/64" choke. In February 1990, Stuart Petroleum Testers performed a Full Scale Separator Test, and it was determined that the Roberts well had a potential of 9,000 MCFGPD and 65.14 barrels of 48° API condensate during the 4-point test. The well later encountered mechanical problems and has since been shut-in.

Brenham plans to side track or drill a new well to regain production from the well in the Yegua. Reserves are estimated to be 4 billion cubic feet of gas and 160,000 barrels of condensate per well from the Yegua. Brenham can drill 3-4 wells on the lease.

The secondary objective is the over-pressured Jackson Shale interval from 6,000 ft. to 8,000 ft., which tested gas from a 40 ft. perforated interval. In the new well to be drilled in the Yegua, Brenham plans to core several intervals in the Jackson Shale to conduct a petro physical study.

Pierce Junction Field - Houston, Texas

The Pierce Junction Field includes eight producing wells, with an additional seven wells scheduled for mechanical work-over that should add more oil reserves. The wells currently have production of 30 barrels per day. Additional offsetting acreage can be developed by Brenham on a well by well basis to produce additional oil reserves from several producing horizons. Presently, Brenham is seeking to acquire additional working interests in this field from the other partners. The Company also is developing a plan to undertake a comprehensive work over program to increase production in the field to approximately 100 barrels per day.

19

Gillock Field - Galveston County, Texas

Gillock Fields are segments of a large, complexly faulted deep seated salt dome. Brenham purchased 4 square miles of 3D seismic data for the purpose of completion of its drilling program in this field. A preliminary review of the reprocessed 3D seismic data shows numerous fault traps and amplitude bright spots normally associated with hydrocarbon production at both the Frio and deeper Vicksburg level. Additionally, structural rollover indicative of a hydrocarbon trap is also present in shallower horizons as well. As there are well over 20 pay zones in Gillock Field, the possibility of shallower pay would not be a surprise and all of the aforementioned anomalies are being carefully investigated and evaluated by our experienced geophysical team. The 3D seismic data in conjunction with adjacent and nearby production will enable Brenham to pick precise drillable locations in the Frio as well as providing Brenham the opportunity to upgrade the reserve category of the Vicksburg Formation, thereby enhancing the value of the Company.

Washington County, Texas

Since November 7, 1997 (inception), Brenham Oil & Gas Inc. has owned an oil and gas mineral royalty interest on a 24 acre parcel of land located in Washington County, Texas. The royalty interest is currently leased by Anadarko Petroleum Corporation for a term continuing until the covered minerals are no longer produced in paying quantities from the leased premises.

Refer to the tables related to proved oil and gas reserves, together with the changes therein, proved developed reserves, and proved undeveloped reserves for the years ended December 31, 2013 and 2012 in the audited consolidated financial statements and notes thereto contained in Brenham’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013.

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.

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.

 

 

20

**Results of Operations**

 

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

 

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 June 30, 2014 and 2013.

*Net revenues. * Revenues from continuing operations were $1,631,836 for the three months ended June 30, 2014, compared to $1,017,146 for the three months ended June 30, 2013, representing an increase of $614,690, or 60%. NPI's revenues, which comprised the majority of the change, increased by $619,730, or 62%, to $1,626,193 for the three months ended June 30, 2014, compared to $1,006,463 for the same period in the prior year, due to an increase in existing customer account organic growth in both the traditional retail and grocery distribution networks.  NPI also added a sizable private label automotive group as a customer.  For the three months ended June 30, 2014 and 2013, Brenham's revenues were $5,643 and $8,079, respectively.  For the three months ended June 30, 2014 and 2013, AITP's revenues were $0 and $2,604, respectively.

 

*Cost of sales and margins.  *Cost of sales for the three months ended June 30, 2014 was $1,198,152, compared to $776,742 for the three months ended June 30, 2013.  Our gross margins were relatively unchanged between the three months ended June 30, 2014, which was 27%, compared to the gross margin for the three months ended June 30, 2013, which was 24%.  NPI’s cost of sales and related revenues comprised the majority of the change. The decrease was due to a decrease in transportation charges and the effect of the weakening of the U.S. dollar to the Renminbi of the People's Republic of China.

*Selling, general and administrative. * Consolidated selling, general and administrative expenses for the three months ended June 30, 2014 were $884,748, compared to $845,820 in the prior year, representing an increase of $38,928, or 5%.  General and administrative expenses for the three months ended June 30, 2014 decreased from the same period in the prior year primarily due to lower compensation and related expenses for NPI and the corporate office.

 

*Loss from operations. * We had an operating loss of $472,143 for the three months ended June 30, 2014, compared to $643,962 for the three months ended June 30, 2013, which represented a decrease of $171,819, or 27%, due to the aforementioned activities.

 

*Total other income (expense). * Total other income was $353,760 for the three months ended June 30, 2014, compared total other expenses of $26,370 for the three months ended June 30, 2013.  Other expenses for the three months ended June 30, 2014 included non-cash unrealized gains/losses on trading securities of gain $21,334, compared to losses of $28,533 for the three months ended June 30, 2013.  Realized gains on trading securities for the three months ended June 30, 2014 were $36,863, compared to $23,953 for the three months ended June 30, 2013.  Interest expense was $58,677 during the three-month period ended June 30, 2014, compared to $59,538 during the same period in the prior year.

 

*Net loss.  *We had a net loss from operations of $122,792, or $0.04 per share, for the three months ended June 30, 2014, compared to $674,332, or $0.35 per share, for the three months ended June 30, 2013. 

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

The following is derived from, and should be read in conjunction with, our unaudited consolidated financial statements, and related notes for the six months ended June 30, 2014 and 2013.

*Net revenues. * Revenues from continuing operations were $2,833,400 for the six months ended June 30, 2014, compared to $2,534,749 for the six months ended June 30, 2013, representing an increase of $298,651, or 12%.  NPI's revenues, which comprised the majority of the change, increased by $309,255, or 12%, to $2,817,336 for the six months ended June 30, 2014, compared to $2,508,081 for the same period in the prior year, due to an increase in existing customer account organic growth in both the traditional retail and grocery distribution networks.  NPI also added a sizable private label automotive group as a customer.  For the three months ended June 30, 2014 and 2013, Brenham's revenues were $16,064 and $16,722, respectively.  For the six months ended June 30, 2014 2013, AITP's revenues were $0 and $9,946, respectively.

 

*Cost of sales and margins.  *Cost of sales for the six months ended June 30, 2014 was $2,120,357, compared to $1,894,741 for the six months ended June 30, 2013. Our gross margins were relatively unchanged between the six months ended June 30, 2014, which was 25%, compared to the gross margin for the three months ended June 30, 2013, which was also 25%.

*Selling, general and administrative. * Consolidated selling, general and administrative expenses for the six months ended June 30, 2014 were $1,790,363, compared to $2,106,849 in the prior year, representing a decrease of $316,486, or 15%.  General and administrative expenses for the six months ended June 30, 2014 decreased from the same period in the prior year primarily due to lower compensation and related expenses for NPI and the corporate office.

 

*Loss from operations. * We had an operating loss of $1,098,399 for the six months ended June 30, 2014, compared to $1,505,387 for the six months ended June 30, 2013, which represented a decrease of $406,988, or 27%, due to the aforementioned activities.

21

*Total other income (expense). * Total other income was $233,248 for the six months ended June 30, 2014, compared to total other expenses of $21,221 for the six months ended June 30, 2013.  Other expenses for the six months ended June 30, 2014 included non-cash unrealized losses on trading securities of $52,848, compared to losses of $88,323 for the six months ended June 30, 2013.  Realized gains on trading securities for the six months ended June 30, 2014 were $49,418, compared to $132,627 for the six months ended June 30, 2013.  Interest expense was $115,294 during the six-month period ended June 30, 2014, compared to $123,799 during the same period in the prior year.

 

*Net loss.  *We had a net loss from operations of $856,305, or $0.36 per share, for the six months ended June 30, 2014, compared to $1,532,728, or $0.85 per share, for the six months ended June 30, 2013. 

**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 debt financing and proceeds from notes receivable.

 

Capital expenditures for the six months ended June 30, 2014 were $245,596, compared to $87,500 for the same period in the prior year.  The Company has no major capital expenditure commitments for the next 12 months.

 

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.

NPI had a line of credit with Trustmark Bank in the amount of $2,000,000, which had a maturity date of April 30, 2014.  On May 21, 2014, the Company entered into a new revolving line of credit agreement with Advantage Business Capital, Inc., which allows NPI to borrow up to $2,500,000.  The previous line of credit balance owed was concurrently paid off.

 

We believe that our cash on hand, operating cash flows 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.

At June 30, 2014, the consolidated working capital was $8,269,725.  We had consolidated current assets and current liabilities of $13,016,905 and $4,747,180, respectively at June 30, 2014.

*Cash flow from operating activities. * Net cash used in operating activities was $465,788 for the six months ended June 30, 2014, compared to $648,434 for the six months ended June 30, 2013.  Net cash provided by operating activities for the six months ended June 30, 2014 was derived primarily from our net loss from continuing operations of $856,305, and a decrease in accounts receivable of $356,117 and a decrease in accounts payable of $156,832, as well as an increase in inventory of $341,872.  Accounts receivable decreased significantly due to collections made in the six months ended June 30, 2014 related to revenues at NPI during the three months ended December 31, 2013.  Accounts payable decreased significantly due to payments made in the six months ended June 30, 2014 for expenses incurred during the three months ended December 31, 2013 in support of the revenues at NPI.  Inventory increased during the six months ended June 30, 2014 in order to address an increase in existing customer account organic growth in both the traditional retail and grocery distribution networks.  NPI also added a sizable private label automotive group as a customer.  Net cash used in operating activities for the six months ended June 30, 2013 was derived from our net loss from continuing operations of $1,532,728, which included non-cash expenses of $390,083, including depreciation, depletion, and amortization of $44,248, share-based compensation of $342,880, and amortization of guarantor fee of $2,955.

*Cash flow from investing activities. * For the six months ended June 30, 2014, our investing activities provided cash of $853,129 primarily as a result of proceeds from sale of assets of $1,262,317 and proceeds from notes receivable of $37,642.  For the six months ended June 30, 2013, our investing activities provided cash of $696,804, primarily as a result of proceeds from notes receivable of $816,745, sales of trading securities of $184,355, offset by purchases of trading securities of $213,808, and the purchase of oil and gas properties of $87,500.

 

*Cash flow from financing activities. * Our financing activities used cash of $237,208 during the six months ended June 30, 2014, primarily due to principal payments of debt of $1,086,981, which was offset by borrowings of $526,907.  For the six months ended June 30, 2013, our financing activities used cash of $56,017, primarily as a result of payments on debt of $173,017, and a reduction in bank overdrafts of $80,598, offset by proceeds from the sale of common stock of a subsidiary of $100,000, net borrowings under line of credit agreements of $67,594, and proceeds from stock subscription receivables of $55,500.

 

**Off-Balance Sheet Arrangements**

As of June 30, 2014, we did not have any off-balance sheet arrangements.

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not applicable.

 

ITEM 4T. CONTROLS AND PROCEDURES

 

*Evaluation of disclosure controls and procedures.* Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of June 30, 2014 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2014. Such conclusion reflects the 2013 departure of our chief financial officer and assumption of duties of principal financial officer by an interim chief financial officer and the resulting lack of accounting expertise of our now principal financial officer and a lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants and our accounting firm to assist with financial reporting.

 

*Changes in internal controls.* No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

**PART II - OTHER INFORMATION**

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

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, 2013.

 

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

 

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

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

 

 

23

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

 

 

 

24

**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: August 19, 2014

 

/s/ Charles R. Zeller

 Interim CFO and Director

 Dated: August 19, 2014

 

25

**CERTIFICATIONS**

 

 

I, Daniel Dror, certify that:

 

1. I have reviewed this quarterly report of American International Industries Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: August 19, 2014

/s/ Daniel Dror

CEO and Chairman

 

**CERTIFICATIONS**

 

 

I, Charles R. Zeller, certify that:

 

1. I have reviewed this quarterly report of American International Industries Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: August 19, 2014

/s/ Charles R. Zeller

Interim CFO and Director

 

Statement Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

 

The undersigned, Daniel Dror, CEO and Chairman of American International Industries, Inc., a Nevada corporation, hereby makes the following certification as required by Section 906(a) of the Sarbanes-Oxley Act of 2002, with respect to the following of this report filed pursuant to Section 15(d) of the Securities Exchange Act of 1934: Quarterly Report of Form 10-Q for the period ended June 30, 2014.

  

The undersigned certifies that the above annual report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, and information contained in the above quarterly report fairly presents, in all respects, the financial condition of American International Industries, Inc. and results of its operations.

 

Date: August 19, 2014

Daniel Dror

CEO and Chairman

/s/ Daniel Dror

 

Statement Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

 

The undersigned, Charles R. Zeller, Interim CFO of American International Industries, Inc., a Nevada corporation, hereby makes the following certification as required by Section 906(a) of the Sarbanes-Oxley Act of 2002, with respect to the following of this report filed pursuant to Section 15(d) of the Securities Exchange Act of 1934: Quarterly Report of Form 10-Q for the period ended June 30, 2014.

 

The undersigned certifies that the above annual report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, and information contained in the above quarterly report fairly presents, in all respects, the financial condition of American International Industries, Inc. and results of its operations.

 

Date: August 19, 2014

Charles R. Zeller

Interim CFO

/s/ Charles R. Zeller |
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